Accounting 22 - 2016 PDF

FINANCIAL ACCOUNTING VOLUME TWO Valix Peralta Valix 2016 Edition SOLUTION MANUAL 1 CHAPTER 1 Problem 1-1 Problem 1-2 Problem 1-3 Problem 1-4 1c 1A LA 1A 2. € 2.0 2.8 2.C€ 3.C 3.0 3A 3. A 4.0 4.C¢ 4A 4c 5A 5c 6. D 7. 8 Problem 1-5 Problem 1-6 Problem 1-7 Problem 1-8 Le 1.0 1b. 1G 20 DG 2.D 2a 3. A 3. A SG. 3.8 4c 4.8 4A 4.0 5. B Problem 1-9 Problem 1-10 Accounts payable 1,000,000 Note payable - trade 3,000,000 Deposits and advances from Note payable - bank 2,000,000 customers 250,000 Note payable - officers 500,000 Notes payable 1,000,000 Accounts payable -trade 4,000,000 Credit balances in customers* Bank overdraft 300,000 accounts 200,000 Dividends payable 1,000,000 Serial bonds payable 1,600,000 Withholding tax payable 100,000: Accrued interest on bonds Income tax payable 800,000 payable 150,000 E: ated warranty liability 600,000 Unearned rent income 100,000 Estimated damages payable 700,000 Total current liabilities 3,700,000 Accrued liabilities 900,000 Estimated premium liability 200,000 Total current labilities 14,100,000 Problem 1-11 Employee income taxes withheld 900,000 Cash overdraft 1,300,000 Accounts receivable with credit balance 750,000 Estimated warranty liability 500,000 Estimated damages payable 1,500,000 Accounts payable 3,000,000 Accrued interest on bonds payable from October | to December 31, 2016 (5,000,000 x 12% x 3/12) 150,000 Total current liabilities 8,100,0002 ‘The bonds will be paid over 5 years because the semiannual payment is P500,000 Since the last bond will be paid on Qctober 1, 2022, the first bond will be paid on April 1, 2018. Accordingly, there is no currently maturing bond in 2017. The stock dividend payable is not an accounting liability but presented as part of shareholders’ equity as an addition to share capital. Problem 1-12 Accounts payable (500,000 + 100,000) 600,000 Accrued liabilities 50,000 Nate payable - refinanced 1,000,000 Note payable - due May 1, 2017 800,000 Total current liabilities 2,450,000 Noncurrent liability: Bonds payable, due December 31, 2018 2,000,000 Problem 1-13 1. Current liabilities: Accounts payable 7,000,000 Note payable - bank 12,000,000 Accrued expenses 4,000,000 23,000,000 Noncurrent liabilities Mortgage payable 4,000,000 Note payable due 2018 3,000,000 7,000,000 Total liabilities. 30,000,000 2. The note payable to bank is paid from the proceeds of the issuance of share capital of P4,000,000 on January 31, 2017 and the availment of a financing agreement on February 15. 2017 with a financially capable commercial bank on April 1, 2017 in the amount of P3,000.000. Nevertheless, the note payable should continue to be classified as current. Problem 1-14 Accounts payable 6,500,000 Note payable - bank 3,000,000 Interest payable 150,000 Mortgage note payable 2,000,000 Bonds payable 4,000,000 Total current liabilities 15,650,000 Problem I-15 Answer A Accounts payable 1,000,000 Unearned rent revenue 300,000 Estimated liability for warranties 250,000 Bonds payable 5,000,000 Discount on bonds payable {_500,000) Total liabilities 6,050,000Problem 1-16 Answer A Accounts payable (4,000,000 + 100,000) Accrued expenses Credit balances in customers’ accounts Estimated liability for coupons Total current liabilities Problem 1-17 Answer A Accounts payable Bonds payable Discount on bonds payable Dividends payable Total current liabi ies Problem 1-18 Answer C Accounts payable lends payable Income tax payable Note payable Total current liabilities Problem 1-19 Answer D Problem 1-20 Answer A Problem 1-21 Answer C Accounts payable Unsecured note payable Accrued expenses Senior bonds payable Total current liabilities Problem 1-22 Answer D Accounts payable (1,350,000 - 150,000) Accrued taxes payable Customers’ deposit Bank overdraft Accrued electric and power bills Total current liabilities Problem 1-23 Answer D 14% note payable due 2017 8% note payable maturing December 31, 2017 Total current maturities Problem 1-24 Answer B 12% note payable - refinanced on January 31, 2017 4,100,000 1,500,000 500,000 600,000 6,700,000 1,500,000 2,500,000 ( 300,000) 800,000 4,500,000 1,900,000 500,000 900,000 600,000 3,900,000 550,000 4,000,000 350,000 5,000,000 9,900,000 1,200,000 125,000 100,000 55,000 60,000 1,540,000 30,000 100,000 130,000 $000,000Problem 1-25 Answer A 6% Note payable 500,000 8% Note payable 800,000 Total current liabilities 1,300,000 PAS |, paragraph 72, provides that an entity shall classify its financial liabilities as current when they are due to be settled within twelve months after reporting date even if an agreement to refinance or reschedule payment on a long-term basis is completed after the reporting period and before the financial statements are authorized for issue Problem 1-26 Answer C Accounts payable and accrued interest 1,000,000 Debentures payable - current portion 500,000 Total current liabilities 1,500,000 lf the refinancing occurs on or before the end of the reporting period, the refinancing is an adjusting event, meaning, the obligation 1s classified as noncurrent liability. Accordingly, the 12% note payable shall be classified as noncurrent because the refinancing is made on December 31, 2016. Problem 1-27 Answer A The entire amount of P750,000 is shown as current liability because the note payable is due to be settled within one year regardless of the issuance of bonds payable Problem 1-28 Answer C Note payable 2,000,000 Refinanced on December 31, 2016 - nancurrent portion (80% x 1,500,000) 1,200,000 Note payable - not refinanced, current portion 800,000 Problem 1-29 Answer A The entire note is classified as a current liability because the refinancing occurred on February 2, 2017, after the end of the reporting period but before issuance of the 2016 Financial Statements. Problem 1-30 Answer D Problem 1-31 Answer A The entire amount of the note payable is classified as noncurrent liability, PAS 1, paragraph 73, provides that if an entity has the discretion to refinance or roll over an obligation for at least twelve months after the end of reporting period, it shall classify the obligation as noncurrent, even if it would otherwise be due within a shorter period, Problem 1-32 Answer BCHAPTER 2 Problem 2-1 Problem 2-2 1A 1D 2.4 Zeg 3.0 3. D 4. D ac 5. A Problem 2-3 2016 1. Cash 3,600,000 Sales 3,600,000 2. Premiums 390,000 Cash 390,000 3. Cash (5,000 x 10) 50,000 Premium expense (5,000 x 40} 200,000 Premiums (5,000 x 50) 250,000 4. Premium expense (5,000 x 20) 100,000 Cash 100,000 5. Premium expense (2,000 x 60) 120,000 Estimated premium liability 120,000 2017 |, Estimated premium liability 120,000 Premium expense 120.000 Reversing entry. Cash 4,200,000 Sales 4,200,000 2. Premiums 580,000 Cash 580,000 3. Cash (9,000 x 10) 90,000 Premium expense (9,000 x 40) 360,000 Premiums (9,000 x 50) 450,000 4. Premium expense (9,000 x 20) 180,000 Cash 180,000 5. Premium expense (3,000 x 60) 180,000 Estimated premium liability 180,000 Problem 2-4 2016 1, Cash 2,500,000 Sales 2,500,0002. Premiums - towels Cash 3. Cash (1,000 x 20) Premium expense Premiums - towels (1,000 x 100) 4. Premium expense (1,000 x 5) Cash 5. Premium expense Estimated premium liability (600 x 85) 2017 1. Estimated premium liability Premium expense Cash Sales 2. Premiums - towels Cash 3. Cash (1,800 x 20) Premium expense Premiums - towels (1,800 x 100) 4. Premium expense (1,800 x 5) Cash 5. Premium expense Estimated premium liability (800 x 85) Statement classification Current asset: Premiums - towels Current liability: Estimated premium liability Selling expense Premium expense Problem 2-5 1. Cash (400,000 x 9) Sales 2. Premiums Cash 3. Premium expense Cash 4. Cash (8,000 x 5) Premium expense (8,000 x 85) Premiums (8,000 x 90) 175,000 20,000 80,000 5,000 51,000 51,000 3,125,000 200,000 36,000 144,000 9,000 68,000 2015 75,000 $1,000 136,000 3,600,000 900,000 30,000 40,000 680,000 6 175,000 100,000 5,000 51,000 51,000 3,125,000 200,000 180,000 9,000 68,000 2016 95,000 68,000 170,000 3,600,000 900,000 30,000 720,0005. Premium expense (2,000 x 85) 170,000 Estimated premium liability 170,000 Bottle caps to be redeemed (25% x 400,000) 100,000 Less: Bottle caps redeemed (8,000 pens x 10) 80,000 Bottle caps outstanding 20,000 Premiums to be distributed on the balance of bottle caps (20,000/10) 2,000 6. Premium expense 150,000 Cash (30 x 5,000) 180,000 Problem 2-6 2016 Cash (7,000,000 / 8,000,000 x 7,000,000) 7,000,000 Sales (1,000,000 / 8.000,000 x 7,000,000) 6,125,000 Unearned revenue - points 875,000 Unearned revenue - points 328,125 Sales 328,125 Points to be redeemed (80% x 50,000) 40,000 Revenue to be recognized in 2016 (15,000 / 40,000 x 875,000) 328,125 2017 Unearned revenue - points 144,375 Sales 144,375 Points to be redeemed (85% x 50,000) 42,500 Total paints redeemed to 12/31/2017 (15,000 + 7,950) 22,950 Cumulative revenue - 12/31/2017 (22,950 / 42,500 x 875,000) 472,500 Revenue recognized in 2016 1 Revenue to be recognized in 2017 144,375 2018 Unearned revenue - points 52,500 Sales 52,500 Points to be redeemed (85% x 50,000) 42,500 Total paints redeemed to 12/31/2018 (15,000 + 7,950 + 2,550) 25,500 Cumulative revenue - 12/31/2018 (25,500 / 42,500 x 875,000) 525,000 Revenue recognized in 2017 472,500) Revenue to be recognized in 2018 52,500 2019 Unearned revenue - points 350,000 Sales 350,000 Points to be redeemed (90% x 50,000) 45,0008 ‘Total points redeemed to 12/31/2019 (15,000 + 7,950 + 2,550+ 15,000) 40,500 Cumulative revenue - 12/31/2018 (40,500 / 45,000 x 875,000) 787,500 Revenue recognized in 2018 (325,000) Revenue to be recognized in 2019 262,500 Problem 2-7 Answer B Problem 2-8 Answer D Coupons to be redeemed (160,000 x 60%) 96,000 Premiums to be distributed Less: Coupons redeemed 40,000 (250,000 x 80% / 10) 20,000 Balance 56,000 Premiums distributed 15,000 Balance 5,000 Number of premiums (56,000 / 5) 11,200 Premium liability (5,000 x 100) 500,000 Amount of liability (11,200 x 20) 224,000 Problem 2-9 Answer & Problem 2-10 Answer B Premiums distributed in 2017 5,500 Coupons to be redeemed Estimated premiums in 2017 500 (80% x 500,000) 400,000 Total 6,000 Less Coupons redeemed 300,000 Less: Estimated premiums in 2016 200 Coupons outstanding 100,000 Premiums applicable to 2017 5,800 Liability for unredeemed Premium expense (5,800 x 60) 348,000 coupons (100,000 x 15) 1,500,000 Problem 2-11 Answer B Coupons to be redeemed (400,000 x 60%) 240,000 Coupons redeemed (100,000) Coupons outstanding 140,000 Estimated liability - December 31, 2016 (140,000 / 5 x P50) 1,400,000 Problem 2-12 Answer A Coupons expected to be redeemed 12,000 Multiply by payment for each coupon (45 + 5) 50 Total liability for coupons 600,000 Payments as of December 31, 2016 (250,000) Liability for coupons, December 31, 2016 350,000 The coupon liability on Decernber 31, 2016 is nat reduced by the 5,000 coupons on hand because the coupons had nat been processed for payment. Problem 2-13 Answer B Basketballs to be distributed (100,000 x 60% / 10) 6,000 Basketballs distributed 4,000 Balance 2,000 Multiply by cost of basketball (4,125,000 / 5,500) 750 Estimated liability 1,500,000Problem 2-14 Answer B Coupons to be redeemed in 2016 and 2017 (1,300,000 x 30%) Coupons redeemed in 2016 and 2017 (140,000 + 200,000) Outstanding coupons - 12/31/2017 Divide by Number of towels Multiply by cost of towels minus remittance (100 - 20) Estimated liability - 12/31/2017 Problem 2-15 Answer D Premiums distributed in 2017 Premiums to be distributed in 2018 Total Premiums arising from 2016 sales distributed in 2017 Premiums applicable to 2017 Premium expense (48,000 x 40) Problem 2-16 Answer C Total coupons issued and to be redeemed (600,000 x 70% x 110%) Less: Total payments to retailer Liability for redeemed coupons - 12/31/2016 Problem 2-17 Answer B Problem 2-18 Answer B Problem 2-19 Answer B Boxtops to be redeemed (675,000 x 60%) Boxtops redeemed Boxtops outstanding Estimated liability - December 31, 2016 (75,000 / 3 x 15) Problem 2-20 Answer C Rebate expense (6,000,000 x 10% x 10) Rebates redeemed (210,000 x 10) Liability for rebates Problem 2-21 Answer A Beer mugs to be distributed (50% x 300,000 / 20) Beer mugs already distributed Beer mugs outstanding Estimated liability - December 31, 2016 (45 x 3,000) Problem 2-22 Question | Answer C Points - stand alone selling price Sales Total 390,000 340,000 $0,000 10 5,000 __ 80 400,000 50,000 3,000 53,000 5,000) 48,000 1,929,000 462,000 220,000 242,000 405,000 (330,000) 25,000 375,000 6,000,000 (2,100,000) 3,900,000 7,500 4,500 3,000 135,000 1,200,000 6.800.000 8,000,000Allocated price of points (1,200 / 8,000 x 6,800,000) Question 2 Answer B Points to be redeemed in 2016 (90% x 80,000) Revenue to be recognized in 2016 (28,800 / 60,000 x 1,020,000) Question 3 Answer A Points to be redeemed in 2017 (85% x 80,000) Points redeemed in 2016 Points redeemed in 2017 Total points redeemed to December 31, 2017 Cumulative revenue 12/31/2017 (40,800 / 68,000 x 1,020,000) Revenue recognized in 2016 Revenue to be recognized in 2016 Problem 2-23 Requirement 1 - Expense as incurred approach 2016 1. Cash 4,500,000 Sales 2. Warranty expense 40,000 Cash 2017 1. Cash 7,500,000 Sales 2. Warranty expense 150,000 Cash Requirement 2 - Accrual approach 2016 1. Cash (300 x 15,000) 4,500,000 Sales 2. Warranty expense 144,000 Estimated warranty liability (G0% x 300 = 180 x 800) 3. Estimated warranty liability 40,000 Cash 2017 1. Cash ($00 x 15,000) 7,500,000 Sales 2. Warranty expense 240,000 Estimated warranty liability (60% x 500 = 300 x 800) 3. Estimated warranty liability 150,000 Cash 10 1,020,000 60,000 489,600 68,000 28,800 12,000 40,800 612,000 (489,600) 122,400 4,500,000 40,000 7,500,000 150,000 4,500,000 144,000 40,000 7,500,000 240,000 150,000Requirement 3 Warranty expense: 2016 144,000 2017 240,000 Actual warranty payments: 2016 40,000 2017 150,000 Estimated warranty liability 12/31/2017 Requirement 4 - Warranty expense related to 2016 sales 2016 First contract year of 1/1/2016 sales (150 x 20% x P800) First contract year of 7/1/2016 sales (150 x 20% x P800 x 6/12) 2017 First contract year of 7/1/2016 sales (150 x 20% x P8QO x 6/12) Second contract year of 1/1/2016 sales (150 x 40% x P800) Second contract year of 7/1/2016 sales (150 x 40% x P800 x 6/12) 2018 Second contract year of 7/1/2016 sales (150 x 40% x P800 x 6/12) Warranty expense for 2016 Warranty expense related to 2017 sales 2016 First contract year of 1/1/2017 sales (250 x 20% x P800) First contract year of 7/1/2017 sales (250 x 20% x P80 x 6/12) 2017 First contract year of 7/1/2017 sales (250 x 20% x P800 x 6/12) Second contract year of 1/1/2017 sales (250 x 40% x P800) Second contract year of 7/1/2017 sales (250 x 40% x P800 x 6/2) 2018 Second contract year of 7/1/2017 sales (250 x 40% x P800 x 6/12) Warranty expense for 2017 Requirement 5 2016 sales still under warranty after 12/31/2017 Second contract year of 7/1/2016 sales 2017 sales still under warranty after 12/31/2017 First contract year of 7/1/2017 sales Second contract year of 1/1/2017 sales Second contract year of 7/1/2017 sales (40,000 + 40,000) Estimated warranty liability 12/31/2017 Estimated warranty liability per book Increase in warranty liability Warranty expense 10,000 Estimated warranty liability VW 384,000 190,000 194,000 24,000 12,000: 12,000 48,000 24,000 24,000 144,000 40,000 20,000 20,000 $0,000 40,000 40,000 240,000 24,000 20,000 80,000 80,000 204,000 194,000 10,000 10,000Problem 2-24 Requirement | - “Expense” approach 2016 1. Cash Sales 2. Warranty expense Cash 2017 |. Cash Sales 2. Warranty expense Cash Requirement 2 - Accrual approach 2016 |. Cash Sales 2, Warranty expense Estimated warranty liability (14% x 5,000,000) 3. Estimated warranty liability Cash 2017 1. Cash Sales 2. Warranty expense Estimated warranty liability (14% x 9,000,000) 3. Estimated warranty liability Cash Requirement 3 Warranty expense: 2016 2017 Actual warranty repairs: 2017 Estimated warranty liability 12/31/2017 5,000,000 200,000 9,000,000 560,000 5,000,000 700,000 200,000 9,000,000 1,260,000 560,000 700,000 200,000 560,000 12 5,000,000 200,000 9,000,000 560,000 5,000,000 700,000 200,000 9,000,000 1,260,000 560,000 1,960,000 760,000 1,200,000Requirement 4 - Warranty expense related to 2016 sales 2016 First contract year of 1/1/2016 sales (2,500,000 x 4%) First contract year of 7/1/2016 sales (2,500,000 x 4% x 6/12) 2017 First contract year of 7/1/2016 sales (2,500,000 x 4% x 6/12) Second contract year of 1/1/2016 sales (2,500,000 x 10%) Second contract year of 7/1/2016 sales (2,500,000 x 10% x 6/12) 2018 Second contract year of 7/1/2016 sales (2,500,000 x 10% x 6/12) Warranty expense for 2016 Warranty expense related to 2017 sales 2017 First contract year of 1/1/2017 sales (4,500,000 x 4%) First contract year of 7/1/2017 sales (4,500,000 x 4% x 6/12) 2018 First contract year of 7/1/2017 sales (4,500,000 x 4% x 6/12) Second contract year of 1/1/2017 sales (4,500,000 x 10%) Second contract year of 7/1/2017 sales (4,500,000 x 10% x 6/12) 2019 Second contract year of 7/1/2017 sales (4,500,000 x 10% x 6/12) Warranty expense for 2017 Requirement 5 2016 sales still under warranty after 12/31/2017: Second contract year of 7/1/2016 sales 2017 sales still under warranty after 12/31/2017 First contract year of 7/1/2017 sales Second contract year of 1/1/2017 sales Second contract year of 7/1/2017 sales Estimated warranty liability 12/31/2017 Estimated warranty liability per book Decrease in warranty liability Estimated warranty liability 85,000 Warranty expense Problem 2-25 Requirement 1 2016 1. Cash 5,000,000 Sales 2. Warranty expense 600,000 Estimated warranty liability (5,000,000 12%) ( 13 100,000 50,000 50,000 250,000 125,000 125,000 700,000 180,000 90,000 90,000 450,000 225,000 225,000 1,260,000 125,000 90,000 450,000 —450,000 1,115,000 1,200,000 85,000) $5,000 $,000,000 600,0003. Estimated warranty liability 100,000 Cash 2017 1. Cash 7,000,000 Sales 2. Warranty expense 840,000 Estimated warranty liability (7,000,000 x 12%) 3, Estimated warranty liability 250,000 Cash Requirement 2 Warranty expense for 2016 and 2017 (600,000 + 840,000) Actual warranty repairs (100,000 + 250,000) Estimated warranty liability - 12/31/2017 Warranty expense related to 2016 sales 2016 First contract year of 01/01/2016 sales (2,500,000 x 3%) First contract year of 07/01/2016 sales (2,500,000 x 3% x 6/12) 2017 First contract year of 07/01/2016 sales (2,500,000 x 3% x 6/12) Second contract year of 01/01/2016 sales (2,500,000 x 9%) Second contract year of 07/01/2016 sales (2,500,000 x 9% x 6/12) Second contract year of 07/01/2016 sales (2,500,000 x 9% x 6/12) warranty expense for 2016 Warranty expense related to 2017 sales 2017 First contract year of 01/01/2017 sales (3,500,000 x 3%) First contract year of 07/01/2017 sales (3,500,000 x 3% x 6/12) 2018 First contract year of 07/01/2017 sales Second contract year of 01/01/2017 sales (3,500,000 x 9%) Second contract year of 07/01/2017 sales (3,500,000 x 9% x 6/12) 2019 Second contract year of 07/01/2017 sales (3,500,000 x 9% x 6/12) Warranty expense for 2017 14 100,000 7,000,000 840,000 250,000 1,440,000 350,000 1,090,000 75,000 37,500 37,500 225,000 112,500 112,500 600,000 105,000 52,500 52,500 315,000 157,500 157,500 840,00015 2016 sales still under warranty after 12/31/2017: Second contract year of 07/01/2016 sales 112,500 2017 sales still under warranty after 12/31/2017: First contract year of 07/01/2017 sales 52,500 Second contract year of 01/01/2017 sales 315,000 Second contract year of 07/01/2017? sales 315,000 Estimated warranty liability - 12/31/2017 795,000 Estimated warranty liability per book 1,090,000 Decrease in warranty liability (_ 295,000) Estimated warranty liability 295,000 Warranty expense 295,000 Problem 2-26 Requirement | 2015 1, Cash 9,000,000 Sales 9,000,000 2. Warranty expense 450,000 Estimated warranty liability (1,000 x 450) 450,000 2016 1. Cash 8,325,000 Sales 8,325,000 2. Warranty expense 405,000 Estimated warranty liability (900 x 450) 405,000 3. Estimated warranty liability 180,000 Cash 180,000 2017 1. Estimated warranty liability (280,000 + 190,000) 470,000 Cash 470,000 Requirement 2 Warranty expense related to 2015 sales 2016 First contract year of 12/31/2015 sales (450,000 x 40%) 180,000 2017 Second contract year of 12/31/2015 sales (450,000 x 60%) 270,000 Warranty expense far 2015 450,000 Warranty expense related to 2016 sales 2017 First contract year of 12/31/2016 sales (405,000 x 40%) 162,000 2018 Second contract year of 12/31/2016 sales (405,000 x 60%) 243,000 Warranty expense for 2016 405,0002015 sales still under warranty after 12/31/2017 2016 sales still under warranty after 12/31/2017: Second contract year of 12/31/2016 sales Estimated warranty liability - 12/31/2017 Estimated warranty liability per book Decrease in warranty liability Estimated warranty liability Warranty expense Problem 2-27 Requirement 1 Total Sales Percent returns January 4,200,000 7% 294,000 February 4,700,000 7% 329,000 March 3,900,000 7% 273,000 April 3,250,000 7% 227,500 May 2,400,000 10% 240,000, June 1,900,000 10% 190,000 Pattern of sales return_ Sales January February March = April = May January 30% 20% 20% 10% February . 30 20 20 March . . 3020. April = 30 May . ; . ; June Requirement 2 Manufacturing cost Freight Total Salvage value Net loss on component returned 38,000 Returns after 06/30/2016 10% 20% 30% 50% 70% 100% 6 0 243,000 243,000 205,000 (38,000) 38,000 Amount 29,400 65,800 81,300 113,750 168,000 190,000 640,850 Total returns June as of 6/30/2016 10% 10 20 20 30 Required estimated warranty liability - 06/30/2016 (648,850 x 65%) Estimated warranty liability per book Increase in warranty liability Requirement 3 Warranty expense Estimated warranty liability 301,353 90% 80 70 50 30 70% 5 75% (10) 65% 421,753 120,400 301,353 301,353Problem 2-28 Units sold: October November December Total Multiply by Total failures expected Less: Failures already recorded: October sales November sales December sales Expected future failures Multiply by Estimated cast Warranty expense Estimated warranty liability Problem 2-29 Requirement 1 2016 Cash Sales Unearned warranty revenue 2017 Unearned warranty revenue Warranty revenue (243,000 / 3) Warranty expense Inventory Cash Requirement 2 Current liabilities: Unearned warranty revenue Noncurrent liabilities Unearned warranty revenue Problem 2-30 Answer D Warranty expense (2,400 x 300) Problem 2-31 Answer C Warranty expense (3,000 x 80) Less: Actual warranty cost Warranty liability-June 30, 2016 17 32,000 28,000 40,000 100,000 2% 2,000 640 360 180 1,180 820 150 123,000 123,000 123,000 2,943,000 2,700,000 243,000 81,000 81,000 60,000 20,000 40,000 81,000 81,000 240,000 7 120,000Problem 2-32 Answer D Warranty liability - January 1, 2016 Add: Warranty expense 2016 (2% x 4,000,000) Total Less: Warranty payments during 2016 Warranty liability - December 31, 2016 Problem 2-33 Answer A Warranty expense: 2016 (6% x 6,000,000) 360,000 2017 (6% x 10,000,000) 600,000 Actual warranty expenditures 2016 90,000 2017 300,000 Warranty liability - December 31, 2017 Problem 2-34 Answer A Warranty expense (5% x 5,000,000) Problem 2-35 Answer A Warranty expense (1% x 5,000,000) Problem 2-36 Answer B Warranty expense: 2016 (5,000,000 x 758) 2017 (7,000,000 x 7%} Warranty costs: 2016 100,000 2017 300,000 Warranty liability - December 31, 2017 Problem 2-37 Answer A Net sales (640,000 / 8%) Problem 2-38 Answer C Problem 2-39 Answer A Problem 2-40 Answer C Estimated warranty liability — January 1, 2016 Warranty expense (5,000 x 200) Actual warranty expenditures. Estimated warranty liability - December 31, 2016 Problem 2-41 Answer D Service contact revenue (42,000 x 81/3) Service expense Net income 18 60,000 80.000 140,000 50.000 90,000 960,000 390,000 370,000 250,000 50,000 350,000 490,000 840,000 400.000 440,000 $000,000 650,000 1,000,000 (_750,000) 900,000 1,134,000 734,000Problem 3-1 Sey auaweNo BP TORN 10 Problem 3-2 Salaries Withholding tax payable SSS payable Philhealth payable Pag-ibig payable Cash Payroll tax expense ‘SSS payable Philhealth payable Pag-ibig payable Problem 3-3 Frances (5% x 2,400,000) Salome (5% x 2,400,000) Gina (5% x 2,400,000) Jerry (4% x 2,400,000) Michael (2.5% x 2,400,000) Liezl (1% x 2,400,000) Problem 3-4 Office staff salaries Office salaries Sales salaries Withholding tax payable SSS payable Philhealth payable Pag-ibig payable Cash Payroll tax expense $55 payable Philhealth payable Pag-ibig payable CHAPTER 3 Commission 120,000 120,000 120,000 96,000 60,000 24,000 600,000 29,000 Salary 10,000 10,000 10,000 10,000 10,000 10,000 154,000 310,000 200,000 69,000 19 70,000 10,000 5.000 7,500 507,500 15,000 6,000 8,000 Total 130,000 130,000 130,000 106,000 70,000 34,000 129,000 25,500 20,500 13,500 475,500 26,000 25,000 18,000Problem 3-5 Answer D Income tax withheld 555 — employee (7% x 500,000) SSS — employer (7% x 500,000) Total payrall liability Payroll tax expense SSS - employer Problem 3-6 Answer D Sales including VAT Sales excluding VAT (1,400,000 / 1.12) Output VAT Payment VAT payable Problem 3-7 Answer B November room rentals December room rentals Total Sales taxes payable (15% x 260,000) Occupancy taxes payable (4,100 room nights x 2) Problem 3-8 Answer A Eligible gross wages (100,000 x 5 employees) Reimbursement of claim Liability for unemployment claims Problem 3-9 1. Cash Gift certificates payable 2. Gift certificates payable Sales 3. Gift certificates payable Forfeited gift certificates (8% x 500,000) Problem 3-10 1. Cash Gift certificates payable 2. Gift certificates payable Sales 3. Gift certificates payable Forfeited gift certificates 20 60,000 35,000 35,000 130,000 25,000 1,400,000 1,250,000 130,000 {__ 60,000) 90,000 110,000 150,000 260,000 39,000 8.200 500,000 10,000 500,000 500,000 400,000 400,000 40,000 40,000 900,000 900,000 780,000 780,000 40,000 40,000Unearned revenue - January | Add: Gift certificates sold Total Less: Gift certificates redeemed Expired gift certificates Unearned revenue - December 31 Problem 3-11 Answer C Unearned revenue - January 1 Add: Gift certificates sold Total Less: Gift certificates redeemed Unredeemed gift certificates Unearned revenue - December 31 Problem 3-12 Answer A Unearned revenue - January | Sales of gift certificates - 2016 Total Redemption of prior year sales Redemption of current year sales Unearned revenue - December 31 Problem 3-13 1. Cash Unearned service contract revenue Service contract expense Cash ‘Unearned service contract revenue Service contract revenue 2. Unearned revenue - January | Cash receipts from contracts sold Total Less: Service revenue recognized Unearned revenue - December 31 Problem 3-14 Answer B 780,000 — 40,000 1,950,000 —100,000 980,000 520,000 860,000 Outstanding contracts on December 31, 2016 that will expire during 2017 2018 2019 Unearned service contract revenue Problem 3-15 Answer B First contract year (40% x 600,000) Second contract year (60% x 600,000) Total contracts sold in 2016 21 260,000 900,000 1,160,000 820,000 340,000 650,000 2,250,000 2,900,000 2,050,000 850,000 750,000 2,500,000 3,250,000 ( 250,000) (1,750,000) ) 1,250,000 980,000 520,000 860,000 600,000 980,000 1,580,000 860,000 720,000 150,000 225,000 190,000 475,000 240,000 360,000 600,00022 Since the contracts are sold evenly, only one-half of the 40% is earned in 2016 and one-half will be earned in 2017. One-half of the 60% will be earned in 2017 and one- half will be earned in 2018_ Thus, the deferred service contract revenue in December 31, 2016 is computed as follows Total contracts sold (1,000 x 600) 600,000 Less: Contracts earned in 2016 (240,000 x 1/2) 120,000 Deferred service revenue - December 31, 2016 480,000 Service contract revenue earned in 2017 Remaining one-half of first contract year (240,000 x 1/2) 120,000 First one-half of the second contract year (360,000 x 1/2) 180,000 Total service contract revenue earned in 2017 300,000 Problem 3-16 Answer D 2016 sales 40% x 500,000 equals P200,000. This amount is earned one-half in 2016 or P100,000 and one-half in 2017 or P100,000. 60% x 500,000 equals P300,000. This amount is earned one-half in 2017 or P150,000 and one-half in 2018 or P150,000. Thus, for the 2016 sales, the amount of P150,000 is unearned on December 31, 2017. 2017 sales 40% x 600,000 equals P240,000. This amount is earned one-half in 2017 or P120,000 and one-half in 2018 or P1 20,000. 60% x 600,000 equals P360,000. This amount is earned one-half in 2018 and one-half in 2019. Thus, for the 2017 sales, the amount unearned on December 31, 2017 is P120,000 plus P360,000 or P480,000. Total unearned revenue - December 31, 2017 (150,000 + 480,000) 630,000 Problem 3-17 Answer A Monthly subscriptions (7,200,000 / 12) 600,000 The subscriptions after the September 30 cut-off are: October 600,000 November 600,000 December 600,000 Total unearned subscription revenue - December 31, 2016 1,800,000 The above subscriptions will be served in the next publication in 2017. Problem 3-18 Answer C23 Problem 3-19 Answer D The entire amount of P720,000 will be considered deferred revenue on December 31, 2016 because the subscriptions start with the January 2017 issue. Problem 3-20 Answer B 2.300,000 Problem 3-21 Answer C Question | Answer C Question 2 Answer C Subscriptions received in 2016 that will expire in 2018 125,000 Subscriptions received in 2017 that will expire in 2018 200,000 Subscriptions received in 2017 that will expire in 2019 140,000 Unearned subscription revenue - December 31, 2017 465,000 Subscription revenue for 2017 (155,000 + 130,000) 285,000 Problem 3-22 1. Cash 390,000 Containers’ deposit 390,000 Containers’ depasit 313,000 Cash 313,000 Containers’ deposit 30,000 Containers 30,000 Containers’ deposit on January 1, 2016 applicable to 2014 deliveries 75,000 Less: Containers returned in 2016 applicable to 2014 deliveries: 45,000 Balance - expired and no longer refundable 30,000 2. Containers’ depasit - January 1, 2016 290,000 Add: Containers’ deposit in 2016 390,000 Total 680,000 Less: Containers returned in 2016 313,000 Containers not returned and expired 30,000 343,000 Containers’ deposit - December 31, 2016 Problem 3-23 Answer B Liability for refundable deposit - January 1 150,000 Deposits made in 2016 (100,000 x 5) 00,000 Total 650,000 Less: Deposits refunded in 2016 (110,000 x 5) 350,000 Balance - December 31 (current liability) 100,000 The lease deposit of P25,000 is a noncurrent liability.Problem 3-24 Answer C Advances - January 1 Advances received Total Advances applied Advances canceled Advances - December 31 Problem 3-25 Answer C Liability for stamp redemptions, January 1, 2016 Add: Estimated cost of redemptions for stamp sold in 2016 (80% x 2,250,000) Total Less: Cost of redemption in 2016. Liability for stamp redemptions, December 2016 Problem 3-26 Answer C Escrow accounts liability - January 1 Add: Escrow payments received 1,580,000 Interest on escrow funds 50,000 Total Less: Real estate taxes paid 1,720,000 Service fee (10% x 50,000) 5,000 Escrow accounts liability - December 31 Problem 3-27 Answer B Escrow liability, January 1, 2016 Escrow deposit received fram January 1 to September 30, 2016 (250,000 x 9 months) Total Less: Payment for real estate tax from January | to September 30, 2016 or three quarters (2,800,000 x 3/4) Escrow liability, September 30, 2016 Problem 3-28 Answer B Sept. 1 Warehouse (2,000 x 2) 4,000 Taxes payable 30 Taxes 2,000 Taxes payable Oct. 31 Taxes 2,000 Taxes payable Nov. 1 Taxes payable 8,000 Taxes 4,000 Cash 24 1,180,000 1,840,000 3,020,000 (1,640,000) ($00,000) 880,000 6,000,000 1,800,000 7,800,000 2,750,000 2,050,000 700,000 1,630,000 2,330,000 1,725,000 605,000 300,000 2,250,000 2,550,000 2,100,000 450,000 4,000 2.000 2,000 12,000Problem 3-29 Answer C Plan #1 (50,000 x 15) Plan #2 (20,000 x 12) Total initial payments Deferred revenue - 12/31/2016 (990,000 x 8/12) Plan #2 (3,000 x 12 x 4) Plan #3 (5,000 x 9 x 4) Total monthly fees - already earned Problem 3-30 1. Bonus ($% x 5,250,000) es B= .05 (5,250,000 - B) B= 262,500 - 05B B+ 05B= 262,500 1,.05B = 262,500 B= 262,500 / 1.05 B= 250,000 Proof Income before bonus and before tax Bonus Income after bonus before tax Multiply by Bonus a: B = .05 (5,250,000 - B - T) T = .30 (5,250,000 - B) B = .05 [5,250,000 - B - .30 (5,250,000 - B)) B = .05 (5,250,000 - B - 1,575,000 + .30B) 262,500 - .0SB - 78,750 + .0156 B+.058-.015B = 262,500 - 78,750 1.0358 = 183,750 B = 183,750 / 1.035 B = 177,536 Proof Income before bonus and before tax Bonus Income after bonus before tax Tax (30% x 5,072,464) Income after bonus and after tax Multiply by Bonus 25 750,000 240,000 990,000 660,000 144,000 180,000 324,000 262.500 5,250,000 250.000) 5,000,000 —__5% 250,000 5,250,000 (_177,536) 5,072,464 (1,521,739) 3,550,725 5% 177,5364, B = .05 (5,250,000 - T) T = .30 (5,250,000 - B) B = .05 (5,250,000 - _30 (5,250,000 - B)] B = .05 (5,250,000 - 1,575,000 + .30B) B = 262,500 - 78,750 + .015B B-.O1SB = 183,750 9858 = 183,750 B = 183,750 / .985 B = 186,548 Proof Income before bonus and before tax Tax (5,250,000 - 186,548 x 30%) Income after tax and before bonus Multiply by Bonus Problem 3-31 Answer B B = .10 (1,650,000 - 8) B = 165,000 - .10B B+.108 = 165,000 1.10B = 165,000 B = 165,000 /1.10 B = 150,000 Problem 3-32 Answer A Income after bonus and tax (280,000 / 10%) Income before tax (2,800,000 / 70%) Income before bonus and tax (4,000,000 + 280,000) Proof Income before bonus and tax Less: Bonus Income before tax Less: Tax (30% x 4,000,000) Income after bonus and tax Problem 3-33 Answer A Income after bonus before tax (600,000 / 125%) Bonus (25% x 480,000) Problem 3-34 Answer B Problem 3-35 Answer B Problem 3-36 Answer D Advertisement for December 2016 Accrued rent from December 16 to December 31, 2016 (120,000 x 6/12) Accrued additional rent (3,000,000 x 5%) Total accrued liabilities 26 5,250,000 1 3,730,964 5% 186,548 2,800,000 4,000,000 4,280,000 4,280,000 280,000 4,000,000 1,200,000 2,800,000 480,000 120,000 35,000 60,000 150,000: 245,00027 CHAPTER 4 Problem 4-1 Problem 4-2 Problem 4-3 Problem 4-4 1B Teak. lA 1.0 2.0 20 2.0 2.0 3a.¢ soc 3.D 3.0 aa 4a 4.C€ 4 5. A 5. 0 5.0 6. A 6 C FE 7A B.A 8c 9..C A 10. ¢ Problem 4-5 Problem 4-6 Problem 4-7 Problem 4-8 1.8 1. A 1D 1D 2.8 ae 2.8 2.0 3. 3. B 3.0 30 4.0 4A 4.8 4.D 5A 5.0 5.4 5. B 6A 6. A 7.0 7.8 8c 8. a. 9D 10. D 10. ¢ Problem 4-9 Problem 4-10 LA 1.8 2.8 2.0 3. B 3. 0 4.8 4.8 5. B 5. 6A Bc aC Problem 4-11 |. Only a disclosure is necessary because it is not probable that the company will be liable, although the amount can be measured reliably. 2. Retained earnings 200,000 Estimated liability for income tax 200,000 3. Accounts receivable - Sunset 120,000 Loss on guaranty 80,000 Note payable ~ bank 200,000 Problem 4-12 |. Unearned subscription revenue 700,000 Subscription revenue (3,000,000 - 2,300,000) 700,00028 2. Loss on lawsuit 1,500,000 Estimated liability for lawsuit 1,300,000 3. Loss on lawsuit 1,000,000 Estimated liability for lawsuit 1,000,000 Problem 4-13 1. Loss on lawsuit 800,000 Estimated liability for lawsuit (50% x 1,600,000) 800,000 2. Environmental cost 1,500,000 Estimated liability for environmental cost 1,500,000 3. No provision is recognized for the guaranty because there is only a remote likelihood that future payment will be made. 4. Contamination clean up cost 500,000 Estimated liability for clean up cost 500,000 5. Loss on lawsuit 300,000 Estimated liability for lawsuit 300,000 Problem 4:14 The shipping company shall recognize a provision for P5,000,000 because the claim of the international freight forwarding company is probable. No provision or disclosure would be needed for the P2,000.000 claim of the international freight forwarding company because there is a remote possibility for the payment. The shipping company shall also recognize a contingent asset of P4,500,000 (90% x P5,000,000), because the amount is virtually certain of collection. Problem 4-15 Restructuring costs 1,730,000 Estimated liability for restructuring costs 1,730,000 Unpaid entitlement of retrenched 200 employees 1,500,000 Unpaid retrenchment package of one executive tasked to complete closure of Mindanao branch 200,000 Unpaid salary of the executive related to closure of Mindanao branch (60% x 50,000) Total provision for restructuring 1,730,000 The cost of P400,000 expected to be incurred in transferring the 50 employees to Manila are not included in the restructuring provision because they relate to ongoing operations. Only 60% of the January salary of the executive is included in the restructuring provision because the remainder relates to the transfer of the 50 employees to Manila and general administration,29 Problem 4-16 Lease termination penalty 4,000,000 Cost of hiring outplacement firm 6,000,000 Employee termination cost 30,000,000 Total restructuring provision 40,000,000 Problem 4:17 Requirement 1 2016 Jan. 1 Oil tanker depot 6,000,000 Cash 6,000,000 1 Oil tanker depot 930,000 Decommissioning liability (1,500,000 x 62) 930,000 Dec. 31 Depreciation 1,386,000 Accumulated depreciation (6,930,000 / 5) 1,386,000 31 Interest expense 93,000 Decommissioning liability (10% x 930,000) 93,000 Requirement 2 2020 Dec. 31 Accumulated depreciation 6,930,000 Oil tanker depot 6,930,000 31 Decommissioning liability 1,500,000 Loss on settlement of decommissioning liability 200,000 Cash 1,700,000 Problem 4-18 Requirement 1 2016 Jan. 1 Mining site 8,000,000 Cash 8,000,000 1 Mining site 926,400 Decommissioning liability (2,000,000 x 4632) 926,400 Dec. 31 Interest expense 7a liz Decommissioning liability (926,400 x 8%) 74,112 Requirement 2 2025 Dec. 31 Decommissioning liability 2,000,000 Cash 1,800,000 Gain on settlement of decommissioning liability 200,000Probl 2016 Jan. lem 4-19 | Detoxification facility 9,000,000 Cash 1 Detoxification facility 840,000 Decommissioning liability (1,500,000 x .56) Dec. 31 Depreciation 984,000 3 2018 Jan. Accumulated depreciation (9,840,000 / 10) Interest expense 30,400 Decommissioning liability (6% x 840,000) 1 Detoxification facility 126,000 Decommissioning liability (200,000 x .63) Dec. 31 Depreciation 999,750 2025 Accumulated depreciation ‘Original cost Additional cost (126,000 / 8) Total depreciation 3 Interest expense 64,189 Decommissioning liability Original liability Interest for 2016 (6% x 840,000) Carrying amount - 12/31/2016 Interest for 2016 (6% x 890,400) Carrying amount - 12/31/2017 Interest for 2018 (6% x 943,824) Interest for 2018 on additional liability (6% x 126,000) Total interest for 2018 Dec. 31 Accumulated depreciation 9,966,000 Detoxification facility Purchase price Original decommissioning cost Additional decommissioning cost Total cost 3 Decommissioning liability 1,700,000 Loss on settlement of decommissioning liability 300,000 Cash 30 9,000,000 840,000 984,000 50,400 126,000 999,750 984,000 15,750 999,750 64,189 840,000 50,400 590,400 53,424 943,824 56,629 7.560 64,189 9,966,000 9,000,000 840,000 126,000 9,966,000 2,000,00031 Problem 4-20 Answer C Cost of shipping goods 30,000 Airfare 10,000 Temporary accommodation cast for May and June 80,000 Reimbursement for lease break cost 20,000 Reimbursement for cost of living increases for May and June (120,000 x 2/12) 20,000 Total provision for relocation costs 160,000 Problem 4-21 Answer A Normal defect (500 x P10,000 x 25%) 1,250,000 Significant defect (500 x P30,000 x 15%) 2,250,000 3,500,000 Problem 4-22 Answer C Major defect (3% x P5,000,000) 150,000: Minor defect (5% x P3,000,000) 150,000 Total warranty provision 300,000 Problem 4-23 Answer D Weighted probabilities 20% x 200,000 x 70% 28,000 80% x 100,000 x 70% 56,000 Weighted cash flows 84,000 Multiply by risk adjustment factor (100% + 7%) 1.07 Adjusted cash flows 89,880 Multiply by PV of | at 5% for one period 95 Present value of cash flows 85,386 Problem 4-24 Answer C Weighted probabilities: 60% x 2,000,000 x 80% 960,000 40% x 1,000,000 x 80% Weighted cash flows 1,280,000 Risk adjustment factor (8% x 1,280,000) 102,400 Adjusted cash flows 1,382,400 Present value of cash flows (1,382,400 x .89) 1,230,336 Problem 4-25 Answer C The decision of the Supreme Court was made on February 15, 2017 which is before the issuance of the statements on February 20, 2017. Accordingly, the accrued provision should be equal to the amount of P3,500,000 decided by the Supreme Court. The date of issue of financial statements is the date when the board of directors approved the financial statements.32 Problem 4-26 Answer C Actual liability 2,800,000 Provision already recognized 2,000,000 Increase in liability _ 800.000 The provision is a present obligation on December 31, 2016. Since the court case was settled on January 31, 2017 prior to the issuance of financial statements, the settlement is an adjusting event, Problem 4-27 Answer B The probable loss is recorded but the possible loss is only disclosed. Problem 4-28 Answer C The best estimate is recorded. The accepted BIR offer is not recorded because it was made after the statements are issued. Problem 4-29 Answer D The provision should be accrued because it is probable and measurable. The accrued amount is P350,000 which is the midpoint of the range in the absence of the best estimate within the range. Problem 4-30 Answer A The guarantee should be accrued as a provision because the loss is probable and the amount can be reasonably estimated. Problem 4-31 Answer D The loss is accrued as a provision because it is probable and the amount can be reasonably estimated. Problem 4-32 Answer A The loss on the accrued as a provi: t lawsuit is both probable and measurable and therefore can be ion. Problem 4-33 Answer B Problem 4-34 Answer C Problem 4-35 Answer B Problem 4-36 Answer B Problem 4-37 Answer D Problem 4-38 Answer C The amount of the loss is P500,000 only because it is the extent of liability of Rex under the comprehensive insurance policy.33 Problem 4-39 Answer D The contingent asset is disclosed only because the case is unresolved on December 31, 2016. The issue is what amount of asset will be disclosed. Since the case is settled in March 2017 after the issuance of the 2016 financial statements, the amount P1,500,000 should be disclosed. However, if the case is settled before the issuance of the statements, the actual award of P],000,000 should be disclosed. Problem 4-40 Answer A Haze can report a gain of P1,500,000 in its 2016 income statement because this amount is already settled on December 31, 2016. However, the remainder of P3,000,000 is only disclosed because the defendant has appealed the said amount. Problem 4-41 Answer D Contingent assets are not recognized in financial statements since this may result in the recognition of income that may never be realized. A contingent asset and the related contingent gain are disclosed only where the inflow of economic benefits is probable Problem 4-42 Answer D Problem 4-43 Answer C ‘The entry on December 31, 2015 is: Loss on lawsuit 400,000 Estimated liability for lawsuit 400,000 The entry on December 31, 2016 is: Estimated liability for lawsuit 400,000 Cash 250,000 Copyright 60,000 Gain on settlement 90,000 Problem 4-44 Answer A Long term service leave - provision 1,200,000 ¢ provision is a present obligation that is uncertain in amount and timing. The present obligation must be both probable and measurable. The amount owing to another entity is a present obligation but technically it is not a provision because the amount is certain. Of course, it is an accrued liability. The estimated cost of relocating the employee is a future cost because it is to be incurred in January 2017. Thus, it is not included in December 31, 2016 provision. The estimated cost of overhaul is not a provision because there is no present obligation. The company may decide to sell the machine or not to repair it.34 CHAPTER 5 Problem 5-1 Problem 5-2 Problem 5-3 Problem 5-4 be LA 1A LA 20 2G 206 2A 3.0 3.0 3.D 3.D 4€ 4.0 4,0 4.8 5. A 5. B 5. D 6.4 6D 7.D 7.D 8. A 8.D 9.D oA 10. € 10, € Problem 5-5 Requirement 1 2016 April 1 Cash (7,000,000 x 106%) 7,420,000 Bonds payable 7,000,000 Premium on bonds payable 420,000 Oct. 1 Interest expense (7,000,000 x 12% x 6/12) 420,000 Cash 420,000 Dec. 31 Interest expense (7,000,000 x 12% x 3/12) 210,000 Interest payable 210,000 31 Premium bonds payable 31,500 Interest expense (420,000 / 10 x 9/12) 31,500 2017 Jan. 1 Accrued interest payable 210,000 Interest expense 210,000 April 1 Interest expense 420,000 Cash 420,000 Oct. | Interest expense 420,000 Cash 420,000 Dec. 31 Interest expense 210,000 Accrued interest payable 210,000 31 Premium on bonds payable 42,000 Interest expense (420,000 / 10) 42,000 Requirement 2 Noncurrent liabilities Bonds payable 7,000,000 Premium on bonds payable 346,500 Carrying amount 7,346,500Problem 5-6 Requirement 1 2016 Jan. 1 Unissued bonds payable Authorized bonds payable Jan. 1 Cash (5,000,000 x 95%) Discount on bonds payable Unissued bonds payable June 30 Interest expense (5,000,000 x 12% x 6/12) Cash Dec. 31 Interest expense Cash 31 Interest expense (250,000 / 10) Discount on bonds payable 2017 June 30 Interest expense Cash Sept. | Cash unissued bonds payable Premium on bonds payable Interest expense (2,000,000 x 12% x 2/12) Dec. 31 Interest expense Cash (7,000,000 x 12% x 6/12) 31 Interest expense Discount on bonds payable 31 Premium on bonds payable Interest expense 8,000,000 4,750,000 250,000 300,000 300,000 25,000 300,000 2,100,000 420,000 25,000 2,400 120 months - 20 = 100 months remaining 60,000 / 100 600 monthly 600x4 = 2,400 Requirement 2 Noncurrent liabilities Authorized bonds payable Less: Unissued bonds payable Issued bonds payable Premium on bonds payable Total Discount on bonds payable Carrying amount ( 35 8,000,000 5,000,000 300,000 300,000 25,000 300,000 2,000,000 60,000 40,000, 420,000 25,000 2.400 8,000,000 1,000,000 7,000,000 57,600 7,057,600 200,000)Problem 5-7 Requirement 1 2016 April 1 Cash 4,850,000 Discount on bonds payable 100,000 Bond issue cost 50,000 Bonds payable Oct. | Interest expense 300,000 Cash (5,000,000 x 12% x 6/12) Dec. 31 Interest expense 150,000 Accrued interest payable ($,000,000 x 12% x 3/12) 31 Interest expense 22,500 Discount on bonds payable (100,000 / 5 x 9/12) Bond issue cost (50,000 / 5 x 9/12) 2017 Jan. | Accrued interest payable 150,000 Interest expense April 1 Interest expense 300,000 Cash July 1 Interest expense 15,000 Discount on bonds payable (20,000 x 6/12) Bond issue cost (10,000 x 6/12) Retirement price (2,000,000 x 99%) Add: Accrued interest from April 1 to July 1, 2017 (2,000,000 x 12% x 3/12) Total payment Bonds payable retired Less: Applicable discount (2/5 x 75,000) 30,000 Applicable issue cost (2/5 x 37,500) 15,000 Carrying amount of bonds retired Less: Retirement price Loss on early retirement July 1 Bonds payable 2,000,000 Interest expense 60,000 Loss on early retirement of bonds 25,000 Cash Discount on bonds payable Bond issue cost Oct. 1 Interest expense 180,000 Cash (3,000,000 x 12% x 6/12) Dec, 31 Interest expense 90,000 Accrued interest payable (3,000,000 x 12% x 3/12) 36 5,000,000 300,000 150,000 15.000 7,500 150,000 300,000 10,000, 5,000 1,980,000 — 60,000 2,040,000 2,000,000 45,000 1,955,000 1,980,000 (25,000) 2,040,000 30,000 15,000 180,000, 90,000,2017 Dec. 31 Interest expense Discount on bonds payable (12.000 x 6/12} Bond issue cost (6,000 x 6/12) Revised annual amortization Discount (3/5 x 20,000) Issue cost (3/5 x 10,000) Requirement 2 Noncurrent liabilities Bonds payable Discount on bonds payable Bond issue cost Carrying amount Problem 5-8 Requirement I 2016 Jan, 1 Cash Bonds payable Premium on bonds payable Dec. 31 Interest expense Cash (4,000,000 x 12%) 3 Premium on bonds payable Interest expense (200,000 / 5) Bonds payable Premium on bonds payable Cash Gain on early retirement of bonds J Face of bonds payable retired Add: Applicable premium (1/4 x 160,000) Carrying amount Less; Retirement price (1,000,000 x 95%) Gain on retirement 2017 Dec. 31 Interest expense Cash (3,000,000 x 12%) 31 Premium on bends payable Interest expense (40,000 x 3/4) Requirement 2 Noncurrent liabilities Bonds payable Premium on bonds payable Carrying amount 9,000 4,200,000 480,000 40,000 1,000,000 40,000 360,000 30,000 37 6,000 3,000 12,000 6,000 3,000,000 ( 39,000) 19,500) 2,941,500 4,000,000 200,000 480,000 40,000 950,000 90,000 1,000,000 4 1,040,000 950,000 30,000 360,000 30,000 3,000,000 90,000 3,090,000Problem 5-9 Total bonds payable issued Less: Face value bonds payable retired Bonds payable - December 31, 2016 Discount on bonds payable Less: Amortization from 2009 to 2015 (300,000 / 10 x 7) Balance - January 1, 2016 Less: Discount applicable to bonds retired (3/6 x 90.000) Adjusted balance Less: Amortization for 2016 (45.000 / 3) Discount on bonds payable - December 31, 2016 2. Interest (3,000,000 x 12%) Amortization of discount for 2016 Interest expense for 2016 3. Adjusting entries on December 31, 2016: a. Retained earnings 210,000 Discount on bonds payable b. Bonds payable 300,000 Discount on bonds payable Gain on early retirement of bonds Bonds payable retired Less: Applicable discount Carrying amount Less: Retirement price Gain on early retirement c. Interest expense 15,000 Discount on bonds payable Amortization for 2016. d_ Interest expense 180,000 Accrued interest payable (3,000,000 x 12% x 1/2) Problem 5-10 1. Cash 3,900,000 Discount on bonds payable 100,000 Bonds payable - new 2. Bonds payable - old 3,000,000 Premium on bonds payable 50,000 Accrued interest payable 180,000 Loss on early retirement of bonds 10,000 Cash Bonds payable - old Premium on bonds payable Carrying amount Less: Retirement price (3,000,000 x 102) Loss on early retirement 38 6,000,000 3,000,000 3,000,000 300,000 210,000 90,000 45,000 45,000 15,000 30,000 360,000 15,000 375,000 210,000 45,000 255,000 3,000,000 45,000 2,955,000 2,700,000 255,000 15,000 180,000 4,000,000 3,240,000 3,000,000 50,000 3,050,000 3,060,000 (10,000)Retirement price Add: Accrued interest payable Total payment Problem 5-11 a. Amortization table Bond Year outstanding Fraction 2017 8,000,000 8/40 2018 8,000,000 8/40 2019 7,000,000 7/40 2020 6,000,000 6/40 2021 5,000,000 5/40 2022 4,000,000 4/40 2023 2,000,000 2/40 40,000,000 b. Journal entries 2016 Dec. 31 Cash Discount on bonds payable Bonds payable 2017 Dec. 31 Interest expense Cash 31 Interest expense Discount on bonds payable 2018 Dec. 31 Interest expense Cash 31 Interest expense Discount on bonds payable 2019 Dec. 31 Interest expense Cash 31 Interest expense Discount on bonds payable 3) Bonds payable Cash Discount amortization 64,000 64,000 56,000 48,000 40,000 32,000 16,000 320,000 Interest paid 960,000 960,000 840,000 720,000 600,000 480,000 240,000 4,800,000 7,680,000 320,000 960,000 64,000 960,000 64,000 840,000 56,000 1,000,000 39 3,060,000 180,000 3,240,000 Interest expense 1,024,000 1,024,000 896,000 768,000 640,000 $12,000 256,000 5,120,000 8,000,000 960,000 64,000 960,000 64,000 840,000 56,000 1,000,00040 Problem 5-12 Amortization table Bond Premium Interest Interest Year outstanding Fraction amortization paid expense 2017 7,000,000 7/28 105,000 840,000 735,000 2018 6,000,000 6/28 90,000 720,000 630,000 2019 5,000,000 5/28 75,000 600,000 525.000 2020 4,000,000 4/28 60,000 480,000 420,000 2021 3,000,000 3/28 45,000 360,000 315,000 2022 2,000,000 2/28 30,000 240,000 210,000 2023 1,000,000 1/28 15,000 120,000 105,000 28,000,000 420,000 3,360,000 2,940,000 2016 Dec. 31 Cash 7,420,000 Bonds payable 7,000,000 Premium on bonds payable 420,000 2017 Dec. 31 Interest expense 840,000 Cash 840,000 31 Premium on bonds payable 105,000 Interest expense 105,000 31 Bonds payable 1,000,000 Cash 1,000,000 2018 Dec. 31 Interest expense 720,000 Cash 720,000 31 Premium on bonds payable 90,000 Interest expense 90,000 31 Bonds payable 1,000,000 Cash 1,000,000 31 Bonds payable 1,000,000 Premium on bonds payable 30,000 Loss on early retirement of bonds 20,000 (Cash (1,000,000 x 105) 1,050,000 420,000 / 28,000,000 = .015 per year 1,000,000 x .015x2 = 30,000 Problem 5-13 Answer B Problem 5-14 Answer D Sinking fund bonds 1,100,000 9% debentures 3,500,000 Industrial revenue bonds 900,000 11% Collateral trust bonds 3,000,000 Total serial bonds 2,000,000 Total terms bonds 6,500,000 Problem 5-15 Answer D Debenture bands are unsecured bonds or bonds withoui collateral security. Collateral trust bonds are bonds secured by investments in shares and bonds.4l Problem 5-16 Question | Answer A Question 2 Answer A Serial bonds Debenture bond 9% Registered bonds 2,750,000 2,750,000 11% Convertible bonds 1,250,000 10% Commodity backed bonds 2,000,000 si -_ Total 4,750,000 4,000,000 Problem S-17 Answer A Issue price (5,000,000 x 110) 5,500,000 Accrued interest from July 1 to October 1, 2016 (5,000,000 x 12% x 3/12) 150,000 Total 5,650,000 Less: Bond issue cost 200.000 Net cash received 5,450,000 Problem 5-18 Answer C Issue price (4,000,000 x 995) 3,960,000 Accrued interest from January 1 to April 1, 2016 (4,000,000 x 8% x 3/12) 80,000 Total 4,040,000 Less: Band issue cost 140,000 Net cash received 3,900,000 Problem 5-19 Answer D Issue price (4,000,000 x 103%) 4,120,000 Accrued interest from January | - March |, 2016 60,000 Total 4,180,000 Less: Bond issue cost 200,000 Net cash received from bond issuance 3,980,000 Problem 5-20 Answer B Bonds payable 5,000,000 Premium on bonds payable (4% x 5,000,000) 200,000 Bond issue cost (125,000) Bond liability 5,075,000 Problem 5-21 Answer D Issue price (4,000,000 x 99%) 3.960.000 Bonds payable 4,000,000 Discount on bands payable (40,000) Bond issue cost 340,000) Bond liability 3,620,000 Problem 5-22 Answer B All costs incurred 2150,000Problem 5-23 Answer B Cash received Accrued interest from June 30 to November 1, 2016 (5,000,000 x 6% x 4/12) Issue price of bands payable Face value Premium on bonds payable Problem 5-24 Answer B Accrued interest payable fram October | to December 31, 2016 (4,000,000 x 8% x 3/12) 42 5,150,000 (_100,000) 5,050,000 5,000,000 ——20.000 80.000 The nominal interest of 8% is used in determining the accrued interest payable. Problem 5-25 Answer D Accrued interest payable from July 1 to September 30, 2016 (3,000,000 x 12% x 3/12) Problem 5-26 Answer B Bonds payable Add: Premium on bonds payable Total Less: Discount on bonds payable Carrying amount Less: Retirement price (5,000,000 x 98%) Gain on retirement Problem 5-27 Answer D Bonds payable Less: Discount on bonds payable Carrying amount Carrying amount retired (4,000,000 / 8,000,000 x 7,570,000) Less: Retirement price (4,000,000 + 100,000) Loss on early extinguishment Problem 5-28 Answer A Discount on bonds payable (2% x $,000.000) Less: Amortization from January 1, 2005 to January 1, 2017 (100,000 x 12/15) Balance - January 1, 2017 Bond issue cost Less: Amortization from January 1, 2005 to January 1, 2017 (200,000 x 12/15) Balance - January |, 2017 90,000, 5,000,000 30,000 5,030,000 50,000 4,980,000 4,900,000 80,000 8,000,000 430,000 2,520,000 3,785,000 4,100,000 (315,000) 100,000 80,000 20,000 200,000 160,000 40,000Bonds payable Less: Discount on bonds payable 20,000 Bond issue cost 40,000 Carrying amount - January 1, 2017 Less: Retirement price (5,000,000 x 102) Loss on retirement Problem S-29 Answer B Problem 5-30 Answer A Problem 5-31 Answer A Carrying amount - December 1, 2013 Carrying amount - December 31, 2015 Amortization for 25 months Monthly amortization (150,000 / 25) Carrying amount - December 31, 2015 Less: Amortization of premium from January | to September 1, 2016 (6,000 x 8) Carrying amount - September 1, 2016 Less: Retirement price at face Gain on early retirement Problem 5-32 Question | Answer A Interest expense (6% x 4,000,000) Question 2 Answer D Bonds payable 1/1/2016 Fair value - 12/31/2016 (4,000,000 x 95%) Increase in fair value of bonds payable — loss Loss from change in fair value 122,400 Bonds payable Problem 5-33 Question | Answer A Nominal interest (12% x P5,000,000) Question 2 Answer A Carrying amount - 1/1/2016 Carrying amount - 12/31/2016 Decrease in liability - gain 43 5,000,000 60,000 4,940,000 1 (160,000) 5,300,000 5,150,000 150,000 5,000 5,150,000 48,000 5,102,000 5,000,000 102,000 240,000 3,677,600 3,800,000 (122,400) 122,400 600,000 5,385,000 5,125,000 260,00044 Problem 5-34 Answer B Carrying amount - 1/1/2016 7,600,000 Carrying amount - 12/31/2016 8,400,000 Increase in liability - loss 800,000 Loss on credit risk 150,000 Loss from change in fair value 650,000 Problem 5-35 Question | Answer B Carrying amount - January 1. 2016 1,077,200 Question 2 Answer A Interest expense for 2016 (12% x 1,000,000) 120,000 Under the fair value option, the interest expense is computed using the nominal rate. Question 3 Answer © Fair value - January 1, 2016 1,077,200 Fair value - December 31, 2016 1,064,600 Gain from change in fair value 12,600 PFRS 9, paragraph 4.2.2, allaws the measurement of a financial liability at fair value. Under the fair value option, the bond payable is measured at fair value at every year. end and any change in fair value is recognized generally in profit or loss. The accounting rules for discount or premium amortization no longer apply. Question 4 Answer A Carrying amount - December 31, 2016 1,064,600 Under the fair value option, the carrying amount of the bonds payable is always the fair value at every year-end. Question S 2016 Jan. | Cash 1,077,200 Bonds payable 1,077,200 July 1 Interest expense 6,000 Cash 6,000 Dec. 31 Interest expense 6,000 Interest payable 6,000 Bonds payable 12,600 Gain from change in fair value 12,600 (1,077,200 - 1,064,600)CHAPTER 6 Problem 6-1 Problem 6-2 1D 1.0 2.0 2.0 3A 3. D 4.8 4c 5. B Problem 6-4 Requirement 1 Jan. 1 Cash Bonds payable Premium on bonds payable Dec. 31 Interest expense (6,000,000 x 12%) Cash 31 Premium on bonds payable Interest expense Interest paid Interest expense (10% x 6,737,000) Premium amortization Requirement 2 Noncurrent liabilities Bonds payable Premium on bonds payable (737,000 - 46,300) Carrying amount Problem 6-5 Requirement 1 Interest Interest Date paid expense 01/01/2016 06/30/2016 150,000 192,740 12/31/2016 150,000 194,450 06/30/2017 150,000 196,228 12/31/2017 150,000 198,082 6,737,000 720,000 46,300 Discount amortization 42,740 44,450 46,228 48,082 45 Problem 6-3 ic CaN mau awn APSNOnmnarg 10. 12. 6,000,000 737,000 720,000 46,300 720,000 673,700 46,300 6,000,000 690.700 6,690,700 Carrying amount 4,818,500 4,861,240 4,905,690 4,951,918 5,000,000Requirement 2 2016 Jan. 1 Cash Discount on bonds payable Bonds payable June 30 Interest expense Cash Discount on bonds payable Dec. 31 Interest expense Cash Discount on bonds payable 2017 June 30 Interest expense Cash Discount on bonds payable Dec. 31 Interest expense Cash Discount on bonds payable st Bonds payable Cash Problem 6-6 a. Amortization table Interest Interest Date paid expense 01/01/2016 06/30/2016 240,000 273,868 12/31/2016 240,000 277,255 06/30/2017 240,000 280,980 12/31/2017 240,000 285,078 06/30/2018 240,000 289,586 12/31/2018 240,000 294,551 b. Journal entries 2016 Jan. 1 Cash Discount on bonds payable Bonds payable June 30 Interest expense Cash Discount on bonds payable 2018 Dec. 31 Interest expense Cash Discount on bonds payable 4,818,500 181,500 192,740 194,450 196,228 198,082 5,000,000 Discount amortization 33,868 37,255 40,980 45,078 49,586 54,551 2,738,682 261,318 273,868 294,551 46 5,000,000 150,000 42,740 150,000 44,450, 150,000 46,228 150,000 48,082 5,000,000 Carrying amount 2,738,682 2,772,550 2,809,805 2,850,785 2,895,863 2,945,449 3,000,000 3,000,000 240,000 33,868 240,000 54,55)2019 Jan. 1 Bonds payable 3,000,000 Cash Problem 6-7 |. Amortization table Interest Interest Discount Date paid expense amortization 04/01/2016 10/01/2016 120,000 105,076 14,924 04/01/2017 120,000 104,330 15,670 10/01/2017 120,000 103,546 16,454 04/01/2018 120,000 102,724 17,276 10/01/2018 120,000 101,860 18,140 04/01/2019 120,000 100,944 19,056 2. Journal entries 2016 Apr. 1 Cash 2,101,520 Bonds payable Premium on bonds payable Oct. 1 Interest expense 105,076 Premium on bonds payable 14,924 Cash Dec. 31 Interest expense 60,000 Accrued interest payable 31 Premium on bonds payable 7,835 Interest expense (15,670 x 1/2) 2017 Jan. | Accrued interest payable 60,000 Interest expense Apr. 1 Interest expense 120,000 Cash 1 Premium on bonds payable 7,835 Interest expense Oct. 1 Interest expense 103,546 Premium on bonds payable 16,454 Cash Dec. 31 Interest expense 60,000 Accrued interest payable 31 Premium on bonds payable 8,638 Interest expense (17,276 x 3/6) 47 3,000,000 Carrying amount 2,101,520 2,086,596 2,070,926 2,054,472 2,037,196 2,019,056 2,000,000 2,000,000 101,520 120,000 60,000. 7,835 60,000 120,000 7,835 120,000 60,000 8,638Problem 6-8 Requirement 1 Interest expense for 2017 (3,805,600 x 10%) Interest paid for 2017 Discount amortization Bonds payable Issue price - proceeds from issuance Discount on bonds payable - 12/31/2016 Amortization for 2017 Discount on bonds payable - 12/31/2017 Bonds payable Payment on 12/31/2017 Bonds payable - 12/31/2017 Discount on bonds payable Carrying amount - 12/31/2017 Requirement 2 1. Cash Discount on bonds payable Bonds payable 2. Interest expense Cash 3. Interest expense Discount on bonds payable 4. Bonds payable Cash Problem 6-9 1. December 31, 2016 Principal payment Interest payment (6,000,000 x 6%) Total payment - 12/31/2016 December 31, 2017 Principal payment Interest payment (4,000,000 x 6%) Total payment - 12/31/2017 December 31, 2018 Principal payment Interest payment (2,000,000 x 6%) Total payment - 12/31/2018 Present value December 31, 2016 (2,360,000 x .9259) December 31, 2017 (2,240,000 x .8573) December 31, 2018 (2,120,000 x .7938) Total present value 3,805,600 194,400 320,000 60,560 800,000 48 380,560 320,000 60,560 4,000,000 194,400 60,560 133,840 4,000,000 800,000) 3,200,000 (_133,840) 2,066,160 4,000,000 320,000 60,560 800,000 2,000,000 — 360,000 2,360,000 2,000,000 240,000 2,240,000 2,000,000 120,000 2.120.000 2,185,124 1,920,352 1.682.856 53.288,3322. Cash 5,788,332 Discount on bonds payable 211,668 Bonds payable Interest expense 360,000 Cash (6% x 6,000,000) Interest expense 103,067 Discount on bonds payable Interest expense (8% x 5,788,332) Interest paid Discount amortization Bonds payable 62,000,000 Cash 3. Bonds payable - 1/1/2016 Discount on bonds payable Principal payment on 12/31/2016 Carrying amount - 12/31/2016 Problem 6-10 Requirement 1 PV of interest payment on 6/30/2016 (240,000 x .9615) PV of principal and interest payment on 12/31/2016 (2,000,000 + 240,000 x .9246) PV of interest payment on 6/30/2017 (120,000 x .8890) PV of principal and interest payment on 12/31/2017 (2,000,000 + 120,000 x .8548) Total present value Requirement 2 Interest Interest Premium Principal Date paid expense amortization payment 1/01/2016 06/30/2016 240,000 168,829 71,171 12/31/2016 240,000 165,982 74,018 2,000,000 06/30/2017 120,000 83,021 36,979 12/31/2017 120,000 81,448 38,552 2,000,000 Requirement 3 1/01/2016 Cash 4,220,720 Bonds payable Premium on bonds payable 6/30/2016 Interest expense 240,000 Cash Premium on bonds payable 7,171 Interest expense 49 6,000,000 360,000 103,067 463,067 360,000 103.067 2,000,000 6,000,000 ( 108,601) (2,000,000) 3,891,399 230,760 2,071,104 106,680 1,812,176 4,220,720 Carrying amount 4,220,720 4,149,549 2,075,531 2,038,552 4,000,000 220,720 240,000 71,17112/31/2016 Interest expense Cash Premium on bonds payable Interest expense Bonds payable Cash 6/30/2017 Interest expense Cash Premium on bonds payable Interest expense 12/31/2017 Interest expense Cash Premium on bonds payable Interest expense Bonds payable Cash Problem 6-11 PV of principal (7,000,000 x .456) PV of interest (350,000 x 13.59) Total issue price Interest Interest Date paid expense 3/1/2016 9/1/2016 350,000 317,940 3/1/2017 350,000 316,658 2016 March 1 Cash Bonds payable Premium on bonds payable Sept. | Interest expense Premium on bonds payable Cash Dec. 31 Interest expense Accrued interest payable (7,000,000 x 10% x 4/12) Premium on bonds payable Interest expense (33,342 x 4/6) Problem 6-12 PV of principal (6,000,000 x .57) PV of interest (600,000 x 3.60) Total issue price 240,000 74,018 2,000,000 120,000 36,979 120,000 38,552 2,000,000 Premium amortization 32,060 33,342 7,948,500 317,940 32,060 233,333 22,228 50 240,000 74,018 2,000,000 120,000 36,979 120,000 38,552 2,000,000 3,192,000 4,756,500 2.248.500 Carrying amount 7,948,500 7,916,440 7,883,098 7,000,000 948,500 350,000 233,333 22,228 3,420,000 2,260,000 5,380,000Interest Interest Premium Date paid expense amortization 6/1/2016 6/1/2017 600,000 669,600 69,600 6/1/2018 600,000 667,952 77,952 2016 June | Cash 5,580,000 Discount on bonds payable 420,000 Bonds payable Dec. 31 Interest expense 350,000 Accrued interest payable (600,000 x 7/12) 31 Interest expense 40,600 Discount on bonds payable (69,600 x 7/12) 2017 Jan. 1 Accrued interest payable Interest expense June 1 Interest expense Cash Interest expense Discount on bonds payable (69,600 x 5/12) Dec. 31 Interest expense Accrued interest payable Interest expense Discount on bonds payable (77,952 x 7/12) Problem 6-13 2016 Jan. 1 Cash Bonds payable Dec. 31 Interest expense Cash 31 Loss from change in fair value Bonds payable 2017 Dec. 31 Interest expense Cash 31 Bonds payable Gain from change in fair value Carrying amount - 12/31/2016 Fair value - 12/31/2016 Present value of interest (500,000 x 3.312) Present value of principal (5,000,000 x 0.735) Loss from change in fair value 350,000 600,000 29,000 350,000 45,472 5,000,000 300,000 331,000 500,000 570,000 1,656,000 3,675,000 51 Carrying amount 5,580,000 5,649,600 5,727,552 6,000,000 350,000 40,600 350,000 600,000 29,000 350,000 45,472 5,000,000 500,000 331,000 500,000 570,000 5,000,000 ( 1 ) 331,000)52 Carrying amount - 12/31/2017 5,331,000 Fair value - 12/31/2017 Present value of interest (500,000 x 2.402) 1,201,000 Present value of principal (5,000,000 x 0.712) 3,560,000 (4,761,000) Gain from change in fair value 570,000 Problem 6-14 Answer B Interest expense from January | to June 30, 2016 (5,316,000 x 12%x 6/12) 318,960 Problem 6-15 Answer D Interest expense (3,504,000 x 10% x 6/12) 175,200 Interest paid (4,000,000 x 8% x 6/12) 160,000 Discount amortization for six months 15,200 Problem 6-16 Answer B Interest expense from January 1 to June 30, 2016 (3,987,000 x 12%x 6/12) 239,220 Problem 6-17 Answer A Interest expense (10% x 3,756,000) 375,600 Interest paid (9% x 4,000,000) 360,000 Discount amortization 15,600 Discount on bonds payable 244,000 Less: Amortization for 2016 15.600 Balance - December 31, 2016 228,400 Problem 6-18 Answer B Interest expense (5,676,000 x 8%) 454,000 Interest paid (5,000,000 x 10%) 500,000 Premium amortization 46,000 Premium on bonds payable 675,000 Less: Amortization for 2016 46,000 Balance - December 31, 2016 629,000 Problem 6-19 Answer C Interest expense (5,250,000 x 6%) 315,000 Interest paid (5,000,000 x 7%) 350,000 Premium amortization for 2016 35,000 Premium on bonds payable, January 1, 2016 250,000 Less; Premium amortization for 2016 — 35.000 Balance - December 31, 2016 215,000 Problem 6-20 Answer B Interest expense (4,695,000 x 10% x 6/12) 234,750 Interest paid (5,000,000 x 9% x 6/12) 225,000 Amortization of discount, January 1 to June 30, 2016 9,75053 Bonds payable 5,000,000 Discount on bonds payable (305,000 - 9,750) 295,250 Carrying amount - June 30, 2016 4,704,750 Problem 6-21 Answer B Issue price (5,000,000 x 98) 4,900,000 Bonds payable 5,000,000 Discount on bonds payable ( 100,000) Bond issue cost (140,000) Carrying amount 4,760,000 Interest expense (12% x 4,760,000) 371,200 Interest paid (10% x 5,000,000) 500.000 Amortization of discount and issue cost 71,200 Bonds payable 5,000,000 Bond discount and issue cost (240,000 - 71,200) (168,000) Carrying amount - 12/31/2016 4,831,200 Note that under the effective interest method, the discount on bends payable and bond issue cost must be “lumped” together. Problem 6-22 Answer A Interest Interest Premium Carrying Date paid expense amortization amount 1/1/2016 4,580,000 7/2016 250.000 274,800 24,800 4,604,800 V/1/2017 250,000 276,288 26,288 4,631,088 551.088 Problem 6-23 Answer C Issue price (5,000,000 x 110) 5,500,000 Bonds payable 5,000,000 Premium on bonds payable 500,000 Bond issue cost (__ 80,000) Carrying amount 5,420,000 Interest expense (6% x 5,420,000) 325,200 Interest paid (8% x 5,000,000) 400,000 Amortization of discount and issue cost 74,800 Bonds payable 5,000,000 Premium on bonds payable (420,000 - 74,800) 345,200 Carrying amount - 12/31/2016 5,345,200 Note that under the effective interest method, the bond issue cost must be “netted” against the premium on bonds payable. Problem 6-24 Answer B Interest expense (10% x 4,757,000) 475,700 Interest expense (8% x 5,000,000) 400,000 Discount amortization 75,70054 Bonds payable 5,000,000 Payment on December 31, 2016 (1,000,000) Discount on bonds payable (243,000 - 75,700) (_167,300) Carrying amount - December 31, 2016 3,832,700 Problem 6-25 Answer A Interest expense (3,680,000 x 10%) 368,000 Interest paid (4,000,000 x 9%) 360,000 Annual amortization of discount 8,000 Amortization from January I te July 1, 2016 (8,000 x 6/12) 4,000 Bonds payable 4,000,000 Discount on bonds payable (320,000 - 4,000) (_316,000) Carrying amount - July 1, 2016 3,684,000 Retirement price (4,000,000 x 193) 4.1 Loss on retirement 436,000 Problem 6-26 Answer A Gain on extinguishment (4,800,000 - 4,400,000) 400,000 Problem 6-27 Answer B Interest expense (12% x 5,700,000 x 6/12) 342,000 Interest paid (10% x 6,000,000 x 6/12) 300,000 Discount amortization 42,000 Carrying amount - 1/1/2016 5,700,000 Carrying amount - 12/31/2016 5,742,000 Retirement price (6,000,000 x 102) 6,120,000 Loss on retirement (378,000) Problem 6-28 Answer D PV of principal (5,000,000 x .3855) 1,927,500 PV of annual interest payments (400,000 x 6.145) 2,458,000 Total present value or issue price of bonds 4,385,500 Problem 6-29 Answer B 2,000,000 x 20% x .952 380,800 2,000,000 x 50% x .907 907,000 2,000,000 x 30% x .864 518.400 Total present value of cash flow 7,806,200 Problem 6-30 Answer D PV of 1 at 4% for 20 periods 46 PV of an ordinary annuity of 1 at 4% for 20 periods 13.59 PV of principal (2,000,000 x .46) 920,000 PV of semiannual interest payments (100,000 x 13.59) 1,359,000 Issue price of bonds 2,279,000 The term of the bonds is 10 years and the interest is payable semiannually. Therefore, there are 20 interest periods. Accordingly, the present value factor should be for the semiannual effective rate of 4% for 20 interest periods.55 Problem 6-31 Answer C Present value of principal (1,000 x .422) 422 Present value of interest (60 x 6.418) 385 Issue price of P1,000 bond 807 Problem 6-32 Answer D Carrying amount of bonds (5,000,000 x 99% - 150,000) 4,800,000 Interest expense (4,800,000 x 11.66%) 559,680 Let X = the effective rate X = 4,800,000 11% = 4,877,850 12% = 4,759,900 This means that the effective rate is higher than 11% but lower than 12%. Thus, by interpolation, the interest differential is determined as follows: 4 4,877, 4,759,900 - 4,877,850 77,850 117,950 Thus, the effective rate is 11% plus the differential of .66 or 11.66%. Problem 6-33 Answer C Issue price 4,395,800 Bond issue cost (137,430) Net proceeds 4,258,370 Using an interest rate of 5%, the relevant PV factors are: PY of I at 5% for 8 periods 6768. PY of an ordinary annuity of | at 5% for 8 periods 6.4632 The market price of the bonds is determined as follows PY of principal (4,000,000 x .6768) 2,707,200 PY of semiannual interest payment (240,000 x 6.4632) - rounded 1,551,170 Market price af bonds 4,258,370 Since the maturity is 4 years and the interest is payable semiannually, there are 8 interest periods. Since the market price using 5% for 8 periods is equal to the net proceeds. the effective rate of interest must be 10% annually for 4 years.CHAPTER 7 Problem 7-1 Problem 7-2 Problem 7-3 1. B 1B 1.0 2. 8 2A 2.0 3. A 32°C 3. D 4. D 4.8 4.6 5. Problem 7-5 Cash (5,000,000 x 120) Bonds payable Premium on bonds payable Share warrants outstanding Issue price with warrants (5,000,000 x 120) 6,000,000 Market price of bonds without warrants (5,000,000 x 1.147) Equity component Interest expense (5,000,000 x 8%) Cash Premium on bonds payable (400,000 - 344,100) Interest expense (6% x 5,735,000 = 344,100) - Cash (20,000 shares x 30) Share warrants outstanding Share capital (20,000 x 25) Share premium Problem 7-6 Jan. 1 Cash Discount on bonds payable Bonds payable Share warrants outstanding Dec. 31 Interest expense (5,000,000 x 12%) Cash 31 Interest expense Discount on bonds payable Interest paid Interest expense (14% x 4,657,000) Discount amortization 31 Cash (25,000 x 100) Share warrants outstanding Share capital (25,000 x 50) Share premium 400,000 55,900 600,000 265,000 5,100,000 343,000 600,000 51,980 2,500,000 443,000 56 Problem 7-4 SPL oFoPo 5,000,000 735,000 265,000 6,000,000 5,735,000 265,000 400,000 55,900 500,000 365,000 5,000,000 443,000 600,000 51,980 600,000 651,980 51,980 1,250,000 1,693,000Problem 7-7 Jan. 1 Cash Bonds payable Premium on bonds payable Share warrants outstanding (6% x FV) (5% x CA) Interest Interest Date paid expense O1/O1/2016 06/30/2016 480,000 429,280 12/31/2016 480,000 426,744 PV of principal (8,000,000 x .61) PV of interest (480,000 x 7.72) Total PV of bonds payable June 30. Interest expense Premium on bonds payable Cash Dec. 31 Interest expense Premium on bonds payable Cash 31 Cash (16,000 x 150) Share warrants outstanding Share capital (16,000 x 100) Share premium Problem 7-8 Present value of principal (2,000,000 x 0.77) Present value of interest payments (120,000 x 2.53) Total present value Face value Discount on bonds payable 1. Cash Discount on bonds payable Bonds payable Share premium - conversion p 2. Interest expense Cash (6% x 2,000,000) 3, Interest expense Discount on bonds payable Interest paid Interest expense (9% x 1,843,600) Discount amortization 4. Bonds payable Share premium - conversion privilege Discount on bonds payable Share capital (50,000 x 20) Share premium - issuance 9,600,000 Premium amortization 50,720 53,256 429,280 50,720 426,744 53,256 2,400,000 1,014,400 2,200,000 156,400 120,000 45,924 2,000,000 356,400 37 8,000,000 585,600 1,014,400 Carrying amount 8,585,600 8,534,880 8,481,624 4,880,000 3,205,600 8,585,600 480,000 480,000 1,600,000 1,814,400 1,540,000 303,600 1,843,600 2,000,000 156,400 2,000,000 356,400 120,000 45,924 120,000 165.924 45,924 110,476 1,000,000 1,245,924Problem 7-9 |, Cash (5,000,000 x 105%) 5,250,000 Discount on bonds payable 300,000 Bonds payable Share premium - conversion privilege 2. Interest expense (14% x 4,700,000) 658,000 Discount on bonds payable Cash (12% x 5,000,000) 3. Bonds payable 5,000,000 Share premium - conversion privilege 550,000 Discount on bonds payable Share capital Share premium - issuance Bonds payable Discount on bonds payable Share premium — conversion privilege Total consideration Share capital issued (40,000 shares x 100) Share premium - issuance Problem 7-10 Bonds payable 5,000,000 Share premium - conversion privilege 500,000 Premium on bonds payable 250,000 Share capital (50.000 x 50) Share premium ~ issuance Share premium - issuance 200,000 Cash Problem 7-11 PV of principal (4,000,000 x .79) PV of interest (240,000 x 2.58) Issue price of bands without conversion privilege Face value Discount on bonds payable Issue price of bonds with conversion option (4,000,000 x 105) Issue price of bonds without conversion option Equity component 1. Cash 4,200,000 Discount on bonds payable 220,800 Bonds payable Share premium - conversion privilege 2. Bonds payable 4,000,000 Interest expense (6% x 4,000,000) 240,000 Cash Share premium - conversion privilege 420.800 Share premium - issuance 58 5,000,000 550,000 $8,000 600,000 242,000 4,000,000 1,308,000 5,000,000 ( 242,000) 550,000 5,308,000 4,000,000 1,308,000 2,500,000 3,250,000 200,000 3,160,000 619,200 3,779,200 4,000,000 220,800 4,200,000 3,279,200 420,800 4,000,000 420,800. 4,240,000 420,80059 Problem 7-12 |. Cash 6,000,000 Bonds payable 3,000,000 Premium on bonds payable 399,300 Share premium - conversion privilege 600,700 2. Bonds payable 5,000,000 Premium on bonds payable 178,300 Share premium - conversion privilege 150,000 Loss on extinguishment 221,700 Cash 5,550,000 Total payment 5,550,000 Liability component 5,400,000 Equity component 150,000 Carrying amount of bends payable 5,178,300 Payment applicable to bonds payable 5,400,000 Loss on extinguishment 221,700) Interest expense (10% x 5,000,000) 500,000 Cash 500,000 Share premium - conversion privilege 450,700 Share premium — issuance 450,700 (600,700 - 150,000) Problem 7-13 Answer B Present value of principal (5,000,000 x 0.52) 2,600,000 Present value of interest payments (600,000 x 3.43) 2,058,000 Issue price of bonds 4,658,000 Face value 5,000,000 Discount on bonds payable 342,000 Problem 7-14 Answer A PFRS 9 requires that an amount is allocated to the bonds payable equal to the market value of the bonds ex-warrants and any residual amount js allocated to the warrants. Problem 7-15 Answer A PV of principal (5,000,000 x .57) 2,850,000 PY of interest (550,000 x 3.60) 1,980,000 PY of bonds payable 4,830,000 Issue price (5,000,000 x 109) 5,450,000 PV of bonds payable 4,830,000 Share warrants outstanding 620,000 Problem 7-16 Answer B Problem 7-17 Answer A Issue price of bonds with conversion privilege (5,000,000 x 110) 5,500,000 Market value of bonds without conversion privilege (5.000.000 x 103) 5,150,000 Residual amount allocated to conversion privilege 350,000Problem 7-18 Answer C PV of principal (5,000,000 x .77) PV of interest (300,000 x 2.53} PV of bonds payable Issue price {5,000,000 x 110) PY of bonds payable Share premium Problem 7-19 Answer B Problem 7-20 Answer B PY of principal (2,000,000x .681) PY of interest (100,000 x 3.993) Total present value Problem 7-21 Answer C Issue price (2,000 x P2,000) Fair value of bonds without option (2,000 x P1,500} Equity component Problem 7-22 Answer B Face value Premium on bonds payable Carrying amount Carrying amount converted (2,000 / 5,000 x 5,300,000) Par value of share capital (2,000 x 50 x 10) Conversion expenses Share premium Problem 7-23 Answer D Carrying amount of bonds converted (9,500,000 x 5/10) Applicable share premium - conversion privilege (2,000,000 x 5/10) Total consideration Par value of shares issued (200,000 x 20) Share premium - issuance Problem 7-24 Answer A Bonds payable Premium on bonds payable Carrying amount Ordinary shares issued at par value (6,000 shares x 50) Share premium 60 3,850,000 759,000 2,609,000 5,500,000 4 4,609,000 891,000 1,362,000 399,300 1,761,300 4,000,000 3,000,000 1,000,000 5,000,000 300,000 5,300,000 2,120,000 1,000,000 1,120,000 20,000 1,100,000 4,750,000 1,000,000 5,750,000 4,000,000 1,250,000 600,000 12,000 612,000 300,000 312,000Problem 7-25 Answer D Journal entries Bonds payable 5,000,000 Interest expense (6% x 5,000,000) 300,000 Cash Share premium - conversion privilege 485.000 Share premium - issuance Problem 7-26 Question | Answer C Question 2 Answer D Question 3 Answer B Fair value of bonds with conversion option (4,000,000 x 105) Fair value of bonds without conversion option (4,000,000 x 95) Equity component Bonds payable Discount on bonds payable Carrying amount Payment equal to fair value of bonds without conversion option Loss on extinguishment Fair value of bonds with conversion aption Interest expense (6% x 4,000,000) Total payment to bondholders 61 5,300,000 485.000 3,500,000 300,000 4,440,000 4,200,000 3.800.000 400,000 4,000,000 {_ $00,000) 3,500,000 3,800,000 —300,000 4,200,000 __ 240,000 4,440,000 )62 CHAPTER 8 Problem 8-1 Problem 8-2 1D 126 2¢ zag 3.0 3.8 4. D 4.8 3. 8B 6. D 7A 8D 9.0 10. B Problem 8-3 1. Land 1,000,000 Cash 190,000 Note payable 900,000 2. Interest expense (10% x 900,000) 90,000 Accrued interest payable 90,000 3. Interest expense 99,000 Accrued interest payable (900,000 + 90.000 x 10%) 99,000 4. Note payable 900,000 Accrued interest payable 189,000 Cash 1,089,000 Problem 8-4 1. Machinery 750,000 Discount on note payable 250,000 Cash 200,000 Note payable 800,000 2. Note payable 200,000 Cash 200,000 3. Interest expense 100,000 Discount on note payable 100,000 Year Note payable Fraction Amortization 2016 800,000 8/20 100,000 2017 600,000 6/20 75,000 2018 400,000 4/20 50,000 2019 200,000 2/20 25,000 2,000,000 250,000 Problem 8-5 1. Building (500,000 + 3,602,700) 4,102,700 Discount on note payable 897,300 Cash 500,000 Note payable 4,500,000Face of note Present value (1,500,000 x 2.4018) Imputed interest 2. Note payable Cash 3. Interest expense Discount on note payable (12% x 3,602,700) Problem 8-6 |. Land (1,250,000 + 2,847,200) Discount on note payable Cash Note payable Face value of note payable Present value (4,000,000 x .711.8) imputed interest 2. Interest expense Discount on note payable (125 x 2,847,200) 3. Note payable Cash Problem 8-7 Requirement a 2016 Jan. 1 Accrued interest payable Interest expense Reversing entry for accrued interest on December 31, 2015 (2,800,000 x 12% x 9/12) April | Interest expense (12% x 2,800,000) Note payable ~ bank Cash July 1 Cash Discount on note payable Note payable - shareholder Dec. 31 Interest expense 1,500,000 432,324 4,097,200 1,152,800 341,664 4,000,000 252,000 336,000 700,000 1,774,000 226,000 189,000 Accrued interest payable (2,100,000 x 12% x 9/12) 31 Interest expense Discount on note payable (226,000x 1/2} Requirement b Note payable - bank Note payable - shareholder Discount on note payable Accrued interest payable Total current liabilities 113,000 2,000,000 (113,000) 63 4,500,000 3,602,700 897,300 1,500,000 432,324 1,250,000 4,000,000 4,000,000 2,847,200 1,152,800 341,664 4,000,000 252,000 1,036,000 2,000,000 189,000 113,000 700,000 1,887,000 189.000 2,776,00064 Requirement c Note payable ~ bank: January 1 - April 1, 2016 (2,800,000 x 12% x 3/12) 84,000 April 1 - December 31, 2016 (2,100,000 x 12% x 9/12) 189,000 273,000 Nate payable - shareholder: Amortization of discount from July | - December 31, 2016 (226,000 x 6/12) 113,000 Total interest expense 386,000 Problem 8-8 Question I - Answer B Present value (600.000 x 3.60) 2,160,000 Question 2 - Answer A Interest expense (12% x 2,160,000) 259,200 Problem 8-9 Answer Note payable, October 1, 2014 3,600,000 Payment on October 1, 2015 (1,200,000) Balance, October 1, 2015 2,400,000 Accrued interest payable fram October 1, 2015 to June 30, 2016 (2,400,000 x 10% x 9/12) 180,000 Problem 8-10 Answer D PY of note payable (200,000 x 5.712) 1,142,400 Payment on 12/31/2016 (_ 200,000) Balance - 12/31/2016 942,400 Problem 8-11 Answer C Interest expense (12% x 2,550,000) 306,000 Problem 8-12 Answer A Interest expense for 2016 (1,780,000 x 6%) 106,800 Problem 8-13 Answer B Note payable 1,000,000 Although the interest on the note is lower than the prevailing market rate, the note payable is shown at face value because it is short-term and made in the usual trade terms. Problem 8-14 Answer B Note payable, September 1, 2015 1,800,000 Less: Payment on September 1, 2016. 600,000 Balance, September 1, 2016 1,200,000 Accrued interest payable fram September 1 to December 31, 2016 (1,200,000 x 12% x 4/12) 48,00065 Problem 8-15 Answer A Interest expense for 2016 (8% x 4,509,950) 360.796 Problem 8-16 Answer C Note payable 2,400,000 Present value 1,989,600 Discount on note payable 410,400 Amortization for 2016 (10% x 1,989,600) 198.960 Discount on note payable - 12/31/2016 211,440 Note payable - 1/1/2016 2,400,000 Annual payment (_ 800,000) Note payable - 12/31/2016 1,600,000 Discount on note payable (211,440) Carrying amount 1,388,560 Problem 8-17 Answer A Note payable, October 1, 2015 1,200,000 Less: Payment on October 1, 2016 4 Balance, October |, 2016 800,000 Interest paid from January | to September 30, 2016 (1,200,000 x 15% x 9/12) 135,000 Interest accrued from October 1 to December 31, 2016 (800,000 x 15% x 3/12) 30,000 Interest expense for 2016 165,000 Problem 8-18 Answer A January 1 - October 31, 2016 (500,000 x 12% x 10/12) 50,000 February | - July 31, 2016 (1,500,000 x 12% x 6/12) 90,000 May | - December 31, 2016 (800,000 x 12% x 8/12) 64,000 Total interest expense of 2016 204,000 Less: Recorded interest expense 150,000 Understatement of interest expense 54,000 Problem 8-19 Answer C Accrued interest from March 1, 2015 to February 28, 2016 (1,000,000 x 12%) 120,000 Accrued interest from March | to December 31, 2016 (1,000,000 + 120,000 x 12% x 10/12) 112,000 Total accrued interest payable, December 31, 2016 232,000 If the interest is compounded annually, it means that the accrued interest for one year will also earn interest. Problem 8-20 Question I - Answer B Note payable - December 31, 2016 (Present value of P950,000) 418,25066 Question 2 - Answer C Current portion 50,000 Present value of remaining payments 418,250 Total contest prize expense 468,250 Problem 8-21 Answer A Note payable - September 30, 2016 1,000,000 Principal payment an December 30, 2016 Total payment 264,200 Interest (1,000,000 x 9% z 3/12) (22,500) 241,700 Carrying amount - December 31, 2016 758,300 Problem 8-22 Question 1 Answer B Question 2 Answer C Question 3 Answer C If the fair value option is elected for reporting a financial liability, the liability is reported at fair value at every year-end with resulting changes in fair value included in profit or loss. 1. Cash 1,000,000 Note payable 1,000,000 2. Nate payable 25,000 Gain on note payable (1,000,000 - 975,000) 25,000 3. Interest expense (10% x 1,000,000) 50,000 Cash 50,000 Under the fair value option, any discount or premium on the note payable is not recagnized. Therefore, any discount or premium does not affect the interest expense. Problem 8-23 Question 1 Answer C 408,150 Question 2 Answer A (500,000 x 8%) 40,000 Question 3 Answer C Question 4 Answer D If the fair value option is elected for reporting a financial liability, the accounting rules for reporting discount or premium no longer apply. Thus, the note payable should be reported on December 3], 2016 at the fair value of P408,150 and a net gain of P500,000 minus P408,150 or P91,850 is reported in 2016.Problem 8-24 Question 1 Answer A Question 2 Answer D Question 3 Answer B Fair value of note - 1/1/2016 (1,000,000 x .751) Fair value of note - 12/31/2016 (1,000,000 x .842) Loss on note payable 67 75,100 84.200 (9.100)CHAPTER 9 Problem 9-1 Problem 9-2 1D 1A 2.€ 2A 3.8 3. A 4.8 4.8 Problem 9-3 1, Total liability Less: Carrying amount of property: Land 1,500,000 Building 4.2 100 Gain 2. Mortgage payable 5,000,000 Accrued interest payable 1,000,000 Accumulated depreciation 1,800,000 Land Building Gain on extinguishment of debt Problem 9-4 |. Note payable 1,000,000 Accrued interest payable 200,000 Patent Gain on extinguishment of debt 2. Note payable 1,000,000 Accrued interest payable 200,000 Patent Gain an exchange Gain on debt restructuring Fair value Carrying amount Gain on exchange Note payable Accrued interest payable Carrying amount of liability Less: Fair value of patent Gain on debt restructuring Problem 9-5 Bonds payable 5,000,000 Premium on bonds payable 150,000 ‘Accrued interest payable 300,000 Land Gain on extinguishment of debt 68 6,000,000 700,000 300,000 1,500,000 6,000,000 300,000 600,000 600,000 600,000 $00,000 100,000 1,100,000 600.000 500,000 1,000,000 —200,000 1,200,000 1,100,000 —100,000 3,200,000 2,250,000Problem 9-6 1. Mortgage payable 4,000,000 Accrued interest payable 300,000 Loss on extinguishment of debt 250,000 Share capital Share premium (35,000 x 30) 2. Mortgage payable 4,000,000 Accrued interest payable 300,000 Loss on extinguishment of debt 200,000 Share capital Share premium 3. Mortgage payable 4,000,000 Accrued interest payable 300,000 Share capital (35,000 x 100} Share premium Problem 9-7 Note payable 6,000,000 Accrued interest payable 600,000 Inventory Gain on extinguishment of debt Problem 9-8 1. Note payable 5,000,000 Accrued interest payable 400,000 Ordinary share capital Share premium - ordinary Preference share capital Share premium - preference Gain on extinguishment of debt 2. Note payable 5,000,000 Accrued interest payable 400,000 Ordinary share capital Share premium - ordinary Preference share capital Share premium - preference Gain on extinguishment of debt Market value Fraction ‘Ordinary 3,000,000 30/45, Preference 1,500,000 15/45 4,500,000 3. Note payable 5,000,000 Accrued interest payable 400,000 Ordinary share capital Share premium - ordinary Preference share capital Share premium - preference 69 3,500,000 1,050,000 3,500,000 1,000,000 3,500,000 800,000 3,600,000 3,000,000 1,500,000 1,500,000 250,000 1,250,000 300,000 1,500,000 1,700,000 250,000 1,350,000 600,000 Issue price 3,200,000 1,600,000 4,800,000 1,500,000 2,100,000 250,000 1,550,000Market value — Fraction ‘Ordinary 3,000,000 30/45 Preference 1,500,000 15/45 4,500,000 Problem 9-9 1, Bonds payable 5,000,000 Accrued interest payable 250,000 Discount on bonds payable Share capital Share premium Gain on extinguishment of debt 2. Bonds payable 5,000,000 Accrued interest payable 250,000 Discount on bonds payable Share capital Share premium Gain on extinguishment of debt 3. Bonds payable 5,000,000 Accrued interest payable 250,000 Discount on bonds payable Share capital Share premium Problem 9-10 1. Note payable 5,000,000 Land Gain on extinguishment of debt 2. Note payable 5,000,000 Share capital Share premium Gain on extinguishment of debt Problem 9-11 Note payable Accrued interest payable Carrying amount of liability Restructured liability Principal 7,000,000 Interest 800,000 Gain on debt restructuring Note payable 8,000,000 Accrued interest payable 800,000 Note payable - restructured Gain on debt restructuring 70 Issue price 3,600,000 1,800,000 5,400,000 200,000 2,500,000 2,000,000 550,000 200,000 2,500,000 2,100,000 450,000 200,000 2,500,000 2,550,000 2,800,000 2,200,000 4,000,000 800,000 200,000 8,000,000 — 800,000 8,800,000 7,800,000 1,000,000 7,800,000 1,000.000Problem 9-12 PV of principal (7,000,000 x .8573) PV of interest payments (700,000 x 1.7833) Total present value of new liability Note payable Accrued interest Carrying amount of old liability PY of new liability Gain on extinguishment of debt 2016 Jan. 1 Note payable - old Accrued interest payable Note payable - new Premium on note payable Gain on debt extinguishment of debt Dec. 31 Interest expense Cash 31 Premium on note payable Interest expense Interest paid Interest expense (7,249,410 x 8%) Amortization of premium 2017 Dec. 31 Interest expense Cash 31 Premium on note payable Interest expense (249,410 - 120,047) 31 Note payable Cash Problem 9-13 PY of principal (5,500,000 x .6355) PV of interest payments (440,000 x 3.0373) PV of new liability Face value Discount on note payable Note payable - old Accrued interest (6,000,000 x 12%) Carrying amount of old liability PV of new liabilit Gain on extinguishment of debt 1. Note payable - old Accrued interest payable Discount on note payable Note payable - new Gain on extinguishment of debt 8,000,000 640,000 700,000 120,047 700,000 129,363 7,000,000 6,000,000 720,000 668,333 71 6,001,100 1,248,310 7,249,410 8,000,000 640,000 8,640,000 1 1,390,590 7,000,000 249,410 1,390,590 700,000 120,047 700,000 $79,953 120,047 700,000 129,363 7,000,000 3,495,250 1,336,412 4,831,662 5,500,000 668,338 6,000,000 720,000 6,720,000 4,831,662 1,888,338 5,900,000 1,888,33872 2. Interest expense (8% x 5,500,000) 440,000 Cash 440,000 Interest expense 139,799 Discount on note payable 139,799 Interest paid 440,000 Interest expense (4,831,662 x 12%) $79,799 Discount amortization 139,799 Problem 9-14 PY of principal (8,000,000 x .8722) 7,017,600 PY of interest payments (800,000 x .8772) 701,760 Total present value of new liability 7,719,360 ‘Old liability 8,500,000 New liability 7,719,360 Gain on extinguishment of debt 780,640 ‘The gain is less than 10% of the old liability of P8,500,000. Thus, the gain is not recognized. 1. Note payable - ald 8,500,000 Note payable - new 8,000,000 Premium on note payable $00,000 2. Interest expense (10% x 8,000,000) 800,000 Cash 800,000 Premium on note payable 500,000 Interest expense 500,000 Actually, using a financial calculator, the effective rate is 3.53%. Accordingly, the amortization of premium is computed as follows: Interest paid (10% x 8,000,000) 800,000 Interest expense (3.53% x 8,500,000) - rounded 300,000 Amortization of premium 500,000 Nate payable - new 8,000,000 Cash 8,000,000 Problem 9-15 PY of principal (4,500,000 x .8264) 3,718,800 PY of interest payments (540,000 x 1.7355) 937,170 Total PV of new liability 4,655,970 Face value 4.500.000 Premium on note payable 155,970 Note payable - old 5,000,000 Accrued interest 1,000,000 Carrying amount of old liability 6,000,000 PV of new liabilit 4.655.970 Gain on extinguishment 1,344,030|. Note payable - ald 5,000,000 Accrued interest payable 1,000,000 Note payable - new Premium on note payable Gain on extinguishment 2. Interest expense (4,500,000 X 12%) $40,000 Cash 3, Premium on note payable 74,403 Interest expense Interest paid (4,500,000 x 12%) Interest expense (4,655,970 x 10%} Premium amortization Problem 9-16 Answer A Note payable ‘Accrued interest payable Carrying amount of liability Less: Cost of land Gain on extinguishment Problem 9-17 Answer B Carrying amount of liability Less: Carrying amount of real estate transferred Pretax gain Problem 9-18 Answer A Note payable Accrued interest Carrying amount of liability Assets transferred Note receivable 2,700,000 Equipment at carrying amount (900,900 - 300,000) 600,000 Gain from debt extinguishment Problem 9-19 Question 1 - Answer A PV of principal (4,000,000 x .75) PV of annual interest payments (320,000 x 2.49) Total present value of new liability Nate payable - ald ‘Accrued interest payable Carrying amount of old liability PV of new liability Gain on extinguishment of debt Note payable - new PV of new liability Discount on note payable 7 4,500,000 155,970 1,344,030 540,000 74,403 540,000 465.597 74,403 5,000,000 600,000 5,600,000 3,600,000 2,000,000 1,500,000 1,000,000 500,000 3,600,000 400,000 4,000,000 3,300,000 700,000 3,000,000 796.800 3,796,800 5,000,000 500,000 5,500,000 3,796,800 1,203,200 4,000,000 3,296,800 203,20074 ‘The entry to record the extinguishment of the old liability and recognition of the new liability on December 31, 2016 is: Note payable - old 5,000,000 Accrued interest payable 500,000 Discount on note payable 203,200 Note payable - new 4,000,000 Gain on extinguishment of debt 1,703,200 Question 2 - Answer B Interest expense (10% x 3,796,800) 379,680 Interest paid (8% x 4,000,000) 320,000 Amortization of discount 53,680 Incidentally, the entries to record the payment of interest on December 31, 2017 and amortization of the discount on note payable for 2017 are: Interest expense 320,000 Cash 320,000 Interest expense 59,680 Discount on note payable 59,680 Problem 9-20 Question 1 - Answer C PV of principal (5,000,000 x .77) PV of annual interest payments (650,000 x 2.53) Total present value of new liability 5,494,500 Question 2 - Answer D Note payable - old 6,000,000 PY of new liability 5,094,500 Gain on extinguishment - not recognized 505,500 The gain is less than 10% of the old liability of P6,000,000. Accordingly, the gain is not recognized because the modification is not considered an extinguishment of the old liability, The old lability is simply continued as follows: Note payable - old 6,000,000 Note payable - new 5,000,000 Premium on note payable 1,000,000 Question 3 - Answer B A new effective rate should be computed. By means of interpolation or use of a financial calculator, the new effective rate is 5.58%. Interest paid (13% x 5,000,000) 650,000 Interest expense (5.58% x 6,000,000) 334,800 Premium amortization 315,200The entries on December 31, 2016 are: Interest expense 650,000 Cash Premium on note payable 315.200 Interest expense Problem 9-21 Question | - Answer A PY of principal (6,000,000 x .683) PV of annual interest payments (720,000 x 3.17) Total present value of new liability Question 2 - Answer C Note payable - old Accrued interest payable Carrying amount of old liability Present value of new liability Gain on extinguishments of debt Note payable - new Present value of new liability Premium on note payable Question 3 - Answer D Interest paid (12% x 6,000,000) Interest expense for 2016 (10% x 6,380,400) Premium amortization Problem 9-22 Answer A Note payable Accrued interest payable ‘Carrying amount of liability Less: Cash settlement Gain on extinguishment of debt Problem 9-23 Answer B Note payable Interest payable (10% x 600,000) Carrying amount of old liability Restructured liability: Principal 400,000 Interest (30,000 + 40,000 + 40,000) 110.000 Gain on debt restructure 75 650,000 315,200 4,098,000 2,282,400 6,380,400 8,000,000 800,000 8,800,000 4 6,380,400 2,419,600 6,000,000 6,380,400 380,400 720,000 638,040 81,960 5,000,000 750,000 5,750,000 4,100,000 1,650,000 600,000 60,000 660,000 510,000 150,000CHAPTER 10 Problem 10-1 CENA RwNS oocrorocoFr 10 Problem 10-2 Book of Marian Company (Lessor) Jan. 1 Machinery Cash Mar. 1 Cash Rent income Dec. 31 Repair and maintenance Cash 31 Rent income Unearned rent income (600,000 x 2/12) 31 Depreciation (2,400,000 / 6) Accumulated depreciation Book of Delia Company (Lessee) Mar. 1 Rent expense Cash Dec. 31 Prepaid rent Rent expense Problem 10-3 Requirement | Books of Lessor 1, Equipment Cash 2. Cash (40,000 x 9) Rent income 3. Cash Unearned rent income 4. Repairs Cash 2,400,000 600,000 30,000 100,000 400,000 600,000 100,000 3,000,000 360,000 120,000 20,000 76 2,400,000 600,000 30,000 100,000 400,000 600,000 100,000 3,000,000 360,000 120,000 20,0005. Unearned rent income Rent income (120,000 / 3 = 40,000 x 9/12) 6. Depreciation Accumulated depreciation (3,000,000 / 10) Books of Lessee 1. Rent expense Cash 2. Prepaid rent Cash 3. Rent expense Prepaid rent Requirement 2 Rentincome (360,000 + 30,000) Less: Repairs Depreciation Net income of lessor Problem 10-4 Books of Lessor 1. Tractor Cash 2. Cash Rent incame 3. Repairs Transportation Cash 4. Rent income Unearned rent incame (50,000 x 3) 5. Depreciation Accumulated depreciation (1,500,000 / 5) Books of Lessee 1. Rent expense Cash 2. Prepaid rent Rent expense Problem 10-5 Requirement 1 Books of Lessor 1. Machinery Cash 30,000 300,000 360,000 120,000 30,000 20,000 300.000 600,000 600,000 15,000 5,000 150,000 300,000 600,000 150,000 2,400,000 77 30,000 300,000 360,000 120,000 30,000 390,000 70,000 ,600,000 600,000 20,000 150,000 300,000 600,000 150,000 2,400,0002. Cash (36,000 x 9) Rent income 3. Deferred initial direct costs Cash 4. Amortization of initial direct costs 324,000 120,000 22,500 Deferred initial direct costs (120,000 / 4 = 30,000 x 9/12) $. Depreciation Accumulated depreciation {2,400,000 / 10 x 9/12) Books of Lessee |. Rent expense Cash Requirement 2 Machinery Accumulated depreciation Carrying amount Deferred initial direct costs Adjusted carrying amount Problem 10-6 Books of Dorey Company Jan. 1) Machinery Cash March 1 Cash Rent income 1 Lease expense Cash Dec. 31 Depreciation Accumulated depreciation (5,000,000 / 10) 31 Rent income Unearned rent income (1,200,000 x 2/12) Books of Anne Company March 1 Rent expense Cash Dec. 31 Prepaid rent expense Rent expense Requirement 2 Rent received Unearned rent income Lease expense Depreciation Net rent income 180,000 324,000 5,000,000 1,200,000 60,000 500,000 200,000 1,200,000 200,000 78 324,000 120,000 22,500 180,000, 324,000 2,400,000 180,000) ( ( 2,220,000 97,500 5,000,000 1,200,000 60,000 500,000 200,000 1,200,000 200,000 1,200,000 200,000) 60,000) 100) 440,000Problem 10-7 |, Rent expense Prepaid rent Rent deposit Leasehold improvement Cash 2. Depreciation Accumulated depreciation (360,000 / 5 x 1/12) Problem 10-8 1. Machinery Cash 2. Cash Rent income 3. Cash Unearned rent income 4. Insurance Cash 5. Depreciation Accumulated depreciation (4,800,000 / 12) 6. Unearned rent income Rent income (300,000 / 3) Problem 10-9 2016 1. Equipment Cash 2, Equipment Cash 2017 1. Cash Rent income 2. Repairs Transportation Cash 3. Depreciation Accumulated depreciation (450,000 / 5) 4. Rent income Unearned rent income (15,000 x 3) Problem 10-10 1, Rent expense Cash 60,000 60,000 80,000 360,000 6,000 4,800,000 850,000 300,000 80,000 400,000 100,000 375,000 75,000 180,000 7,000 3,000 90,000 45,000 900,000 79 560,000 6,000 4,800,000 850,000 300,000 80,000 400,000 100,000 375,000 75,000 180,000 10,000 90,000 45,000 900,0002. Cash 6,000,000 Sales 3. Prepaid rent 250,000 Cash 4. Rent expense (5% X 1,000,000) 50,000 Accrued rent payable 5. Rent expense 25,000 Prepaid rent (250,000 / 10) Problem 10-11 2016 Rent receivable 765,000 Rent income Total rent (100,000 x 51 months} Average annual rent (5,100,000 / 5) Rent from April 1 to December 31, 2016 (1,020,000 x 9/12) 2017 Cash (100,000 x 12) 1,200,000 Rent income Rent receivable 2018 Cash 1,200,000 Rent income Rent receivable 2019 Cash 1,200,000 Rent incame Rent receivable 2020 Cash 1,200,000 Rent incame Rent receivable 2021 Cash (100,000 x 3) 300,000 Rent income (1,020,000 x 3/12) Rent receivable 80 6,000,000 250,000 $0,000 25,000 765,000 5,100,000 1,020,000 765,000 1,020,000 180,000 1,020,000 180,000 1,020,000 180,000 1,020,000 180,000 255,000 45,000 The rental for 2021 |s for three months only, from January | to April 1, 2021. Books of Ronald Company (Lessee) 2016 Rent expense 765,000 Rent payable 2017 Rent expense 1,020,000 Rent payable 180,000 Cash 2018 Rent expense 1,020,000 Rent payable 180,000 Cash 2019 Rent expense 1,020,000 Rent payable 180,000 Cash 765,000 1,200,000 1,200,000 1,200,00081 2020 Rent expense 1,020,000 Rent payable 180,000 Cash 1,200,000 2021 Rent expense 255,000 Rent payable 45,000 Cash 300,000 Problem 10:12 Books of Lessor 2016 Rent receivable 877,500 Rent income 877,500 Total rent (P300,000 x 117 remaining months) 35,100,000 Average annual rent (35,100,000 / 10) 3,510,000 Rent from October 1, to December 31, 2016 (3,510,000 x 3/12) 877,500 2017 Cash (300,000 x 12) 3,600,000 Rent income 3,510,000 Rent receivable 90,000 2026 Cash (300,000 x 9) 2,700,000 Rent income (3,510,000 x 9/12) 2,632,500 Rent receivable 67,500 The rent for the last year 2026 is for 9 months from January | to September 30, 2026, Books of Lessee 2016 Rent expense 877,500 Rent payable 877,500 2017 Rent expense 3,510,000 Rent payable 90,000 Cash 3,600,000 2026 Rent expense 2,632,000 Rent payable 67,500 Cash 2,700,000 Problem 10-13 Books of Lessor 2016 Cash 600,000 Rent receivable 600,000 Rent incame 1,200,000 Average annual rent (3,600,000 / 3) 1,200,000 2017 Cash 900,000 Rent receivable 300,000 Rent income 1,200,0002018 Cash Rent income Rent receivable Books of Lessee 2016 Rent expense Cash Rent payable 2017 Rent expense Cash Rent payable 2018 Rent expense Rent payable Cash Problem 10-14 Question 1 Answer B Question 2 Answer B Problem 10-15 Answer B Rent for June Amortization of bonus (prepaid rent) [600,000 / 5 x 1/12] Rent expense for the month of June Problem 10-16 Answer D Problem 10-17 Answer D Problem 10-18 Answer C Problem 10-19 Answer B Annual rent (15,000 x 12) Additional rent 6% x 3,000,000 5% x 3,000,000 Property taxes Insurance Total expenses Problem 10-20 Answer C Annual rent Additional rent (59 x 1,000,000) Amortization of bonus (240,000 / 10) Total rent expense Problem 10-21 Answer D Rent payment on 7/1/2016 (360,000 x 6/12) Lease bonus (240,000 x 30/36) Prepaid rent - 12/31/2016 2,100,000 1,200,000 1,200,000 1,200,000 900,000 82 1,200,000 300,000 600,000 600,000 900,000 300,000 2,100,000 460,000 320,000 200,000 —10,000 210,000 180,000 180,000 150,000 120,000 50,000 680.000 960,000 50,000 24,000 1,034,000 180,000 200,000 380,00083 Problem 10-22 Answer B Leasehold improvement 900,000 Less: Depreciation from July 1 to December 31, 2016 (900,000 / 5 x 6/12) 90,000 Leasehold improvement, December 31, 2016 810,000 Rent security deposit 350,000 Last month's rent —150,000 Total amount to be deferred 1,310,000 Problem 10-23 Answer A Total rent expense (200,000 x 5] remaining months) 10,200,000 Average annual rent expense, July 1, 2015 to June 30, 2016 10,200,000 / 5) 2,040,000 Problem 10-24 Answer B Total rent expense (600,000 x 117 remaining months) 70,200,000 Average annual rent (70,200,000 / 10) 7,020,000 Rent expense from October 1 to December 31, 2016 (7,000,000 x 3/12) 1,755,000 Problem 10-25 Answer Total rental (1,600,000 x 18 years) 28,800,000 Average annual rental (28,800,000 / 20 years) 1,440,000 Problem 10-26 Answer B Annual rental 1,115,000 Amortization of upfront cash received (60,000 / 4) (15,000) Lease expense 1.100,000 Problem 10-27 Answer C First year (1,200 x 1,000) 1,200,000 Second year (3,000 x 1,000) 3,000,000 Third year (3,000 x 1,000) 3,000,000 Total rental revenue 7,200,000 Average annual rental (7,200,000 / 3) 2,400,000 Rental revenue from January! to September 30, 2016 (2,400,000 x 9/12} 1,800,000 Problem 10-28 Answer C First year (800,000 x 6/12) 400,000 Second year 1,250,000 Third year 1,250,000 Fourth year 1,250,000 Fifth year 1,250,000 Total rental revenue 5,400,000 Average annual rental revenue (5,400,000 / 5) 1,080,000 Problem 10-29 Answer A Total rental (500,000 x 8 years) 4,000,000 Average annual rental (4,000,000 / 10) 400,000Problem 10-30 Answer B 2016 (100,000 x 12) 2017 (150,000 x 12) 2018 (200,000 x 12) 2019 (250,000 x 12) Total rent over the lease term Average annual rental (8,400,000 / 4) Rent income for 2016 and 2017 (2,100,000 x 2) Rent collected in 2016 and 2017 (1,200,000 + 1,800,000) Rent receivable - 12/31/2017 Problem 10-31 Answer B Average annual rental (7,000,000 / 5) Rent income for 2016 and 2017 (1,400,000 x 2) Rent collected In 2016 and 2017 (1,000,000 + 1,000,000) Rent receivable - 12/31/2017 Problem 10-32 Answer A Rent income Less: Amortization of initial direct costs (150.000 / 10) 15,000 Depreciation 120,000 Insurance and property tax 90,000 Net rent income Problem 10-33 Answer C Annual rental Amortization of lease bonus (500,000 / 5) Total rent revenue Problem 10-34 Answer C Annual rental Amortization of lease bonus (300,000 / 3) Total Less: Depreciation 400,000 Insurance 80,000 Operating profit Problem 10-35 Answer C Rent from April 1 to December 31, 2016 (50,000 x 9) Less: Depreciation (1,600,000 - 100,000 / 5) 300,000 Commission (120,000 / 2 x 9/12) 45,000 Repairs 15,000 Transportation 10,000 Net rent revenue 84 1,200,000 1,800,000 2,400,000 3,000,000 8,400,000 2,100,000 4,200,000 (3,000,000) 1,200,000 1,400,000 2,800,000 (2,000,000) 800,000 $00,000 225,000 275,000 900,000 100,000 1,000,000 850,000 100,000 950,000 480,000 470,000 450,000 370,000 80,00085 Problem 10-36 Answer B The second year’s rent of P500,000 which was received in 2016 is unearned rent income and therefore shown as a current liability on December 31, 2016. The deposit of P1,000,000 is unearned rent deposit classified as noncurrent liability because it is applied to payment of rent for the last two years of the lease. Problem 10-37 Question 1 - Answer C Future value of 1 for 3 periods at 10% 1,331 Rental payment due on December 31, 2016 (133,100 / 1.331) 190,000 Rental payment due on December 31, 2017 (100,000 x 1.10) 110,000 Question 2 - Answer B 2016 100,000 2017 (100,000 x 1.10) 110,000 2018 (110,000 x 1.10) 121,000 2019 (121,000 x 1.10) 133,100 Total rentals 464,100 Annual rental income (464,100 / 4) 116,025 Problem 10-38 Answer B Refundable security deposit 20,090 Problem 10-39 Answer A Net rental income (810,000 - 600,000) 210.000 Problem 10-40 Question | Answer D Rent expense 720,000 Question 2 Answer A Pretax income (720,000 - 64,000 - 360,000) 296,00086 CHAPTER 11 Problem 11-1 Problem 11-2 Problem 11-3 Problem 11-4 1B 1B ie LA eG 2.€ 2.¢ 2.8 3. 8B 3. 3, B 3. c 4.€ ac 4.0 4. 8B 5. B 5. D 6. D 6c 7.0 7.8 8. B 8. C 9. B oe 10. 4 10. D Problem 11-5 Problem 11-6 Problem 11-7 1A 1A ec 2.€ 2A 21 © B.A 3. B 3. B 4c 4.€ 4.€ 5.8 5. B 5.0 6. C 6. B BA 7h 78 aA 8. C 8. B 8c 9.D oA 10. D 10. B Problem 11-8 2016 Jan. 1 Building (800,000 x 4.17) 3,336,000 Lease liability 3,336,000 1 Building 100,000 Cash 100,000 1 Lease liability 800,000 Cash 800,000 Dec. 31 Depreciation (3,436,000 / 10) 343,600 Accumulated depreciation 343,600 31 Interest expense 253,600 Accrued interest payable 253,600 Year Payment 10% interest Principal Present value 1/1/2016 3,336,000 1/1/2016 800,000 - 800,000 2,536,000 T/L f2017 800,000 253,600 546,400 1,989,600 V/1f2018 800,000 198,960 601,040 1,388,560 31 Taxes 40,000 Cash 40,0002017 Jan.) Accrued interest payable 253,600 Lease liability 546,400 Cash Dec. 31 Depreciation 343,600 Accumulated depreciation 31 Interest expense 198,960 Accrued interest payable 31 Taxes 40,000 Cash Problem 11-9 2016 1. Building (1,000,000 x 3.79) 3,790,000 Lease liability 2. Interest expense 379,000 Lease liability 621,000 Cash Year Payment 10% interest Principal 01/01/2016 12/31/2016 1,000,000 379,000 621,000 12/31/2017 1,000,000 316,900 683,100 3. Taxes 75,000 Insurance 125,000 Cash 4. Depreciation (3,790,000 / 10) 379,000 Accumulated depreciation 2017 1. Interest expense 316,900 Lease liability 683,100 Cash 2. Taxes 75,000 Insurance 125,000 Cash 3. Depreciation 379,000 Accumulated depreciation Problem 11-10 2016 Jan. 1 Machinery 6,392,400 Lease liability Present value of rentals (1,000,000 x 6.328) Present value of bargain option (200,000 x .322) Total cost 87 800,000 343,600 198,960 40,000 3,790,000 1,000,000 Present value 3,790,000 3.169.000 2,485,900 200,000 379,000 1,000,000 200,000 379,000 6,392,400 6,328,000 64,400 6,392,40088 2016 Jan. 1 Lease liability 1,000,000 Cash 1,000,000 Dec. 31 Depreciation (6,392,400 / 15) 426,160 Accumulated depreciation 426,160 31 Interest expense 647,088 Accrued interest payable 647,088 Year Payment 12% interest Principal Present value 1/1/2016 6,392,400 1/1/2016 1,000,000 - 1,000,000 5,392,400 TA1/2017 1,000,000 647,088 352,912 5,039,488 V/1/2018 1,000,000 604,739 395,261 4,644,277 2017 Jan, | Accrued interest payable 647,088 Lease liability 352,912 Cash 1,000,000 Dec. 31 Depreciation 426,160 Accumulated depreciation 426,160 31 Interest expense 604.739 Accrued interest payable 604,739 Problem 11-11 |, Building (1,000,000 x 7.606) 7,606,000 Lease liability 7,606,000 2. Depreciation (7,606,000 / 15) 507,067 Accumulated depreciation 307,067 The term of the lease is at least 75% of the life of the asset (15/20). Since this is the basis of the finance lease, the depreciation is computed using the term of the lease, which is shorter than the life of the asset, 3, Interest expense (10% x 7,606,000) 760,600 Lease liability 239,400 Cash 1,000,000 Problem 11-12 Requirement 1 Present value of rentals (1,000,000 x 3.2743) 3,274,300 Present value of quaranteed residual value (474,060 x 4761) 225,700 Total present value 3,500,000 The lease is accounted for as finance lease because the present value of rentals is 100% of the fair value of the leased asset,Year Payment 16% interest 01/01/2016 12/31/2016 1,000,000 560,000 12/31/2017 ‘1,000,000: 489,600 12/31/2018 1,000,000 407,936 12/31/2019 1,000,000 313,206 12/31/2020 1,000,000 203,318 Requirement 2 2016 Jan. 1 Equipment Lease liability Dec. 31 Interest expense Lease liability Cash 31 Depreciation Accumulated depreciation (3,500,000 - 474,060 / 5) 2017 Dec. 31 Interest expense Lease liability Cash 31 Depreciation Accumulated depreciation Requirement 3 Accumulated depreciation (605,188 x 5} Lease liability Equipment Requirement 4 Accumulated depreciation Lease liability Equipment Loss on finance lease Cash (474,060 - 300,000) Requirement 5 Accumulated depreciation Lease liability Equipment Problem 11-13 Requirement | Percentage of lease term (6 years / 8) Principal 440,000 510,400 592,064 686,794 796,682 3,500,000 560,000 440,000 605,188 489,600 510,400 605,188 3,025,940 474,060 3,025,940 474,060 174,060 3,025,940 474,060 89 Present value 3,500,000 3,060,000 2,549,600 1,957,536 1,270,742 474,060 3,500,000 1,000,000 605,188 1,000,000 605,188 3,500,000 3,500,000 174,060 3,500,000PV of rentals (500,000 x 4.7908) PV of guaranteed residual value (400,000 x .5645) Total present value Percentage of present value to fair value (2,621,200 / 2,800,000) 90 2,395,400 225,800 2,621,200 93.61% In conclusion, the lease is a finance lease. The asset and liability should be recorded at the lower between the present value of rentals and the fair value of the asset. Requirement 2 Date Payment Interest 1/1/2016 1/1/2016 500,000 ms 1/1/2017 500,000 212,120 1/1/2018 500,000 183,332 1/1/2019 500,000 151,665 1/1/2020 500,000 116,832 1/1/2021 500,000 78,515 1/1/2022 400,000 36,336 Requirement 3 2016 Jan. 1 Machinery Lease liability 1 Lease lability Cash Dec. 31 Interest expense Accrued interest payable 31 Depreciation Accumulated depreciation {2,621,200 - 400,000 / 6) 2017 Jan, 1 Accrued interest payable Lease liability Cash Dec. 31 Interest expense Accrued interest payable 31 Depreciation Accumulated depreciation Requirement 4 2022 Jan. | Accumulated depreciation (370,200 x 6) Lease liability Accrued interest payable Machinery Principal 500,000 287,880 316,668 348,335 383,168 421,485 363,664 2,621,200 500,000 212,120 370,200 212,120 287,880 183,332 370,200 2,221,200 363,664 36,336 Present value 2,621,200 2,121,200 1,833,320 1,516,652 1,168,317 785,149 363,664 2,621,200 $00,000 212,120 370,200 500,000 183,332 370,200 2,621,20091 Requirement 5 2022 Jan. | Accumulated depreciation (370,200 x 6) 2,221,200 Lease liability 363,664 Accrued interest payable 36,336 Machinery 2,621,200 Loss on finance lease 100,000 Cash 100,000 Problem 11-14 Requirement 1 PV of rentals (420,000 - 20,000 x 3.6243) 1,449,720 PV of guaranteed residual value (200,000 x .7623) 152,580 Total present value 1.602.300 Percentage of present value to fair value (1,602,300 / 1,700,000) 94.25% Since the present value is at least 90% of the fair value and the lease carries a huge penalty, the cancelable lease is a finance lease, Requirement 2 Date Payment Interest Principal —_ Present value 12/31/2016 1,602,300 12/31/2016 400,000 : 400,000 1,202,300 12/31/2017 400,000 84,161 315,839 886,461 12/31/2018 400,000 62,052 337,948 548,513 12/31/2019 400,000 38,396 361,604 186,909 12/31/2020 200,000 13,091 186,909 . Requirement 3 2016 Dec. 31 Equipment 1,602,300 Lease liability 1,602,300 31 Prepaid insurance 20,000 Lease liability 400,000 Cash 420,000 2017 Jan, 1 Insurance expense 20,000 Prepaid insurance 20,000 Dec. 31 Prepaid insurance 20,000 Interest expense 84,161 Lease liability 315,839 Cash 420,000 31 Depreciation 350,575 Accumulated depreciation 350,575 {1,602,300 - 200,000 / 4) The guaranteed residual value of P200,000 is deducted from the cost to get the depreciable amount.92 Requirement 4 2020 Dec. 31 Accumulated depreciation (350,575 x 4) 1,402,300 Interest expense 13,091 Lease liability 186,909 Equipment 1,602,300 31 Loss on finance lease 150,000 Cash 150,000 Problem 11-15 1. Annual rental 600,000 Multiply by PV of an ordinary annuity of 1 at 12% for 5 periods 3.60 PV of rentals 2,160,000 The residual value is not included in present value of rentals because it is unguaranteed by the lessee. The lease is a finance lease because the present value is at least 90% of the fair value of asset. The asset and liability should be recognized at P2,160,000 because this amount is lower than the fair value. 2. Equipment 2,160,000 Lease liability 2,160,000 Interest expense (1.2% x 2,160,000) 259,200 Lease liability 340,800 Cash 600,000 Depreciation 432,000 Accumulated depreciation (2,160,000 / 5) 432,000 3. Accumulated depreciation {432,000 x 5) 2,160,000 Equipment 2,160,000 The lessee has no obligation for the lower fair value because the residual value is unguaranteed by the lessee. The lessor will suffer the loss from a lower fair value. Problem 11-16 Equipment 1,835,000 Accumulated depreciation 2,465,000 Lease liability 1,300,000 Equipment under finance lease 4,000,000 Cash 1,600,000 Equipment under finance lease 4,000,000 Accumulated depreciation (2,465,000) Carrying amount 1,535,000 Cash payment 1,600,000 Total consideration 3,135,000 Lease liability (1,300,000) Cost of equipment purchased 1,835,00093 Problem 11-17 1. 2017 300,000 2018 300,000 2019 300,000 Remaining future lease payments 900,000 Executory costs (30,000 x 3 years) ‘90,000 Guaranteed residual value ___ $0,000 1,040,000 2. Machinery 985,150 Lease liability 985,150 3. Interest expense 98,515 Lease liability 201,485 Cash 300,000 Executory cost 30,000 Cash 30,000 4. Depreciation 233,788 Accumulated depreciation 233,788 Cost of asset 985,150 Guaranteed residual value 50,000) Depreciable amount 935,150 Annual depreciation (935,150 / 4 years} 233,788 5. Interest expense 31,766 Lease liability 268,234 Cash 300,000 Executory cost 30,000 Cash 30,000 6. Lease liability 50,000 Accumulated depreciation (233,788 x 4) 935,150 Machinery 985,150 Problem 11-18 Answer B Present value of minimum lease payments. 1,584,000 Initial direct costs 12,500 Total initial cost of machine 1.396.500 PAS 17, paragraph 20, provides that an entity shall recognize a finance lease as asset and liability at the fair value of the leased property or present value of minimum lease payments, whichever is lower. Paragraph 24 further provides that initial direct costs incurred by the lease are added to the amount recognized as an asset. Problem 11-19 Answer D This is not a finance lease and therefore no liability is recorded because: 1, There is no transfer of ownership or title to the lessee at the end of the lease term.94 2. There is no bargain purchase option 3. The term is only 66 2/3% of the life of the asset (10 / 15 equals 66 2/39. 4. The present value of the rental of P3,380,000 (500,000 x 6.76) is only 84.5% of the fair value of P4,000,000. Problem 11-20 Answer B Cost of leased property (100,000 « 6.145) 614,500 The lease is treated as a finance lease because the term is 83 1/3% of the life of the asset (10 years / 12 years). Problem 11-21 Answer B (800,000 x 5.11) 4,088,000 Problem 11-22 Answer B Present value of rentals (400,000 x 5.95) 2,380,000 The purchase option of P500,000 is not included in the computation of the lease liability because it approximates the fair value of the asset at the end of the lease term and therefore is not a bargain purchase option. Again, the lease is a finance lease because the term is 83 1/3% of the life of the asset (10/12). Problem 11-23 Answer C To qualify as a finance lease, the present value of the minimum lease payments should be equal at least to 90% of the fair value of the asset at the inception of the lease. Thus, 90% times P4,000,000 equals P3,600,000. Problem 11-24 Answer C The annual rental should be split between the land lease and building lease based on their relative fair value. Leasehold interest 7,500,000 Attributable to building 6,000,000 Attributable to land 1,500,000 Operating lease expense (1,500,000 / 7,500,000 x 800,000) 160,000 A land and building lease should be separated into two components namely, the land lease and the building lease. In general, a land lease is classified as an operating lease if title is not expected to Pass to the lessee by the end of the lease term. However, under the amendment to PAS 17, a land lease of several decades (more than two) or longer may be classified as finance lease even if title will not pass to the lessee at the end of lease term. The building lease is a finance lease because in this case the lease term extends to the end of the building's useful life. Problem 11-25 Answer C The warehouse lease is a finance lease and therefore the leasehold interest of 2,500,000 is recognized as an asset.95 ‘The land lease is an operating lease and therefore the leasehold interest of P5,000,000 is not recognized as an asset. Problem 11-26 Answer C Present value of rentals (100,000 x 6.328) 632,800 Present value of bargain purchase option (100,000 x .322) 32,200 Total lease liability - beginning of lease term 665,000 The purchase option of P100,000 is a bargain purchase option because it is significantly lower than the estimated fair value of the asset at the end of the lease term. Accordingly, this is included in the computation of the initial lease liability. If the purchase option is P200.000 which is equal to the fair value of the asset, it is excluded in the computation of the lease liability. Problem 11-27 Answer D Cost of leased property 2,400,000 Less: Residual value 200,000 Depreciable amount 2,200,000 Depreciation (2,200,000 / 8) 275,000 Problem 11-28 Answer B 460,000 Problem 11-29 Answer B Depreciation (1,080,000 / 12) 90,000, If the “transfer of ownership criterion” is used in qualifying a finance lease, the depreciation is based on the life of the asset. Problem 11-30 Answer A 675,000 Problem 11-31 Answer C Depreciation for 2016 (4,700,000 / 10 years) 470,000 Cost of leased equipment 4,900,000 Guaranteed residual value (200,000) Depreciable amount 4,700,000 The guaranteed residual value is deducted from cost in determining depreciable amount because the machine will revert back to the lessor upon the lease expiration The lease term of 10 years is used in computing depreciation because there is no bargain purchase option and no transfer of title. The lease is a finance lease because the lease term |s at least 75% of the life of the asset (10/12 or 83 1/3). Problem 11-32 Answer C Annual depreciation (686,000 / 5 years) 137,200 The present value of the minimum lease payments of P686,000 is recognized as an asset because it is lower than the fair value. The useful life of the asset of 5 years is used in computing annual depreciation because there is a bargain purchase option.96 Problem 11-33 Answer C Annual depreciation (3,552,000 / 6 years) 592,000 The lease term of 6 years is used in computing depreciation because there is no transfer of the title and no bargain purchase option. The lease is classified as finance lease because the lease term is at least 75% of the useful life of the asset (6 years divided 8 years). The present value of minimum lease payments is lower than fair value and therefore becomes the basis in computing depreciation, Problem 11-34 Question 1 Answer Question 2 Answer Question 3 Answer >> rw Question 4 Answer Problem 11-35 Question 1 Answer B Question 2 Answer C Question 3 Answer B Cc Question 4 Answer Ts Date Payment 10% interest Principal Present value 01/01/2016 1,352,000 01/01/2016 200,000 ® 200,000 1,152,000 O1/Ol/2017 200,000 115,200 84,800 1,067,200 Lease liability - December 31, 2016 1,152,000 Current portion - paid on January |, 2017 84,800 Noncurrent liability - December 31, 2016 1,067,200 2. Interest expense for 2016 115,200 3. Depreciation for 2016 (1,352,000 / 20) 67,600 Problem 11-36 Answer B Present value (using implicit rate of 10%) 3,165,000 Less: Payment on December 31, 2016 (all applicable to principal) 500,000 Balance - December 31, 2016 2,665,000 Less: Principal payment on December 31, 2017 Payment 500,000 Interest (10% x 2,665,000) 266,500 233,500 Lease liability - December 31, 2017 2,431,500 Problem 11-37 Answer B Present value, January 1, 2016 1,125,000 Less: First payment on December 31, 2016 100,000 Interest for 2016 (8% x 1,125,000) (90,000) 10.000 Lease liability, December 31, 2015 5,00497 Problem 11-38 Answer B Lease liability - December 31, 2016 1,350,000 Less: First payment on December 31, 2016 (applicable to principal) 200,000 Lease liability - December 31, 2016 1,150,000 Less: Second payment on December 31, 2017: Payment 200,000 Interest for 2017 (10% x 1,150,000) 115,000 Principal payment 85,000 Lease liability - December 31, 2017 1,065,000 Lease liability - December 31, 2016 1,150,000 Current portion (represented by the principal payment on December 31, 2017) 85,000 Nancurrent portion 1,065,000 Problem 11-39 Answer A Lease liability - 1/1/2016. 4,900,000 First payment on January }, 2016 (all applicable to principal) (700,000) Lease liability - 12/31/2016 4,200,000 Accrued interest payable - 12/31/2016 (4,200,000 x 9%) 378,000 Total lease liability - 12/31/2016 4,578,000 Problem 11-40 Answer D Present value, December 31, 2016 4,170,000 Less: First payment an December 31, 2016 (all applicable to principal} 1,000,000 Lease liability, December 31, 2016 3,170,000 Less: Second payment on December 31, 2017 1,000,000 Interest for 2016 (10% x 3,170,000) {_ 317,000) _ 683,000 Lease liability, December 31, 2017 2,487,000 The executory cost of P50,000 is an outright expense and therefore deducted from F1,050,000 to get annual lease payment of P1,000,000. Problem 11-41 Answer A Present value of rentals (1.300.000 x 4.24) 5,512,000 Present value of guaranteed residual value (1,000,000 x 0.65) 650,000 Total lease liability - 1/1/2016 6,162,000 Less: First payment on January 1, 2016 (all applicable to principal) 1,300,000 Lease liability - 12/31/2016 4,862,000 The present value of an “annuity due” factor is used in the computation because the rental is payable in advance. Problem 11-42 Answer C Lease liability - 1/1/2016 (1.000.000 x 6.14) 6,140,000 First payment on 12/31/2016 1,000,000 Interest for 2016 (10% x 6,140,000) (_614,000) 386,000 Lease liability - 12/31/2016 5,754,000 The minimum lease payments shall include the guaranteed residual if guaranteed by the lessee, In this case, the residual value is guaranteed by a third party and therefore excluded in computing the lease liability.Problem 11-43 Answer A Interest expense for 2016 (10% x 3,790,000) Problem 11-44 Answer D Lease liability - December 31, 2016 Less: First payment on December 31, 2016 (applicable to principal} Lease liability Second payment on December 31, 2017 Interest for 2017 (10% x 2,300,000) Reduction of lease liability on December 31, 2017 Problem 11-45 Answer A Cash payment Carrying amount of leased asset (2,000,000 - 800,000) Total consideration Balance of lease liability Cost of machinery purchased The entry to record the actual purchase of the leased asset is: Machinery (purchased) 1,340,000 Lease liability 1,300,000 Accumulated depreciation 800,000 Cash Machinery fleased) Problem 11-46 Answer A Leased equipment Accumulated depreciation Carrying amount Cash payment Total Lease liability Cost of equipment purchased Problem 11-47 Answer A Cost of equipment - January 1, 2016 Accumulated depreciation - January 1, 2022 {4,800,000 - 300,000 / 8 x 6 years) Carrying amount - January 1, 2022 Lease liability - 1/1/2022 (bargain purchase option) Loss on finance lease 98 379,000 2,700,000 400,000 2,300,000 400,000 (230,000) 170,000 1,440,000 1,200,000 2,640,000 1,300,000 1,340,000 1,440,000 2,000,000 4,000,000 (2,450,000 1,550,000 1,600,000 3,150,000 300,000) 1,850,000 4,800,000 (3,375,000) 1,425,000 {_ 100,000) 1,325,000 The entry to record the return of the asset to the lessor as a result of the nonexercise of the bargain purchase option is as follows Accumulated depreciation 3,375,000 Lease liability 100,000 Loss on finance lease 1,325,000 Equipment 4,800,00099 On January 1, 2022, the balance of the lease liability is equal to the bargain purchase option of P100,000. If the bargain purchase option is not exercised, a loss is recognized equal to the difference between the carrying amount of the asset and the lease liability.CHAPTER 12 Problem 12-1 Problem 12-2 LA Lc 2.8 z.6 2 © 3D 4.8 4c Problem 12-3 2016 Jan. 1 Lease receivable Machinery Unearned interest income 1 Cash Lease receivable Dec. 31 Unearned interest income Interest income Year Payment 12% interest 01/01/2016 01/01/2016 100,000 O1/O1/2017 100,000 36,444 O1/O1/2018 100,000 28,817 2017 Jan. 1 Cash Lease receivable Dec. 31 Unearned interest income Interest income Problem 12-4 1. Gross rentals (600,000 x 10) Net investment in the lease: Cost of equipment Initial direct costs Total financial revenue 2. PV factor (3,533,400 / 600,000) 100 500,000 403,700 96,300 100,000 100,000 36,444 36,444 Principal Present value 403,700 100,000 303,700 63,556 240,144 71,183 168,961 100,000 100,000 28,817 28,817 6,000,000 (3,390,000) (143,400) 2.466.600 5.889 This factor is applicable to 11%. Thus, this is the new implicit rate in computing interest income. 3. Equipment Cash Lease receivable Equipment Unearned interest income Cash Lease receivable 143,400 143,400 6,000,000 3,533,400 2,466,600 600,000 600,000Unearned interest income Interest income (11% x 3,533,400) Problem 12-5 Requirement 1 Gross rentals (900,000 x 8) Residual value Gross investment - debit to lease receivable Net investment - cost of equipment Total financial revenue Requirement 2 Date Payment Interest 1/1/2016 1/1/2016 900,000 x VAL f2017 900,000 522,000 \/1/2018 900,000 476,640 1/1/2019 900,000 425,837 1/1/2020 900,000 368,937 1/1/2021 900,000 305,210 1/1/2022 900,000 233,835 1/1/2023 900,000 153,695 1/1/2024 600,000 63,646 7,800,000 2,550,000 Requirement 3 2016 Jan. 1 Lease receivable Equipment Unearned interest income 1 Cash Lease receivable Dec. 31 Unearned interest income Interest income 2017 Jan. 1 Cash Lease receivable Dec. 31) Unearned interest income Interest income Requirement 4 2023 Jan. 1 Cash Lease receivable (Final payment) Dec. 31 Unearned interest income Interest income 388,674 Principal 900,000 378,000 423,360 474,163 531,063 594,790 666,165 746,105 536,354 7,800,000 900,000 522,000 900,000 476,640 900,000 63,646 101 388,674 7,200,000 — 600,000 7,800,000 5,250,000 2,550,000 Present value 5,250,000 4,350,000 3,972,000 3,548,640 3,074,477 2,543,414 1,948,624 1,282,459 536,354 5,250,000 2,550,000 900,000 522,000 900,000 476,640 900,000 63,646Requirement 5 2024 Jan. 1 Equipment Loss of finance lease Lease receivable Problem 12-6 Requirement 1 Cost PV of residual value (200,000 x .5066) Net investment to be recovered from rental Divide by PV factor Annual rental Requirement 2 Date Payment Interest 01/01/2016 O1/01/2016 629,490 = 12/31/2016 629,490 284,461 12/31/2017 629,490 243,058 12/31/2018 629,490 196,686 12/31/2019 629,490 144,749 12/31/2020 629,490 86,580 12/31/2021 200,000 21,4906 3,976,940 976,940 Requirement 3 2016 Jan. 1 Machinery Cash 1 Lease receivable Machinery Unearned interest income Gross rentals (629,940 x 6) Residual value Grass investment - debit to lease receivable Net investment - cost af machinery Unearned interest income 1 Cash Lease receivable (First payment) Dec. 31 Cash Lease receivable 31 Unearned interest income Interest income (2016 interest income) 500,000 100,000 Principal 629,490 345,029 386.432 432,804 484,741 542,910 178,594 3,000,000 3,976,940 629,490 629,490 284,461 102 600,000 3,000,000 (101.320) 2,898,680 4.6048 629,490 Present value 3.000.000 2,370,510 2.025.481 1.639.049 1,206,245 721,504 178,594 3,000,000 3,000,000 976,940 3,776,940 200,000 3,976,940 3.000.000 976,940 629,490 629,490 284,461Requirement 4 2021 Dec. 31 Unearned interest income Interest income (2021 interest income) Requirement 5 2021 Dec. 31 Machinery Lease receivable 21,406 200,000 103 21,406 200,000 if the entries from 2016 to 2021 are properly recorded and posted, the lease receivable has debit balance of P200,000 equal to the unquaranteed residual value, and the unearned interest income has a zero balance. Problem 12-7 Requirement 1 Gross rentals (400,000 x 4) Net investment in the lease Total financial revenue Requirement 2 Date Payment Interest V/1/2016 1/1/2016 400,000 = 1/1/2017 400,000 107,523 1/1/2018 400,000 75,350 1/1/2019 400,000 39,647 Requirement 3 2016 Jan. 1 Lease receivable Machinery Unearned interest income 1 Cash Lease receivable Lease Income Dec. 31 Unearned interest income Interest income 2017 Jan. 1 Cash Lease receivable Lease income Dec. 3) Unearned interest income Interest income Principal 400,000 292,477 324,650 364,353 1,600,000 440,000 107,523 440.000 75,350 1,600,000 1,377,480 — 222,520 Present value 1,377,480 977,480 685,003 360,353 1,377,480 222,520 400,000 40,000 107,523 400,000 40,000 75,3502018 Jan. 1 Cash Lease receivable Lease income Dec. 31 Unearned interest income Interest income 2019 Jan. 1 Cash Lease receivable Lease income Problem 12-8 Question 1 Answer B Question 2 Answer B Question 3 Answer A Question 4 Answer B Problem 12-9 Question | Answer C Question 2 Answer A Question 3 Answer A Cost of equipment Present value of residual value (200,000 x .466) Net investment to be recovered from rental Annual rental (4,268,000 / 5.335) Problem 12-10 Answer C 104 440,000 400,000 40,000 39,647 39,647 440,000 400,000 40,000 4,361,200 ( 4,268,000 800,000 This is mathematical. The procedure is to determine the annual rental payment which is equal to the “cost of the asset divided by the present value factor of annuity of 1". Accordingly, the annual rental is equal to P3,234,000 divided by 4.312 or P750,000. Lease receivable (750,000 x 5) Present value of rentals (fair value) Total interest revenue Problem 12-11 Answer B Present value of rentals equal to the cost of asset Advance payment on January 1, 2016 Balance - January 1. 2016 Interest income for 2016 (7,200,000 x 9%) Problem 12-12 Answer A (2,898,000 / 4.60) 3,750,000 3.234.000 316,000 8,400,000 1,200,000 7,200,000 648.000 630,000105 Problem 12-13 Answer C Cost of asset 5,239,000 iN of guaranteed residual value (2,000,000 x .68) (1,360,000) investment to be recovered from rental 3,879,000 bi de by PV of an annuity of 1 in advance at 8% for 5 years 4.31 Annual lease payment 300,000 Problem 12-14 Answer C (7,994,000 / 2.855) 2,800,000 Problem 12-15 Answer A Cost of asset 2,300,000 Divide by PV of an annuity in advance of 1 at 12% for six periods 4.60 Annual lease payment 500,000 The residual value is ignored because title is transferred ta the lessee at the end of lease term Problem 12-16 Lesser Question 1 Answer A Present value of rentals (1,000,000 x 3.79) 3,790,000 Residual value (1,200,000 x .62) 744,000 Net investment in the lease 4,534,000 Lessee Question 2 Answer A Lease liability (1,000,000 x 3.79) 3,790,000 The guaranteed residual value is not included in the lease liability because it is guaranteed by a third party. Problem 12-17 Lessor Question 1 Answer A PV of lease payments (1,730,541 x 3.3522) 5,801,120 Unguaranteed residual value (400,000 x .4972) 198,880 Net investment or cost of asset 6,000,000 Question 2 Answer A. Gross lease payments (1,730,541 x 5) 8,652,705 Unguaranteed residual value 400,000 Gross investment 9,052,705 Net investment (cost of asset) 6,000,000 Unearned interest income 3,052,705 Lessee Question 3 Answer A Lease liability (1,730,541 x 3.3522) 5,801,120 The residual value is not included in the lease liability because it is unguaranteed.Problem 12-18 Question | Answer C Fair value Divide by PV of an ordinary annuity of | at 10% for ten periods Minimum annual lease payment Question 2 Answer D Minimum annual lease payment Executory costs Total annual lease payment Question 3 Answer A Gross investment (480,000 x 10 years) Net investment equal Lo the fair value Unearned interest income 106 2,949,600 6.145 480,000 480,000 20,000 500,000 4,800,000 2,949,600 (1,850,400)CHAPTER 13 Problem 13-1 Been anawnm PNIVANFNerrO 1 Problem 13-2 1. Lease receivable Sales Unearned interest income 2. Cost of goods sald Inventory 3. Cash Lease receivable 4. Unearned interest income Interest income (10% x 3,072,500) Problem 13-3 2016 Jan, 1 Lease receivable (600,000 x 8) Sales Unearned interest income 1 Initial direct costs Cash 1 Cash Lease receivable Dec. 31 Unearned interest income Interest income Date Payment 10% interest 1/1/2016 1/1/2016 600,000 a 1/1/2017 600,000 292,000 1/1/2018 600,000 261,200 2017 Jan. 1 Cash Lease receivable Dec. 31 Unearned interest income Interest income 5,000,000 2,000,000 500,000 307,250 4,800,000 50,000 600.000 292,000 Principal 600,000 308,000 338,800 600,000 261,200 107 3,072,500 1,927,500 2,000,000 300,000 307,250 3,520,000 1,280,000 50,000 600,000 292,000 Present value 3,520,000 2,920,000 2,612,000 2,273,200 600,000 261,200Problem 13-4 Books of Fox Company (Lessor) 2016 Jan, 1 Lease receivable (500,000 x 10) Sales Unearned interest income Cost of goods sold Inventory Cash Lease receivable Dec. 31 Unearned interest income Interest income Date Payment 12% interest 1/1/2016 1/1/2016 500,000 ® 1/1/2017 500,000 319,000 1/1/2018 500,000 298,176 2017 Jan. 1 Cash Lease receivable Dec. 31 Unearned interest income Interest income Books of Tiger Company (Lessee) 2016 Jan.) Equipment Lease liability 1 Lease liability Cash Dec. 31 Depreciation (3,165,000 / 10) Accumulated depreciation 31 Interest expense Accrued interest payable 2017 Jan. 1 Accrued interest payable Lease liability Cash Dec. 31 Depreciation Accumulated depreciation 31 Interest expense Accrued interest payable 5,000,000 2,675,000 500,000 319,800 Principal 500,000 180,200 201,824 500,000 298,176 3,165,000 500,000 316,500 319,800 319,800 180,200 316,500 298,176 108 3,165,000 1,835,000 2,675,000 500,000 319,800 Present value 3,165,000 2,665,000 2,484,800 2,282,976 500,000 298,176 3,165,000 500,000 316,500 319,800 500,000 316,500 298,176Problem 13-5 Books of Universal Company (Lessor) Gross rentals (700,000 x 8) Unguaranteed residual value Lease receivable - gross investment Present value: Gross rentals (700,000 x 4.968) Unguaranteed RY (400,000 x .404) Unearned interest income Cost of equipment sold Less: PV of unguaranteed RV Cost of goods sold |, Lease receivable Cost of gaods sold Sales (equal to PV of rentals only) Unearned interest income Inventory 2. Cash Lease receivable 3. Unearned interest Income Interest income (12% x 3,639,200) Books of National Company (Lessee) 1. Equipment (700,000 x 4.968) Lease liability 3,477,600 161,600 6,000,000 1,838,400 700,000 436,704 3,477,600 109 5,600,000 400,000 6,000,000 3,639,200 2,360,800 1 1,838,400 2,000,000 61,600 3,477,600 2,360,800 2,000,000 700,000 436,704 3,477,600 The residual value is unguaranteed, so it is not included in the computation of the lessee’s lease liability. 2. Interest expense (12% x 3,477,600) Lease liability Cash 3. Depreciation Accumulated depreciation (3,477,600 / 8} Problem 13-6 Gross rentals (3,000,000 x 5) Residual value - guaranteed Gross investment Present value: Rentals (3,000,000 x 3.60) Residual value (1,000,000 x .57) Total unearned financial revenue Sales Cost of goods sold. Cost of machinery Initial direct costs Gross income 417,312 282,688 434,700 10,800,000 570,000 700,000 434,700 15,000,000 1,000,000 16,000,000 11,370,000 4,630,000 11,370,000 (8,000,000) (300,000) 3,070,000Books of Vanderbilt Company (lessor) |. Lease receivable Cost of gaods sold Sales Unearned interest income Inventory 2. Cost of goods sold (Initial direct costs) Cash 3. Cash Lease receivable 4. Unearned interest income Interest income (12% x 11,370,000) Books of Thunder Company (lessee) 1. Machinery Lease liability 2. Interest expense Lease liability Cash 3. Depreciation Accumulated depreciation (11,370,000 - 1,000,000 / 5) Problem 13-7 |. Lease receivable (3,328,710 x 5) PY of gross rentals (3,328,710 x 3.605) Total unearned financial revenue 16,000,000 8,000,000 300,000 3,000,000 1,364,400 11,370,000 1,364,400 1,635,600 2,074,000 110 11,370,000 4,630,000 8,000,000 300,000 3,000,000 1,364,400 11,370,000 3,000,000 2,074,000 16,643,550 12,000,000 4,643,550 The residual value of P500,000 is ignored by the lessor because ownership of the assets is transferred to the lessee at the end of the lease term, 2. Sales price (equal to present value of rentals) ‘Cost of goods sold: Cost of equipment Initial direct costs Manufacturer's profit 3. Interest income for first year 12% x 12,000,000) Requirement 4 - Journal entries |, Lease receivable Sales Unearned interest income 2. Cost of goods sold Inventory 3. Cost of goods sold (initial direct costs} Cash 16,643,550 8,000,000 200,000 12,000,000 ( 8,000,000) 200,000) 3,800,000 1,440,000 12,000,000 4,643,550 8,000,000 200,0004. Cash Lease receivable 5. Unearned interest income Interest income Problem 13-8 Requirement 1 Gross rentals (700,000 x 8) Present value of rentals (700,000 x 5.868) Total financial revenue Requirement 2 Sales - present value of rentals Cost of goods sold - cost of equipment Gross profit on sale Requirement 3 Date Payment Interest 4/1/2016 4/1/2016 700,000 : 4/1/2017 700,000 340,760 4/1/2018 700,000 304,836 2016 April 1 Lease receivable Sales Unearned interest income 1 Cost of goods sold Inventory 1 Cash Lease receivable Dec. 31 Unearned interest income Interest income (340,760 x 9/12) 2017 April 1 Cash Lease receivable Dec. 31 Unearned interest income Interest income 1/1/2017 to 3/31/2017 (340,760 x 3/12) 4/1/2017 to 12/31/2017 (304,836 x 9/12) Total interest income for 2017 3,328,710 1,440,000 Principal 700,000 359,240 395,164 5,600,000 3,760,000 700,000 255,570 700,000 313,817 11 3,328,710 1,440,000 5,600,000 4,107,600 1,492,400 4,107,600 3,760,000 347,600 Present value 4,107,600 3,407,600 3,048,360 2,653,196 4,107,600 1,492,400 3,760,000 700,000 255,570 700,000 313,817 85,190 313,817Problem 13-9 Requirement 1 Gross rentals (900,000 x 20) Present value of rentals (900,000 x 9.36) Total financial revenue 2 18,000,000 8,424,000 9,576,000 The residual value is ignored because ownership is transferred to the lessee at the lease expiration. Requirement 2 Sales — equal to present value of rentals Cost of goods sald Gross profit on sale Requirement 3 Date Payment Interest 4/1/2016 4/1/2016 900,000 “ All f201? 900,000 752,400 4/1/2018 900,000 737,640 2016 April 1 Lease receivable Sales Unearned interest income 1 Cost af goods sold Inventory | Cash Lease receivable Dec. 31 Unearned interest income Interest income (752,400 x 9/12) 2017 April 1 Cash Lease receivable Dec. 3] Unearned interest income Interest income 1/1/2017 to 3/31/2017 (752,400 x 3/12) 4/1/2017 to 12/31/2017 (737,640 x 9/12) Total interest income for 2017 Problem 13-10 Requirement 1 Gross rentals (875,000 x 8) Bargain purchase option Gross investment Principal 900,000 147,600 162,360 18,000,000 6,000,000 900,000 564,300 900,000 741,330 8,424,000 6,000,000 2,424,000 Present value 8,424,000 7,524,000 7,376,400 7,214,040 8,424,000 9,576,000 6,000,000 900,000 564,300 900,000 741,330 188,100 553,230 741,330 7,000,000 300,000 £300,000Present value of gross rentals (875,000 x 5.8684) Present value of bargain purchase option (300,000 x .4665) Total present value Gross investment Total present value Unearned interest income Requirement 2 Sales - equal to total present value Cost of goods sold Gross profit Requirement 3 Date Payment Interest Jan. 1, 2016 Jan. 1, 2016 875,000 Jan. 1, 2017 875,000 439,980 Jan. 1, 2018 875,000 396,478 2016 Jan. 1 Lease receivable Cost of goods sold Sales Unearned interest income Inventary 1 Cash Lease receivable Dec. 31 Unearned interest income Interest income 2017 Jan. 1 Cash Lease receivable Dec. 31 Unearned interest income Interest income Requirement 4 2023 Dec, 31 Cash Lease receivable Requirement 5 2023 Dec. 31 Inventory Loss on finance lease Lease receivable Principal 875,000 435,020 478,522 7,300,000 3,100,000 875,000 439,980 875,000 396,478 300,000 200,000 100,000 113 5,134,850 —139,950 5,274,800 7,300,000 5,274,800 2,025,200 5,274,800 3,100,000 2,174,800 Present value 5,274,800 4,399,800 3,964,780 3,486,258 5,274,800 2,025,200 3,100,000 875,000 439,980 875,000 396,478 300,000 300,000Problem 13-11 Requirement 1 Gross rentals (500,000 x 5) Present value (500,000 x 3.60) Unearned interest income Requirement 2 Sales Cost of goods sold Gross profit Date Payment Jan. 01, 2016 Dec. 31, 2016 500,000 Dec. 31, 2017 500,000 Dec. 31, 2018 500,000 Requirement 3 Interest 216,000 181,920 143,750 2016 Jan. 1 Lease receivable Sales Unearned interest income Dec. 31 Cash Lease receivable 31 Unearned interest income Interest income 2017 Dec. 31 Cash Lease receivable 31° Unearned interest income Interest income 2018 July | Unearned interest income 1 Interest income (143,750 x 1/2) Cash Unearned interest income Loss on sale of leased asset Lease receivable 114 Lease receivable - 7/1/2018 Unearned interest income - 7/1/2018 Carrying amount Actual sale price Loss on sale of leased asset 2,500,000 1,800,000 700,000 1,800,000 1,000,000 800,000 Principal _ Present value 1,800,000 284,000 1,516,000 318,080 1,197,920 356,250 841,670 2,500,000 1,800,000 700,000 500,000 500,000 216,000 216,000 500,000 500,000 181,920 181,920 71,875 71,875 1,200,000 230,205 69.795 1,500,000 1,500,000 (230,205) 1,269,795 1,200,000 69,795115 Unearned interest income - 1/1/2016 700,000 Interest income recognized 2016 216,000 2017 181,920 2018 71,875 469,795 Unearned interest income - 7/1/2018 230,205 Problem 13-12 Answer B Sales revenue equal to the present value of lease payment - lower 2,780,000 Carrying amount of equipment sold 2,000,000 Profit on sale 780,000 PAS 17, paragraph 44, provides that the sales revenue recognized at the commencement of the lease term by a manufacturer or dealer lessor is equal to the fair value of the asset or the present value of the minimum lease payments, whichever is lower. Problem 13-13 Question 1 Answer B Question 2 Answer B Problem 13-14 Answer B Gain on sale (3,520,000 - 2,800,000) 720,000 Date Payment 10% Interest Principal Present value 07/01/2016 3,520,000 07/01/2016 600,000 : 600,000 2,920,000 07/01/2017 600,000 292,000 308,000 2,612,000 July 1 to December 31, 2016 (292,000 x 1/2) 146,000 Problem 13-15 Answer B Date Payment 10% Interest Principal Present value 1/1/2016 2,400,000 1/1/2016 355,080 ic 355,080 2,044,920 1/1/2017 355,080 204,492 150,588 1,894,332 Selling price or fair value 2,400,000 Less: Cost to Gallant Company 2,000,000 Dealer's profit 400,000 Add: Interest income - 2016 204,492 Total income before tax 604,492 Problem 13-16 Question 1 Answer A Question 2 Answer A Gross rentals (1,500,000 x 20) 30,000,000 Present value or fair value of asset (1,500,000 x 8.37) 12,555,000 Unearned financial revenue 17,445,000116 Observe that the present value of rentals is lower than the fair value of the asset. Note also that the residual value is ignored because the ownership of the asset will transfer te the lessee at the end of the lease term. Question 3 Answer B Fair value of asset - sales price 12,555,000 Cost of asset 8.000.000 Profit on sale 4,555,000 Question 4 Answer C PV of rentals equal to the fair value of asset 12,555,000 Payment of January 1, 2016 - all applicable to principal | Balance - January |, 2016 11,055,000 Interest income for 2016 (11,055,000 x 12%) 1,326,600 Problem 13-17 Question I Answer B Gross rentals (1,500,000 x 5) 7,500,000 Residual value 500,000 Gross investment 8,000,000 Net investment 5,685,000 Total financial revenue 2,315,000 Question 2 Answer B PV of rentals (1,500,000 x 3.60) 5,400,000 PV of residual value (500,000 x .57) 285,000 Net investment 5,685,000 Question 3 Answer A Interest income for 2016 (12% x 5,685,000) 682,200 Question 4 Answer A Sales 5,400,000 Cost of goods sold (4,000,000 - 285,000) (3,715,000) Initial direct cost (200,000) Gross profit 1.485.000 Problem 13-18 Question 1 - Answer B Gross rentals (2,000,000 x 10) 20,000,000 PY of rentals (2,000,000 x 6.33) 12,660,000 Total financial revenue 7,340,000 The residual value is ignored because the ownership of the asset will transfer to the lessee at the end of the lease term.Question 2 - Answer B Sales Cost of sales Gross profit Question 3 - Answer C PV of rentals First payment on January 1, 2016 Balance - 1/1/2016 Interest income for 2016 (12% x 10,660,000) Problem 13-19 Question 1 Answer A Sales price Cost of goods sold Initial direct cost Profit on sale 117 12,660,000 ~9.000,000 3,660,000 12,660,000 (_2,000,000) 10,660,000 1,279,200 14,875,000 { 8,500,000) (500,000) 5,875,000 The residual value is ignored because the ownership of the asset will transfer to the lessee at end of the lease term. Question 2 Answer A Gross rentals (2,500,000 x 10) Present value of rentals - equal to the sales price Unearned interest income - January |, 2016 Question 3 Answer B Present value of rentals Advance rental payment on January 1, 2016 Balance - January 1, 2016 Interest income for 2016 (12,375,000 x 14%) Problem 13-20 Answer D Date Payment ‘10% Interest V/1/2016 V/1/2016 900,000 * V/1/2017 900,000 438,000 1/1/2018 900,000 391,800 Problem 13-21 Answer B Sales revenue Cost of goods sold Legal fees - initial direct cost Gross profit on sale Principal 900,000 462,000 508,200 25,000,000 14,875,000 10,125,000 14,875,000 2,500,000 12,375,000 1,732,500 Present value 5,280,000 4,380,000 3,918,000 3,409,800 750,000 (600,000) (20,000) 140,000Problem 13-22 Answer B Sales - equal to the present value Cost of goods sold - cost of equipment Gross profit Present value - 7/1/2016 First rental payment on 7/1/2016 Balance - 7/1/2016 Interest income from 7/1/2016 to 7/1/2017 (12% x 2,665,000) Interest income from 7/1/2016 to 12/31/2016 (319,800 x 6/12) Problem 13-23 Question | Answer A Sales revenue Cost of goods sold Gross profit on sale Question 2 Answer D Interest income 7/1/2016 to 6/30/2017 (5,250,000 - 750,000 x 9%) Interest income July 1, 2016 to 12/31/2016 (405,000 x 6/12) Problem 13-24 Answer A Problem 13-25 Question 1 Answer B Interest income for 2016 (10% x 4,850,000) Question 2 Answer C Lease receivable Unearned interest income (1,000,000 - 485,000) Carrying amount - 12/31/2016 Question 3 Answer A Sale price Carrying amount of lease receivable Loss on sale of machinery 1. To recognize the interest income for 2016: Unearned interest income 485,000 Interest income 2. To record the sale of the machinery: Cash 3,250,000 Unearned interest income 515,000 Loss on sale of machinery 2,085,000 Lease receivable 118 3,165,000 (2,675,000) 490,000 3,165,000 (500,000) 2,665,000 319,800 159,900 5,250,000 4,650,000, 600,000 405,000: 202,500 485,000 5,850,000 (515,000) 5,335,000 3,250,000 5,335,000 (2,085,000) 485,000 5,850,000Problem 14-1 ay RNR rFOrPrPO,Y Problem 14-2 Books of German Company |, Cash Accumulated depreciation Equipment Gain on sale and leaseback 2. Rent expense Cash Books of Sterling Company 1. Equipment Cash 2. Cash Rent income 3. Depreciation (1,100,000 / 10) Accumulated depreciation Problem 14-3 Books of Canada Company 1. Cash Accumulated depreciation Loss on sale and leaseback Machinery 2. Rent expense Cash Books of Saigon Company 1. Machinery Cash 2. Cash Rent income 3, Depreciation (500,000 / 10) Accumulated depreciation CHAPTER 14 1,100,000 1,500,000 40,000 1,100,000 40,000 110,000 500,000 450,000 50,000 90,000 500,000 90,000 50,000 119 2,500,000 100,000 40,000 1,100,000 40,000 110,000 1,000,000 90,000 500,000 90,000 50,000Problem 14-4 1. Cash Impairment loss Deferred loss on sale and leaseback Machinery 2. Rent expense Cash 3. Loss on sale and leaseback Deferred loss on sale and leaseback (1,500,000 / 5 years) Problem 14-5 |. Cash Deferred loss on sale and leaseback Machinery 2. Rent expense Cash 3. Loss on sale and leaseback Deferred loss on sale and leaseback (1,000,000 / 2 years) Problem 14-6 1. Cash Machinery Deferred gain on sale and leaseback Gain on sale and leaseback 2. Rent expense Cash 3. Deferred gain on sale and leaseback Gain on sale and leaseback (300,000 / 3 years) Problem 14-7 1. Cash Impairment loss Machinery Deferred gain on sale and leaseback 2. Rent expense Cash 3. Deferred gain on sale and leaseback Gain on sale and leaseback (500,000 / 4 years) 5,000,000 500,000 1,500,000 80,000 300,000 4,000,000 1,000,000 50,000 500,000 4,600,000 90,000 100,000 4,500,000 200,000 80,000 125,000 120 7,000,000 80,000 300,000 5,000,000 50,000 500,000: 3,500,000 300,000 800,000 30,000 100,000 4,200,000 500,000 80,000 125.000121 Problem 14-8 Answer B sales price 360,000 Carrying amount 330,000 Gain on sale and leaseback 30,000 If the leaseback is an operating lease, any gain on sale is not deferred but recognized immediately. Problem 14-9 Answer B Fair value 3,500,000 Carrying amount 3,800,000 Impairment loss (300,000) Sale price 3,000,000 Adjusted carrying amount equal to fair value 3,500,000 Deferred loss (500,000) Rent expense 50,000 Impairment loss 300,000 Amortization of deferred loss (500,000 / 4) 1 Total amount in profit or loss 475,000 Problem 14-10 Answer C Fair value of equipment 6,000,000 Carrying amount 5,000,000 Outright gain 1,000,000 Sales price 7,500,000 Fair value Deferred gain - 12/31/2016 1,800,000 PAS |? provides that if the sale price is above fair value, the excess of sale price over fair value is deferred and amortized over the period for which the asset is expected to be used (by the lessee) which is actually the lease term. Thus, the deferred gain of P1,500,000 is amortized over 2 years or P750,000 annually, starting 2017. The excess of the fair value over carrying amount is recognized as gain immediately Problem 14-11 Answer C Fair value of land 2,150,000 Cost of land 1,500,000 Outright gain in 2016 — 650,000 Sales price 2,300,000 Fair value of land 2,150,000 Deferred gain - 12/31/2016 150,000 Problem 14-12 Answer B (35,000 x 6) 219,000 Problem 14-13 Answer B Rent expense - July to December 2016 (15,000 x 6} 90,000,122 Sales price 5,500,000 Carrying amount 5,000,000, Outright gain 500,000 The leaseback is an operating lease because the lease term is 2 years and the remaining life of the asset is 10 years, or a ratio of 20%. Problem 14-14 Answer A 120,000 Problem 14-15 Question 1 Answer B Question 2 Answer B Question 3 Answer D Problem 14-16 Books of Cuba Company 1. Cash 2,415,000 Accumulated depreciation 3,400,000 Building 5,000,000 Deferred gain on sale and leaseback 815,000 2. Building 2,415,000 Lease liability 2,415,000 3. Depreciation (2,415,000 / 15) 161,000 Accumulated depreciation 161,000 4. Deferred gain on sale and leaseback 81,500 Gain on sale and leaseback (815,000 / 10) $1,500 5. Interest expense (16% x 2,415,000) 386,400 Lease liability 113,600 Cash 500,000 Books of Mexico Company 1. Building 2,415,000 Cash 2,415,000 2. Lease receivable ($00,000 x 10) 5,000,000 Building 2,415,000 Unearned interest income 2,585,000 3. Cash 500,000 Lease receivable 500,000 4. Unearned interest income 386,400 Interest income 386,400123 Problem 14-17 Books of Hook Company (Seller - lessee) . To record the sale on January 1, 2016: Cash 1,500,000 Equipment 1,000,000 Deferred gain on sale and leaseback 500,000 2. To record the leaseback as a finance lease: Equipment 1,500,000 Lease liability 1,500,000 3. To record the first rental payment on December 31. 2016: Interest expense 150,000 Lease liability 94,120 Cash 244,120 Rental payment 244,120 Applicable to interest (10% x 1,500,000) 150,000 Applicable to principal 94.120 4. To amortize the deferred gain aver the lease term Deferred gain on sale and leaseback 50,000 Gain on sale and leaseback (500,000 / 10 years) 50,000 5. To record the depreciation for 2016: Depreciation 150,000 Accumulated depreciation (1,500,000 / 10) 150,000 Books of Maco Drilling (Purchaser - lessor) 1. Equipment 1,500,000 Cash 1,500,000 2. Lease receivable (244,120 x 10) 2,441,200 Equipment 1,500,000 Unearned interest income 941,200 3. Cash 244,120 Lease receivable 244,120 4, Unearned interest income 150,000 Interest income 150,000 Problem 14-18 Answer A Sales price 7,800,000 Carrying amount 5,850,000 Deferred gain - December 31, 2016 1,950,000124 Problem 14-19 Answer B Sales price 3,500,000 Carrying amount 2,750,000 Deferred gain - January 1, 2016 750,000 Realized gain for 2016 (750,000 / 6) 125,000 Deferred gain - December 31, 2016 625,000 Problem 14-20 Answer A Sales price 4,050,000 Carrying amount of building 4,200,000 Loss on sale and leaseback (150,000) If the leaseback is a finance lease, any loss on sale is not deferred but recognized immediately. Problem 14-21 Question 1 Answer B Sales price 2,500,000 Carrying amount 2,000,000 Deferred gain - 1/1/2016 500,000 Realized gain for 2016 (500,000 / 5) 100,000 Question 2 - Answer B Gross rentals (700,000 x 5) 3,500,000 Present value of rentals equal to fair value of asset 2,500,000 Total finance charge 1,000,000 Problem 14-22 Answer C Unearned income - 1/1/2016 (5,700,000 - 4,500,000) 1,200,000 Realized in 2016 (40% x 1,200,000) 480,000 Unearned incame - 12/31/2016 720,000 Straight line rate (100% / 5) 20% Dauble declining rate (20% x 2) 40% Since the entity is using the double declining method of depreciation, the same method should be applied in recognizing the income from sale and leaseback. Problem 14-23 Answer D Journal entries on January |, 2016 Cash 2,550,000 Computer 2,250,000 Deferred gain 300,000 Leased computer 2,550,000 Lease liability 2,550,000Journal entries on December 31, 2016 Interest expense (2,550,000 x 10%) Lease liability Cash Depreciation (2,550,000 / 12) Accumulated depreciation Deferred gain (300,000 / 10) Gain on sale and leaseback Executory costs Cash 255,000 160,000 212,500 30,000 45,000 125 415,000 212,500 30,000 45,000126 CHAPTER 15. Problem 15-1 Problem 15-2 Problem 15-3 Problem 15-4 1 1B LA Ic 2.4 2.€ 2¢ 2.€ 3. B 3.A 3. A BG 4.B 4.€ 4c 4.D 5. B 5. D 5.8 5. B 6A 6. D 7.8 7,D 8.4 B.C 9A 9c 10. B 10. ¢ Problem 15-5 Problem 15-6 se we 2.0 26 3.4 3. B 4.D 4.D 366 5. D 6. B 7.0 8. oC 10. B Problem 15-7 1. Income tax expense 450,000 Income tax payable (30% x 1,500,000) 450,000 2. Income tax expense 150,000 Deferred tax liability (30% x 500,000) 150,000 3. Income tax payable 200,000 Cash 200,000 Current tax expense 450,000 Deferred tax expense 150,000 Total income tax expense (30% X 2,000,000) 600,000 Problem 5-8 1, Income tax expense 1,200,000 Income tax payable (30% x 4,000,000) 1,200,000 2. Deferred tax asset 300,000 Income tax benefit (30% x 1,000,000) 300,000 3. Income tax payable 500,000 Cash 500,000 Current tax expense 1,200,000 Income tax benefit ( 300,000) Total income tax expense (30% x 3.000.000) 900,000Problem 15-9 2016 1. Income tax expense Income tax payable (30% x 7,000,000) 2. Deferred tax asset Income tax benefit (30% x 1,000,000) Income statement presentation Income before income tax Income tax expense: Current tax expense Income tax benefit Net income 2017 1. Income tax expense Income tax payable (30% x 8,000,000) 2. Income tax expense Deferred tax asset Income statement presentation Income before income tax Income tax expense Current tax expense Decrease in deferred tax asset Net income Problem 15-10 2016 1. Income tax expense Income tax payable (30% x 5,000,000) 2, Income tax expense Deferred tax liability (30% x 500,000) Income statement presentation Income before income tax Income tax expense Current tax expense Deferred tax expense Net income 2017 1, Income tax expense Income tax payable (30% x 7,500,000) 2. Deferred tax liability Income tax expense 2,100,000 300,000 2,100,000 (300,000) 2,400,000 300,000 2,400,000 300,000 1,500,000 150,000 1,500,000 150,000 2,250,000 150,000 127 2,100,000 300,000 6,000,000 1,800,000 4,200,000 2,400,000 300,000 9,000,000 2,700,000 6,300,000 1,500,000 150,000 5,500,000 1,650,000 3,859,000 2,250,000 150,000128 Income statement presentation Income before income tax 7,000,000 Income tax expense: Current tax expense 2,250,000 Decrease in deferred tax liability (150,000) 2,100,000 Net income 4,900,000 Problem 15-11 Accounting income 4,000,000 Permanent differences Nondeductible expenses 200,000 Nontaxable revenue (300,000) Accounting income subject to tax 3,900,000 Taxable temporary differences: Deferred income ( 450,000) Excess tax depreciation (50,000) Deductible temporary differences Doubtful accounts 100,000 Estimated warranty cost 100,000 Taxable income 3,600,000 1. Income tax expense 1,080,000 Income tax payable (30% x 3,600,000) 1,080,000 2. Income tax expense 150,000 Deferred tax liability (30% x 500,000) 150,000 3. Deferred tax asset 60,000 Income tax benefit (30% x 200,000) 60,000 4. Income before income tax 4,000,000 Income tax expense Current tax expense 1,080,000 Deferred tax expense 150,000 Income tax benefit (60,000) 1,170,000 Net income 2.830.000 S. Tax expense from increase in deferred tax liability 150,000 Tax benefit from increase in deferred tax asset 60,000) Net deferred tax expense 90,000 Problem 15-12 2016 1. Income tax expense 720,000 Income tax payable (30% x 2,400,000) 720,000 2. Income tax expense 180,000 Deferred tax liability (30% x 600.000) 180,000 2017 1. Income tax expense 1,080,000 Income tax payable (30% x 3,600,000) 1,080,0002. Income tax expense Deferred tax liability (30% x 1,500,000) 2018 |. Income tax expense Income tax payable (30% x 6.200.000) Income before construction income Construction income Taxable income 2. Deferred tax liability Income tax expense (30% x 2,100,000) Problem 15-13 Requirement 1 The “current expense” is computed as follows: 450,000 1,860,000 630,000 2018 4,000,000 200,000 3,800,000 1,140,000 129 450,000 1,860,000 3,200,000 3,000,000 6,200,000 630,000 2019 4,000,000 100.000 3,900,000 1,170,000 Deferred tax liability 15,000 (15,000) 45,000) 2016 2017 Income before depreciation 4,000,000 4,000,000 Depreciation - SYD 400,000 300,000 Taxable income 3,600,000 3,700,000 Current tax expense (30%) 1,080,000 1,110,000 The deferred tax liability arising from the taxable temporary difference is computed as follows: Temporary difference Rate 2016 150,000 30% 2017 50,000 30% 2018 ¢ 50,000) 30% 2019 (150,000) Balance m= 2016 1. Income tax expense Income tax payable 2. Income tax expense Deferred tax liability 2017 1. Income tax expense Income tax payable 2. Income tax expense Deferred tax liability 2018 1, Income tax expense Income tax payable 2. Deferred tax liability Income tax expense 1,080,000 45,000 1,110,000 15,000 1,140,000 15,000 1,080,000 45,000 1,110,000 15,000 1,140,000 15,000130 2019 1. Income tax expense 1,170,000 Income tax payable 1,170,000 2. Deferred tax liability 45,000 Income tax expense 45,000 Requirement 2 ~ Statement of Financial Position on December 31, 2017 Noncurrent liabilities Deferred tax liability 60,000 Problem 15-14 Requirement | 2016 2017 2018 2019 Accounting income 2,000,000 = 3,000,000 4,000,000 5,000,000 Doubtful accounts 100,000 100,000) Rent income 120,000 ( 40,000) ( 40,000) ( 40,000) Warranty cost 300,000 {__ 20,000) (___80,000) (200,000) Taxable income 2,520,000 2,840,000 3,880,000 4,760,000 Tax rate 30% 30% 30% 30% Current tax expense 756,000 _ 852,000 1,164,000 = 1,428,000 Temporary difference Rate Deferred tax liability 2016 520,000 30% 156,000 2017 (166,000) 30% ( 48,000) 2018 (120,000) 30% ( 36,000) 2019 (240,000) 30% (72,000) Balance = 2016 1. Income tax expense 756,000 Income tax payable 756,000 2. Deferred tax asset 156,000 Income tax benefit 156,000 2017 1. Income tax expense 852,000 Income tax payable 852,000 2. Income tax expense 48,000 Deferred tax asset 48,000 2018 |, Income tax expense 1,164,000 Income tax payable 1,164,000 2. Income tax expense 36,000 Deferred tax asset 36,000 2019 1. Income tax expense 1,428,000 Income tax payable 1,428,000131 2. Income tax expense 72,000 Deferred tax asset 72,000 Requirement 2 - Statement of Financial Position on December 31, 2017 Noncurrent assets: Deferred tax asset 108,000 Problem 15-15 Requirement 1 Accounting income 7,900,000 Taxable temporary difference Tax depreciation (1,000,000) Deductible temporary differences. Litigation loss 400,000 Warranty cost — 300,000 Taxable income 7,600,000 |. Income tax expense 2,280,000 Income tax payable (30% x 7,600,000) 2,280,000 2. Income tax expense 300,000 Deferred tax liability (30% x 1,000,000) 300,000 3. Deferred tax asset 210,000 Income tax benefit (30% x 700,000) 210,000 Requirement 2 Income statement presentation Income before income tax 7,900,000 Income tax expense: Current tax expense 2,280,000 Deferred tax expense 300,000 Income tax benefit (210,000) 2,370,000 Net income 5,530,000 Statement of financial position presentation Noncurrent assets, Deferred tax asset 210,000 Current liabilities: Income tax payable 2,280,000 Noncurrent liabilities. Deferred tax liability 300,000 Requirement 3 Tax expense from increase in deferred tax liability 300,000 ‘Tax benefit from increase in deferred tax asset (210,000) Net deferred tax expense 30,000132 Problem 15-16 Requirement 1 a. Income tax expense 2,100,000 Deferred tax liability (30% x 7,000,000) 2,100,000 b. Deferred tax asset 600,000 Income tax benefit (30% x 2,000,000) 600,000 ¢. Income tax expense 2,400,000 Income tax payable 2,400,000 Pretax accounting income 13,000,000 Future taxable amount ( 7,000,000) Future deductible amount Taxable income 8,000,000 Current tax expense (30% x 8,000,000) 2,400,000 Requirement 2 Income before income tax 13,000,000 Income tax expense: Current tax expense 2,400,000 Deferred tax expense 2,100,000: Income tax benefit (600,000) Net income 9,100,000 Problem 15-17 1. Equipment 4,000,000 Accumulated depreciation 1,500,000 Revaluation surplus 2,500,000 Cost Replacement cost Appreciation Equipment 8,000,000 12,000,000 4,000,000 Accumulated depreciation { 8,000,000 x 3/8) 3,000,000 (12,000,000 x 3/8) 4,500,000 1,500,000 CA/SV/RS 5,000,000 7,500,000 2,500,000 2. Revaluation surplus 750,000 Deferred tax liability (30% x 2,500,000) 750,000 3. Income tax expense 2,700,000 Income tax payable 2,700,000 Pretax income before depreciation 10,000,000 Depreciation on cost (5,000,000 / 5) (1,000,000) Taxable income 9,000,000 Current tax expense (30% x 9,000,000) 2,700,000 4. Deferred tax liability 150,000 Income tax expense 150,000Equipment at replacement cost Accumulated depreciation January 1, 2016 Depreciation on revalued amount for 2016 (7,500,000 / 3} Carrying amount - 12/31/2016 Equipment at cost Accumulated depreciation: January 1, 2016 Depreciation on cost for 2016 Tax base - 12/31/2016 Carrying amount - 12/31/2016 Tax base - 12/31/2016 Taxable temporary difference Deferred tax liability - 12/31/2016 (30% x 2,000,000) Deferred tax liability - 1/1/2016 Decrease in deferred tax liability 5. Revaluation surplus (2,500,000 - 750,000 / 5) Retained earnings 6. Income before depreciation Depreciation on revalued amount Income before income tax Income tax expense: Current tax expense Decrease in deferred tax liability Net income Problem 15-18 1. Motor vehicle: Carrying amount Tax base Taxable temporary difference Deferred tax liability (30% x 400,000) 133 12,000,000 4,500,000 1.500.000 _ 6,000,000 8,200,000 8,000,000 3,000,000 1,900,000 4,000,000 4,000,000 6,000,000 4,000,000 2,000,000 600,000 750,000 (150,000) 350,000 350,000 10,000,000 1,500,000) 8,500,000 2,700,000 (150,000) _ 2,550,000 5,950,000 1,650,000 1,250,000 —400,000 120,000. There is a deferred tax liability when the carrying amount of an asset is higher the amount tax base. 2. Carrying AR 1,500,000 Warranty Deposits Total deductible temporary differences Deferred tax asset (30% x 520,000) 120,000 150,000 Deductible Tax base temporary 1,750,000 250,000 0 120,000 0 150,000: 520,000 156,000 There is a deferred tax asset when the tax base of an asset is higher than the carrying amount or when the tax base of liability is lower than the carrying amount.3. Tax expense from increase in deferred tax liability Tax benefit from increase in deferred tax asset Net deferred tax benefit 4. Financial income Taxable temporary difference Deductible temporary differences Taxable income Current tax expense (30% x &,120,000) 5. Current tax expense Net deferred tax benefit Total income tax expense (30% x 8,000,000) Problem 15-19 Carrying amount Property 10,000,000 Plant and equipment 5,000,000 Inventory 4,000,000 Trade receivables 3,000,000 Trade payable 6,000,000 Cash 2,000,000 Property Plant and equipment Future taxable amount Deferred tax liability (30% x 4,000,000) Inventory Trade receivables Future deductible amount Deferred tax liability (30% x 3,000,000) Accounting income Future taxable amount Future deductible amount Taxable income 1. Income tax expense Income tax payable 2. Income tax expense Deferred tax liability 3. Deferred tax asset Income tax benefit 4. Net deferred tax expense (1,200,000 - 900,000) Tax base 7,000,000 4,000,000 6,000,000 4,000,000 6,000,000 2,000,000 2,400,000 1,200,000 900,000 5. Total income tax expense (2,400,000 + 300,000 or 30% x 9,000,000) ( 134 120,000 (156,000) (36,000) 8,000,000 400.000) 520,000 8,120,000 2,436,000 2,436,000 (__6,000) ( ) 2,400,000 Difference 3,000,000 1,000,000 2,000,000 1,000,000 3,000,000 1,000,000 4,000,000 1,200,000 2,000,000 1 1,999,000 3,000,000 900,000 9,000,000 8,000,000 2,400,000 1,200,000 900,000 300,000 2,700,000Problem 15-20 135 1. No entry. There is no current tax expense because there is an operating loss carryover. Pretax accounting income Permanent differences: Interest income Insurance premium Accounting income subject to tax Temporary differences. Gross profit on installment sale Warranty liability Operating loss carryover 2. Income tax expense 1,350,000 Deferred tax liability (30% x 4,500,000) 3. Deferred tax asset 870,000 Income tax benefit Warranty liability (2,000,000 x 30%) ‘Operating loss carryover (900,000 x 30%) Deferred tax asset 4. Tax expense from deferred tax liability Tax benefit from deferred tax asset Net deferred tax expense 5. Current tax expense Net deferred tax expense Total income tax expense Another computation (30% x 1,600,000) Problem 15-21 Answer A Pretax accounting income Dividend received Financial income subject to tax Estimated litigation loss Revenue from installment sale Taxable income Current tax expense (30% x 4,600,000) Problem 15-22 Answer A Pretax accounting income Proceeds from life insurance Accounting income subject to tax Excess tax depreciation Cash received - taxable in 2016 Taxable income Total income tax expense (4,500,000 x 30%) 2,000,000 (500,000) 100,000 7,600,000 (4,500,000) 2,000,000 (900,000) 1,350,000 870,000 600,000 270,000 870,000 1,350,000 870.000) 480,000 0 480,000 480,000, 480,000 5,000,000 {__100,000) 4,900,000 300,000 (600,000) 4,800,000 1,380,000 5,000,000 (_500,000) 4,500,000 ( 200,000) (120,000) 4,180,000 1,350,000136 Problem 15-23 Answer C Financial income 6,200,000 Interest revenue on government bonds ( 200,000) Tax depreciation in excess of financial depreciation (600,000 - 500,000) (_100,000) Taxable income Current tax expense (30% x 5,900,000) 1,279,000 Problem 15-24 Answer C Accounting or financial income per book 6,000,000 Permanent difference (_ 300,000) Accounting or financial income subject to tax 5,500,000 Total income tax expense (30% x 5,500,000) 1,650,000 The total income tax expense is based on accounting or financial income subject to tax, In computing financial income subject to tax, permanent difference is excluded. Problem 15-25 Answer A 148,000 Problem 15-26 Answer C 50,000 Problem 15-27 Answer A Current provision (30% x 150,000) 45,000 Problem 15-28 Answer © Pretax accounting income 1,000,000 Permanent differenc Premium on officers’ life insurance (nondeductible) Accounting income subject to tax 7,030,000 Temporary differences Rent income { 50,000) Depreciation 60,000) Taxable income 980,000 Current provision for income tax (980,000 x 30%) 294,000 The “current provision” for income tax is actually the current tax expense. Problem 15-29 Answer D Financial income 5,000,000 Nontaxable life insurance proceeds ( 900,000) Life insurance premium for an officer 200,000 Financial incame subject to tax 4,300,000 Estimated warranty expenses 1,200,000 Taxable income 5,500,000 Income tax payable (30% x 5,500,000) 1,650,000 The income tax payable is actually the current tax expense since there is no income tax payment during the year.137 Problem 15-30 Answer B Accounting profit 4,000,000 Donation - nondeductible 1,000,000 Tax depreciation in excess of accounting depreciation ( 400,000) Annual leave paid in excess of amount recognized (800,000 - 700,000) ( 100,000) Rent revenue in excess of rent received (1.200.000 - 1,000,000) (200,000) Taxable income 4,300,000 Current tax liability (30% x 4,300,000) 1,290,000 Carrying amount (1,600,000 / 20%) 8,000,000 Tax depreciation rate 2556 Tax depreciation 2,000,000 Accounting depreciation 1,600,000 Excess tax depreciation 400,000 Problem 15-31 Answer B Income before tax and depreciation 2,000,000 Tax depreciation 400,000) Taxable income 1,600,000 Current tax liability (1,600,000 x 30%) 480,000 Problem 15-32 Answer B Net income per book 900,000 Permanent difference: Interest income on time deposit (200,000) Accounting income subject to tax 700,000 Temporary difference: Rent received in advance 150,000 Excess tax depreciation (100,000) Taxable income 750,000 Current tax expense or current tax provision (750,000 x 30%) 225,000 Current income tax liability (225.000 - 125,000) 100,000 Problem 15-33 Answer D Depreciation per book 1,500,000 Taxable temporary difference (90,000 / 30%) __ 300,000 Depreciation for tax purposes 1,800,000 Problem 15-34 Answer B Taxable income 2,400,000 Future taxable amount in 2016 (1,350,000 - 960,000) 350,000 Pretax financial income 2,790,000 Problem 15-35 Answer D Taxable income 4,000,000 Excess tax depreciation (500,000 — 400,000) 100,000 Goodwill impairment loss ( 300,000) Interest income on treasury bills 600,000 Pretax accounting income 4,400,000138 The pretax accounting income is the accounting income per book and not the accounting incame subject to tax. The accounting income subject to tax is equal to P4.000,000 plus P100,000 or P4,100,000, The permanent differences are excluded. Problem 15-36 Answer D The two items are nondeductible expense for tax purposes and therefore permanent differences. Problem 15-37 Answer A Accounting income 4,000,000 Premiums of life insurance 100,000 Excess tax depreciation { 120,000) Interest on exempt bonds (53,000) Warranty expense 40,000 Actual warranty repairs (32,000) Bad debts expense 14,000 Writeoff of accounts (14,000 - 8,000) (6,000) Rent received in advance 240,000 Taxable income 4,183,000 Problem 15-38 Answer C Deferred tax asset (200,000 x 30%) 60,000 The unearned income on December 31, 2016 of P200,000 will result to a deferred tax asset because it is a future deductible temporary difference. Problem 15-39 Answer D The deferred tax liability of P75,000 is noncurrent. Problem 15-40 Answer D Current tax expense 260,000 Income tax benefit from increase in deferred asset (400,000 - 300,000) (100,000) Total income tax expense 160,000 Problem 15-41 Answer B Increase in differed tax liability (1,500,000 - 1,000,000) 500,000 Decrease in deferred tax asset (400,000 - 0) 400,000 Deferred tax expense 300,000 The deferred tax expense is the net effect of the changes in deferred tax liability and deferred tax asset. Actually, the adjustments on December 31, 2016 are: 1. To record the increase in deferred tax liability. Income tax expense 500,000 Deferred tax liability 500,000139 2. To record the decrease in deferred tax asset. Income tax expense 400,000 Deferred tax asset 400,000 Problem 15-42 Answer C Decrease in deferred tax asset 90,000 Increase in deferred tax liability (30% x 700,000) 210,000 Deferred tax expense 300,000 Problem 15-43 Answer C Deferred tax asset (40% x 300,000) 120,000 Deferred tax liability (40% x 2,900,000) 1,160,000 Net deferred tax expense 1,040,000 Problem 15-44 Answer A This can be explained clearly by preparing some entries. The bad debts expense is a future deductible temporary difference and therefore will result to a deferred tax asset as follows: Deferred tax asset (30% x 400,000) 120,000 Income tax benefit 120,000 The profit from installment sale is a future taxable temporary difference and therefore will result to a deferred tax liability as follows Income tax expense 300,000 Deferred tax liability (30% x 1,000,000) 300,000 Accordingly, the deferred tax expense is P1 80,000 (P300,000 minus income tax benefit of P120,000) Problem 15-45 Answer D Deferred tax asset (30% x 2,000,000) 600,000 Deferred tax liability (30% x 100,000) 30,000 Net deferred tax benefit 570,000 Problem 15-46 Answer C 2017 (100,000 x 30%) 30,000 2018 (50,000 x 30%) 15,000 2019 (50,000 x 30%) 15,000 2020 (100,000 x 25%) 25,000 Deferred tax asset - 12/31/2016 85,000 Problem 15-47 Answer C The impact of the difference in the equipment of P800,000 is a higher financial income and therefore will result to a deferred tax liability. Accordingly, it is a future taxable temporary difference. The difference of P750,000 is a permanent difference because the officers’ insurance Premium is nondeductible. Therefore, this difference has no deferred tax consequence.140 The impact of the difference of P500,000 in warranty liability is a higher taxable income and therefore will result to a deferred tax asset. Accordingly, it is a future deductible temporary difference. Problem 15-48 Answer D Problem 15-49 Answer A Problem 15-50 Answer C Deferred tax liability (30% x 3,000,000) 900,000 Deferred tax asset (30% x 2,000,000) (600,000) Net deferred tax expense 300,000 Problem 15-51 Answer A Deferred tax liability - 12/31/2016 (500,000 x 30%) 150,000 The deferred tax liability is based on the cumulative future taxable temporary difference of P500,000 on December 31, 2016. Problem 15-52 Answer C Increase in deferred tax liability (30% x 3,500,000) 1,050,000 Increase in deferred tax asset (30% x 1,500,000) (_ 450,000) Net deferred tax expense —600,000 Problem 15-53 Question 1 - Answer A Taxable income 8,000,000 Excess tax depreciation 800,000 Estimated product claim liability { 1,200,000) Installment sales income not included in taxable income 2,600,000 Accounting income subject to tax 10,200,000 Total income tax expense (30% x 10,200,000) 3,060,000 Question 2 - Answer € Deferred tax asset - 12/31/2016 G0% x 1,200,000) 360,000 The accrual for product liability in excess of actual claim is a future deductible amount and therefore will result to a deferred tax asset. Excess tax depreciation 800,000 Installment sales income 2,600,000 Total future taxable amount 3,400,000 Deferred tax liability - 12/31/2016 (30% x 3,400,000) Loze,000 Net deferred tax expense (1,020,000 - 360,000) 660,000141 Problem 15-54 Answer B Accrual method - financial or accounting income 8,400,000 Installment method - taxable income 4, Future taxable amount 4,400,000 Deferred tax liability, December 31, 2017 (4,400,000 x 30%) 1,320,000 Problem 15-SS Answer A The carrying amount of the interest receivable is P| 000,000 for accounting purposes but the tax base is zero because the related revenue is taxed on a cash basis. The carrying amount of the trade receivables is P5,000,000 and the tax base is also P5,000,000 because the related revenue is recognized for tax purposes in the same year. Problem 15-56 Answer B Future taxable amount (1,800,000 - 900,000) 900,000 Deferred tax liability (30% x 900,000) 270,000 Problem 15-57 Answer D The tax base is zero because the intangible asset is already expensed in 2016. Problem 15-58 Answer A Deferred tax liability (25% x 2,200,000) 550,000 Problem 15-59 Answer D Problem 15-60 Question 1 - Answer B Current tax expense (1,400,000 x 30%) 420,000 Question 2 - Answer C Total tax expense (30% x 1,550,000) 465,000: Question 3 - Answer C Deferred tax liability (30% x 250,000) 75,000 Question 4 - Answer A (30% x 100,000) 30,000 Problem 15-61 Question 1 Answer Question 2 Answer Question 3 Answer An 8 > Question 4 AnswerProblem 15-62 Question 1 Answer Question 2 Answer Question 3 Answer Question 4 Answer Problem 15-63 Question | Answer Question 2 Answer Question 3 Answer Question 4 Answer o> om oF OB 142143 CHAPTER 16 Problem 16-1 Problem 16-2 Problem 16-3 Problem 16- 1 & 1.D 1A 1B 2. 6 2.D 2.0 2.6 3A 3. D 3A 3.D 4.8 4.4 4A 4,€ 5. D a: € 5. D 5.D 6. Cc 6.0 6. 0 6A 7A 7.¢ 7. 7, BD BA 8c 8. D B.A 9A 9c 9.8 Problem 16-5 Problem 16-6 Problem 16-7 1D 1B iG 2¢ 2.0 2D 3.8 3. 0 2A 4.68 4A 4A 3. D 5. B 6A 7.€ & 98 10. D Problem 16-8 2016 Emplayee benefit expense 200,000 Cash (4,000,000 x 533} 200,000 2017 Employee benefit expense 210,000 Cash (4,200,000 x 5%) 210,000 Problem 16-9 2016 Dec 31 Employee benefit expense 300,000 Accrued benefit payable 300,000 2017 Feb 15 Accrued benefit payable 300,000 Cash 300,000 Problem 16-10 2016 Dec 31 Employee benefit expense 350,000 Prepaid benefit expense 50,000 Cash 400,000 Problem 16-11 2016 Emplayee benefit expense 850,000 Cash 700,000 Prepaid/accrued benefit cost 150,0002017 Employee benefit expense 1,000,000 Prepaid/accrued benefit cost 50,000 Cash Noncurrent liability - 12/31/2016 Accrued benefit cost Noncurrent liability - 12/31/2017 Accrued benefit cost Problem 16-12 1. Annual pension payment - PBO (300,000 x 1.48 x 3% x 12) Problem 16-13 Future salary - PBO (500.000 x 2.094) Annual pension payment - PBO (1,047,000 x 2% x 10 years) Multiply by PV of an ordinary annuity of 1 at 8% for 15 years Present value - 12/31/2041 Multiply by PV of | at 8% for 25 periods Projected benefit obligation - 12/31/2016 Problem 16-14 Future salary (600,000 x 1.48) Annual pension payment (2% x 888,000 x 15 years) Multiply by PV of an ordinary annuity of 1 at 10% for 8 periods Present value - 12/31/2026 Multiply by PV of 1 at 10% for 10 periods PBO - 12/31/2016 Problem 16-15 Annual benefit (5% x 1,500,000) Current service cost PV factor 2016 75,000 361 2017 75,000 404 2018 75,000 452 (5% x liability) Date Current service cost Interest cost 12/31/2016 27,075 : 12/31/2017 30,300 3,249 12/31/2018 33,900 7,275 Problem 16-16 1. Annual retirement benefit (10% x 1,440,000) Current service cost PV factor 2016 144,000 9079 2017 144,000 (9524 2018 144,000 1.0000 432,000 144 1,050,000 150,000 100,000, 159,840 1,047,000 209,400 8.559 1,792,255 —2.146 261,669 888,000 266,400 5.335 1,421,244 0.386. 548,600 75,000 Discounted 27,075 30,300 33,900 Liability 27,075 60,624 101,799 144,000 Discounted 130,608 137,146 144,000 411,7542. (5% x liability) Date Current service cost Interest cost 12/31/2016 130,608 : 12/31/2017 137,146 6,530 12/31/2018 144,000 13,716 Problem 16-17 Current service cost Interest expense (10% x 6,000,000) Interest income (10% 5,000,000) Employee benefit expense 2. Actual return Interest income Remeasurement gain on plan assets 3. Employee benefit expense 1,650,000 Cash Remeasurement gain - OCI Prepaid/accrued benefit cost 4. P/ABC - January 1 Credit adjustment P/ABC - December 31 5. FVPA - January | Contribution Actual return FVPA - December 31 PBO- January 1 Current service cost Interest expense PB O- December 31 P/ABC - December 31 (6,850,000 - 8,150,000) Problem 16-18 1. Current service cast Interest expense (10% x 6,500,000) Interest income (10% 5,750,000) Employee benefit expense 2. Actual return Interest income Remeasurement gain on plan assets 3. Employee benefit expense 675,000 Prepaid/accrued benefit cost 350,000 Cash Remeasurement gain - OCI 4. P/ABC - January 1 Debit adjustment P/ABC - December 31 145 Liability 130,608 274,284 432,000 1,550,000 600,000 (_500,000) 1,650,000 650,000 500,000 150,000 1,200,000 150,000 300,000 (1,000,000) (300,000) (1,300,000) 5,000,000 1,200,000 _ 650,000 6,850,000 6,000,000 1,550,000 600,000 8,150,000 (1,300,000) 600,000: 650,000 (875,000) 875,000 700,000 575,000 125,000 900,000 125,000 (750,000) 350,000 (400,000)5. FVPA - January | Contribution Actual return Benefits paid FVPA - December 31 PBO- January t Current service cost Interest expense Benefits paid PB O- December 31 P/ABC - December 31 (7,250,000 - 7,650,000) Problem 16-19 |. Current service cast Past service cost Interest expense (10% x 7,600,000) Interest income (10% x 6,700,000) Employee benefit expense 2. Actual return Interest income Remeasurement loss on plan assets 3. Employee benefit expense 1,840,000 Remeasurement loss - OCI 170,000 Cash Prepaid /accrued benefit cost 4. P/ABC January | Credit adjustment P/ABC - December 31 5. FVPA - January | ‘Contribution Interest income Remeasurement loss on plan assets Benefits paid FVPA - December 31 PBO - January | ‘Current service cost Past service cost Interest expense Benefits paid PB O - December 31 Prepaid/accrued BC - December 31(7,900,000 - 9,310,000) Problem 16-20 1. Retained earnings 300,000 Prepaid /accrued benefit cost 146 5,750,000 900,000 700,000 (100,000) 2.250,000 6,500,000 600,000 650,000 (100,000) 2,650,000 (_ 400,000) 1,450,000 300,000 760,000 (670,000) 1.840.000 500,000 670,000 (170,000) 1,500,000 $10,000 ( 900,000) ($10,000) (1,410,000) 6,700,000 1,500,000 670,000 ( 170,000) (_ 800,000) 2,200,000 7,600,000 1,450,000 300,000 760,000 (800,000) 9,310,000 (1,410,000) 300,000Current service cost Interest expense (8% x 7,500,000) Interest income (8% x 6,000,000) Employee benefit expense Actual return Interest income Remeasurement gain on plan assets . Employee benefit expense Cash Remeasurement gain - OCI Prepaid/accrued benefit cost . P/ABC - January | Transitional effect - credit Credit adjustment P/ABC - December 31 . VPA - January | Contribution Actual return Benefits paid FVPA - December 31 PBO- January 1 Current service cost Interest expense Benefits paid PBO - December 31 P/ABC - December 31 (7,050.000 - 8,850,000) Problem 16-21 Te Current service cost Interest expense (10% x 7,500,000) Interest income (10% x 6,500,000) Employee benefit expense » Actual return Interest income Remeasurement gain Decrease in P B O - actuarial gain Total remeasurement gain - OCI Employee benefit expense Prepaid/accrued benefit cost Cash Remeasurement gain - OCI . PYABC - January I Debit adjustment P/ABC - December 31 1,020,000 1,300,000 250,000 147 900,000 600,000 C4 1,020,000 700,000 480,000 220,000 500,000 220,000 300,000 (1,200,000) ( 300,000) (__ 300,000) (1,800,000) 6,000,000 500,000 700,000 (_150,000) 7,050,000 7,500,000 300,000 600,000 (150,000) 8,850,000 (L.890,000) 1,200,000 750,000 (650,000) 1,300,000 800,000 650,000 150,000 200,000 350,000 1,200,000 350,000 (1,000,000) ( 250.000 750,000)5. FVPA - January 1 Contribution Actual return Benefits paid FVPA - December 31 PB O - January 1 Current service cost Interest expense Decrease in PBO Benefits paid PBO - December 31 P/ABC - December 31 (7,000.000 - 7,750,000) Problem 16-22 Retained earnings Prepaid/accrued benefit cost Prepaid/accrued benefit cost Retained earnings . Current service cost Interest expense (6% x 5,500,000) Interest income (6% x 4,750,000) Employee benefit expense Actual return Interest income Remeasurement gain on plan assets Increase in PBO - actuarial lass Net remeasurement gain - OCI Employee benefit expense Prepaid/accrued benefit cost Cash Remeasurement gain- OCI . P/ABC - January | Transitional effect - credit Transitional effect - debit Debit adjustment P/ABC - December 31 FVPA - January 1 Contribution Actual return Benefits paid FVPA - December 31 1,250,000 850,000 970,000 430.000 148 6,500,000 1,200,000 800,000 (1,500,000) 2,000,000 7,500,000 1,200,000 750,000 ( 200,000) (1,500,000) 7,750,000 (750,000) 1,250,000 850,000 925,000 330,000 (285,000) 970,000 485,000 (285,000) 200,000 (150,000) 50,000 1,350,000 50,000 « 350,000) (1,250,000) 850,000 430,000 320,000 4,750,000 1,350,000 485,000 (995,000) 5,290,000PBO - January 1 Current service cast Interest expense Increase in PBO. Benefits paid PBO - December 31 P/ABC - December 31 (5,590,000 - 5,910,000) Problem 16-23 a Present value of defined benefit obligation settled Lump sum payment Gain on settlement Current service cost Interest expense (12% x 3,000,000) Interest income (12% x 6,000,000) Gain on settlement Employee benefit expense Actual return Interest income Remeasurement gain on plan assets . Employee benefit expense Cash Remeasurement gain - OCI Prepaid/accrued benefit cast . P/A BC - January 1 Credit adjustment P/A BC - December 31 . FVPA - January | Contribution Actual return Lump sum payment FVPA - December 31 PB O- January | Current service cost Interest expense Present value of defined benefit obligation settled PBO - December 31 P/A BC - December 3! (6,700,000 - 8,860,000) Problem 16-24 FVPA - January | Contribution Actual return FVPA - December 31 940,000 149 5,500,000 925,000 330,000 1S0,000 (_ 995,000) 3.210.000 (320,000) 1,000,000 800,000 200,000 900,000 960,000 (720,000) (200,000) 240,000 800,000 720.000 80,000 700,000 80,000 160,000 (2,000,000) (160,000) (2,160,000) 6,000,000 700,000 800,000 (800,000) 6,700,000 8,000,000 900,000 960,000 (1,000,000) 8,860,000 (2,160,000) 6,000,000 1,000,000 900,000 7,900,0002. PBO- January 1 Current service cost Past service cost Interest expense (10% x 5,000,000) Decrease in PBO - actuarial gain PBO - December 31 3. FVPA - December 31 PRO - December 31 Prepaid/accrued benefit cost - surplus Asset ceiling - December 31, 2016 Effect of asset ceiling 4. Current service cost Past service cost Interest expense on PBO (10% x 5,000,000) Interest income on FVPA (10% x 6,000,000) Interest expense on effect of asset ceiling (10% x 300,000) Employee benefit expense S. Actual return Interest income Remeasurement gain on plan assets Decrease in PBO - actuarial gain Effect of asset ceiling - December 31 Effect of asset ceiling - January 1 Total change in the effect of asset ceiling Interest expense on effect of asset ceiling (10% x 300,000) Remeasurement loss on the effect of asset ceiling Remeasurement gain on plan asset Actuarial gain on PBO Remeasurement loss - asset ceiling Net remeasurement gain 6, Employee benefit expense 830,000 Prepaid/accrued benefit cost 500,000 Cash Remeasurement gain - OCI 7. P/ABC - January 1, asset ceiling - debit Debit adjustment P/ABC - December 31, asset ceiling - debit Problem 16-25 Answer A Future salary (500,000 x 1.217) Annual pension payment (3% x 608.500 x 15) Multiply by PV of an ordinary annuity of 1 at 12% for 6 periods Present value - December 31, 2021 Multiply by PV of 1 at 12% for 5 periods PBO - December 31, 2016 150 5,000,000 700,000 200,000 500,000 (__ 500,000) 5.900.000 7,900,000, 5,900,000 2,000,000 1,200,000 800,000 700,000 200,000 500,000 (600,000) 30,000 830,000 900,000 600,000 300,000 500,000 800,000 300,000 500,000. (_ 30,000) 470,000 300,000 500,000 (470,000) 330,000 1,000,000 330,000 700,000 — 200,000 1,200,000 608,500 273,825 41 1,125,695 —0.567 638.269Problem 16-26 Answer D 2016 (300,000 x .826) 2017 (300,000 x .909) 2018 (300,000 x 1.000) Total current service cost Date Current service cost Interest cost Dec. 31, 2016 247,800 - Dec. 31, 2017 272,700 24.780 Dec. 31, 2018 300,000 $4,720 Problem 16-27 Answer C Current service cost Interest income Past service cost Annual interest on pension liability Total pension expense Actual return on plan assets Interest income on plan assets Remeasurement loss. Pension expense Remeasurement loss Total defined benefit cost Problem 16-28 Answer A Current service cost Interest expense on PEO Interest income on plan assets Loss on plan settlement Past service cost Employee benefit expense Actual return Interest income Remeasurement gain Actuarial gain Total remeasurement gain Employee benefit expense Remeasurement gain Total defined benefit cost Problem 16-29 Answer C Current service and interest cost Interest income on plan assets (10% x 1,000,000) Employee benefit expense Contribution to the plan Employee benefit expense Prepaid benefit cost 151 247,800 272,700 300,000 820,500 Present value 247,800. 545,280 900,000 1,600,000 (400,000) 50,000 500,000 1,750,000 350,000 400,000 (50,000) 1,750,000 50,000 1,800,000 1,300,000 550,000 ( 500,000) 250,000 400,000: 2,000,000 600,000 300,000 100,000 200,000 300,000 2,000,000 (_300,000) 1,700,000 620,000 1 (109,000) 520,000 1,000,000 520,000 480,000152 Problem 16-30 Answer C Contribution or funding in 2016 1,700,000 Service cost in 2016 1,500,000 Prepaid pension cast - 12/31/2016 200,000 Service cost in 2017 1,650,000 Interest cost 150,000 Interest income (170,009) Employee benefit expense in 2017 1,630,000 Contribution or funding in 2017 1,850,000 Employee benefit expense in 2017 1 Prepaid pension cost in 2017 220,000 Prepaid pension cost - 12/31/2016 200,000 Prepaid pension cost - 12/31/2017 420,000 Problem 16-31 Answer C Fair value of plan assets 37,000,000 Projected benefit obligation (33,000,000) Prepaid benefit cost - surplus 4,000,000 Asset ceiling 2,500,000 Effect of asset ceiling 1,500,000 Under PAS 19R, the prepaid benefit cost or “surplus” shall not exceed the asset ceiling. Assuming there is no beginning asset ceiling, the prepaid benefit cost is adjusted as follows. Remeasurement loss ~ OCI 1,500,000 Prepaid/accrued benefit cost 1,500,000 Problem 16-32 Answer A Current service cost 190,000 Interest cost 380,000 Interest income (400,000) Past service cost 500,000 Employee benefit expense 670,000 Contribution or funding 400,000 Accrued benefit cost in 2016 270,000 Prepaid benefit cost - 1/1/2016 20,000, Net accrued benefit cost - 12/31/2016 250,000 Problem 16-33 Answer B Fair value of plan assets 3,450,000 Projected benefit obligation 5,700,000 P/ABC - credit balance (2,250,000) In accordance with PAS 19R, the defined benefit obligation is equal to the projected benefit obligation.Problem 16-34 Answer B PBO after amendment PBO before amendment Past service cost Problem 16-35 Answer D PRO - January 1 Current service cost Interest cost (10% x 7,200,000) Total Less: Benefits paid PBO - December 31 Problem 16-36 Answer A PRO - january 1 Current service cost (squeeze) Interest cost (10% x 3,000,000) Total Less: Benefits paid PBO - December 31 Problem 16-37 Answer A PBO - January 1 (120,000 / 8%) Current service cost (squeeze) Interest cost Total Pension benefits paid PBO - December 31 Problem 16-38 Answer A PBO - January 1 Current service cost (squeeze) Interest cost (10% x 3,500,000) Total Benefits paid PBO - December 31 Problem 16-39 Answer A (14,500,000 - 7,000,000 - 200,000) Problem 16-40 Answer A Problem 16-41 Answer B FVPA - January 1 Contribution to the fund Actual return on plan assets Total Benefits paid FPA - December 31 153 1,900,000 1,300,000 600,000 7,200,000 1,800,000 720,000 9,720,000 1,500,000 8,220,000 3,000,000 700,000 300,000 4,000,000 500,000 3,500,000 1,500,000 675,000 120,000 2,295,000 (_135,000) 2,160,000 3,500,000 600,000 350,000 4,450,000 (250,000) 4,200,000 7,300,000 8,750,000 700,000 950,000 10,400,000 {__600,000) 9,800,000Problem 16-42 Question | Answer D (Current service cost Interest cost Interest income Employee benefit expense Question 2 Answer B Projected benefit obligation ~ 1/1/2016 Fair value of plan assets - 1/1/2016 Transitional liability - 1/1/2016 Question 3 Answer D Retained earnings Prepaid /accrued benefit cast Employee benefit expense Prepaid/accrued benefit cost Cash P/ABC - January 1 debit before transition Transitional effect - credit Debit adjustment P/ABC - December 31 credit Problem 16-43 Question | Answer B Current service cost Interest cost (10% x 7,000,000) Interest income (10% x 8,000,000) Employee benefit expense Question 2 Answer © Actual return Interest income Remeasurement gain on plan assets Question 3 Answer C Employee benefit expense Remeasurement gain Defined benefit cost Contribution Unfunded benefit cost during the year Prepaid/accrued benefit cost Retained earnings 1,500,000 1,600,000 400,000 1,500,000 154 1,500,000 900,000 {_800,000) 1.899,000 9,000,000 8,000,000 1,000,000 1,500,000 2,000,000 500,000 (1,500,000) 400,000 600,000 1,800,000 700,000 (_ 800,000) 1,700,000 1,000,000 800,000 — 200,000 1,700,000 (_ 200,000) 7,500,000 400,000 1,100,000 1,500,000,Employee benefit expense 1,700,000 Cash Remeasurement gain - OCI Prepaid/accrued benefit cost P/ABC - January 1, credit Transitional effect - debit Credit adjustment - credit P/ABC - December 31, credit Problem 16-44 Answer D Question | Answer C Current service cost Interest expense (10% x 9,000,000) Interest income (10% x 10,000,000) Employee benefit expense Question 2 Answer D Actual return Interest income Remeasurement gain on plan assets Actual loss during the year Net measurement loss Employee benefit expense Net measurement loss Total defined benefit cost Contribution to the plan Accrued benefit cost during the year Employee benefit expense 2,400,000 Remeasurement loss ~ OCI 700,000 Cash Prepaid/accrued benefit cost Retained earnings 1,500,000 Prepaid/accrued benefit cost P/ABC - January 1, debit Credit adjustment Transitional effect - credit P/ABC - December 31, credit Problem 16-45 Question | - Answer C Current service cost Interest cost (10% x 7,500,000) Interest income (10% x 7,000,000) Gain on plan settlement Employee benefit expense 155 400,000 200,000 1,100,000 ( 500,000) 1,500,000 (1,100,000) (_100,000) 2,500,000 900,000 (1,000,000) 2,400,000 1,200,000 1,000,000 200,000 (900,000) (_200,000) 2,400,000 — 700,000 3,100,000 500,000 2,600,000 500,000 2,600,000 1,500,000 2,500,000 (2,600,000) 500,000) (1,600,000) 1,400,000 750,000 ( 700,000) 100,000) 1,350,000Question 2 - Answer C Actual return Interest income Remeasurement gain on plan assets Decrease in PBO - actuarial gain Total remeasurement gain Question 3 - Answer A FVPA - January | Contribution to the plan Actual return Benefits paid Settlement price of defined benefit obligation FPA - December 31 Question 4 - Answer B PBO - January 1 Current service cost Interest cost Benefits paid Decrease in PBO Present value of benefit obligation settled PBO - December 31 Question 5 - Answer B Employee benefit expense Prepaid/accrued benefit cost Cash Remeasurement gain - OCI Prepaid/acerued benefit cost - January | Debit adjustment Prepaid/accrued benefit cost - December 31 Reconciliation Fair value of plan assets - January 1 Projected benefit obligation - December 31 Prepaid/accrued benefit cost - credit Problem 16-46 Question | - Answer A Current service cost Interest cost (9% x 10,000,000) Interest income (9% x 9,200,000) Pension expense Question 2 - Answer B Actual return Interest income Remeasurement loss 1,350,000 190,000 156 840,000 700,000 140,000 200,000 340,000 7,000,000 1,200,000 840,000 (1,500,000) C4 ) 7,140,000 7,500,000 1,400,000 750,000 (1,500,000) ( 200,000) (500,000) 7,450,000 1,200,000 340,000 (500,000) 190,000 310,000 7,140,000 (7,450,000) {__ 310,000) 1,200,000 900,000 {_ 828,000) 1,272,000 250,000 (828,000) (578,000)Question 3 - Answer A Prepaid/acerued benefit cost - January | (credit) Credit adjustment Balance - December 31 Journal entry Employee benefit expense 1,272,000 Remeasurement loss 578,000 Cash Prepaid/accrued benefit cost Proof Fair value of pension fund - January 1 Actual return Contribution to the fund Benefits paid Fair value of pension fund - December 31 PBO - January 1 Current service cost Interest cost Benefits paid PBO - December 31 Fair value of pension fund - December 31 Projected benefit obligation - December 31 Prepaid/accrued benefit cost Problem 16-47 Question 1- Answer A Current service cost Interest cost (5% x 2,200,000) Interest income (5% x 2,100,000) Past service cost for the year Employee benefit expense Question 2- Answer A FVPA - 1/1/2016 Contribution Actual return (SQUEEZE) Total Benefits paid FVPA - 12/31/2016 187 ( 800,000) «_ 800.000) (1,600,000) 1,050,000 800,000 9,200,000 250,000 1,050,000 (1,100,000) 1 ( I 9,400,000 0,000,000 1,200,000 300,000 1,100,000) |,000,000 9,400,000 11,000,000) ( « 1,600,000) 30,000 110,000, (105,000) 115,000 150,000 2,100,000 21,000 —310,000 2,431,000 31,000) 2,400,000Question 3- Answer D PBO - 1/1/2016 Current service cost Interest cost Past service cost during the year Increase in PBO - actuarial loss (squeeze) Total Benefits paid PBO - 12/31/2016 Question 4- Answer C Actual return Interest income Remeasurement gain on plan assets Actuarial loss on PBO Net remeasurement gain Question 5- Answer C Employee benefit expense Cash Remeasurement loss P/ABC - January 1, credit No adjustment P/ABC - December 31, credit Reconciliation FVPA - January 1 PBO - December 31 P/ABC - December 31 Problem 16-48 Question 1 - Answer A FVPA - January 1 Contribution Actual return (SQUEEZE) Benefits paid FVPA - December 31 Question 2- Answer A PBO - January 1 Current service cost Interest cost (10% x 2,000,000) Benefits paid Actuarial gain (SQUEEZE) PBO - December 31 150,000 158 2,200,000 30,000 110,000 115,000 76,000 2,531,000 (__ 31,000) 2,500,000 310,000 105,000 205,000 76,000) 129,000 21,000 129,000 (100,000) (100,000) 2,400,000 ) (2,500,000) (100,000) 2,600,000 350,000 200,000 (150,000) 3,000,000 2,000,000 100,000 200,000 ( 150,000) (__30,000) 2,100,000Question 3- Answer C Current service cost Interest cost (10% x 2,000,000) Interest income (10% x 2,600,000) Interest expense on effect of asset ceiling (10% x 400,000) Employee benefit expense Question 4- Answer D Actual return Interest income (10% x 2,600,000) Remeasurement loss on plan assets Actuarial gain - decrease in PBO Remeasurement loss on effect of asset ceiling Net remeasurement loss Effect of asset ceiling - December 31 Effect of asset ceiling - January 1 Change in the effect of asset ceiling Interest expense on effect of asset ceiling (10% x 400,000) Remeasurement loss Journal entry Employee benefit expense Remeasurement loss - OCI Prepaid/accrued benefit cost Cash Reconciliation P/ABC, January | - asset ceiling Debit adjustment P/ABC, December 31 - asset ceiling 80,000 170,000 100,000 159 100,000 200,000 (260,000) 40,000 80,000 200,000 260.000) ( 60,000) $0,000 (160,000) (170,000) 600,000 400,000 200,000 (40,000) 160,000 350,000 200,000160 CHAPTER 17 Problem 17-1 Problem 17-2 Problem 17-3 1.€ LA 1D 2.D 2.¢ 2.8 3. A 3. D 3. 4.€ 4€ 4.0 5. A 5. 0 6. 6B 7A 7.8 8. D 8D oA 10. B Problem 17-4 Requirement I |. To record the used vacation weeks Vacation pay expense (1,000 x P3,000) 3,000,000 Cash 3,000,000 2. To accrue the unused vacation weeks: Vacation pay expense (500 x P3,300) 1,650,000 Accrued vacation pay 1,650,000 Requirement 2 1. To record the used vacation weeks Vacation pay expense 3,000,000 Cash 3,000,000 2. To accrue the unused vacation weeks: No accrual is necessary because nonaccumulating paid absences are recognized when the absences occur and lapse when the entitlement is not used in full. Problem 17-5 Journal entries 1. To record the bonus for 2016: Bonus expense (8% x 50,000,000) 4,000,000 Bonus payable 4,000,000 2. To record the bonus payment on December 31, 2017: Bonus payable 4,000,000 Cash 4,000,000161 Problem 17-6 Journal entries. 1. To record the bonus for 2016: Bonus expense 9,120,000 Bonus payable 9,120,000 Maximum possible bonus (12% x 80,000,000) 9,600,000 Saving thraugh staff turnover (5% x 9,600,000) (480,000) Estimated liability 9,120,000 2. To record the bonus payment on December 31, 2017, assuming there is no change in the estimated liability: Bonus payable 9,120,000 Cash 9,120,000 Problem 17-7 Aye Bee Cee Unused sick leave - 1/1/2016 10 6 4 Sick leave taken in 2016 from previous year Ca) (6) (4) Sick leave on 1/1/2016 not taken - forfeited z 0 oO Sick leave earned in 2016 lo 10 10 Sick leave taken in 2016 from current year aus i) (2 Unused sick leave - 1/1/2016 19 7 8 Note that the unused sick leave of employee Aye on January 1, 2016 is 10 days. However, only 7 days are taken in 2016. The balance of 3 days cannot be carried forward anymore because the sick leave is good for the next calendar year. In the case of Bee, the sick leave taken is 6 days from previous year and 3 days from 2016 ora total of 9 days taken. In the case of Cee, the sick leave taken is 4 days from previous year and 2 days from 2016 or a total of 6 days taken. Expected daily wage Aye (1,500 x 120%) 1,800 Bee (2,500 x 12556) 3,125 Cee {4,000 x 130%) 5,200 Accrued sick leave pay - 12/31/2016 Aye (1,800 x 10) 18,000 Bee (3.125% 7) 21,875 Cee (5,200 3) 41,600 Total liability - 12/31/2016 81,475 Problem 17-8 Answer B Vacation pay 1,100,000 Sick pay 900,000 Liability for compensated absences 2,000,000162 Problem 17-9 Answer D Liability for compensated absences, December 31, 2016 (150 vacation days x P1,000 per day) 150,000 Note that North is mot required to accrue the sick pay benefits, Note also that the unadjusted balance of P210,000 of the liability account does not affect the computation of the required December 31, 2016 liability. Problem 17-10 Answer C Employee 2 (600 x 5 days not taken) 3,000 Employee 3 (800 x 15 days not taken) 12,000 Accrued vacation pay 15,000 Problem 17-11 Answer C Liability for accumulated vacations, December 31, 2015 350,000 Less: Payment for pre-2016 accrued vacations 200,000 Balance 150,000 Vacations earned for work in 2016 300,000 Adjustment of pre-2016 vacations (150,000 x 10%) 15,000 Vacation pay expense in 2016 315,000 Problem 17-12 Answer B vacation days in 2016 12 Vacation days in 2017 12 Total 24 Vacation days taken in 2017 <9) Vacation days not taken - 12/31/2017 15 Accrued liability - 12/31/2017 (50 x 15 x 8 hours x P80) 480,000. Note that the entity's policy is to accrue liability at end of each year at the wage rate for that year. Problem 17-13 Answer B Accrued overtime 50,000 Accrued salaries (3/10 x 900,000) 270,000 Total accrual 320,000 Problem 17-14 Question 1- Answer A Vacation pay expense for 2016 (35 x 10 days x 8 hours x P129) 361,200Question 2- Answer A FIFO vacation days earned in 2016, 2017 and 2018 Vacation days taken in 2017 Vacation days taken in 2018 Vacation days not taken (2017 - 2, 2018 - 10) Vacation days earned in 2017 not taken (2 x 135 x 8 hours x 35 employees) Vacation days earned in 2018 not taken (10 x 142.50 x 8 x 35 employees) Accrued liability - 12/31/2018 Problem 17-15 Question | Answer C Lump sum payments PY of periodic payments Total liability Question 2 Answer C ‘The entry to recognize the liability for termination benefits is as follows Accrued pension cost 45,000 Termination benefits 585,000 Liability for termination benefits Problem 17-16 Question | Answer A Employees leaving before closure (150 x P20,000}) Employees leaving until closure (50 x P60,000) Total benefit Question 2 Answer A Termination benefit (200 x P20,000) Question 3 Answer A Total benefit per employee Termination benefit Short-term benefit per employee Number of employees leaving until closure Total amount of short-term benefit Problem 17-17 Question 1 Answer A Question 2 Answer C Question 3 Answer B 163 30 (8) a0) 12 75,600 399.000 474,600 475,000 155,000 630,000 630,000 3,000,000 3,000,000 6,000,000 4,000,000 60,000 20,000 40,000 eee) 2,000,000 4,500,000 1,000,000164 Problem 17-18 Question | Answer A vacation pay expense for 2016 (50 x 15 days x 8 hours x P10) 300,000 Question 2 Answer A FIFO Vacation days earned in 2016, 2017 and 2018 (15 x 3) 45 Vacation days taken in 2017 (13) Vacation days taken in 2018 as) Vacation days not taken (2017 - 2, 2018 - 15) 7 vacation days earned in 2017 not taken (2 x P200 x $ hours x $0 employees) 160,000 Vacation days earned in 2018 not taken (15 x P2S0 x 8 hours x SO employees) 1,500,000 Accrued liability - December 31, 2018 1,660,000 Note that the entity has chosen to acerue liability at the current rate of pay in effect when the compensated time is earned.165 CHAPTER 18 Problem 18-1 Problem 18-2 Problem 18-3 Problem 18-4 LB 1D ic ie a € 2.4 2.4 2.8 3. B 3. D 3. A 3. B 4.8 4.D 4.8 4.€ 5A 5. 5.8 6.0 aA B.A SA 10.0 Problem 13-5 Problem 18-6 Problem 18-7 Problem 18-8 18 LA 6 Lec 2.0 2,0 2eC 2,0 3. 3.8 3. € 3, 4.€ 4.D 4.D 4.65 a6 5. D 5. B 6. 6.8 6. D 7A 7€ ZC 8.D 8.8 8.D 9. B 9.8 9D 10. B 10. € 10. D Problem 13-9 Requirement a 2 Memo entry The corporation was authorized to issue share capital of P5,000,000, divided into 100,000 shares with par value of P50. Subscriptions receivable 1,250,000 Subscribed share capital 1,250,000 (25% x 100,000 = 25,000 shares) . Cash (25% x 1,250,000) 312,500 Subscriptions receivable 312,500 . Cash 562,500 Subscriptions receivable (15,000 x 50 x 75%) 562,500 Subscribed share capital 750,000 Share capital (15,000 x 50) 750,000 . Land 600,000 Share capital (10,000 x 50) 500,000 Share premium 100,000 . Cash (5,000 x 60) 300,000 Share capital (5,000 x 50) 250,000 Share premium 50,0007. Legal expenses Share capital (2,000 x 50) Requirement b Shareholders’ equity: Share capital, P$0 par, 100,000 shares authorized, 32.000 shares issued Subscribed share capital Subscriptions receivable Share premium Problem 18-10 Requirement a 1. Unissued share capital Authorized share capital Subscriptions receivable Subscribed share capital (40% x 50,000 = 20,000 shares) 2. Cash (25% x 2,000,000) Subscriptions receivable 3. Cash Subscriptions receivable (10,000 x 100 x 75%) Subscribed share capital Unissued share capital {10,000 shares x 100) 4. Patent (5,000 x 100) Unissued share capital 5. Cash (15,000 x 120) Unissued share capital (15,000 shares x 100) Share premium Requirement b Shareholders’ equity: Authorized share capital, P100 par, 50,000 shares Unissued share capital Issued share capital, 30,000 shares Subscribed share capital Subscriptions receivable Share premium Problem 18-11 1. Subscriptions receivable Subscribed share capital (40,000 x 100) 100,000 ( 5,000,000 2,000,000 500,000 750,000 1,000,000 500,000 1,800,000 4,000,000 166 100,000 1,600,000 500,000 375,000) 1,875,000 5,000,000 2,000,000 500,000 750,000 1,000,000 500,000 1,500,000 300,000 5,000,000 2, 3,000,000 1,000,000 ( 750,000) 300,000 3,550,000 4,000,000167 2. Accounts receivable 350,000 Note receivable 70,000 Inventory 680,000 Accounts payable 100,000 ‘Subscriptions receivable 1,000,000 3. Land 150,000 Building 850,000 Subscriptions receivable 1,000,000 4. Cash 375,000 Subscriptions receivable (15.000 x 100 x 25%) 375,000 5. Legal expenses 50,000 Share capital 50,000 6. Subscriptions receivable (1,000 x 120) 120,000 Subscribed share capital 100,000 Share premium 20,000 Cash (1,000 x 40) 40,000 Subscriptions receivable 40,000 7. Cash 1,100,000 Subscriptions receivable 1,100,000 A 200,000 8 300,000 C (800,000 x 75%) 600,000 Total 1,100,000 Subscribed share capital 3,300,000 Share capital (33,000 x 100) 3,300,000 Requirement b Shareholders" equity: Share capital, P! 00 par Authorized - 50,000 shares Issued and outstanding - 33,500 shares 3,350,000 Subscribed share capital - 8,000 shares 800,000 Subscriptions receivable ( 605,000) Share premium 20,000. 3,565,000 Problem 18-12 1. Memo - The company was authorized to issue share capital as follows: Preference share capital, P100 par, 30,000 shares 3,000,000 Ordinary share capital, P50 par, 100,000 shares 5,000,000 Total authorized share capital 8,000,000 2. Cash 2,400,000 Ordinary share capital 2,000,000 Share premium - ordinary share 400,0003. Cash 1,200,000 Preference share capital Share premium - ordinary share 4. Subscriptions receivable 1,000,000 Subscribed preference share capital 5. Cash 400,000 Subscriptions receivable 6. Legal expenses 100,000 Preference share capital 7. Property, plant and equipment 1,300,000 Preference share capital Share premium - preference share 8. Subscriptions receivable 750,000 Subscribed ordinary share capital 9. Cash 300,000 Subscriptions receivable 10. Cash 600,000 Subscriptions receivable Subscribed preference share capital 1,000,000 Preference share capital 11. Treasury ordinary shares 200,000 Cash 12. Retained earnings 200,000 Retained earnings appropriated for treasury shares 13. Profit and loss 2,000,000 Retained earnings Brook Company Shareholders’ equity December 31, 2016 Preference share capital Ordinary share capital Subscribed ordinary share capital Subscriptions receivable Share premium: Preference share 200,000 Ordinary share 700,000 Retained earnings: Unappropriated 1,800,000 Appropriated for treasury shares 200.000 Treasury ordinary shares Shareholders’ equity 168 1,000,000 200,000 1,000,000 400,000 100,000 1,000,000 300,000 750,000 300,000 600,000 1,000,000 200,000 200,000 2,000,000 2,100,000 3,000,000 750,000 ( 450,000) 900,000 2,000,000 200,000) 8,100,000Problem 18-13 1. Unissued ordinary share capital Authorized ordinary share capital 2. Subscriptions receivable Subscribed ordinary share capital 3. Cash Subscriptions receivable 4. Cash Subscriptions receivable (10,000 x 100 x 75%) 5. Subscribed ordinary share capital Unissued ordinary share capital 6. Land Building Unissued ordinary share capital Share premium 7. Loan payable Accrued interest payable Unissued ordinary share capital Share premium Gain on extinguishment 8. Profit and loss Retained earnings Shareholders’ equity Authorized ordinary share capital Unissued ordinary share capital Issued ordinary share capital Subscribed ordinary share capital Subscriptions receivable Share premium Retained earnings Problem 18-14 1. Subscriptions receivable - PS (20,000 x 100) Subscribed preference share capital 2. Subscriptions receivable - PS (4,000 shares x 120) Subscribed preference share capital Share premium - preference 3. Cash (2,480,000 - 120,000) Subscriptions receivable - PS 4. Subscribed preference share capital Preference share capital (22,000 x 100) 10,000,000 2,500,000 625,000 750,000 1,000,000 800,000 2,500,000 1,100,000 200,000 3,000,000 2,000,000 480,000 2,360,000 2,200,000 169 10,000,000 2,300,000 625,000 750,000 1,000,000 3,000,000 300,000 1,000,000 200,000 100,000 3,000,000 10,000,000 (_5,000,000) 5,000,000 1,500,000 (1,125,000) 500,000 3,000,000 8,875,000 2,000,000 400,000 80,000 2,360,000 2,200,0005. Land Ordinary share capital (8,000 x 10) Share premium - ordinary 6. Subscription receivable - CS Subscribed ordinary share capital (40,000 x 10) Share premium - ordinary (950,000 - 150,000) ‘Ordinary shares issued and outstanding Ordinary shares subscribed Total Less: Ordinary shares issued to acquire land Ordinary shares originally subscribed 7. Cash (1,200,000 - 360,000) Subscriptions receivable - ordinary 8. Subscribed ordinary share capital Ordinary share capital (24,000 - 8,000 x 10) Issued Subscribed Share premium Subscriptions receivable ‘Contributed capital Problem 18-15 Jan. 1 Land Organization expense Ordinary share capital (10,000 shares) Share premium - ordinary Feb. 20 Cash (15,000 x 120) Preference share capital Share premium - preference Share premium - preference Cash Mar. 10 Cash (25,000 x 260) Ordinary share capital Share premium - ordinary Share premium - preference Cash April 1. Subscription receivable (20,000 x 350) Subscribed ordinary share capital Share premium - ordinary July 1S Cash (10,000 shares) Ordinary share capital Share premium - ordinary 230,000 1,200,000 840,000 160,000 Preference 2,200,000 200,000 80,000 {_120,000) 2,360,000 2,500,000 500,000 1,800,000 50,000 6,500,000 200,000 7,000,000 3,000,000 170 80,000 150,000 400,000 800,000 24,000 24,000 48,000 8,000 40,000 840,000 160,000 Ordinary 240,000 240,000 950,000 360,000) 1,070,000 1,000,000 2,000,000 1,500,000 300,000 50,000 2,500,000 4,000,000 200,000 2,000,000 5.000.000 1,000,000 2,000,000171 Building 7,000,000 Ordinary share capital (12,000 x 100) 1,200,000 Share premium - ordinary (12,000 x 200) 2,400,000 Preference share capital (20,000 x 100) 2,000,000 Share premium - preference 1,400,000 Aug. 1 Cash 4,500,000 Subscription receivable 4,300,000 Subscribed ordinary share capital 1,000,000 Ordinary share capital (10,000 x 100) 1,000,000 Dec. 31 Subscribed ordinary share capital (5,000 shares) 500,000 Share premium - ordinary (5,000 x 250) 1,250,000 Subscription receivable 1,500,000 Share premium - forfeited subscriptions 250,000 31 Income summary 3,000,000 Retained earnings 3,000,000 Requirement 2 Preference share capital, P100 par, 50,000 shares authorized, 35,000 shares issued and outstanding 3,500,000 Share premium - preference 1,650,000 Ordinary share capital, P100 par. 100,000 shares authorized, 67,000 shares issued and outstanding 6,700,000 Subscribed ordinary share capital - 5,000 shares 500,000 Share premium - ordinary 13,950,000 Share premium - forfeited subscriptions 250,000 Subscription receivable ( 1,000,000) Retained earnings 3,000,000 Total shareholders’ equity 28,550,000 Problem 18-16 1. Preference share capital authorized (50,000 shares x P100 par} 5,000,000 Ordinary share capital authorized (200,000 shares x P15 stated value) 3,000,000 Total authorized share capital $000,000 2. Unissued preference share capital 1,800,000 Unissued ordinary share capital (20,000 x 15) 300,000 Total unissued share capital 2,100,000 3. Preference share capital issued (5,000,000 - 1,800,000) 3,200,000 ‘Ordinary share capital issued 2,700,000 Total issued share capital 5,900,000 4, Preference share capital available for subscription: Unissued preference share capital 1,800,000 Less: Subscribed preference share capital 300,000 =—-1,500,000 ‘Ordinary share capital available for subscription: Unissued ordinary share capital 300,000 Less: Subscribed ordinary share capital 220,000 Ordinary share capital available for subscription 1,530,0005. Authorized preference share capital Unissued preference share capital issued preference share capital ‘Ordinary share capital Subscribed preference share capital Less: Subscription receivable Subscribed ordinary share capital Less: Subscription receivable Share premium - ordinary Retained earnings Treasury preference shares Shareholders’ equity Problem 18-17 1. a. Preference share capital (5,000 x 100) Share premium - PS (5,000 / 50,000 x 500,000) Ordinary share capital (5,000 x 50) Share premium - ordinary share b. Preference share capital Share premium - PS. Retained earnings Ordinary share capital (20,000 x $0) 2. a. Preference share capital Share premium - PS Retained earnings Cash (5,000 x 120) b. Preference share capital Share premium - PS Cash (5,000 x 80) Share premium - redemption Problem 18-18 2016 Jan. 1 Cash Redeemable preference shares Dec. 31 Interest expense Accrued interest payable (10% x 5,000,000) 2017 Dec. 31 Interest expense Accrued interest payable (10% x 5,500,000) 2013 Jan. 1 Redeemable preference shares Accrued interest payable Cash 500,000 50,000 500,000 50,000 450,000 500,000 50,000 50,000 500,000 50,000 5,000,000 500,000 550,000 5,000,000 1,050,000 172 5,000,000 (2,800,000) 3,200,000 2,700,000 300,000 { 200,000) 270,000 « 170,000) 950,000 2,000,000 {_ 600,000) 8,450,000 250,000 300,000 1,000,000 600,000 400,000 150,000 5,000,000 500,000 550,000 6,050,000173 Problem 18-19 1. Cash {4,000 x 60} 240,000 Ordinary share capital (20,000 rights/5 ~ 4,000 shares) 200,000 Share premium 40,000 2. Sales price 2,500,000 Less: Market value of warrants (20,000 x 10) — 200,000 Issue price of preference shares 2,300,000 Cash 2,500,000 Preference share capital 2,000,000 Share premium - PS 300,000 Share warrants outstanding 200,000 Cash (9,000 x 60) 540,000 Share warrants outstanding (18,000 / 20,000 x 200,000) 180,000 Ordinary share capital 450,000 Share premium - ordinary shares 270,000 Share warrants outstanding 20,000 Share premium - unexercised warrants 20,000 3. Market value of ordinary share 80 Less: Option price 60 Excess 20 Multiply by 25,000 shares Value of warrants 500,000 Cash 6,000,000 Preference share capital 5,000,000 Share premium - PS 500,000 Share warrants outstanding 500,000 ‘Cash (25,000 x 60) 1,500,000 Share warrants outstanding 500,000 Ordinary share capital (25,000 x 50) 1,250,000 Share premium - ordinary share 750,000 Problem 18-20 2016 May 31 Cash 6,000,000 Bonds payable 5,000,000 Premium on bonds payable 250,000 Share warrants outstanding 750,000 ‘Sales price of bonds with warrants 6,000,000 Less. Market value of bonds ex-warrants. 5,250,000 issue price of warrants 750,000 Dec. 31 Cash (10.000 x 120) 1,200,000 Share warrants outstanding (10,000 / 15,000 x 750,000) 500.000 ‘Ordinary share capital 10,000 x 100) 1,000,000 Share premium 700,000 31 Profit and lass 2,000,000 Retained earnings 2,000,0002017 July 15 Memo - Issued 60,000 rights permitting shareholders to acquire 1 share at P130 for every 5 rights Dec. 31 Cash (60,000 / 5 = 12,000 x 130) 1,560,000 Ordinary share capital (12,000 x 100} Share premium - issuance 31 Share warrants outstanding 250,000 Share premium - unexercised share warrants 31 Profit and loss 3,000,000 Retained earnings Shareholders’ Equity December 31, 2017 Ordinary share capital, P100 par Authorized - 200,000 shares Issued and outstanding - 72,000 shares Share premium Retained earnings Shareholders’ equity Problem 18-21 Requirement 1 a. Treasury shares 300,000 Cash b. Cash 1,000,000 Treasury shares Share premium c. Cash 700,000 Retained earnings 100,000 Treasury shares Requirement 2 Ordinary share capital 500,000 Share premium (5,000 x 4) 20,000 Retained earnings 280,000 Treasury share Problem 18-22 Requirement a 1. Cash 4,000,000 Share capital (200,000 x 15) Share premium 2. Cash 6,250,000 Share capital (250,000 x 15} Share premium 174 1,200,000 360,000 250,000 3,000,000 7,200,000 2,310,000 $8,000,000 17,510,000 800,000 800,000 200,000 800,000 800,000 3,000,000 1,000,000 3,750,000 2,500,00075 3. Treasury shares 1,000,000 Cash 1,000,000 4. Cash 1,250,000 Treasury shares 1,000,000 Share premium 250,000 Requirement b 1. Cash 4,000,000 Share capital (200,000 x 20) 4,000,000 2. Cash 6,250,000 Share capital (250,000 x 20) 5,000,000 Share premium 1,250,000 3. Treasury shares 1,000,000 Cash 1,000,000 4. Cash 1,250,000 Treasury shares 1,000,000 Share premium 250,000 Problem 18-23 Requirement a a. Cash 4,200,000 Preference share capital 3,000,000 Share premium - PS 1,200,000 b. Cash 5,500,000 Ordinary share capital 5,000,000 Share premium - ordinary share 500,000 c. Preference share (10,000 x 100) 1,000,000 Share premium - PS 400.000 Cash (10.000 x 120) 1,200,000 Share premium - retirement 200,000 d. Treasury shares (15,000 x 52) 780,000 Cash 780,000 e. Cash (10,000 x 60) 600,000 Treasury shares (10,000 x 52) 520,000 Share premium - treasury share 80,000 f. Received 20,000 ordinary shares as donation from shareholders. Cash (10,000 x 65) 650,000 Donated capital 650,000 g. Profit and loss 3,000,000 Retained earnings 3,000,000 h. Retained earnings 260,000 Retained earnings appropriated for treasury shares 260,000Shareholders’ Equity Preference share capital, 12% P100 par Ordinary share capital, P50, 100,000 shares issued, of which 5,000 shares are in treasury and 10,000 shares are donated Share premium: Preference share 800,000 Retirement of preference share 200,000 Ordinary share 500,000 Treasury share 80,000 Donated capital 650,000 Retained earnings Unappropriated 2,740,000 Appropriated for treasury shares 260,000 Treasury shares, at cost Shareholders’ equity Problem 18-24 a. Share capital 3,000,000 Share premium 200,000 Share capital (40,000 x 50) Share premium - recapitalization b. Memo - Issued 100,000 new shares with par of P30 as a result of 5 for | split of 20,000 original shares with par of P150, c. Share capital (26,000 x $0) 1,000,000 Share premium - recapitalization d. Share capital 3,000,000 Share premium 200,000 Retained earnings 800,000 Share capital (80,000 x 50) Problem 18-25 Requirement a 1. Cash 1,000,000 Ordinary share capital 2. Treasury shares 300,000 Cash 3. Memo - Issued 140,000 new ordinary shares with par of P25 as a result of a2 for 1 split of 70,000 original shares with a par of P150. 4. Cash 120,000 Treasury shares (3,000 / 10,000 x 300,000) Share premium - treasury shares 176 2,000,000 5,000,000 2,230,000 3,000,000 260,000) 11,970,000 2,000,000 1,200,000 1,000,000: 4,000,000 1,000,000 300,000 90,000 30,0005. Memo - Received 15.000 ordinary shares by way of donation. Cash (10,000 x 40) Donated capital 6. Profit and loss Retained earnings 7. Retained earnings Retained earnings appropriated for treasury shares Shareholders’ Equity Preference share capital Ordinary share capital Share premium: Preference share Ordinary share Treasury share Donated capital Retained earnings Unappropriated Appropriated for treasury shares Treasury shares, at cost Shareholders’ equity Problem 18-26 a. Share capital Donated capital (5,000,000 x 10%) Donated capital Retained earnings b. Share capital (50,000 x 50) Share premium Share premium Retained earnings c. Share capital Share premium Share capital (100,000 x 55) Retained earnings d. Share capital Share premium Share capital (150,000 x 20) Share premium - recapitalization Share premium - recapitalization Retained earnings 400,000 500,000 210,000 200,000 500,000 30,000 400,000 2,290,000 —210,000 500,000 500,000 2,500,000 500,000 5,000,000 1,000,000 5,000,000 1,000,000 500,000 ( 177 400,000 500,000 210,000 500,000 3,500,000 1,130,000 2,500,000 210,000) 500,000 $00,000 2,500,000 500,000 5,500,000 $00,000 3,000,000 3,000,000 500,000178 Problem 18-27 Answer A Share capital 15,000,000 Share premium 5,000,000 Retained earnings unappropriated 6,000,000 Retained earnings appropriated 3,000,000 Revaluation surplus 4,000,000 Cumulative translation gain 1,500,000 Unrealized loss on forward contract { 1,000,000) Treasury shares, at cost (2.000.000) Total shareholders’ equity 31,500,000 The translation gain is part of equity as component of other comprehensive income. The unrealized loss on forward contract is also component of other comprehensive income. Problem 18-28 Answer A Preference share capital 2,300,000 Ordinary share capital 5,250,000 Subscribed share capital 500.000 Total legal capital 8,050,000 Problem 18-29 Answer A Sales 10,000,000 Total expenses (_7,800,000) Net income 2,200,000 Retained earnings - January 1 1,000,000 Dividends 700,000) Retained earnings - December 31 2,500,000 Preference share capital 2,000,000 Ordinary share capital 3,000,000 Share premium 1,000,000 Retained earnings 2,500,000 Treasury shares 500,000) Total shareholders’ equity 8,000,000 Problem 18-30 Answer B Share capital 5,000,000 Subscribed share capital 3,000,000 Subscription receivable (2,000,000) Share premium 1,500,000 Contributed capital 7,500,000 Problem 18-31 Answer C Ordinary share capital - 150,000 shares 18,000,000 Preference share capital - 50,000 shares x 60 3,000,000 Subscribed preference share capital - 20,000 x 100 2,000,000 Total contributed capital 23,000,000 Observe that the subscribed preference share capital is already included in contributed capital because the subscription receivable is collected within one year. Moreover, contributed capital includes the aggregate par value and share premium but does not include retained earnings.179 Problem 18-32 Answer A January 10 (25,000 x 2) 50,000 March 25 (1,000 x 4) 4,000 September 30 (5,000 x 6) 30,000 Total share premium 84,000 Problem 18-33 Answer C Problem 18-34 Answer D Jan. 15 (30,000 x 50) 1,500,000 Feb. 14 (300,000 - 200,000) 100,000 Mar. 27 : Oct. 31 (4,400,000 - 3,880,000) 520,000 Nov, 5 Dec. 17 = (10,000 x 25) 250,000 Total share premium 2,370,000 Issuance of convertible bonds (4,000,000 x 110) 4,400,000 Market value of convertible bonds without conversion feature (4,000,000 x 97) 3,880,000 Share premium - conversion feature _520,000 (On November 5, the par value was reduced from P100 to PSO because of the 2 for 1 share split. Thus, the issuance on December 17 resulted in a share premium of P25 per share. Problem 18-35 Answer A When shares are issued for services, the measure should be the fair value of such services. However, in this case, the fair value of the services is not available. Thus, the measure is the fair value of the shares. Legal expenses (1,000 x 140) 140,000 Share capital (1,000 x 5) 5,000 Share premium 135,000 The normal billing rate is not necessarily the fair value of the services because this amount is likely to be negotiable. Problem 18-36 Answer B Cash received 11,000,000 Less: Market value of bonds payable 4,000,000 Residual amount allocated to ordinary shares 7,000,000 Less: Par value of ordinary shares (10,000 x 50) 500.000 Share premium 6,500,000 Problem 18-37 Answer C Market value Fraction Allocated proceeds Ordinary (10,000 x 36) 360,000 36/90 320,000 Preference (20.000 x 27) 540.000 54/90 480.000 900,000 800,000180 Problem 18-38 Answer A Issuance (200,000 x 15) 3,000,000 Net income 750,000 Cash dividends (380,000) Treasury shares (12.000 x 12) ( 144,000) Reissue of treasury (8,000 x 8) 64,000 Retirement of treasury - no effect = 3,290,000 Problem 18-39 Answer C Per book 980,000 Treasury shares: 1,000 x 28 € 28,000) 900 x 30 € 27,000) Reissuance of treasury (1,500 x 32) 48,000, Net income 110,000 1,083,000 Problem 18-40 Answer A Issuance of ordinary shares on 1/1/2016 (950,000 x 1/2 x 15) 7,125,000 Net income for 2016 1,025,000 Dividend declared in 2016 230,000) Shareholders’ equity - 12/31/2016 7,920,000 Issuance of ordinary shares (100,000 x 17) 1,700,000 Issuance of preference shares (150,000 x 8) 1,200,000 Issuance of preference shares (50,000 x 9) 450,000 Net income for 2017 1,215,000 Dividend declared in 2017 (635,000) Shareholders! equity - 12/31/2017 11,850,000 Problem 18-41 Answer B Ordinary share capital 6,000,000 Preference share capital 5,000,000 Share premium 6,000,000 Retained earnings 6,500,000 Treasury shares ( 1,500,000) Unrealized loss on interest rate swap 500,000) Total shareholders’ equity 21,500,000 Problem 18-42 Answer C Share split does not affect the elements of shareholders’ equity. Only the number of shares and par value are affected, In this case, the share split up increases the number of shares but it decreases the par value. Problem 18-43 Answer A Problem 18-44 Answer C New par value (10 x 5) 50 The reverse share split decreases the shares to 2,000 but increases the par to P50 or a total of P100,000 - the same capital before the split.181 Problem 18-45 Answer D Total ordinary shares issued (200,000 + 100,000) 300,000 Less: Treasury ordinary shares 75,000 Ordinary shares outstanding 225,000 Problem 18-46 Answer A Issued (80,000 x 2) 160,000 Treasury (10,000 x 2) 20,000) Outstanding 140,000 Problem 18-47 Answer A Issued shares (125,000 x 3) 375,000 Less: Old treasury shares (12,000 balance x 3) 36,000 New treasury shares 5,000 41,000 Outstanding 334,000 Problem 18-48 Answer A Original shares issued 190,000 New shares issued 10,000 Total shares issued before split 110,000 Shares issued after split (110,000 x 2) 220,000 Treasury shares after split (4,000 x 2) Outstanding ordinary shares 212,000 Problem 18-49 Answer C Share capital (2.000 x 10) 20,000 Share premium (2,000 x 90) 180,000 Retained earnings (balancing) 100,000 Cash 300,000 Problem 18-50 Answer B Share capital (20,000 x 20) 400,000 Share premium (20,000 x 6) 120,000 Cash (20,000 x 24) 480,000 Share premium - treasury (20,000 x 2) 40,000 Problem 18-51 Answer B The par value method of recording treasury share is accounted for as retirement of share capital. Accordingly, the treasury shares account is debited at par and any share premium from original issuance is canceled. Treasury shares (5.000 x 100) 500,000 Share premium - issuance (5,000 x 40) 200,000 Cash (5,000 x 110) 550,000 Share premium - treasury (balancing) 150,000181 Problem 18-45 Answer D Total ordinary shares issued (200,000 + 100,000) 300,000 Less: Treasury ordinary shares 75,000 Ordinary shares outstanding 225,000 Problem 18-46 Answer A Issued (80,000 x 2) 160,000 Treasury (10,000 x 2) 20,000) Outstanding 140,000 Problem 18-47 Answer A Issued shares (125,000 x 3) 375,000 Less: Old treasury shares (12,000 balance x 3) 36,000 New treasury shares 5,000 41,000 Outstanding 334,000 Problem 18-48 Answer A Original shares issued 190,000 New shares issued 10,000 Total shares issued before split 110,000 Shares issued after split (110,000 x 2) 220,000 Treasury shares after split (4,000 x 2) Outstanding ordinary shares 212,000 Problem 18-49 Answer C Share capital (2.000 x 10) 20,000 Share premium (2,000 x 90) 180,000 Retained earnings (balancing) 100,000 Cash 300,000 Problem 18-50 Answer B Share capital (20,000 x 20) 400,000 Share premium (20,000 x 6) 120,000 Cash (20,000 x 24) 480,000 Share premium - treasury (20,000 x 2) 40,000 Problem 18-51 Answer B The par value method of recording treasury share is accounted for as retirement of share capital. Accordingly, the treasury shares account is debited at par and any share premium from original issuance is canceled. Treasury shares (5.000 x 100) 500,000 Share premium - issuance (5,000 x 40) 200,000 Cash (5,000 x 110) 550,000 Share premium - treasury (balancing) 150,000Problem 18-52 Answer C Share capital Less: Par value of treasury shares retired (5,000 x 25) Share capital outstanding Problem 18-53 Answer B Issue price of preference shares (8,000 x 105) Par value of ordinary shares (8,000 x 3 = 24,000 x 25) Share premium Problem 18-54 Answer A Issue price of preference shares (5,000 x 110) Ordinary shares issued at par value (5,000 x 3 =15,000 shares x 25) Share premium Problem 18-55 Answer A To record the issuance of preference shares Cash (15,000 x 110) 1,650,000 Preference share capital Share premium - PS To record the conversion of preference shares into ordinary shares: Preference share capital 1,500,000 Share premium - PS 150,000 Ordinary share capital (45,000 x 25) Share premium - Ordinary (15,000 preference shares x 3 = 45,000 ordinary shares) 182 625,000 125,000 $00,000 840,000 600,000 240,000 350,000 375.000 175,000 500,000 150,000 1,125,000 $25,000CHAPTER 19 Problem 19-1 Problem 19-2 Problem 19-3 1A 1.8 we 2.4 2A 24 3A BA 3A 4.6 4.¢ 4A 5. B 5. D 6. 66 7A 78 8D BC 9A 10, D Problem 19-5 Share capital issued Treasury shares Outstanding Dividend (45,000 x 30) December 31, 2016 Retained earnings Dividends payable January 15, 2017 No entry January 31,2017 Dividends payable Cash Problem 19-6 2016 Oct. 31 Retained earnings Dividend payable (10,000 x 130) Dec. 31 Retained earnings Dividend payable (10,000 x 20) 2017 March 31 Dividend payable Retained earnings (10,000 x 40) 31 Dividend payable Investment in equity securities Gain on distribution of property dividend 183 Problem 19-4 1. B 2.8 3. 6B 4.6 5.D 6c 7.8 BC 9D 10. A $0,000 «_5,000) 45,000 1,350,000 1,350,000 1,350,000 1,350,000 1,350,000 1,300,000 1,300,000 200,000 200,000 400,000 400,000 1,100,000 900,000Problem 19-7 2016 March | Treasury shares 500,000 ‘Cash (50,000 x 10) July 1 Retained earnings 1,800,000 Dividend payable Dec. 31 Retained earnings 300,000 Dividend payable 31 Retained earnings 500,000 Retained earnings appropriated for treasury shares 31 Income summary 3,000,000 Retained earnings 2017 March | Retained earnings 200,000 Dividend payable 1 Dividend payable 2,000,000 Inventory Gain on distribution of property dividend Problem 19-8 2016 Oct. 1 Retained earnings 3,800,000 Dividend payable Dec.31 Dividend payable 100,000 Retained earnings 31 Impairment loss 300,000 Machinery 2017 April | Dividend payable 200,000 Retained earnings 1 Dividend payable 3,500,000 Loss on distribution of property dividend 200,000 Machinery Problem 19-9 |, Retained earnings 1,200,000 Capital liquidated 300,000 Dividends payable (50,000 x 30) 2. Dividends payable 1,500,000 Cash 184 500.000 1,500,000 300,000 500,000 3,000,000 200,000 1,200,000 800,000 3,800,000 190,000 300,000 200,000 3,700,000 1,500,000 1,500,000Problem 19-10 Requirement 1 2016 Dec. 31 Retained earnings Dividend payable Cash alternative (500,000 x 10 x 80%) Noncash alternative (600,000 x 10 x 20%) Dividend payable 2017 July 1 Dividend payable Cash Retained earnings Requirement 2 2016 Dec. 31 Retained earnings Dividend payable 2017 July 1 Retained earnings Dividend payable (6,000,000 - 5,200,000} 1 Dividend payable Car inventory Gain on distribution of property dividend Problem 19-11 1. Retained earnings (10,000 x 100) Stock dividends payable Stock dividends payable Share capital 2. Retained earnings (5,000 x 150) Stock dividends payable (5,000 x 100) ‘Share premium Stock dividends payable Share capital Problem 19-12 Authorized Unissued Issued Subscribed Total Less: Treasury Outstanding shares 5,200,000 5,200,000 5,200,000 800,000 6,000,000 1,000,000 1,000,000 750,000 500,000 185 5,200,000, 4,000,000 1,200,000 5,200,000 5,000,000 200,000 5,200,000 800,000 4,000,000 2,000,000 1,000,000 1,000,000 500,000 250,000 500,000 50,000 20,000 30,000 10,000 40,000 5,000 35,0001, Retained earnings (3,500 x 140) Stock dividends payable Share premium Stock dividends payable Share capital unissued 2. Retained earnings. Stock dividends payable (3,500 / 5,000 x 600,000) Stock dividends payable Treasury shares Problem 19-13 a. Retained earnings (10,000 x 15) Steck dividends payable Share premium Stock dividends payable Share capital b. Retained earnings (50,000 x 10) Stock dividends payable Stock dividends payable Share capital ¢. Retained earnings (150,000 x 10% x 15) Stock dividends payable Share premium Stock dividends payable Share capital d, Retained earnings (20,000 x 10) Stock dividends payable Stock dividends payable Share capital Fractional warrants outstanding Fractional warrants outstanding Share capital (90% x 30,000) Share premium Problem 19-14 2016 Sept. 15 Retained earnings (100,000 x 20% x 10) Stock dividends payable (20,000 x 10) Oct. 15 Stock dividends payable Share capital (18,000 x 10) Fractional warrants outstanding (2,000 x 10) 490,000 350,000 420,000 420,000 150,000 100,000 500,000 500,000 225,000 150,000 200,000 200,000 30,000 200,000 200,000 186 350,000 140,000 350,000 420,000 420,000 100,000 50,000 100,000 500,000 500,000 150,000 75,000 150,000 200,000 170,000 30,000, 27,000 3,000 200,000 180,000 20,000,2016 Dec. 1 Fractional warrants outstanding Share capital (1,500 x 10) Share premium 2017 Sept. 15 Retained earnings (119,500 shares x 2) Scrip dividends payable Nov. 15. Scrip dividends payable Interest expense (239,000 x 12% x 2/12) Cash Dec. 1 Retained earnings (119,500 x 4) Dividends payable 31 Retained earnings (119,500 x 2) idends payable 31 Dividends payable Investment in Sharp Company Gain on distribution of property dividend Problem 19-15 Answer D Retained earnings Scrip dividend payable Interest expense (100,000 x 10% x 9/12) Accrued interest payable Problem 19-16 Answer D Problem 19-17 Answer C Retained earnings Cash Dividends payable Retained earnings (15,000 x 20) Share capital (15,000 x 10) Share premium 5% x 300,000 = 15,000 shares Problem 19-18 Answer B Shares issued as split (80,000 x 5) Less: Treasury (4,000 x 5) Outstanding 10% stock dividend Reissuance of treasury Total outstanding 20,000 239,000 239,000 478,000 239,000 717,000 100,000 7,500 3,800,000 300,000 =n 187 15,000 5,000 239,000 4,780 243,780 478,000 239,000 358,500 358,500 100,000 7,500 260,000 ,700,000 , 100,000 150,000 150,000 400,000 20,000 380,000 38,000 20,000 438,000Problem 19-19 Answer A Original shares Stock dividend in March (15% x 80,000) Total Stock dividend in June (10% x 92,000) Total issued shares before split Total issued shares after split (101,200 x 4) Treasury shares after split (10,000 x 4) Outstanding shares Problem 19-20 Answer A Original shares Stock dividend (10% x 200,000) Total Remaining treasury shares Outstanding shares before split Shares issued after split ($30,000 x 2) Treasury shares after split (50,000 x 2) Outstanding shares after split Problem 19-21 Answer D Retained earnings (5,000 x 50) 250,000 Stock dividend payable (5,000 x 20) Share premium Problem 19-22 Answer C 10% stock dividend at fair value 25% stock dividend at par value Total amount debited to retained earnings Problem 19-23 Answer A Market value on date of declaration (10% x 30,000 = 3,000 shares x 90) Par value of stock dividend (3,000 x 20) Share premium Problem 19-24 Answer A 4,000 shares / 20,000 = 20% stack dividend Retained earnings before stock dividend Less: Stock dividend (4,000 x 100) Retained earnings after stock dividend Problem 19-25 Answer C Shares issued Less: Treasury shares Outstanding Stock dividend shares. 188 80,000 12.000 92,000 9.200 191,200 404,800 (_40,000) 364,800 300,000 —20,000 330,000 (50,000) 280,000 660,000 (100,000) 560,000 190,000 150,000 1,500,000 3,300,000 5,000,000 270,000 60.000 210,000 1,500,000 400,000‘Treasury shares as stock dividends (5,000 shares at cost) Unissued shares as stock dividend (45,000 x P25) Retained earnings to be capitalized Problem 19-26 Answer A Shares to be issued as stock dividend (P2,400,000 / P60 market value) Outstanding shares ($00,000 - 100,000) Percentage of stock dividend (40,000 / 400,000) Problem 19-27 Answer A Retained earnings - January | Stock dividend declared on April 1 (10% x 100,000 shares x P70) Net loss Retained earnings - December 31 Problem 19-28 Answer A Retained earnings - 12/31/2016 Net income for 2017 Cash dividend Stock dividend Retained earnings - 12/31/2017 Increase in share capital Increase in share premium Stock dividend Problem 19-29 Answer C Shareholders’ equity before dividend Cash dividends Preference (2,100 + 2,100 x P500 x 10%) Ordinary (3,000 + 3,000 x P10) Shareholders’ equity after dividends 189 150,000: 1,125,000 1,275,000 40,000, 400,000 10% 8,000,000 ( 700,000) (1,200,000) 6,100,000 5,000,000 1,500,000 ( 750,000) (_500,000) 5,250,000 100,000 400.000 $00,000 4,090,000 { 210,000) (__ 60.000) 3,820,000 The stock dividends do not affect the total amount of shareholders’ equity. Incidentally, the retained earnings balance after the dividends is computed as follows Retained earnings per book Stock dividends: Preference (2,200 - 100 = 2,100 x P500) Ordinary (3,000 shares at issue price) Cash dividends Preference Ordinary Adjusted retained earnings 2,500,000 (1,050,000) ( 600,000) ( 200,000) (__60,000) 580,000 The shareholders’ equity may also be computed by itemizing the elements as follows Preference share capital (2,200 + 2,100 x PS00) Treasury preference shares, at cost Ordinary share capital (600,000 + 600,000) Retained earnings Total shareholders’ equity 2,150,000 ( 110,000) 1,200,000 580.000 3,820,000Problem Problem Problem Problem Problem 19-30 Answer 19-31 Answer 19-32 Answer 19-33 Answer 19-34 Answer OP, > > 190CHAPTER 20 Problem 20-1 Problem 20-2 1D LC 2.0 2.€ a. 3. A 4.c 4c 5.8 5.c 6D 7.8 8.0 9B 10. D Problem 20-3 1. Retained earnings 200,000 Retained earnings appropriated for bond redemption 2. Bonds payable 1,000,000 Cash 3, Retained earnings appropriated for bond redemption 1,000,000 Retained earnings 4. Retained earnings (30% x 250,000 x P10) 750,000 Share capital Problem 20-4 a. Retained earnings 500,000 Retained earnings appropriated for contingencies b. Loss on damages 200,000 Cash ¢, Retained earnings appropriated for contingencies 500,000 Retained earnings Problem 20-5 1, Retained earnings 5,000,000 Retained earnings appropriated for plant expansion 2. Retained earnings appropriated for plant expansion —_ 3,000,000 Retained earnings 3. Retained earnings appropriated for plant expansion 2,000,000 Retained earnings 191 200,000 1,000,000 1,000,000 750,000 500,000. 200,000 500,000 5,000,000 3,000,000 2,000,000Problem 20-6 1. Treasury shares (6,000 x 90) $40,000 Cash 2. Cash 360,000 Treasury shares (3,000 x 90) Share premium 3. Memo - Issued 47,000 rights to enable shareholders to purchase two shares at P140 per share plus one right, 4. Cash (20,000 x 140) 2,800,000 Share capital Share premium 5. Retained earnings (67,000 x 20) 1,340,000 Dividends payable Shares originally issued Newly issued Total Less: Treasury ‘Outstanding 6. Share capital (2,000 x 100) 200,000 Treasury shares (2,000 x 90) Share premium 7. Profit and loss 540,000 Retained earnings 8. Retained earnings 90,000 Retained earnings appropriated for treasury shares Statement of Changes in Equity Year Ended December 31, 2016, Share Share Retained capital premium earnings Balances - January 1 5,000,000 400,000 1,500,000 Acquisition of TS (6,000 shares) Reissuance of TS (3,000 shares) 30,000 Retirement of TS (2,000 shares) ( 200,000) 20,000 Issuance of 20,000 shares 2,000,000 800,000 Dividends declared (1,340,000) Net income 540,000 Appropriated for TS (__30,000) Balances - December 31 6,800,000 1,310,000 610,000 Shareholders’ equity Share capital Share premium Retained earnings: Unappropriated 610,000 Appropriated for treasury shares —20.000 Treasury shares Shareholders’ equity 192 540,000 270,000 90,000 2,000,000 800,000 1,340,000 50,000, 20,000 70,000 3,000 67,000 180,000 20,000 540,000 90,000 Treasury shares 540,000 (270,000) (180,000) 90,000 6,800,000 1,310,000 700,000 (90.000) 8,720,000193 Problem 20-7 |. Treasury shares (5,000 x 110) 550,000 Cash 350,000 2. Cash (3,000 x 140) 420,000 Treasury shares (3,000 x 110) 330,000 Share premium 90,000 3. Retained earnings (58,000 x 20) 1,160,000 Dividends payable 1,160,000 Dividends payable 1,160,000 Cash 1,160,000 4. Memo entry - Issued 120,000 new shares with par value of P50 as a result of a 2 for 1 split of 60,000 original shares with par value of P50. There are 4,000 shares in the treasury, 5. Equipment 260,000 Share capital (4,000 x 50) 200,000 Share premium 60,000 6. Profit and loss 1,730,000 Retained earnings 1,730,000 7. Retained earnings 220,000 Retained earnings appropriated for TS 220,000 Statement of Changes in Equity Year Ended December 31, 2016 Share Share Retained = Treasury capital premium earnings — shares Balances - january 1 6,000,000 $00,000 1,800,000 Acquisition of TS (5,000 shares) 550,000 Reissuance of TS (3,000 shares) 90,000 (320,000) Dividends paid (1,160,000) Issuance of 4,000 shares for equipment 200,000 60,000 Aporopriated for TS. « 220,000) Net income 1,730,000 Balances - December 31 6,200,000 650,000 50,000 220,000 Shareholders’ equity Share capital, P50 par, 124,000 shares issued, of which 4,000 shares are in treasury ‘Share premium Retained earnings: Unappropriated 2,150,000 Appropriated for TS 220,000 Treasury shares, at cost Shareholders’ equity 6,200,000 650,000 2,370,000 (220.000) 9,000,000194 Problem 20-8 |, Cash (100,000 x 54) 5,400,000 Preference share capital 5,000,000 Share premium - preference 400,000 2. Treasury shares (10,000 x 32) 320,000 Cash 320,000, 3. Cash (250,000 x 34) 8,500,000 Ordinary share capital (250,000 x 20) 5,000,000 Share premium - ordinary 3,500,000 4. Retained earnings (1,240,000 x 2) 2,480,000 Dividends payable 2,480,000 Dividends payable 2,480,000 Cash 2,480,000 5. Cash (5,000 x 42) 210,000 Treasury shares (5,000 x 32) 160,000 Share premium - TS 50,000 6. Retained earnings (9% x 5,000,000) 450,000 Dividends payable 450,000 7. Profit and loss 3,500,000 Retained earnings 3,500,000 8. Retained earnings 160,000 Retained earnings appropriated for treasury shares 160,000 Statement of Changes in Equity Year Ended December 31, 2016 Share Share Retained Treasury capital premium earnings shares Balances - january I 20,000,000 6,000,000 5,000,000 Issuance of 100,000 preference shares, PSO par 5,000,000 400,000 Acquisition of TS (110,000 shares) 320,000 Reissuance of TS (5,000 shares) 50,000 (160,000) Issuance of 250,000 ardinary shares, P20 par 5,000,000 3,500,000 Dividends to ordinary share (2,480,000) Dividends to preference share ( 450,000) Net income 3,500,000 Appropriated for TS 160,000 ( 160,000) Balances December 31 30,000,000 10,110,000 5,410,000 Shareholders' equity Preference share capital, PSQ par, 9X cumulative, 400,000 shares authorized 100,000 shares issued $,000,000 Ordinary share capital, P20 par, 4,000,000 shares authorized, 1,250,000 shares issued, af which 5,000 shares are in treasury 25,000,000 Reserves (Note 1) 10,110,000 Retained earnings 3,410,000 Treasury shares Total shareholders’ equity 45,360,000Note I - Reserves Share premium Retained earnings appropriated for treasury shares Total Problem 20-9 Retained earnings Inventory Retained earnings Property, plant and equipment Share capital (350,000 x 5) Share premium Share premium Retained earnings Share capital, 350,000 shares, PS par Share premium Total shareholders’ equity Problem 20-10 Te. Retained earnings Inventory Note payable Accumulated depreciation Retained earnings Equipment Note payable Carrying amount Loss on extinguishment of debt . Retained earnings Goodwill . Mortgage payable Preference share capital Share premium . Ordinary share capital (50,000 x 80) Share premium Share premium Retained earnings 250,000 1,500,000 1,750,000 2,200,000 150,000 500,000 1,200,000 300,000 1,200,000 4,200,000 4,000,000 4,450,000 195 9,950,000 160,000 10,110,000 250,000 1,500,000 1,750,000 2,200,000 1,750,000 350,000 2,100,000 150,000 2,000,000 500,000 800,000 (300,000) 1,200,000 4,000,000 200,000 4,000,000 4,450,000Subic Company ‘Statement of Financial Position December 31, 2016 Assets Cash Accounts receivable Inventory Property, plant and equipment Accumulated depreciation Total assets Liabilities and Shareholders’ Equity Accounts payable Preference share capital, P100 par Ordinary share capital, P20 par Share premium Total liabilities and shareholders’ equity Problem 20-11 |, Preference share capital 1,500,000 Retained earnings $00,000 Bonds payable 2. Retained earnings 500,000 Goodwill 3. Property, plant and equipment 4,000,000 Accumulated depreciation (25%) Revaluation surplus 4. Revaluation surplus 2,000,000 Retained earnings Statement of Financial Position December 31, 2016 Assets Cash Other current assets Property, plant and equipment 12,000,000 Less: Accumulated depreciation 3,000,000 Total assets ities and Shareholders’ Equity Current Liabilities Bonds payable Ordinary share capital Share premium Revaluation surplus Total liabilities and shareholders” equity 196 200,000 300,000 350,000 7,900,000 (1,900,000) 6,850,000 1,100,000 4,000,000 1,000,000 6,850,000 2,000,000 500,000 1,000,000 3,000,000 2,000,000 425,000 1,325,000 9,000,000 10,750,000 2,000,000 2,000,000 5,000,000 750,000 1,000,000 10,750,000197 Problem 20-12 Answer A The preference dividends in arrears do not necessarily require appropriation of retained earnings. Legally, retained earnings must be appropriated to the extent of the cost of treasury shares. Problem 20-13 Answer C Original cost (20,000 x 12) 240,000 Less: Cost of treasury shares reissued (15,000 x 12) 180,000 Remaining cost 60,000 Legally, retained earnings must be appropriated to the extent of the cost of treasury stock. Problem 20-14 Answer A - 1,200,000 Only the retained earnings appropriated for the construction of new plant should be reported, The retained earnings appropriated for the construction of office building should be reverted to unappropriated retained earnings because the building is already completed. The cash restriction for the retirement of bonds payable does mot necessarily require an appropriation of retained earnings. Problem 20-15 Answer A Retained earnings - January 1, 2016 2,800,000 Stock dividend (57,000 x 5) { 285,000) Cash dividend (247,000 x 10) (2,470,000) Net income 3,000,000 Appropriation for treasury shares (10,000 x 30) (300,000) Unappropriated balance - 12/31/2016 2,745,000 Shares issued - January 1, 2016 200,000 Treasury shares (16,000) Outstanding shares 190,000 Stock dividend (30% x 190,000) $7,000 Total outstanding shares 247,000 Problem 20-16 Answer A Retained earnings - January 1 300,000 Net income 60,000 Appropriated far TS (4,000 x 20) (80,000) Unappropriated retained earnings - December 31 280,000 Problem 20-17 Answer B Retained earnings- 1/1/2016 2,000,000 Net income 2,500,000 Property dividend of inventory, at fair value on 12/31/2016 ( 800,000) Appropriated far treasury shares (50,000 x P10) (500.000) Unappropriated retained earnings - 12/31/2016 3,200,000Problem 20-18 Question 1 Answer B Question 2 Answer A Net income - 2013, 2014 and 2015 Dividends declared - 2014 and 2015 Retained earnings - 1/1/2016 Net incame for 2016 (4,800,000 x 70% Prior periad adjustment (400,000 x 70%) Cumulative decrease in income from change in inventory method (700,000 x 70%) Dividend declared in 2016 Retained earnings - 12/31/2016 Problem 20-19 Answer A Retained earnings - 1/1/2016 Prior period error - overdepreciation (500,000 x 70%) Net income for 2016 Cash dividend — preference Cash dividend - ordinary Retained earnings - 12/31/2016 Problem 20-20 Answer B Retained earnings - 1/1/2016 Excess of cost of treasury over issue price (400,000 - 300,000) Property dividend of Digos share, at fair value on 12/31/2016 Preference dividend (10% x 2,000,000) Overstatement of 2015 rent income Net income for 2016 Retained earnings - 12/31/2016 Problem 20-21 Answer B To reduce the par value of the share capital- Share capital (100,000 x 25) 2,500,000 Share premium To eliminate the deficit Share premium 2,100,000 Retained earnings 198 6,300,000 (2,000,000) 4,300,000 3,360,000 ( 280,000) ( 490,000) (2,000,000) 4,890,000 4,500,000 350,000 4,000,000 (1,000,000) (2,000,000) 5,850,000 4,000,000 ( 100,000) ( 900,000) ( 200,000) (700,000) 3,000,000 5,100,000 2,500,000 2,100,000 Considering the adjustments, the share premium should have a balance of P1,900,000. Problem 20-22 Answer C To reduce the property, plant and equipment to appraised value: Retained earnings 4,000,000 Property, plant and equipment 4,000,000199 To reduce the par value of the share Share capital (700,000 x 5) 3,500,000 Share premium 3,500,000 To eliminate the deficit: Share premium 4,900,000 Retained earnings 4,900,000 The inventory is not adjusted anymore because it is already recorded at its market value. After adjustment, the resulting balances are: Share capital 3,500,000 Share premium 200,000 Total shareholders’ equity 3,700,000 Problem 20-23 Answer A Retained earnings 500,000 Inventory $00,000 Retained earnings 1,500,000 Accumulated depreciation 1,300,000 Cash 4,000,000 Share premium 4,000,000 Share capital (100,000 x P20) 2,000,000 Share premium 2,000,000 Share premium 5,000,000 Retained earnings 5,000,000 Share premium per book 1,750,000 Reduction of par 2,000,000 Cash contribution from shareholders 4,000,000 Elimination of deficit (5,000,000) Adjusted share premium 2,750,000 Problem 20-24 Answer A Deficit 8,000,000 Reduction in inventory 2,000,000 Reduction in PPE 4,000,000 Writeoff of goodwill 1,000,000 Total deficit 15,000,000 Charged against share premium 5.000.000 Reduction of share capital 10,000,000 Problem 20-25 ee Cash 5,000,000 Share capital 400,000 Share premium (400,000 x 11.50) 4,600,000200 ae Share capital (100,000 x 1) 100,000 Share premium (100,000 x 10) 1,000,000 Retained earnings 200,000 Cash (100,000 x 13) 1,300,000 . B- 600,000 Suit No. 1 is a possible loss and therefore requires only disclosure which may be done by appropriation of retained earnings. Suit No. 2 is a probable loss and therefore requires accrual to expense. A June 15 - 1,800,000 shares x .20 360,000: December 15 - 1,700,000 shares x .20 340,000 Total cash dividend 290,000 B - 900,000 Legally, retained earnings must be appropriated equal to the cost of treasury shares.CHAPTER 21 Problem 21-1 Problem 21-2 1A he 2.0 2.0 3.8 3. B ay 4.0 5A 5G 6B 7A ac 9. ¢ 10.D Problem 21-3 Fair value of options (40,000 x 30) Annual compensation (1,200,000 / 2) 2016 Dec. 31 Salaries - share options Share options outstanding 2017 Dec. 31 Salaries - share options Share options outstanding 2018 Jan. 15 Cash (35,000 shares x 125) Share options outstanding (35,000 x 30) Ordinary share capital (35,000 x 100) Share premium Dec. 31 Share options outstanding (5,000 x 30) Share premium - unexercised stock options Problem 21-4 2016 Salaries - share options (450,000 / 2) Share options outstanding 2017 Salaries - share options (600,000 - 225,000) Share options outstanding 2018 Salaries - share options (30,000 x 5) Share options outstanding Cash (30,000 x 30) Share options outstanding Ordinary share capital (30,000 x 10) Share premium 201 1,200,000 600,000 600,000 600,000 600.000 600,000 4,375,000 1,050,000 3,500,000 1,925,000 150,000 150,000 225,000 225,000 375,000 375,000 150,000 150,000 900,000 750,000 300,000 1,350,000Problem 21-5 Compensation expense for 2016 (6,000,000 x 95% / 3) Cumulative compensation - 12/31/2017 (6,000,000 x 94% / 3 x 2) Less: Compensation recognized for 2016 Compensation expense for 2017 Cumulative compensation - 12/31/2018 (6,000 x 95%) Less: Cumulative compensation - 12/31/2016 Compensation expense for 2017 Problem 21-6 2016 Number of employees Employees who left Employees expected to leave Employees entitled Multiply by share options Total share options Multiply by fair value each option Total fair value of share options Compensation expense for 2016 (2,700,000 / 3) 2017 Number of employees Employees who left in 2016 Employees who left in 2017 Employees expected to leave Employees entitled Multiply by share options Total share options Multiply by fair value each option Total fair value of share options Cumulative compensation - December 31, 2017 (2,400,000 / 3 x 2) Less: Compensation recognized for 2016 Compensation expense for 2017 2018 Number of employees Employees who left in 2016 Employees who left in 2017 Employees who left in 2018 Employees entitled Multiply by share aptions Total share options Cumulative compensation - 12/31/2018 (49,400 x $0) Less: Cumulative compensation - 12/31/2017 Compensation expense for 2018 202 1,900,000 3,760,000 1,900,000 1,860,000 5,700,000 3,260,000 1,940,000 300 ( 20) (10) 270 200 34,000 50 2,700,000 900,000 300 (20) « 8) (32) 240 200 48,000 50 2,400,000 1,600,000 900,000 700,000 300 ( 20) ( 8) (25) 247 __ 200 49,400 2,470,000 1,600,000 870,000203 Problem 21-7 2016 Number of employees 100 Multiply by share options 100 Total share options 10,000 Multiply by fair value each option 30 Total fair value of share options 200,000 Compensation expense for 2016 (300,000 / 3) 100,000 2017 Average increase (8% + 10% / 2) om Number of employees 100 Multiply by share options 100 Total share options 10,000 Multiply by fair value each option —_20 Total fair value of share options 300,000 Cumulative compensation - 12/31/2017 (300,000 / 3 x 2) 200,000 Less: Cumulative compensation - 12/31/2016 100,000 Compensation expense for 2017 100,000 2018 Average increase (8% + 10% + 8% / 3) 12% Number of employees 100 Multiply by share options 200 Total share options 20,000 Multiply by fair value each option Total fair value of share options Less: Cumulative compensation - 12/31/2017 Compensation expense for 2018 Problem 21-8 Requirement | 2016 Share options 10,000 Multiply by fair value each option 45 Total fair value of share options 450,000 Compensation expense for 2016 (450,000 / 3) 150,000 2017 Compensation expense for 2017 159,000 There is no change in the compensation expense because the earnings target of at least an average of 10% is achieved in 2017. 2018 Share options 10,000 Multiply by fair value each option 40 Cumulative compensation - 12/31/2018 400,000 Less: Cumulative compensation - 12/31/2017 300,000 Compensation expense for 2018 100,000204 Average increase (10% + 11% + 3% / 3) 8% The earnings target of at least an average of 10% is not achieved in 2018. Thus, the exercise price is P120 and the fair value of each share option is P40. Requirement 2 2016 Salaries - share options 150,000 Share options outstanding 150,000 2017 Salaries - share options 150,000 Share options outstanding 150.000 2018 Salaries - share options 100,000 Share options outstanding 100,000 Cash (10,000 x 120) 1,200,000 Share options outstanding 400,000 Share capital (10,000 x 50) $00,000 Share premium 1,100,000 Problem 21-9 2016 Salaries (90,000 / 3 years} 30,000 Share options outstanding 30,000 Share options 30,000 Multiply by intrinsic value (63-60) ——3 Total intrinsic value 90.000 2017 Salaries 90,000 Share options outstanding 90,000 Share options 30,000 Multiply by intrinsic value (66-60) 6 Total intrinsic value 180,000 Cumulative compensation - 12/31/2017 (180,000 / 3 x 2 years) 120,000 Compensation recognized in 2016 _30,000 Compensation expense for 2017 90,000. 2018 Salaries 330,000 Share options outstanding 330,000 Share options 30,000 Multiply by intrinsic value (75-60) —_15. Cumulative compensation - 12/31/2018 450,000 Cumulative compensation - 12/31/2017 120,000 Compensation expense for 2018 330,000 2019 Salaries 390,000 Share options outstanding 390,000 Share options 30,000 Multiply by increase in intrinsic value (88-75) 13 Additional compensation 390,0002020 2021 Cash (10,000 x 60) Share options outstanding (10,000 x 28) Share capital (10,000 x 50) Share premium Intrinsic value per option (88-60) Salaries Share options outstanding Share options (30,000 - 10,000) Multiply by increase in intrinsic value (100-88) Additional compensation Cash (15,000 x 60) Share options outstanding (15,000 x 40) Share capital (15,000 x 50) Share premium Intrinsic value per option (100-60) Share options outstanding Gain on reversal of share options Share options (20.000 - 15,000) Multiply by decrease in intrinsic value (100-90) Decrease in intrinsic value Cash (5,000 x 60) Share options outstanding (5,000 x 30) Share capital (5,000 x 50) Share premium Intrinsic value per option (90-60) Problem 21-10 Requirement 1 2016 2017 2013 Salaries Share options outstanding Salaries Share options outstanding Salaries (1,500,000 - 700,000) Share options outstanding Cash (20,000 x 110) Share options outstanding Share capital (20,000 x 100) Share premium 600,000 280,000 240,000 900,000 600,000 50,000 300,000 150,000 300,000 400,000 300,000 2,200,000 1,500,000 205 300,000 380,000 28 240,000 20,000 2 240,000 750,000 750,000 250,000 200,000 30 300,000 400.000 800,000 2,000,000 1,700,000206 Requirement 2 2018 Dec. 31 Share options outstanding 700,000 Salaries 600,000 Cash 1,300,000 Problem 21-11 Requirement 1 2016 Salaries 240,000 Equity contribution from parent (80 x 200 x 30 / 2) 240,000 2017 Salaries 246,000 Equity contribution from parent 246,000 Cumulative compensation - 12/31/2017 (81 x 200 x 30) 486,000 Compensation for 2016 (240,000) Compensation for 2017 246,000 Requirement 2 2018 Cash (16,200 x 60) 972,000 Share capital (16,200 x 50) 810,000 Share premium 162,000 Problem 21-12 2016 Number of employees 2,000 Employees who left in 2016 (80) Employees expected to leave {_ 140) Employees entitled to share options 1,780 Multiply by number of share options 20 Total share options 35,600 Multiply by fair value of share option 60 Total compensation 2,136,000 Compensation for 2016 (2,136,000 / 3) Z12.000 2017 Number of employees 2,000 Employees who left in 2016 (80) Employees who left in 2017 { 90) Employees expected to leave (60) Employees entitled to share options 1,770 Multiply by number of share options 20 Total share options 35,400 Multiply by fair value of share option Total compensation 2,124,000 Cumulative compensation - 12/31/2017 (2,124,000 / 3 x 2) 1,416,000 Compensation based on modification (35,400 x 20 / 2 years) 354,000 Total 1,770,000 Compensation expense for 2016 (712,000) Compensation expense for 2017 1,058,000207 2018 Number of employees 2,000 Employees who left in 2016 (80) Employees who left in 2017 ( 90) Employees who left in 2018 50) Employees entitled to share options 1,780 Multiply by number of share options 20 Total share options 35,600 Multiply by fair value of share option 60 Cumulative compensation - 12/31/2018 2,136,000 Compensation based on modification (35,600 x 20) 712,000 Total compensation 2,848,000 Compensation expense for 2016 ( 712,000) Compensation expense for 2017 (1,058,000) Compensation expense for 2018 1,078,000 Journal entries. 2016 Salaries expense 712,000 Share options outstanding 712,000 2017 Salaries expense 1,058,000 Share options outstanding 1,058,000 2018 Salaries expense 1,078,000 Share options outstanding 1,078,000 Problem 21-13 Answer A Total compensation (20,000 x 15) 300,000 Compensation for 2016 (300,000 / 2) 150,000 Problem 21-14 Answer D Total compensation (40,000 x 20) 800,000 Compensation for 2016 (800,000 / 2) 400,000 Problem 21-15 Answer C 1,000 x 50) 50,000 Problem 21-16 Answer A Fair value of share options (100,000 x 8) 800,000 If the options vest immediately, the total fair value of the share options shall be recognized immediately in full as expense. Since the options are granted on January 1, 2016 and exercisable on January 1, 2016, it means that the share options vest immediately, Problem 21-17 Answer B (10,000 x 24 / 3) $0,000Problem 21-18 Answer C Fair value of share options (50,000 x 50) Compensation for 2016 (2,500,000 / 4) Problem 21-19 Question 1 Answer C Question 2 Answer C Question 3 Answer D Question 4 Answer A 2016 Fair value of share options ($00 x 100 x 30) Compensation expense for 2016 (1,500,000 / 3) 2017 Number of employees Employees who left in 2017 Employees expected to leave Employees entitled to share options Fair value of share options (440 x 100 x 30) Cumulative compensation on 12/31/2017 (1,320,000 / 3 x 2) Compensation expense recognized in 2016 Compensation expense in 2017 2018 Number of employees Employees who left in 2017 Employees who left in 2018 Employees entitled to share options Fair value of share options 12/31/2018 (450 x 100 x 30) Cumulative compensation 12/31/2017 Compensation expense in 2018 Exercise price (45,000 shares x 120) Fair value of options - 12/31/2018 Total consideration Par value (45,000 x 100) Share premium from exercise Problem 21-20 Question 1 Answer Question 2 Answer Question 3 Answer rman Question 4 Answer 208 2,500,000 625,000 1.500,000 500,000 500 { 30) (30) 440 1,320,000 880,000 500,000) 380,000 500 ( 30) (20) 450 1,350,000 (_ 880,000) 470,000 5,400,000 1.350,000 6,750,000 4,500,000 2,250,000209 2016 Fair value of share options (30,000 x 30) 900,000 Compensation expense for 2016 (900,000 / 3) 300,000 The fair value of share option is P30 because the sales increased by 11% in 2016 2017 Fair value of share options (30,000 x 30) 900,000 Cumulative compensation 12/31/2017 (900,000 / 3 x 2) 600,000 Compensation expense for 2016 (300,000) Compensation expense for 2017 300,000 The fair value of the share option is still P30 because the sales increased by 12% in 2017 or an average of 11.5% for two years. 2018 Fair value of share options 12/31/2018 (30.000 x 25) 750,000 Cumulative compensation 12/31/2017 600,000: Compensation expense for 2018 150,000 The fair value of share option is only P25 because the sales increased by 4% in 2018 or an average of 9% only for 3 years (11% plus 12% plus 4% divided 3 equals 9%), Exercise price (30,000 shares x 100) 3,000,000 Fair value of options - 12/31/2018 750,000 Total consideration 3,750,000 Par value (30,000 x 50) 1,500,000 Share premium upon exercise 2,250,000 Problem 21-21 Question | Answer D 2016 Fair value of share options (300 x 200 x P30) 1,800,000 Compensation expense for 2016 (1,800,000 / 3) 600,000 The sales increased by 10% in 2016 and therefore, each employee is entitled to 200 share options. 2017 Fair value of share options (300 x 300 x 30) 2,700,000 Cumulative compensation 12/31/2017 (2,700,000 / 3 x 2) 1,800,000 Compensation expense for 2016 (600,000) Compensation expense for 2017 1,200,000 Each employee is entitled to 300 share options because the sales increased by 15% in 2017. 2018 Number of employees 300 Employees who left in 2018 (50) Employees entitled to share options 250210 Fair value of share options (250 x 300 x P30) 2,250,000 Cumulative compensation 12/31/2017 (1,800,000) Compensation expense in 2018 450,000 Each employee is entitled to 300 share options because the sales increased by 15% in 2018. Question 2 Answer A Exercise price (75,000 shares x 80) 6,000,000 Fair value of share options - 12/31/2018 2,250,000 ‘Total consideration 8,250,000 Par value (75,000 x 50) 3,750,000 Share premium 4,500,000 Problem 21-22 Question | Answer D The intrinsic value method is followed if the fair value of the share options cannot be measured reliably. The intrinsic value is equal to the excess of the market price of the share over the option price. 2016 Market price 62 Option price 60 Intrinsic value per share option 2 Intrinsic value of share options (60,000 x 2) 120,000 Compensation expense for 2016 (120,000 / 3) 40,000 The intrinsic value of share options is recognized as expense over the vesting period, not over the life of share options. 2017 Intrinsic value of share options (66 - 60 = 6 x 60,000) 360,000 Cumulative compensation 12/31/2017 (360,000 / 3 x 2) 240,000 Compensation expense for 2016 (40.000) Compensation expense for 2017 290,000 2018 Intrinsic value of share options 12/31/2018 (75 - 60 = 15 x 60,000) 900,000 Cumulative compensation 12/31/2017 (360.000 / 3 x 2) (240,000) Compensation expense for 2018 660,000 Question 2 Answer B 2019 Market price - 12/31/2019 85 Market price - 12/31/2018 7 Increase in intrinsic value 10 (Compensation expense for 2019 (60,000 x 10) 600,000211 Question 3 Answer A Exercise price (60,000 shares x 60) 3,600,000 Fair value of share options - 12/31/2019 1,500,000 Total consideration 5,100,000 Par value (60,000 x 50) Share premium upon exercise 2,100,000 Problem 21-23 Answer D 2016 Fair value of share options (20,000 x 90) 1,809,000 Compensation expense for 2016 (1,800,000 / 3) 600,000 The sales revenue pf P4.500,000 in 2016 is within the Level 2 range and therefore, the employees are entitled to 20,000 share options. 2017 Fair value of share options (30,000 x 90) 2,700,000 Cumulative compensation 12/31/2017 (2,700,000 / 3 x 2) 1,800,000 Compensation expense for 2016 (600,600) Compensation expense for 2017 1.200.000 The sales revenue of P5,500,000 in 2017 is within the Level 3 range and therefore, the employees are entitled to 30,000 share options. 2018 Fair value of share options 12/31/2018 (30,000 x 90) 2,700,000 Cumulative compensation 12/31/2017 (1.800.000) Compensation expense in 2018 900,000 The sales revenue of P?,000,000 in 2018 is within the Level 3 range and therefore, upon vesting the employees are entitied to 30,000 share options. Problem 21-24 Answer C {8,000,000 - 2,000,000 - 2,100,000) 3.900.000 Problem 21-25 Answer B Cash payment 5,000,000 Share options outstanding (1,500,000 + 1,300,000) (2,800,000) Compensation expense for 2016 2,200,000 Problem 21-26 Answer D {30,000 x 8 / 2 years) 120,000 Problem 21-27 Answer A (50,000 x 6.50) 325,000212 Problem 21-28 Answer A To record the compensation for 2016: Salaries (10,000 x 30) 300,000 Share options outstanding 300,000 Observe that the options vest immediately and therefore the total fair value of the share options is recognized as expense in full in 2016. The effect of the above entry on sharehalders’ equity is offsetting, To record the exercise of the options on December 31. 2016: Cash (10,000 x 20) 200,000 Share options outstanding 300,000 Ordinary share capital (10,000 x 10) 100,000 Share premium 400,000 The effect of the above entry on shareholders’ equity is a net increase of P200,000, equal to the cash received. Problem 21-29 Question 1 Answer A {5,000 x 60) 300,000 Question 2 Answer A Cash received (5,000 x 120) 600,000 Problem 21-30 Answer C (350,000 x 2) 700,000 Problem 21-31 Answer B 500,000 Problem 21-32 Answer A June 30, 2016 to December 31, 2018 = 2.5 years $,400,000 / 2.5 = 2,160,000 Problem 21-33 Answer B Compensation expense for 2016 (240,000 / 2 years service period) 120,000CHAPTER 22 Problem 22-1 Problem 22-2 1.0 Lc 2.8 2.0 3.8 3A 44 4c 5.0 Problem 22-3 2016 Salaries 40,000 Accrued salaries payable (20,000 x 6 = 120,000 / 3) 2017 Salaries 200,000 Accrued salaries payable Total compensation (20,000 x 18) Accrued compensation - December 31, 2017 (360,000 / 3 x 2) Less: Accrued campensation ~ December 31, 2016 Adjustment 2018 Salaries 180,000 Accrued salaries payable Total compensation December 31, 2018 (20,000 x 21) Less: Accrued compensation - December 31, 2017 Adjustment Accrued salaries payable 420,000 Cash Problem 22-4 2016 No entry 2017 Salaries 80,000 Accrued salaries payable Total compensation (10,000 x 12) Accrued compensation - December 31, 2017 (120,000 / 3 x 2) 2018 Salaries 170,000 Accrued salaries payable Total compensation December 31, 2018 (10,000 x 25) Less: Accrued compensation - December 31, 2017 Adjustment Accrued salaries payable 250,000 Cash 213 40,000 200,000 280,000 240,000 _40,000 200,000 180,000 420,000 240,000 180,000 420,000 80,000 129,000 80,000 170,000 250,000 80,000 120,000 250,000Problem 22-5 2016 Salaries Accrued salaries payable (80,000 x 30 / 4) 2017 Salaries Accrued salaries payable 2018 Salaries Accrued salaries payable 2019 Salaries Accrued salaries payable (80,000 x 60 = 4,800,000 - 1,800,000) 2020 Accrued salaries payable Cash (80,000 x 40) Gain on reversal of share appreciation rights Problem 22-6 2016 Salaries Accrued salaries payable (50,000 x 15) 2017 Accrued salaries payable Cash (50,000 x 8) Gain on reversal of appreciation rights Problem 22-7 |. Purchases Accounts payable Share options outstanding 2. Accounts payable Share options outstanding Interest expense Cash Share premium Cash payment (8,000 x 120) Liability component Implied interest 3. Accounts payable Share options outstanding Share capital (100,000 x 50) Share premium Problem 22-8 Requirement 1 Fair value of share alternative (25,000 shares x P48) Fair value of liability (20,000 shares x P51) Equity component 600,000 600,000 600,000 3,000,000 4,800,000 750,000 750,000 1,000,000 900,000 100,000 60,000 900,000 100,000 214 600,000 600,000 600,000 3,000,000 3,200,000 1,600,000 750,000 400,000 350,000 900,000 190,000 960,000 100,000 960,000 900.000 60,000 500,000 500,000 1,200,000 1,020,000 180,000Requirement 2 Fair value of liability - 12/31/2016 (20,000 x P54) Compens. Compensation from equity component (180,000 / 3) Total compensation expense for 2016 Fair value of liability - 12/31/2017 (20,000 x P66) Accrued liability - 12/31/2017? (1,320,000 / 3 x 2) Compensation expense in 2016 from liability component Compensation expense in 2017 from liability component Compensation expense from equity component Total compensation expense for 2017 Fair value of liability - 12/31/2018 (20,000 x P65) Accrued liability - 12/31/2017 Compensation expense in 2018 from liability component Compensation expense from equity component Total compensation expense for 2018 Requirement 3 2016 Salaries 420,000 Accrued salaries payable Share options outstanding 2017 Salaries 580,000 Accrued salaries payable Share options outstanding 2018 Salaries 480,000 Accrued salaries payable Share options outstanding Requirement 4 2018 Dec. 31 Accrued salaries payable 1,300,000 Share options outstanding 180,000 Cash Share premium Requirement 5 2018 Dec. 31 Share options outstanding 180,000 Accrued salaries payable 1,300,000 Share capital (25,000 x 30} Share premium n expense for 2016 from liability component (1,080,000 / 3) 215 1,080,000 360,000 60,000 420,000 1,320,000 880,000 360,000 520,000 60.000 380,000 1,300,000 — 880.000 420,000 60,000 480,000 360,000 60,000 520.000 60.000 420,000 60,000 1,300,000 180,000 750,000 730,000Problem 22-9 Requirement 1 2016 Share appreciation rights (300 employees x 100) Multiply by fair value Total fair value Accrued liability - 12/31/2016 (300,000 / 3) 2017 Share appreciation rights Multiply by fair value Total fair value Accrued liability - 12/31/2017 (360,000 / 3 x 2) Accrued liability - 12/31/2016 Compensation expense 2017 2018 Share appreciation rights not yet exercised (300 - 50 x 100) Multiply by fair value 15, Accrued liability - 12/31/2018 Accrued liability - 12/31/2017 Compensation expense for 2018 Share appreciation rights exercised (50 x 100) Multiply by fair value Total payment ‘Compensation related to rights not yet exercised Compensation paid for rights already exercised Total compensation expense for 2018 2019 Share appreciation rights not yet exercised (250 - 150 x 100) Multiply by fair value Accrued liability - 12/31/2019 Accrued liability - 12/31/2018 Decrease in accrued liability Share appreciation rights exercised (150 x 100) Multiply by intrinsic value Total payment Reversal of accrued liability related to rights not yet exercised Compensation paid for rights already exercised Net compensation expense for 2019 2020 Share appreciation rights exercised (100 employees « 100) Multiply by intrinsic value Total payment in 2020 Accrued liability - 12/31/2019 Net compensation expense for 2020 216 30,000 10 300,000 100,000 30,000 12 360,000 240,000 (100,000) 140,000 25,000 375,000 (240,000) 135,000 5,000 10 50,000 135,000 50,000 185,000: 10,000 18 180,000 375,000) (195,000) 15,000 15 225,000 (195,000) 225,000Requirement 2 2016 Salaries 100,000 Accrued salaries payable 2017 Salaries 140,000 Accrued salaries payable 2018 Salaries 135,000 Accrued salaries payable Salaries 50,000 Cash 2019 Accrued salaries payable 195,000 Salaries Salaries 225,000 Cash 2020 Accrued salaries payable 180,000 Salaries 20,000 Cash Problem 22-10 Answer C Market price - December 31, 2016 Predetermined price on January!, 2016 Intrinsic value Compensation for 2016 (20,000 x 15) Problem 22-11 Answer C Market price - December 31, 2017 Predetermined price Excess Accrued compensation - December 31, 2017 (30,000 x 8 = 240,000 / 3 x 2 years) Problem 22-12 Answer D Total compensation (10,000 x 18} Accrued compensation - December 31, 2016 (180,000 / 3) Total compensation for 2017 (10,000 x 12} Accrued compensation - December 31, 2017 (120,000 / 3 x 2) Less: Accrued compensation - December 31, 2016 Compensation expense for 2017 Problem 22-13 Answer C Compensation expense for 2016 (100,000 x 10 x 90% = 900,000 / 3) 217 100,000 140,000 135,000 50,000 195,000 255,000 200,000 160,000 180,000 60,000 120,000 $0,000 60,000 20,000 300,000218 Problem 22-14 Answer C Accrued compensation - 12/31/2016 {50,000 x 24 = 1,200,000 / 3) 400,000 Accrued compensation - 12/31/2017 (50,000 x 51 = 2,550,000 /3x2) 1,700,000 Accrued compensation - 12/31/2016 (400,000) Compensation expense for 2017 1,300,000 Accrued compensation - 12/31/2018 (50,000 x 51) 2,550,000 Accrued compensation - 12/31/2017 (1,700,000) Compensation expense for 2018 850,000 Problem 22-15 Answer C Accrued compensation - 12/31/2016 {80,000 x 20) 1,600,000 The compensation is recognized as expense entirely in 2016 because the rights are exercisable immediately. Salaries 1,600,000 Accrued salaries payable 1,600,000 2017 Accrued compensation - 12/31/2017 (80,000 x 15) 1,200,000 Accrued compensation - 12/31/2016 1,600,000 Decrease in accrued compensation (400,000) Accrued salaries payable 1,600,000 Cash 1,200,000 Gain on reversal of share appreciation rights 400,000 Problem 22-16 Question | Answer D Question 2 Answer D Accrued liability - 12/31/2018 (10,000 x 72) 720,000 Accrued liability - 12/31/2017 (10,000 x 66 = 660,000 / 3 x 2) 440,000 Compensation expense for liability component 280,000 Compensation expense for equity component (75,000 / 3) _ 25,000 Total compensation expense for 2018 305,000 Question 3 Answer A Share alternative (15,000 x 45) 675,000 Cash alternative (10,000 x 60) 600,000 Equity component 75,000 Fair value of cash alternative on December 31, 2018 (10,000 x 72) 720,000 Total consideration 795,000 Par value of shares issued (15,000 x 40) 600,000 Share premium 195,000Problem 21-17 Question | Answer C Fair value of equipment equal to the cash purchase price Fair value of liability (15,000 shares x 80} Equity component Equipment 2,000,000 Accounts payable Share options outstanding Question 2 Answer C Fair value of liability - 12/31/2016 (15,000 shares x 100) Fair value of liability - 1/1/2016 Implied interest Accounts payable 1,200,000 Interest expense 300,000 Share options outstanding 800,000 Cash Share premium Question 3 Answer B Accounts payable 1,200,000 Share options outstanding 800,000 Share capital (20,000 x 50) Share premium Problem 22-18 Question 1 Answer A Compensation expense for 2016 (60.000 x 8) Question 2 Answer B Accrued compensation - 12/31/2017 (60,000 x 15) Compensation in 2016 Compensation expense for 2017 Question 3 Answer C Accrued compensation ~ 12/31/2018 (60,000 x 10) Accrued compensation - 12/31/2017 Gain on reversal of SARs Accrued compensation - 12/31/2018 Payment for exercise of SARs (20,000 x 10) Adjusted accrued liability - 12/31/2018 Accrued salaries payable 300,000 Gain on reversal of SARS Accrued salaries payable 200,000 Cash 219 2,000,000 (2,200,000) 800,000 1,200,000 800,000 1,500,000 (1,200,000) 300,000 1,500,000 800,000 1,000,000 1,000,000 480,000 900,000 (480,000) 420,000 600,000 900,000 (300,000) 600,000 (200,000) 400,000 300,000 200,000220 CHAPTER 23 Problem 23-1 Problem 23-2 Problem 23-3 Te LA LA 2, G 2.8 2.8 3. 8B 3. A 3. A 4D 4.8 4A Problem 23-4 Book value per share (8,800,000 / 50,000) 176 Problem 23-5 Excess Preference Ordinary a. Balances 3,000,000 1,000,000 4,000,000 12% x 1,000,000 x 2 ( 240,000) 240,000 12% x 4,000,000 {_ 480,000) 480,000 Balance for participation 2,280,000 456,000 ‘1,824,000 Total 1,696,000 6,304,000 Divide by shares outstanding 1 4 Book value per share 169.60 187.60 b. Balances 3,000,000 1,000,000 4,000,000 12% x 1,000,000 x 2 ( 240,000) 240,000 15% x 4,000,000 {_ 600,000) 600,000 Balance for participation 2,160,000 432,000 1,728,000 Total 1,672,000 6,328,000 Divide by shares 1 4 Book value per share 167.20 158.20 c, Balances 3,000,000 1,000,000 4,000,000 12% x 1,000,000 x 2 ( 240,000) 240,000 12% x 4,000,000 {_ 480,000) 480,000 Balance for participation 2,280,000 4% x 1,000,000 40,000 2,240,000 Total 1,280,000 6,720,000 Divide by shares 10,000 40,000 Book value per share 28 68 d. Balances 3,000,000 1,000,000 4,000,000 12% x 1,000,000 x 2 {_ 240,000) 240,000 To ordinary 2,760,000 2,760,000 Total 1,240,000 6,760,000 Divide by shares 10,000 4 Book value per share 124 169221 Excess Preference Ordinary @. Balances 3,000,000 1,000,000 4,000,000 12% x 1,000,000 (120,000) 120,000 To ordinary 2,880,000 2,880,000 Total 1,120,000 6,880,000 Divide by shares 10,000 40,000 Book value per share Liz I Problem 23-6 Excess Preference Ordinary a. Balances { 900,000) 2,000,000 4,000,000 125% x 2,000,000 x 3 720,000) 720,000 Te ordinary (1,620,000) ——— (1620,000) Total 2,720,000 2,380,000 Divide by shares 40,000 40.000 Book value per share 68 59.50 b. Balances (900,000) 2,000,000 4,000,000 Prorata sharing 900,000 (_ 300,000) {_ 600,000) Total 1,700,000 3,400,000 Divide by shares 40,000 40,000 Book value per share 42.50 85 Problem 23-7 Excess Preference Ordinary Balances 4,000,000 2,000,000 5,000,000 Liquidation premium (40,000 x 3) { 120,000) 120,000 Preference dividend (12% x 2,000,000) (_ 240,000) 240,000 To ordinary 3,640,000 3,640,000 2,360,000 8,640,000 40,000 100,000 Book value per share 59 86.40 In the absence of a contrary statement, the preference share is noncumulative and honparticipating. Problem 23-8 6% Preference dividends (6% x 3,000,000 x 3 years) 540,000 8% Preference dividends (8% x 2,000,000) 160,000 Total preference dividends 700,000 Excess 6% 8% over par Preference Preference Ordinary Preference as to assets: Balances 530,000 3,000,000 2,000,000 5,000,000 Preference dividends (700,000) 540,000 160,000 Balance to ordinary 170,000) (_170,000) Total 3,540,000 2,160,000 4,830,000 Divide by shares outstanding 30,000 20,000 50,000 Book value per share 118 108 96.60222 Excess 6% B% over par Preference Preference Ordinary Preference as to dividends: Balances 530,000 3,000,000 2,000,000 5,000,000 Prior years” preference dividends (6% x 3,000,000 x 2 years) 360.000 360,000 Balance 170,000 6% Preference (180,000 / 340,000 x 170,000) 90,000 B34 Preference (160.000 / 340,000 x 170,000) 80,000 Total 3,450,000 2,080,000 5,000,000 Divide by shares outstanding 30,000 20,000 50,000 Book value per share 15 104 100 Problem 23-9 Preference Ordinary Shares, Amount Shares Amount Issued 15,000 1,500,000 30,000 3,000,000 Add: Subscribed 2,000 200.000 5,000 _ 500,000 Total 17,000 1,700,000 = 35,000 + 3,500,000 Less: Treasury 1,000 _ 100,000 1,000 _ 100,000 Issued and outstanding 16,000 1,600.000 = 34,000 3,400,000 |, Preference share capital 100,000 Share premium 10,000 Treasury preference share 110,000 2. Ordinary share capital 100,000 Treasury ordinary share 70,000 Share premium 30,000 Share premium (300,000 - 10,000 + 30,000) 320,000 Retained earnings unrestricted 968,000 Retained earnings appropriated 680,000 Total excess over par 1,968,000 Excess Preference Ordinary Balances 1,968,000 1,600,000 3,400,000 12% x 1,600,000 x 5 ( 960,000) 960,000 12% x 3,400,000 (_ 408,000) 408,000 Balance for participation 600,000 16 / 50 x 600,000 192,000 34 / 50 x 600,000 408,000 Total 2,752,000 4,216,000 Divide by shares outstanding 16.000 34,000 Book value per share 172 124 Problem 23-10 Total shareholders’ equity 3,820,000 Less: Preference shareholders’ equity: Preference share capital 1,000,000 Preference dividends (8% x 1,000,000 x 2) 160,000 1,160,000 Ordinary shareholders’ equity 2,660,000Book value per share: Preference (1,160,000 / 10,000 shares} Ordinary (2,660,000 / 20,000 shares) Ordinary shares issued Less: Treasury shares Outstanding ordinary shares Problem 23-11 Ordinary issued Subscribed Total Less: Treasury Outstanding Shares 20,000 10,000 30,000 5.000. 23,000 Share premium (300,000 + 100,000 gain on treasury shares) Retained earnings Total excess Excess Balances 2,440,000 12% x 1,500,000 x 3 (540,000) 12% x 2,500,000 (300,000) Balance for participation 11,600,000 15 / 40 x 1,600.000 25 / 40 x 1,600,000 Total Divide by shares outstanding Book value per share Problem 23-12 Preference share capital Liquidation premium (40,000 x 10) Preference dividend (10% x 4,000,000 x 3) Preference shareholders’ equity Divide by preference shares Book value per preference share Total shareholders’ equity Preference shareholders’ equity Ordinary shareholders’ equity Divide by ordinary shares (200,000 + 70,000 - 20,000) Book value per ordinary share Problem 23-13 |. Annual preference dividend (12% x 2,000,000) Paid in 2015 Balance in 2015 Dividend in 2016 Total preference dividends in 2016 Preference 1,500,000 540,000 300,000 600,000 2,640,000 15,000 ———_176 223 116 133 22,000 2,000 20,000 Amount 2,000,000 1,000,000 3,000,000 — 300,000 2,300,000 400,000 2,040,000 2,440,000 Ordinary 2,500,000 1,000,000 3,800,000 — 25,000 —_li2 4,000,000 400,000 1,200,000 5,600,000 40,000 —__140 24,300,000 (5,600,000) 18,700,000 250,000 74.80 240,000 200,000 40,000 240,000 280,0002. Total dividends paid in 2016 Less: Preference dividends paid in 2016 Ordinary dividends Problem 23-14 1. Net income 2015 and 2016 Net loss 2012, 2013 and 2014 Retained earnings - maximum dividend Retained 10% earnings Preference Balance 1,010,000 10% x 500,000 (50,000) 50,000 12% x 1,000,000 x5 ( 600,000) 10% x 1,500,000 (150,000) Balance 210,000 5 (30x 210,000 35,000 10/30 x 210,000 15 / 30 x 210,000 Total dividends 85,000 Problem 23-15 Preference dividend (15% x 2,500,000) Ordinary dividend (200,000 x 5) Maximum dividend Problem 23-16 Ordinary dividend (200,000 x P10) Percentage of ordinary dividend (2,000,000 / 10,000,000) Ordinary dividend for 2016 Preference dividend: 2015 (12% x 8,000,000) 2016 (20% x 8,000,000) Maximum dividend Problem 23-17 Answer D Total shareholders’ equity Preference shareholders’ equity Preference share capital Preference dividends in arrears Liquidation premium Ordinary shareholders’ equity Divide by ordinary shares outstanding Book value per ordinary share 224 600,000 280,000 320,000 1,619,000 (600,000) 1,019,000 12% Preference Ordinary 600,000 130,000 70,000 —___—-_:105,,000 670,000 255,000 375,000 1,000,000 1,325,000 2,000,000 20% 2,000,000 960,000 1,600,000 4,560,000 10,025,000 2,500,000 250,000 500,000 3,250,000 7,000,000 100,000 70,00Problem 23-18 Answer A Preference share capital Liquidation premium - excess of liquidating value over par (20,000 x 5) Preference dividend for current year only (1,000,000 x 12%) Total preference shareholders’ equity Divide by preference shares outstanding Book value per preference share Problem 23-19 Answer C Total shareholders’ equity Preference shareholders’ equity Preference share capital 1,000,000 Preference dividends (1,000,000 x 8% x 2) 160,000 Liquidation premium (20,000 x 5) 100,000 Ordinary shareholders’ equity Divide by ordinary shares outstanding Book value per ordinary share Problem 23-20 Answer B Total shareholders’ equity Preference shareholders’ equity Preference share capital 1,000,000 Liquidation premium (10,000 x 5) 50,000 Ordinary shareholders’ equity Divide by ordinary shares outstanding Book value per ordinary share Problem 23-21 Answer A Total shareholders’ equity Preference shareholders’ equity: Preference share capital 500,000 Preference dividend (500,000 x 8%) 40,000 Ordinary shareholders’ equity Divide by ordinary shares Book value per ordinary share Ordinary shares issued Less: Treasury shares Outstanding Problem 23-22 Answer C Total equity Preference shareholders’ equity: Preference share capital 500,000 Preference dividends for 2015 and 2016 (500,000 x 8% x 2) 80,000 Ordinary shareholders’ equity 225 1,000,000 100,000 120,000 1,220,000 20,000 — il 3,900,000 1,260,000 2,640,000 100,000 26.40 4,950,000 1,050,000 3,900,000 30,000 130 1,608,000 540,000 1,068,000 — 89.000 ———2 90,000 1,000 89,000 1,910,000 580,000226 Ordinary shares issued (1,100,000 / 100) 11,000 Treasury ordinary shares (1,000) Ordinary shares outstanding 10,000 Book value per ordinary share (1,330,000 / 10,000) 133 Problem 23-23 Answer A Excess 12% PS 14% PS Ordinary Balances 3,740,000 2,000,000 3,000,000 5,000,000 12% x 2,000,000 x 3 ( 720,000} 720,000 14% x 3,000,000 x 1 { 420,000) 420,000 12% x 5,000,000 x 1 600,000) 600,000 Balance - prorate 2,000,000 —400.000 _ 600.000 1,000,000 Total 3,120,000 4,020,000 6,600,000 Divide by shares outstanding 20,000 10.000 50,000 Book value per share 156 420 132 The “excess” is the sum of the retained earnings and share premium. Share capital Fraction Allocation 12% Preference share 2,000,000 2/10 400,000 14% Preference share 3,000,000 3/10 600,000. Ordinary share 5,000,000 5/10 1,000,000 10,000,000 2,000,000 Problem 23-24 Answer C Preference share capital 2,000,000 Ordinary share capital 4,000,000 Subscribed ordinary share capital 2,000,000 Share premium 1,000,000 Retained earnings 2,400,000 Treasury shares (__ 800,000) Total equity 10,600,000 Preference shareholders’ equity: Preference share capital 2,000,000 Preference dividend for 2014, 2015, 2016 (2,000,000 x 10% x 3) 600,000 _ 2,600,000 Ordinary shareholders’ equity 8,000,000 For book value purposes, the subscription receivable is nat deducted from subscribed share capital in determining the total shareholders’ equity. Ordinary shares issued 40,000 Ordinary shares subscribed 20.000 Total 60,000 Treasury shares 10,000) Ordinary shares outstanding 50,000 Book value per ordinary share (8,000,000 / $0,000) 160Problem 23-25 Answer B 227 Total dividend declared in 2016 440,000 Preference dividends: In arrears on December 31, 2015 120,000 2016 (6% x 4,000,000) 240,000 360,000 Balance to ordinary share _80,000 Problem 23-26 Answer D Ordinary dividend (250,000 x 4) 1,000,000 Preference dividend (2,500,000 x 105%) 250,000 Total dividend 1,250,000 Problem 23-27 Answer C Dividend Preference Ordinary Balance 1,000,000 10% x 3,000,000 ( 300,000) 300,000 10% x 2,000,000 (_ 200,000) 200,000 Balance for participation 500,000 3,000,000 / 5,000,000 x 500,000 300,000 2,000,000 / 5,000,000 x 500,000 200,000 600,000 400,000: Problem 23-28 Answer C Dividend Preference Ordinary Amount 900,000 6% x 1,000,000 x 3 (180,000) 180,000 6% x 4,000,000 (240,000) 240,000 Balance prorate 480,000 1/5 x 480,000 96,000 4/5 x 480,000 384,000 Total dividends 276,000 624,000 Problem 23-29 Question 1 Answer B Question 2 Answer A Question 3 Answer B Total income 2015 and 2016 8,000,000 Total loss 2012, 2013 and 2014 (3,000,000) Retained earnings - maximum dividend 5.000.000 Retained 12% 10% earnings Preference Preference Ordinary Dividend 5,000,000 12% x 1,000,000 (120,000) 120,000 10% x 2,500,000 x 5 (1,250,000) 1,250,000 10% x 7,500,000 (750,000) 750,000 Balance for participation 2,880,000 Sauehes! Z. 1 Total dividend 120,000 1,970,000 2,910,000228 Before participation, one year dividend is paid to ordinary share capital using the participating preference rate. The balance for participation is disturbed on a prorata basis as follows Amount Fraction Allocation 10% Preference share 2,500,000 25/100 720,000 Ordinary share 7,500,000 75/100 2,160,000 10,000,000 2,880,000 Problem 23-30 Answer B Book value per ordinary share (5,000,000 / 160,000 shares) 31.25 Problem 23-31 Answer A Preference shares 2,000,000 Preference dividend for 2016 (10% x 2,000,000) 200,000 Preference shareholders’ equity 2,200,000 Preference shares 2,000,000 Ordinary shares 2,500,000 Share premium 1,500,000 Retained earnings 4 Total shareholders’ equity 10,800,000 Preference shareholders’ equity (2,200,000) Ordinary shareholders’ equity 8,600,000 Divide by ordinary shares outstanding (2,500,000 / 10 par value) 250,000 Boak value per ordinary share 34.40 Problem 23-32 Answer A The dividend of P500,000 is paid to preference shares only because the total preference dividends amount to 8% x P3,000,000 x 3 or P720,000. Problem 23-33 Answer C Dividend Preference Ordinary Amount 1,350,000 6% x 2,500,000 x 2 { 300,000) 300,000 6% x 5,000,000 300,000) 300,000 Balance pro rata 750,000 250,000 $00,000 Total dividend 550,000 800,000 Total par Fraction Participation Preference (25,000 x 100) 2,500,000 25/75 250,000 Ordinary ($0,000 x 100) 5,000,000 50/75 500,000 7,500,000 750,000 The preference share is participating. Before participation, the ordinary share is paid an amount equal to the current year dividend using the preference rate.229 Problem 23-34 Answer B Total dividend distributed in the current year 2,500,000 Preference dividend (8% x 5,000,000 x 2) (_ 800,000) Dividend payable to ordinary shareholders 1,700,000CHAPTER 24 Problem 24-1 Problem 24-2 Problem 24-3 1.8 we ee 2.0 2.8 256 3A 3. B 3. D 4.0 4.8 4c 5.D 5. A 68 6 ¢ 7. 7. B aA 8B 9.¢ 9.8 Problem 24-5 1. Basic earnings per share: Income from continuing operations (3,400,000 / 50,000) Loss fram discontinued operations (600,000 / 50,000) Net income 2. Basic earnings per share: Income from continuing operations Less: Preference dividend (10% x 2,000,000) Income to ordinary share Income from continuing operations (3,200,000 / 50,000) Loss fram discontinued operations Net Income Problem 24-6 |. Date Shares January 1 120,000 June 1 12,000 September 30 (24,000) 2. Basic earnings per share (3,630,000 / 121,000) Problem 24-7 |. Date Shares January 1 120,000 April 1 20,000 2. Income from continuing operations Less: Preference dividend actually paid Income to ordinary share Basic earnings per share: Fraction 12/12 TAZ 3/12 Fraction 12/12 afl2 Income from continuing operations (3,645,000 / 135,000) Loss from discontinued operations (540,000 / 135,000) Net income per share 230 Problem 24-4 I iz 3. 4 5 aAnaao 68 a2) 56 3,400,000 200,000 3,200,000 64 (i) 52 Average 120,000 7,000 (__6,000) 121,000 30 Average 120,000 15,000 135,000 3,765,000 120,000 3,645,000 27 4 23231 Problem 24-8 Date Shares Months Peso months 1. January 1 150,000 12 1,800,000 May 1 30,000 & 240,000 july 7 12,000 6 (72,000) December | 6,000 1 6,000 1,974,000 Average shares (1,974,000 / 12) 164,500 2. Net loss (2,690,000) Preference dividend (12% x 5,000,000) (_ 600,000) Total loss to ordinary share (3,290,000) Basic loss per share (3,290,000 / 164,500) (20) Problem 24-9 Date Shares Months Peso months, 1. January 1 1,000.000 12 12,000,000 May | 120,000 10 1,200,000 July 1 48,000 E {__ 96,000) 13,104,000 Average shares (13,104,000 / 12) 1,092,000 2. Net income 5,860,000 Less: Preference dividend (10% x 4,000,000) — 400,000 Adjusted income to ordinary share 5,460,000 Basic earnings per share (5,460,000 / | 092,000) 5 Problem 24-10 1. January 1 (3,000,000 x 12/12) 3,000,000 January 1 (250,000 x 1/5 x 12/12) 50,000 April 1 {600,000 x 9/12) 450,000 July 1 (400,000 x 6/12) 200.000) Average shares 3,300,000 2. Net income per book 15,000,000 Exceptional profit 4,000,000 Adjusted net income 19,000,000 Preference dividend for current year (4,000,000 / 2) { 2,000,000) Preference share premium payable upon redemption (1,000,000) Net income to ordinary shares 16,000,000 The preference share premium is actually a preference dividend for a participating preference share. Basic EPS (16,000,000 / 3,300,000) 4.85Problem 24-11 Basic dividend: Preference (8% x 3,000,000) Ordinary (100,000 x 10) Balance for participation Total Preference Ordinary Basic earnings per share: Preference (750,000 / 30,000) Ordinary (1,850,000 / 100,000) Problem 24-12 Par value 3,000,000 5,000,000 8,000,000 Preference 240,000 310,000 750,000 Fraction 3/8 5/8 1, Market value of ordinary shares outstanding (600,000 x 11) Proceeds from exercise of rights (120,000 x 5) Total Shares outstanding Shares issued through exercise of rights Total shares outstanding Theoretical value of stock ex-right (7,200,000 / 720,000) 2. Adjustment factor (11/10) 3. 2016 Shares outstanding Adjustment factor Adjusted shares Basic EPS (11,000,000 / 660,000) 2017 January 1 (600,000 x 1.10 x 2/12) March 1 (720,000 x 10/12) Total Basic EPS (15,000,000 / 710,000) 2018 Basic EPS (18,000,000 / 720,000) Problem 24-13 1. Value af right = MV of share right-on Value of right MV of share ex-right 232 Ordinary 1,000,000 — 850,000 1,850,000 Participation 510,000 850.000 1,360,000 25.00 18.50 6,600,000 600,000 7,200,000 600,000 12 110,000 600,000 710,000 21.13 25.00 Es po233 2. Adjustment factor 10/9 3. 1/1/2016 (810,000 x 10/9) 900,000 Basic EPS - 2016 (2,250,000 / 900,000) 2.50 1/1/2017 (810,000 x 10/9 x 3/12) 225,000 4/1/2017 (810,000 + 162,000 x 9/12) 729,000 Average shares 954,000 Basic EPS - 2017 (3,500,000 / 954,000) 3.67 Problem 24-14 Answer A Net income 750,000 Less: Preference dividend 120,000 Net income to ordinary share 630,000 Basic EPS (630,000 / 60,000) 19.50 Problem 23-15 Answer D Ordinary shares - 1/1/2016 200,000 Stock dividend on 10/1/2016 (10% x 200,000) 20.000 Total ordinary shares outstanding 220,000 Net income 1,920,000 Less: Preference dividend 200,000 Net income to ordinary shares 1.720,000 Basic EPS (1,720,000 / 220,000) 7.82 Problem 24-16 Answer A January 1 80,000 + 40,000 120,000 June 30 40,000 + 20,000 x 6/12 30,000 ‘Average shares 150,000 Basic EPS (2,400,000 / 150,000) 16 Problem 24-17 Answer A Ordinary shares outstanding (1,000,000 / 5) 200.000 Basic earnings per share (4,300,000 / 200,000) 21.50 ‘The preference dividend is ignored because the preference shares are redeemable and therefore the preference dividend of P500,000 is already deducted from the net income as a finance cost. Problem 24-18 Answer C January 1 33,000 x 12 months 396,000 March 1 9,000 x 10 months 90,000, July! 8,000 x 6 months 48,000 224,000 Average number of shares (534,000 / 12) 44,500Problem 24-19 Answer C January | 300,000 + 30,000 x 12 months October 1 24,000 x 3 months Average number of shares (3,888,000 / 12) Problem 24-20 Answer A January 1 (600,000 x 12/12) May | (120.000 x 8/12) September | (60,000 x 4/12) November | (90,000 x 2/12) Average shares Problem 24-21 Answer B January 1 100,000 x 2 x 1.20 June 1 30,000 x 1.20 x 7/12 ‘Average number of shares Problem 24-22 Answer B January 1 (00,000 x 2 x 1.20 x 3) April | (30,000 x 2 x 1.20 x 3 x 9/12) June 30 (10,000 x 1.20x 3x 6/12) Average shares Problem 24-23 Answer A January 1 (44,000 x 1.25 x 3) February | (56,000 x 1.25% 3x 11/12) May | (25,000 x 1.25 x 3.x 8/12) September 1 (10,000 x 3 x 4/12) Average shares Problem 24-24 Answer B January 1 (200,000 x 2 x 12/12) july 1 (100,000 x 6/12) Problem 24-25 Question | Answer A 2016 January? (250,000 x 1.20 x 3) March 1 (24,000 x 1.20 x 3 x 10/12) October 1 (16,000 x 3 x 3/12) December | (15,000 x 3 x 1/12) Average shares 234 3,960,000 (__72,000) 3,888,000 324,000 600,000 80,000 ( 20,000) 15,000 675,000 240,000 1 261,000 720,000 162,000 (18,000) 864,000 1,650,000 192,500 (62,500) 10,000 305,000 400,000 _ 50,000 450,000, 900,000 72,000 12,000 (_3,750) 280,250Question 2 Answer A 2017 January 1 (329,800 x 3) September 1 (60,000 x 4/12) Average shares January 1, 2016 (250,000 x 1.20) March 1, 2016 (24,000 x 1.20) October 1, 2016 December 1, 2016 Shares actually outstanding - January 1, 2017 Problem 24-26 Answer C 1/1 (1,250,000 x 2) 4/1 (200,000 x 2 x 9/12) 10/1 (100,000 x 2 x 3/12) Average shares Problem 24-27 Answer A January 1 (220,000 x 2 x 1.10) February | (60,000 x 2 x 1.10 x 11/12) April 1 (3,000 x 2 x 1.10 « 9/12) July 1 (15,000 x 1,10 x 6/12) Problem 24-28 Answer B Net income Less: Preference dividend for one year (2,500,000 x 4%) Net income to ordinary share Basic EPS (4,900,000 / 200,000) Problem 24-29 Answer D 235 989,400 20,000 1,009,400 300,000 28,800 16,000 (15,000) 329,800 2,500,000 300,000 (50,000) 2,250,000 484,000 121,000 (4,950) 8.250 608,300 5,000,000 100,000 4,900,000 24.50 In the absence of any contrary statement, the preference share is noncumulative. Accordingly, the annual preference dividend is mot deducted from net income because there is no declaration. The basic earnings per share should be P1,800,000 divided by 20,000 ordinary shares or P9.00. Problem 23-30 Answer A Ordinary shares issued (30,000,000 / P100} Treasury shares Ordinary shares outstanding Net income Less: Preference dividend (10% x 5,000,000) Net income to ordinary share Basic EPS (14,500,000 / 250,000) 300,000 (_50,000) 230,000 15,000,000 500,000 14,500,000 38Problem 24-31 Answer A Fair value of shares (100,000 x P35) Proceeds from exercise of rights (100,000 / 4 = 25,000 x P30) Total Ordinary shares outstanding Ordinary shares issued through exercise of rights (100,000 / 4) Total ordinary shares Theoretical value of share ex-right (4,240,000 / 125,000) Another approach 35-30 Theoretical value of right = ——------ = 1 Market value of share right-on Theoretical value of right Market value of share ex-right Problem 24-32 Answer A Fair value of shares outstanding (100,000 x 16) Proceeds from exercise of rights (100,000 / 5 = 20,000 x 10) Total Ordinary shares outstanding Ordinary shares issued through exercise of rights (100,000 / 5) Total ordinary shares Theoretical value of share ex-right (1,800,000 / 120,000) Adjustment factor or fraction January 1 (100,000 x 16/15 x 9/12) October 1 (120,000 x 3/12) Total average shares Basic EPS (5,500,000 / 110,000) Problem 24-33 Answer A The theoretical value of a right is computed as follows: 160-100 = P10 per right S+1 236 3,500,000 750,000 4,250,000 199,000 _25,000 125,000 34 1,600,000 _ 200,000 1,800,000 100,000 20,000 120,000 15 16/15 30,000 _ 30,000 119,000 50Market value of share right-on Theoretical value of right Marker value of share ex-right Adjustment factor Ordinary shares on January | Ordinary shares issued through exercise of rights on March 31 (300,000 / 5) Total ordinary shares on March 31 January 1 300,000 x 160/150 x 3/12 March 31 360,000 x 9/12 Average number of shares Basic EPS (6,000,000 / 350,000) Problem 24.34 Answer B 35-10 Theoretical value of right = nem 4+1 = 5 Market value of share right-on Theoretical value of right Market value of share ex-right Adjustment factor Ordinary shares on January | Ordinary shares issued through exercise of rights on October | (600,000 / 4) Total ordinary shares on October | January 1 600,000 x 35/30 x 9/12 March 31 750,000 x 3/12 Average number of ordinary shares Basic EPS (8,550,000 / 712,500) Problem 24-35 Answer B Ordinary shares - 12/31/2016 Bonus issue (200,000 x 2) Total shares outstanding Basic earnings per share 2016 (18,000,000 / 600,000) 2017 (60,000,000 / 600,000) Problem 24-36 Answer A January 1 Ordinary shares july 1 Bonus issue Total ordinary shares Basic earnings per share P1 2,000,000 / 400,000) 237 160 10 150 160/150 300,000 60,000 360,000 80,000 270,000 350,000 17.14 35 Ss 30 35/30 600,000 150,000 750,000 525,000 187,500 712,500 12.00 200,000 400,000 600,000 30.00 100,00 200,000 200,000 400,000 30Problem 24-37 Answer D January 1 (100,000 + 20,000) October | (28,000 x 3/12) Average shares Problem 24-38 Answer B January 1 (20,000 x 12/12) May 1 (10,500 x 8/12) Average number of shares Net income Preference dividend (10,000 x P40) Net income to ordinary shares Basic earnings per share (567,000 / 27,000) Problem 24-39 Answer A Basic earnings per share - 2016 (85 / 4) The bonus issue is the equivalent of a stock dividend. Problem 24-40 Answer B Net loss Preference dividend (20,000 x 10) Total loss to ordinary shares Basic loss per share (3,200,000 / 200,000) Problem 24-41 Answer C Basic EPS (5,100,000 / 425,000) Problem 24-42 Answer C Basic EPS (7,100,000 / 400,000) Problem 24-43 Question 1 Answer B January 1, 2017 200,000 x 12/12 April], 2017 20,000 x 2x 9/12 Average number of shares 2017 EPS (410,000 / 230,000) Question 2 Answer B December 31, 2016 balance July 1, 2017 2-for-1 share split Total ordinary shares - December 31, 2016 2016 EPS (350,000 / 200,000) 238 120,000 7,000 127,000 20,000 7,000 27,000 967.000 (400,000) 567,000 21.00 3,000,000 — 200,000 3,200,000 16.00 12.00 200,000 —30,000 230,000 L.78 190,000 100,000 200,000 L75239 CHAPTER 25 Problem 25-1 Problem 25-2 Problem 25-3 Problem 25-4 LA 1B LA ee 2A 2A 2.0 2.¢ 3A 3. A 3c 2B 4.6 4.4 4.8 4.4 5A 5. A Boe 6A 6. ¢€ 7.8 rates BA Bc SA 3.8 10.4 Problem 25-5 1.0 2.0 3. B 4.8 Problem 25-6 1. Basic earnings per share (1,730,000 / 50,000) 34.60 2. Ordinary shares outstanding 50,000 Assumed issued ordinary shares through bond conversion (1,000 x 10) 10,000 Total ordinary shares 60,000 Net income 1,730,000 Add: Interest on bonds payable (10% x 1,000,000 x 70%) 7 Adjusted income 1,800,000 Diluted EPS (1,800,000 / 60,000) 30 Problem 25-7 |. Net income 5,400,000 Less: Preference dividend (10% x 5,000,000) 500,000 Adjusted income to ordinary share 4,900,000 Basic EPS (4,900,000 / 200,000) 24.50 2. Ordinary shares outstanding 200,000 Assumed issued ordinary shares through band conversion of preference share (50,000 x 2) 100,000 Total ordinary shares 300,000 Diluted EPS (5,400,000 / 300,000) 18 Problem 25-8 Net income 3,695,000 Less: Preference dividend (12% x 3,000,000) 360,000 Net income to ordinary share 3,335,000 Basic EPS (3,335,000 / 100,000) 33.35,240 Net income Shares EPs Basic EPS 3,335,000 100,000 33.35 Bonds payable 105,000 30,000 Diluted EPS 3,440,000 130,000 26.46 Preference shares 60,000 a Diluted EPS 3,800,000 190,000 20,00 Incremental EPS on BP (105,000 / 30,000) 3.50 Incremental EPS on PS (360,000 / 60,000) 6.00 Both the BP and PS are potentially dilutive because the incremental EPS is lower than the basic EPS. Problem 25-9 Net income 2,410,000 Less: Preference dividend (20,000 x 5) Net incame to ordinary share 2,310,000 Basic EPS (2,310,000 / 100,000) 23.10 Net income Shares EPS Basic EPS 2,310,000 100,000 23.10 Preference shares 100,000 40,000 ____ Diluted EPS 2,410,000 140,000 1720 Bonds payable 140,000 _ 30,000 See Diluted EPS 2,550,000 170,000 15.00 Incremental EPS on BP (140,000 / 30,000) 4.67 Incremental EPS on PS (100,000 / 40,000) 2.50 Problem 25-10 1. Basic EPS (2,749,000 / 100,000) 27.49 2. Ordinary shares outstanding 100,000 Assumed issued ordinary shares through bond conversion (2,000 x 10 = 20,000 x 9/12) —15.000 Total ordinary shares 115,000 Net income 2,749,000 Add: interest on bonds (12% x 2,000,000 x 9/12) 180,000 Less: Income tax - 30% 54,000 —126,000 Adjusted income 2,875,000 Diluted EPS (2,875,000 / 115,000) 22 Problem 25-11 |. January | (100,000 x 12) 1,200,000 April 1 (3,000 x 20 = 60,000 x 9) 540,000 1,740,000 Average (1,740,000 / 12) 145,000 Basic EPS (2,320,000 / 145,000) 1624) 2. Ordinary shares outstanding 190,000 Ordinary shares issued through actual bond conversion (3,000 x 20) 60,000 Assumed ordinary shares issued through conversion of remaining bonds (1,000 x 20) _ 20,000 Total ordinary shares 180,000 Since the bonds are outstanding on January 1, 2016, the ordinary shares issued through the actual bond conversion are considered outstanding from January 1, 2016. Net income 2,320,000 Add: Interest on bonds actually converted (3,000,000 x 12% x 3/12) 90,000 Interest on remaining bonds (1,000,000 x 12%) 120,000 Total 210,000 Less: Income tax - 30% 63,000 147,000 Adjusted income 2,467,000 Diluted EPS (2,467,000 / 180,000) 13.71 Problem 25-12 |, Basic earnings per share (2,000,000 / 100,000) 20.00 2. Net income 2,000,000 Interest on bonds (800,000 x 5% x 70%) 28,000 Adjusted net income 2,028,000 ‘Ordinary shares outstanding 100,000 Assumed ordinary shares through conversion of bonds ‘an most favorable terms (800,000 / 10,000 x 150) _12,000 Total ordinary shares 112,000 Diluted EPS (2,028,000 / 112,000) 18.11 Problem 25-13 1. Basic EPS (7,500,000 / 200,000) 37.50 2. Total option price (50,000 x 60) 3,000,000 ‘Ordinary shares actually outstanding 200,000 Incremental ordinary shares: Option shares 50,000 Less: Assumed treasury shares (3,000,000 / 75) 40.000 10.000 Total ordinary shares 210,000 Diluted EPS (7,500,000 / 210,000) 35.71 Problem 25-14 |, Basic earnings per share (33,000,000 / 10,000,000) 3.20 2. Net income 33,000,000 Interest on bonds (10% x 30,000,000 x 70%) 2,100,000 Adjusted net income 35,100,000242 ‘Ordinary shares outstanding 10,000,000 Assumed ordinary shares issued though conversion (4,000,000 x 2) 8,000,000 Total ordinary shares 18,000,000 Diluted EPS (35,100,000 / 18,000,000) 1.95 Problem 25-15 |, Basic EPS (3,000,000 / 60,000) 50 2. Total option price (20,000 x 160) 3,200,000 Option shares 20,000 Less: Assumed treasury shares (3,200,000 / 250) 12.800 Incremental ordinary shares 7,200 Multiply by (9 months} 9/12 Average incremental shares 5,400 ‘Ordinary shares actually outstanding 60,000 Total 65,400 Diluted EPS (3,000,000 / 65.400) 45.87 Problem 25-16 1. January 1 Beginning balance 100,000 April 1 (50,000 x 9/12) Total ordinary shares 137,500 Basic EPS (5,500,000 / 137,500) 40 2. Proceeds from assumed exercise of options (50,000 x 140) 7,000,000 January 1 Beginning balance 100,000 April 1 {50,000 x 9/12) 37,500 Incremental ordinary shares: Option shares 50,000 Less: Assumed treasury shares (7,000,000 / 400) 7.500 Incremental shares 32,500 Weighted average (32,500 x 3/12) 8125 Total ordinary shares 145,625 Diluted EPS (5,500,000 / 145,625) 37.77 Problem 25-17 1. Net income 6,700,000 Less: Preference dividend (10,000 x 30) __ 300,000 Adjusted income 6,400,000 January 1 Beginning balance 300,000 September | (60,000 x 4/12) 20,000 320,000 Basic EPS (6,400,000 / 320,000) 202. Net income Less: Preference dividend Balance Add: Interest on bonds (1,000,000 x 10%) Less: Income tax 30% Adjusted income Proceeds from assumed exercise of options (30,000 x 25) January 1 Balance September 1 Issued (60,000 x 4/12) Assumed Issued ordinary shares through bond conversion (1,000 x 40) Incremental ordinary shares: Option shares Less: Assumed treasury shares (750,000 / 30) Total ordinary shares Diluted EPS (6,470,000 / 365,000) Problem 25-18 1. Net income Preference dividend Net income to ordinary share ~ basic EPS Basic EPS (4,500,000 / 500,000) 2. Effect on net income: Preference dividend (100,000 x PS) Interest on bonds (3,000,000 x 10% x 70%) Incremental EPS: Preference share (500,000 / 200,000) Bonds payable (210,000 / 100,000) 100,000 —30,000 30,000 25,000 Warrants to purchase 20,000 ordinary shares ~ antidilutive because the exercise price is higher than the average market price 243 6,700,000 300,000 6,400,000 70,000 6,470,000 230,000 300,000 20,000 40,000 5,000 1223 5,000,000 (_ $00,000) 4,500,000 9.00 500,000 210,000 2.50 2.10 The multiple potential ordinary shares shall be ranked starting with the lowest incremental EPS. Thus, the bonds payable shall be ranked first and the preference share second. Net income Basic EPS 4,500,000 Convertible bonds payable 210,000 Diluted EPS 4,710,000 Convertible PS 500,000 Diluted EPS 5,210,000 Problem 25-19 1. Net income Preference dividend Net income to ordinary share - basic EPS Basic EPS (550,000 / 110,000) Shares 500,000 100,000 600,000 200,000 800,000 EPS 9.00 650,000 (100.000) 550,000 5.00244 2. Effect on net income: Preference dividend (20,000 x P5) 100,000 Interest on bonds (2,000,000 x 10% x 70%) 140,000 Incremental EPS- Convertible PS (100,000 / 40,000) 2.50 Convertible bonds (140,000 / 30,000) 4.67 ‘The share options are ranked first, the preference share second, and the bonds payable third. Share options 20,000 Assumed treasury shares (20,000 x P15 = 300,000 / P20) 15,000. Incremental ordinary shares 5,000 Net income Shares EPS Basic EPS 550,000 110,000 5.00 Share options gusset 5,000 Diluted EPS 550,000 115,000 Convertible PS 190,000 40,000 Diluted EPS 650,000 155,000 Convertible bonds 140,000 30,000 Diluted EPS 790,000 185,000 Camiguin Company shall report diluted EPS of P4.19. The convertible bonds are ignored because the effect is antidulitive. Note that the diluted EPS increased to P4.27 from P4.19 after considering the bonds payable Problem 25-20 1. Ordinary shares - 1/1/2016 1,000,000 April | (50,000 x 9/12) 37,300 July 1 (50,000 x 6/12) 25,000 Total 1,062,500 Basic EPS (5,900,000 / 1,062,500) 5.55 2. Ordinary shares - 1/1/2016 1,000,000 April | - new branch 50,000 July) ~ new branch 50,000 December 31 - net income in excess of PS,000,000 (900 x 1,000) 900,000 Total 2,009,000 Diluted EPS (5,900,000 / 2,000,000) 2.95245 CHAPTER 26 Problem 26-1 Answer D Ordinary shares outstanding 1,200,000 Ordinary shares to be issued in the acquisition of subsidiary 50,000 Total ordinary shares 1,250,000 Net income 3,400,000 Less: Preference dividend 200,000 Net income to ordinary share 3,200,000 Diluted earnings per share (3,200,000 / 1,250,000) 2.56 Problem 26-2 Answer B Ordinary shares outstanding 200,000 Ordinary shares to be issued for conversion of preference (20,000 x 5) 100,000 Total ordinary shares 300,000 Diluted EPS (840,000 / 300,000) 2,80 Problem 26-3 Question | Answer D January 1 Outstanding 100,000 September 1 Conversion (10,000 x 6 x 4/12) 20,000 Average number of shares 120,000 Net income 2,000,000 Preference dividend (5% x 1,000,000) (__50,000) Net income to ordinary share 7,950,000 Basic EPS (1,950,000 / 120,000) 16.25 Question 2 Answer A January 1 Outstanding 100,000 September 1 Conversion (10,000 x 6) 60,000 Total ordinary shares 160,000 Diluted EPS (2,000,000 / 160,000) 12.50 The issuance of ordinary shares on September I is not “averaged” anymore because the convertible preference shares are outstanding on January | Problem 26-4 Answer C January | 500,000 x 1 500,000 October 1 120,000 x 3/12 30,000 January 1 100,000 x 1 100,000 ‘Average ordinary shares 630,000246 Problem 26-5 Answer B January} 2,500,000 x 1 2,500,000 April T 500,000 x 9/12 375,000 July 1 250,000 x 6/12 125,000 October 1 200,000 x 3/12 50.000 Average shares 3,050,000 Problem 26-6 Answer A Ordinary shares actually outstanding 100,000 Ordinary shares issued through actual bond conversion (200 x 200) 40,000 Total ordinary shares 140,000 Net income 5,551,000 Add: Interest on bonds (2,000,000 x 7% x 6/12) 70,000 Less: Income tax - 30% 21,000 49,000 Adjusted income 5,600,000 Diluted EPS (5,600,000 / 140,000) 40 Problem 26-7 Answer C Ordinary shares outstanding on January | 600,000 Ordinary shares issued on April | (180,000 x 9/12) 135,000 Potential ordinary shares to be issued for bond conversion 150,000 Total ordinary shares 885,000 Problem 26-8 Question | Answer A January 1 Outstanding 800,000 May 1 (60,000 x 8/12) 40,000 july 1 (100,000 x 6/12) ( 50,000) October | (2,000 x 80 x 3/12) 40,000 Average number of shares 830,000 Basic EPS (9,500,000 / 830,000) 1.45 Question 2 Answer A January 1 Outstanding 800,000 January 1 (5,000 bonds x 80) 400,000. May 1 (60,000 x 8/12) 40,000 July 1 (100,000 x 6/12) (_ 50,000} Average number of shares 1L.199,000 All of the 5,000 bonds are assumed to be converted on January 1 because the convertible bonds are outstanding on January 1.247 Net income 9,500,000 Interest on bonds actually converted on October 1 (2,000,000 x 12% x 9/12) 180,000 Interest on bonds not converted (3,000,000 x 12%) 360.000 Total interest 540,000 Tax effect (30% x 540,000) (162,000) 378,000 Adjusted income 9,878,000 Diluted EPS (9,878,000 / 1,190,000) 8.30 Problem 26-9 Answer B Ordinary shares outstanding on January 1 300,000 Ordinary shares issued on July 1 (50,000 x 6/12) 25,000 Share warrants outstanding 40,000 Assumed treasury shares (600,000 / 20) (30,000) Average shares 335,000 Problem 26-10 Answer A Ordinary shares outstanding 100,000 Share options 40,000 Assumed treasury shares (40,000 x 10 = 400,000 / 16} (25,000) Total ordinary shares ‘115,000 Diluted EPS (2,000,000 / 115,000) 17.39 Problem 26-11 Question | Answer B Ordinary shares outstanding 100,000 Exercise of share options on April 1 (40,000 x 9/12) 30.000 Average number of shares 130,000 Basic EPS (2,000,000 / 130,000) 15.38 Question 2 Answer A Share options 40,000 Assumed treasury shares (40,000 x 10 = 400,000 / 16) (25,000) Potential ordinary shares 15,000 Note that the share price of P16 on exercise date on April | is used in computing the assumed treasury shares. Outstanding shares on January 1 100,000 Exercise of shares options an April 1 30,000 Potential shares from January 1 to April 1 (15,000 x 3/12) 3,750 Average number of shares 33,750 Diluted EPS (2,000,000 / 133,750) 14.95248 Problem 26-12 Answer B January | 200,000 x 1.10 x 12/12 220,000 1. Option shares 40,000 1 Assumed treasury shares (800,000 / 25) (_32,000) Average number shares 228,000 Diluted EPS (1,100,000 / 228,000) 4,82 Problem 26-13 Question | - Answer D Operating revenue 5,600,000 Operating expenses (3,000,000) Income before tax 2,600,000 Income tax (30% x 2,600,000) (_780,000) Net income 1,820,000 Basic EPS (1,820,000 / 200,000) 9.10 Question 2 - Answer A The amount of diluted EPS is the same as the basic EPS because the share options are antidilutive. To be dilutive, the option price must be lower than the average market price. In this case, the option price of P25 is higher than the average price of P20. Accordingly, the share options are ignored in computing diluted EPS. The bonds are alsa ignored because they are nonconvertible. Nonconvertible securities never become potential ordinary shares. Problem 26-14 Answer D January 1 to March 31 (150,000 x 3/12) 37,500 April | to May 31 (120,000 x 2/12) 20,000 June 1 to December 31 (180,000x 7/12) 105,000 162,500 Diluted EPS (2,500,000 / 162,500) 15.38 The share options are antidilutive because the exercise price is higher than the average market price. Problem 26-15 Answer A January 1 Outstanding 200,000 October | Conversion (4,000 x 40) 160,000 Total ordinary shares 360,000 The issuance of ordinary shares on October 1 is not “averaged” anymore because the convertible bonds are outstanding on January 1.249 Net income 5,000,000 Interest on bonds net of tax from January 1 to October 1 (4,000,000 x 10% x 9/12 x 70%) 210,000 Adjusted income 5,210,000 Divide by ordinary shares 360,000 Diluted EPS 14.47 The after tax actual interest paid on the bonds up to the date of conversion is added back to net income. Problem 26-16 Answer A Basic earnings per share 150 Effect of possible band conversion C8) Diluted earnings per share 142 The effect of the possible exercise of ordinary share options is ignored because it increases earnings per share and therefore it is antidilutive. Problem 26-17 Answer A The maximum amount of earnings per share is equal to the basic earnings per share. On the other hand the minimum amount is equal to the diluted earnings per share computed as follows: Basic earnings per share 120 Effect of possible conversion of preference share CD Effect of possible exercise of ordinary share warrants (2 Diluted EPS uu? Problem 26-18 Answer C Ordinary shares outstanding on January 1 $00,000 Ordinary shares issued on October | (100,000 x 3/12) 25,000 Potential ordinary shares for bond conversion 225.000 Average ordinary shares. 750,000 Net income 6,000,000 Interest on bonds (6% x 20,000,000 x 70%) 840,000 Adjusted net income 6,840,000 Diluted EPS (6,840,000 / 750,000 shares) 9.12 Problem 26-19 Question 1 Answer D Net incame 8,000,000 Preference dividend (20,000 x 40) (800,000) Net income to ordinary shares Basic EPS (7,200,000 / 200,000 shares) 36.00250 Question 2 Answer C Ordinary shares outstanding 200,000 Potential ordinary shares - preference 40,000 Potential ordinary shares - bonds (5,000 x 50) 250,000 Total ordinary shares 490,000 Net income 8,000,000 Interest on bonds (10% x 5,000,000 x 70%) 350,000 Adjusted net income 8,350,000 Diluted EPS (8,350,000 / 490,000 shares) 17.04 Problem 26-20 Answer B Basic earnings per share (6,000,000 / 200,000) 30.00 Outstanding shares 200,000 Potential ordinary shares (20,000 x 1 x 6/12) _10,000 Total ordinary shares 210,000 Net income 6,000,000 Interest on bonds (20,000,000 x 7% x 6/12 x 70%) 490,000 Adjusted net income 6,490,000 Diluted EPS (6,490,000 / 210,000) 30.90 The amount of diluted EPS is higher than basic EPS. Therefore, the convertible bonds are antidilutive and thus ignored. The diluted EPS to be reported should be the same as the basic EPS of P30. Problem 26-21 Question | Answer A 2016 January 1 (200,000 x 1.10 x 2) 440,000 April 1 (125,000 x 1.10 x 2 x 9/12) 206,250 October 1 (7,000 x 2 x 3/12) “3/500 649,75. Question 2 Answer A 2017 January 1 (364,500 x 2) 729,000 April 1 (170,000 x 3/12) 42.500 271,500 January 1, 2016 (200,000 x 1.10) 220,000 April}, 2016 (125,000 x 1.10) 137,500 October |, 2016 7,000 Outstanding shares - January |, 2017 364,500

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