PROBLEM NO.

7
In connection with your audit of Ginebra Corporation’s financial statements for the year
2005, you noted the following liability account balances as of December 31, 2004:
Note payable, bank P 5,600,000
Liability under finance lease 430,000
Deferred income taxes 700,000
Transactions during 2005 and other information relating to Ginebra’s liabilities were as
follows:
a. The principal amount of the note payable is P5,600,000 and bears interest at 12%.
The note is dated April 1, 2004 and is payable in four equal annual installments of
P1,400,000 beginning April 1, 2005. The first principal and interest payment was
made on April 1, 2005.
b. The capitalized lease is for a ten-year period beginning December 31, 2002.
Equal annual payments of P100,000 are due on December 31 of each year,
and the 14% interest rate implicit in the lease known by Ginebra. The present
value at December 31, 2004 of the seven remaining lease payments (due
December 31, 2005 through December 31, 2011) discounted at 14% was
P430,000.
c. Deferred income taxes are provided in recognition of timing differences
between financial and income tax reporting of depreciation. For the year ended
December 31, 2005, depreciation per tax return exceeded book depreciation
by P312,500. Ginebra’s effective income tax rate for 2004 was 32%.
d. On July 1, 2005, Ginebra issued for P1,774,000, P2,000,000 face amount of
its 10%, P1,000 bonds. The Bonds were issued to yield 12%. The bonds are
dated July 1, 2004 and will mature on July 1, 2014. Interest is payable annually
on July 1. Ginebra uses the interest method to amortize bond discount.
QUESTIONS:
Based on the above and the result of your audit, determine the following:
1. Liability under finance lease as of December 31, 2005
a. P381,600 b. P390,200 c. P344,828 d. P330,000
2. Total noncurrent liabilities as of December 31, 2005
a. P5,610,440 b. P5,770,640 c. P5,931,328 d. P5,725,268
3. Current portion of long-term liabilities as of December 31, 2005
a. P1,445,372 b. P1,400,000 c. P1,500,000 d. P1,446,576
4. Accrued interest payable as of December 31, 2005
a. P484,440 b. P432,628 c. P532,628 d. P478,000
5. Total interest expense for the year 2005
a. P652,440 b. P707,068 c. P712,640 d. P699,760