FINANCIAL LIABILITIES 1) The leased asset has an estimated useful life of seven

EXERCISE 1 HOPE Company adopted the policy of leasing as the years, which is also the lease term.
primary method of selling its products. The entity’s main product is 2) At the expiration of the lease, the equipment will revert to
a small helicopter that is very popular among politicians and entity Irene, at which time it is expected to have a residual value
managers. HOPE Company constructed such a helicopter for SOLO of P 120,000 (none of which is guaranteed)
Company at a cost of P 8,500,000. 3) Irene’s implicit interest rate is 12% which is known by
Financing the construction was at a 14% rate. The terms of the lease Gabby
provided for annual advance payments of P 2,500,000 to be paid 4) Gabby’s incremental borrowing rate is 14% at December
over 10 years with the ownership transferring to the lessee at the 31, 2013
end of the lease period. It is estimated that the helicopter will have 5) Lease rentals consist of seven equal annual payments, the
first of which was paid on December 31, 2013
an economic life of 20 years and a residual value of P 1,600,000 at
6) Irene properly accounts for this lease as a direct financing
that date.
lease and as a finance lease by Gabby. Both lessor and
The lease payments began January 1, 2014. HOPE Company lessee are calendar year corporations and depreciate all
incurred initial direct cost of P 500,000 in financing the lease property, plant, and equipment on the straight line basis.
agreement with SOLO. The present value of an annuity due of 1 at The present value tables show the following present value
14% for 10 periods is 5.95. factors:
Present value of 1 for seven periods at 12% 0.4523
1. What is the gross profit on sale that should be recognized by Present value of 1 for seven periods at 14% 0.3996
HOPE Company? Present value of an annuity due for 7 periods at 12% 5.1114
a. P5,875,000 b. P 6,375,000 c. P 4,275,000 Present value of an annuity due for 7 periods at 14% 4.8387
2. What is the unearned interest income on January 1, 2014? 1. How much is the annual lease payment?
a. P10,125,000 b. P 11,725,000 c. P 9,625,000 a.P135,103.43b.P142,857.14c.P185,022.50d. P 195,641.12
3. What is the interest income for 2014? 2. How much unearned interest income should be recognized
a. P 2,082,500 b. P1,732,500 c. P 2,306,500 by Irene at the inception of the lease?
4. What is the cost of the helicopter that should be recognized by a. P 0 b.P 65,724 b. 120,000 d.P415,157.50
SOLO? 3. What is the amount of depreciation expense that Gabby
a. P 25,000,000 b. P 6,900,000 c. P 8,500,000 should record for 2014
5. What is the depreciation expense that should be recognized by a.P0 b.P135,103.43 c.P142,857.14 d.P185,022.50
SOLO in 2014? 4. The amount of interest expense that should be recorded
a. P 743,750 b. P 663,750 c. P 1,327,500 by Gabby for 2014 is
a.P76,070.15 b.P91,284.18 c.P100,000 d.P113,487
EXERCISE 2 Irene Co., a lessor of office equipment, purchased a new
equipment for P1,000,000 on December 31, 2013. The equipment EXERCISE 3 WALMART Corporation is in the business of leasing new
was delivered the same day to Gabby Co., the lessee sophisticated computer systems.As a lessor of computers, WALMART
The following information relates to the lease transaction purchased a new system on December 31, 2014.The system was
delivered the same day(by prior arrangement) to General Investment
Company, a lessee. The corporation accountant revealed the
following information relating to the lease transaction:
Cost of system to WALMART P550,000
Estimated useful life and lease term 8 years
Expected residual P40,000
value(unguaranteed)
Walmart implicit rate of interest 12%
General’s incremental borrowing rate 14%
Date of first lease payment Dec. 31, 2014
Additional information is as follows:
(a) At the end of the lease, the system will revert to
WALMART.
(b) General is aware of Walmart rate of implicit interest.
(c) The lease rental consists of equal annual payments.
Questions:
Based on the above and the result of your audit, answer the
following:
1. The annual lease payment under the lease is
a. P110,717 b. P95,950 c. P102,665 d. P91,664
2. The total financial revenue to be earned by the lessor over the
lease term is
a. P257,600 b. P183,312 c. P271,320 d. P335,736
3. The interest income to be recognized by the lessor in 2015 is
a. P53,680 b. P52,714 c. P54,486 d. P52,547
4. The total expenses related to the lease that will be recognized
by the lessee in 2015 is
a. P121,464 b. P130,792 c. P112,630 d. P119,278
5. The amount to be reported under current liabilities as liability
under finance lease as of December 31, 2015 is
a. P60,239 b. P48,611 c. P35,715 d. P64,963
EXERCISE 4 Kim Company’s accounts payable balance at December
31, 2010, was P2,200,000 before considering the following data:
• Goods shipped to Kim FOB shipping point on December 22,
2010, were lost in transit. The invoice cost of P40,000 was
not recorded by Kim. On January 27, 2011, Kim filed a P40,000 claim
against the common carrier.
• On December 27, 2010, a vendor authorized Kim to return, for
full credit, goods shipped and billed at P70,000 on December 3,
2010. The returned goods were shipped by Kim on December 28,
2010. A P70,000 credit memo was received and recorded by Kim on
January 5, 2011.
What amount should Kim report as accounts payable in its
December 3, 2011 statement of financial position?
A. P2,170,000 C. P2,230,000
B. P2,180,000 D. P2,280,000
EXERCISE 5
You were engaged to audit the financial statements of FELIX
Company for the year ended December 31, 2014. During the course
of the audit, you obtained the following information about the
Company’s liabilities outstanding at December 31, 2014:
1. At December 31, 2014, FELIX has an obligation to its suppliers
for the purchase of raw materials amounting to P128,500.
2. At the end of 2014, the Company was in breach of a loan
covenant in respect of a P600,000 long-term loan from a bank
that is otherwise repayable three years after. A review of
subsequent events disclosed that before the financial
statements were approved for issue, the bank formally agreed
not to demand early repayment of the loan.
3. On 1 January 2014 FELIX issued 1,000 of its P1,000 bonds for
P1,000,000 in a private transaction. On 1 January each year
interest at the fixed rate of 5 per cent per year is payable on
outstanding capital amount of the bonds. On 31 December each
year, the entity has a contractual obligation to redeem 100 of
the bonds at P1,000 per bond.
4. At December 31, 2014, the carrying amount of an entity’s
unfunded obligation for long-service leave was P100,000,
P40,000 of which employees are entitled to take as leave in the
twelve months following the end of the reporting period. The
balance of P60,000 is in respect of leave that employees are
entitled to take only after the end of the next annual reporting
period. The entity anticipates that only 75 per cent of its
 employees will take the leave due during the next annual and is payable in four equal installments of P700,000
reporting period. beginning April 1, 2015. The first principal and interest
payment was made on April 1, 2015.
Required: 2. The capitalized lease is for ten-year period beginning
1. Compute the amount of current liability as of December December 31, 2012. Equal annual payments of P100,000
31, 2014. are due December 31 of each year, and the 14% interest
a.P313,500 b. P903,500 c. P908,500 d. P303,500 rate implicit in the lease is known by MORGAN. The
2. Compute the amount of non- current liability as of present value at December 31, 2014, of the seven
December 31, 2014. remaining lease payments (due December 31, 2015,
a.P1,470,000 b.P1,460,000 c.P870,000 d.P860,000 through December 31, 2017) discounted at 14% was
P430,000.
EXERCISE 6 3. Deferred income taxes are provided in recognition of
On January 1, 2010, Mini Company purchased ten-year bonds with a timing differences between financial statement and
face value of P1,000,000 and a stated interest rate of 8% per year income tax reporting of depreciation. For the year ended
payable semiannually July 1 and January 1. The bonds were acquired December 31, 2015 depreciation per tax return exceeded
to yield 10%. book depreciation by P90,000. MORGAN’s effective
Present value factors are as follows: income rate for 2015 was 40%.
4. On July 1, 2015, MORGAN issued for P1,774,000,
Present value of 1 for 10 periods at 10% .386 P2,000,000 face amount of its 10%, P1,000 bonds. The
Present value of 1 for 20 periods at 5% .377 bonds were issued to yield 12%. The bonds are dated July
Present value of an annuity of 1 for 10 periods at 10% 6.145 1, 2015 and mature on July 1, 2020. Interest is payable
Present value of an annuity of 1 for 20 periods at 5% 12.462 annually on July 1. MORGAN uses the interest method to
amortize bond discount.
The purchase price of the bonds is
A. P1,124,620 C.P1,000,000 Compute for the following as of December 31, 2015:
B. P1,100,000 D.P 875,380 A B C D
1. LT liab 3,921,268 3,525,268 3,885,268 3,966,640
EXERCISE 7 2. CL of LT 1,081,622 754,372 745,372 700,000
Included in MORGAN Corporation’s liability account balances at 3.Acc Intpay 100,000 336,250 286,250 436,250
December 31, 2014 were the following: 4. Int Exp 401,450 547,690 543,890 507,890
Note payable, bank P2,800,000
LiabilityUnderFinanceLease 430,000 EXERCISE 8 On April 1, 2011, Adel Company began offering a new
Deferred income taxes 360,000 product for sale under a one-year warranty. Of the 50,000 units in
Transactions during 2015 and other information relating to inventory at April 1, 2011, 30,000 had been sold by June 30, 2011.
MORGAN’s liabilities were as follows: Based on its experience with similar products, Adel estimated that
1. The principal amount of the note payable is P2,800,000 the average warranty cost per unit sold would be P80. Actual
and bears interest at 15%. The note is dated April 1, 2014
warranty costs incurred from April through June 30, 2011 amounted that the entity will be required to pay damages of P2 million (the
to P700,000. amount sought by the claimant) and a 40 percent chance that the
At June 30, 2011, what amount should Adel report as estimated entity will be required to pay damages of P1 million (the amount
warranty liability? that was recently awarded by the same judge in a similar case).
A. P 900,000 C. P1,700,000 Other amounts of damages are unlikely.
B. P1,600,000 D. P3,300,000 The court is expected to rule in late December 2015. There is no
indication that the claimant will settle out of court.
EXERCISE 9 A 7 per cent risk adjustment factor to the cash flows is considered
JENNINGS Co. gives warranties at the time of sale to purchasers of its appropriate to reflect the uncertainties in the cash flow estimates.
product. Under the terms of the contract for sale JENNINGS Co., An appropriate discount rate is 10 per cent per year
undertakes to make good, by repair or replacement, manufacturing 1. What is the interest expense in 2014?
defects that become apparent within one year from the date of sale. a. P0 b. P1,000 c. P2,000 d. P3,000
On the basis of experience, it is probable (ie more likely than not) 2. The provision for warranty at December 31, 2014 is
that there will be some claims under the warranties. a. P105,000 b. P111,300 c. P100,000 d. P106,000
At 31 December 2013 JENNINGS Co., appropriately recognised 3. The warranty expense in 2014 is
P50,000 warranty provision. JENNINGS Co., incurred and charged a. P196,000 b. P186,000 c. P114,000 d. P194,000
P140,000 against the warranty provision in 2014. P80,000 of this
4. How much provision should be recognized from lawsuit?
related to warranties for sales made in 2014. The increase during
a. P1,500,000 b. P1,600,000 c. P2,000,000 d. P0
2014 in the discounted amount recognised as a provision at 31
December 2014 arising from the passage of time is P2,000.
At 31 December 2014 JENNINGS Co., estimated that it would incur
expenditures in 2015 to meet its warranty obligations at 31
Problem 1
December 2014, as follows:
In an effort to increase sales, Rofix Company began a sales
 5 per cent probability of P400,000
promotion campaign on June 30, 2002. Part of this promotion
 20 per cent probability of P200,000
included placing a special coupon in each package of candy bars
 50 per cent probability of P80,000
sold. Customers were able to redeem ten coupons for a Frisbee.
 25 per cent probability of P20,000.
Each premium costs Rofix P1.50. Rofix estimated that 60 percent of
Assume for simplicity that the 2015 cash flows for warranty repairs
the coupons issued will be redeemed. For the six months ended
and replacements take place, on average, on 30 June 2015. An
December 31, 2002, the following information is available:
appropriate discount rate is 10 per cent per year. An appropriate risk
Packages of candy bars sold 3,200,000
adjustment factor to reflect the uncertainties in the cash flow
Premiums purchased 172,000
estimates is an increment of 6 per cent to the probability-weighted
Coupons redeemed 1,425,000
expected cash flows.
What is the estimated liability for premium claims outstanding at
JENNINGS Co., is also the defendant in a breach of patent lawsuit. Its
December 31, 2002?
lawyers believe there is a 70 per cent chance that JENNINGS Co., will
successfully defend the case. However, if the court rules in favor of
Problem 2
the claimant, the lawyers believe that there is a 60 per cent chance
Monumental Studios, in an effort to promote the release of their
new movie "Ninjas from Space," began a national sales promotion
campaign. Two coupons from specially marked boxes (one coupon in
each box) of "Sugar Charms" cereal are redeemable for one ticket to
the show. Tickets cost Monumental P1.50 each. Monumental
estimates that 40 percent of the coupons will be redeemed. At the
end of 2002, the following information is available:

Boxes of cereal sold 640,000

Movie tickets purchased by Monumental 140,000
Coupons redeemed 250,000

What is the estimated liability for premium claims outstanding at

December 31, 2002?

Problem 3
On March 1, 2002, Pyne Furniture Co. issued P700,000 of 10 percent
bonds to yield 8 percent. Interest is payable semiannually on
February 28 and August 31. The bonds mature in ten years. Pyne
Furniture Co. is a calendar-year corporation.

(1) Determine the issue price of the bonds. Show your

computations.
(2) Prepare an amortization table through the first two interest
periods using the effective-interest method.
(3) Prepare the journal entries to record bond-related transactions
as of the following dates:
(a) March 1, 2002
(b) August 31, 2002
(c) December 31, 2002