BONDS PAYABLE

Problem
On April 1, 2018, Greg Company issued at 99 plus accrued interest, 2,000 of 8% P1,000 face
value bonds. The bonds are dated January 1, 2018, mature on January 1, 2028, and pay
interest on January 1 and July 1. The entity paid bond issue cost of P70,000.
From the bond issuance, what is the net cash received?
a. 2,020,000
b. 1,980,000
c. 1,950,000
d. 1,910,000

Problem
On March 1, 2018, Cain Company issued at 103 plus accrued interest 4,000 of 9%, P1,000
face value bonds. The bonds are dated January 1, 2018 and mature on January 1, 2028.
Interest is payable semiannually on January 1 and July 1. The entity paid bond issue cost of
P200,000.
What is the net cash received from the bond issuance?
a. 4,320,000
b. 4,180,000
c. 4,120,000
d. 3,980,000

Problem
On November 1, 2018, Mason Company issued P8,000,000 of 10-year, 8% term bonds
dated October 1, 2018. The bonds were sold to yield 10% with total proceeds of P7,000,000
plus accrued interest. Interest is paid every April 1 and October 1.
What amount should be reported as accrued interest payable on December 31, 2018?
a. 175,000
b. 160,000
c. 116,667
d. 106,667

Problem
On January 31, 2018, Beau Company issued P3,000,000 maturity value, 12% bonds for
P3,000,000 cash. The bonds are dated December 31, 2017 and mature on December 31,
2027. Interest is payable semiannually on June 30 and December 31.
What amount of accrued interest payable should be reported on September 30, 2018?
a. 270,000
b. 240,000
c. 180,000
d. 90,000

Problem
On June 30, 2018, Huff Company issued at 99, five thousand of 8%, P1,000 face value
bonds.
The bonds were issued through an underwriter to whom the entity paid bond issue cost of
P425,000.
On June 30, 2018, what amount should be reported as bond liability?
a. 4,525,000
b. 4,950,000
c. 5,000,000
d. 4,575,000

Problem
On July 1, 2018, Carr Company issued at 104, five thousand of 10% P1,000 face value
bonds. The bonds were issued through an underwriter to whom the entity paid bond issue
cost of P125,000.
On July 1, 2018, what amount should be reported as bond liability?
a. 4,875,000
b. 5,075,000
c. 5,200,000
d. 5,325,000

Problem
Aye Company is authorized to issue P5,000,000 of 6%, 10-year bonds dated July 1, 2018
with interest payments on June 30 and December 31. When the bonds are issued on
November, 1, 2018, the entity received cash of P5,150,000 including accrued interest.
What is the discount or premium on bonds payable?
a. 150,000 bond premium
b. 50,000 bond premium
c. 150,000 bond discount
d. No bond premium and discount

EFFECTIVE INTEREST METHOD

Problem
On July 1, 2018, Tara Company issued 4,000 of 8%, P1,000 face value bonds payable for
P3,504,000. The bonds were issued to yield 10%.
The bonds are dated July 1, 2018 and mature on July 1, 2028. Interest is payable
semiannually on January 1 and July 1.
Using the effective interest method, what amount of the bond discount should be
amortized for the six months ended December 31, 2018?
a. 30,400
b. 24,800
c. 19,840
d. 15,200

Problem
On January 1, 2018, Carrow Company issued 10% bonds in the face amount of P1,000,000
that mature on January 1, 2028.
The bonds were issued for P886,000 to yield 12%, resulting in bond discount of P114,000.
The entity used the interest method of amortizing bond discount. Interest is payable on
January 1 and July 1.
For the year ended December 31, 2018, what amount should be reported as bond interest
expense?
a. 106,510
b. 100,000
c. 53,160
d. 50,000

Problem
On January 1, 2018, West Company issued 9% bonds in the face amount of P5,000,000,
which mature on January 1, 2028. The bonds were issued for P4,695,000 to yield 10%.
Interest is payable annually on December 31. The entity used the interest method of
amortizing bond discount.
1. What is the interest expense for 2018?
a. 450,000
b. 469,500
c. 422,550
d. 500,000
2. On December 31, 2018, what is the carrying amount of the bonds payable?
a. 4,695,000
b. 4,714,500
c. 4,704,750
d. 5,000,000

OPERATING LEASE – LESSEE

Problem
On December 1, 2018, Tell Company leased office space for five years at a monthly rental of
P600,000. On the same date, the entity paid the lessor the following amounts:
Bonus to obtain lease 300,000
First month’s rent 600,000
Last month’s rent 600,000
Security deposit refundable at lease expiration 800,000
Installation of new walls and offices 3,600,000

What total amount of the expenses relating to the utilization of the office space should be
reported for 2018?
a. 1,400,000
b. 1,200,000
c. 665,000
d. 600,000

Problem
On January 1, 2018, Park Company signed a 10-year operating lease for office space at
P960,000 per year.
The lease included a provision for additional rent of 5% of annual company sales in excess
of P5,000,000.
The sales for the year ended December 31, 2018 totaled P6,000,000.
Upon execution of the lease, the entity paid P240,000 as a bonus for the lease.
What is the rent expense for the year ended December 31, 2018?
a. 984,000
b. 1,010,000
c. 1,034,000
d. 1,250,000

Problem
As an inducement to enter a lease, Aris Company, a lessor, granted Hompson Company, a
lessee, nine months of free rent under a five-year operating lease.
The lease was effective on July 1, 2018 and provided for monthly rental of P100,000 to
begin April 1, 2019.
In the income statement for the year ended June 30, 2019, what amount should be reported
as rent expense?
a. 1,020,000
b. 900,000
c. 300,000
d. 255,000
OPERATING LEASE – LESSOR
Problem
On January 1, 2018, Wren Company leased a building to Brill under an operating lease for
ten years at P500,000 per year, payable the first day of each lease year. Wren paid
P150,000 to a real estate broker as a finder fee.
The building is depreciated P120,000 per year. Wren incurred insurance and property tax
expense totaling P90,00 for the year.
What is the net rent income for 2018?
a. 275,000
b. 290,000
c. 350,000
d. 365,000
Problem
Rapp Company leased a new machine to Lake Company on January 1, 2018. The lease
expires on January 1, 2023. The annual rental is P900,000.
Additionally, on January 1, 2018, Lake paid P500,000 to Rapp as a lease bonus and
P250,000 as a security deposit to be refunded upon expiration of the lease.
What amount of rental revenue should be reported for 2018?
a. 1,400,000
b. 1,250,000
c. 1,000,000
d. 900,000

Problem
On January 1, 2018, Glen Company leased a building to Dix Company for a ten-year term at
an annual rental of P500,000.
At inception of the lease, Glen received P2,000,000 covering the first two years’ rent of
P1,000,000 and a security deposit of P1,000,000.
This deposit will not be returned to Dix upon expiration of the lease but will be applied to
payment of rent for the last two years of the lease.
1. What portion of the P2,000,000 should be reported as current liability on December 31,
2018?
a. 1,500,000
b. 1,000,000
c. 500,000
d. 0
2. What portion of the P2,000,000 should be reported as noncurrent liability on Decemebr
31, 2018?
a. 2,000,000
b. 1,000,000
c. 1,500,000
d. 0
FINANCE LEASE – LESSEE
Problem
Elysee Company leased a machine with a fair value of P1,650,000 for a period of 5 years
under a finance lease. The initial direct costs included in negotiating the lease amounted to
P12,500.
The present value of the minimum lease payments discounted at the rate implicit in the
lease is P1,584,000.
At what amount should the machine be recognized initially in the financial statement?
a. 1,650,000
b. 1,596,500
c. 1,662,500
d. 1,584,000
FINANCE LEASE LIABILITY
Problem
On January 1, 2018, Babson Company leased two automobiles for executive use. The lease
requires Babson to make five annual payments of P1,300,000 beginning January 1, 2018. At
the end of the lease term, December 31, 2022, the entity guaranteed the residual value of
the automobiles at P1,000,000. The lease qualifies as a finance lease. The interest rate
implicit in the lease is 9%. Present value factors for the 9% rate implicit in the lease are as
follows:
For an annuity due with 5 payments (in advance) 4,240
For an ordinary annuity with 5 payments 3,890
Present value of 1 for 5 periods 0.650

What is the finance lease liability immediately after the first required payment?
a. 4,862,000
b. 4,407,000
c. 3,562,000
d. 3,107,000
SALES TYPE LEASE – LESSOR
Problem
Howe Company leased equipment to Kew Company on January 1, 2018, for an eight-year
period expiring December 31, 2025. Equal payments under the lease are P500,000 and are
due on January 1 of each year. The first payment was made on January 1, 2018.
The selling price of the equipment is P2,900,000 and the carrying amount is P2,000,000.
The lease is appropriately accounted for as a sales type lease.
The present value of the lease payments at an implicit interest rate of 12% is P2,780,000.
What amount of gross profit on sale should be reported for 2018?
a. 900,000
b. 780,000
c. 240,000
d. 333,600

Problem
Meg Company leased equipment from Wee Company on July 1, 2018 for an eight-year
period expiring June 30, 2026.
Equal payments under the lease are P600,000 and are due on July 1 of each year. The first
payment was made on July 1, 2018. The rate of interest contemplated by Meg and Wee is
10%.
The cash selling price of the equipment is P3,520,000 and the carrying amount is
P2,800,000. The lease is appropriately recorded as a sales type lease.
1. What amount of profit on the sale should be recorded for the year ended December 31,
2018?
a. 600,000
b. 720,000
c. 360,000
d. 300,000
2. What amount of interest revenue should be recorded for the year ended December 31,
2018?
a. 292,000
b. 146,000
c. 352,000
d. 176,000

DIRECT FINANCING LEASE – LESSOR

Problem
Camia Company is in the business of leasing new sophisticated equipment. As lessor, the
entity expects a 12% return.
At the end of the lease term, the equipment will revert to Camia Company.
On January 1, 2018, an equipment is leased to another entity under a direct financing lease.
Cost of equipment to Camia 5,500,000
Residual value - unguaranteed 400,000
 Annual rental payable in advance 959,500
Useful life and lease term 8 years
Implicit interest rate 12%
First lease payment January 1, 2018

1. What is the gross investment in the lease?

a. 7,676,000
b. 8,076,000
c. 5,500,000
d. 5,900,000
2. What is the unearned interest income on January 1, 2018?
a. 2,576,000
b. 2,176,000
c. 1,776,000
d. 1,616,500
3. What is the interest income for 2018?
a. 322,000
b. 544,860
c. 660,000
d. 496,860

Problem
On January 1, 2018, Glade Company leased computer equipment to Blass Company under a
direct financing lease. The equipment has no residual value at the end of the lease and the
lease does not contain bargain purchase option.
The entity wishes to earn 8% interest on a 5-year lease of equipment with a cost of
P3,234,000. The present value of an annuity due of 1 at 8% for 5 years is 4.312.
1. What is the total interest revenue that Glade will earn over the lease term?
a. 1,293,600
b. 1,394,500
c. 516,000
d. 750,000
2. What is the interest revenue to be reported by Glade for 2018?
a. 258,720
b. 198,720
c. 103,200
d. 646,800
 SALE AND LEASEBACK
Problem
On December 31, 2018, Bain Company sold a machine with 12-year useful life to another
entity and simultaneously leased it back for one year.
Sale price 360,000
Carrying amount 330,000
Present value of reasonable lease rentals (P3,000 for 12 months @ 12%) 34,100

What amount of revenue from the sale should be reported in 2018?

a. 34,100
b. 30,000
c. 4,100
d. 0

Problem
On December 31, 2018, Thunder Company sold land with a cost of P1,500,000 to Victoria
Company for P2,300,000 when the land’s fair value was P2,150,000.
Thunder Company immediately entered into a cancelable lease agreement to use the land
for 2 years at an annual rental of P20,000.
1. What amount of profit should Thunder record on the sale of land for 2018?
a. 150,000
b. 800,000
c. 650,000
d. 725,000
2. What amount should be recognized as deferred gain on December 31, 2018?
a. 800,000
b. 650,000
c. 150,000
d. 400,000

POSTEMPLOYMENT BENEFITS
Problem
Silay Company has established a defined benefit pension plan for the employees. Annual
payments under the pension plan are equal to 3% of an employee’s highest lifetime salary
multiplied by the number of years with the entity. An employee’s salary in 2018 was
P500,000.
The employee is expected to retire in 10 years, and the salary increases are expected to
average 4% per year during that period. On December 31, 2018, the employee has worked
for 15 years. The future value of 1 at 4% for 10 periods is 1.48.
What is the annual pension payment that should be used in computing the projected
benefit obligation on December 31, 2018?
a. 555,000
b. 375,000
c. 333,000
d. 225,000

ACCOUNTING FOR INCOME TAX

Basic Problems
Problem
Hilton Company reported pretax financial income of P6,200,000 for the current year.
Included in other income was P200,000 of interest revenue from government bonds held
by the entity. The income statement included depreciation expense of P500,000 for a
machine with cost of P3,000,000. The income tax return reported P600,000 as depreciation
on the machine. The enacted tax rate is 30% for the current year and future years.
What is the current tax expense for the current year?
a. 1,860,000
b. 1,800,000
c. 1,770,000
d. 1,830,000

Problem
Tantrum Company began operations at the beginning of the current year. At the end of the
first year of operations, the entity reported P6,000,000 income before income tax in the
income statement but only P5,100,000 taxable income in the tax return.
Analysis of the P900,000 difference revealed that P500,000 was a permanent difference
and P400,000 was a temporary tax liability difference related to a current asset. The
enacted tax rate for the current year and future years is 30%.
1. What is the current tax expense?
 a. 1,800,000
b. 1,530,000
c. 1,380,000
d. 1,680,000
2. What is the total income tax expense to be reported in the income statement for the
current year?
a. 1,800,000
b. 1,530,000
c. 1,650,000
d. 1,950,000

Problem
In 2018, Tiger Company reported pretax financial income of P5,000,000. Included in the
pretax financial income are P900,000 of nontaxable life insurance proceeds received as a
result of the death of an officer, P1,200,000 of estimated warranty expense accrued on
December 31, 2018, and P200,000 of life insurance premiums for a policy for an officer.
No income tax was previously paid during the year and the income tax rate is 30%.
1. What is the income tax payable on December 31, 2018?
a. 1,500,000
b. 1,230,000
c. 1,290,000
d. 1,650,000
2. What is the total tax expense?
a. 1,500,000
b. 1,290,000
c. 1,230,000
d. 1,560,000

Problem
Viking Company reported in the income statement for the year ended December 31, 2018
pretax income of P1,000,000.
Tax return Accounting record
Rent income 70,000 120,000
Depreciation 280,000 220,000
Premiums on officers’ life insurance 90,000
Income tax rate 30%
1. What is the current provision for income tax for 2018?
a. 360,000
b. 300,000
c. 294,000
d. 327,000
2. What is the total tax expense?
a. 300,000
b. 273,000
c. 267,000
d. 327,000

Problem
Pine Company reported pretax financial income of P800,000 for the year ended December
31, 2018.
In the computation of income taxes, the following data were considered:
Nontaxable gain 350,000
Depreciation deducted for tax purposes in excess of depreciation deducted 50,000
for book purposes
Estimated tax payment in 2018 70,000
Enacted tax rate 30%

1. What amount should be reported as current tax liability on December 31, 2018?
a. 135,000
b. 120,000
c. 50,000
d. 65,000
2. What is the total income tax expense?
a. 120,000
b. 135,000
c. 240,000
d. 85,000

Problem
Huskie Company reported in the income statement for the current year pretax income of
P400,000.
The following items are treated differently per tax return and per book:
Tax return Book
 Royalty income 20,000 40,000
Depreciation expense 125,000 100,000
Payment of a penalty None 15,000
Income tax rate 30%

1. What amount should be reported as current portion of income tax expense?

a. 111,000
b. 106,500
c. 138,000
d. 114,000
2. What is the total tax expense?
a. 120,000
b. 124,500
c. 115,500
d. 117,000
SHAREHOLDERS’ EQUITY
Problem
Mara Company provided the following data at year-end:
Authorized share capital 5,000,000
Unissued share capital 2,000,000
Subscribed share capital 1,000,000
Subscription receivable 400,000
Share premium 500,000
Retained earnings unappropriated 600,000
Retained earnings appropriated 300,000
Revaluation surplus 200,000
Treasury shares, at cost 100,000

What total amount should be reported as shareholders’ equity?

a. 5,100,000
b. 5,500,000
c. 4,900,000
d. 4,800,000

Problem
Glenn Company provided the following information at year-end:
Preference share capital, P100 par 2,300,000
 Share premium – preference share 805,000
Ordinary share capital, P10 par 5,250,000
Share premium – ordinary share 2,750,000
Subscribed ordinary share capital 50,000
Retained earnings 1,900,000
Note payable 4,000,000
Subscription receivable – ordinary share 400,000

What is the amount of legal capital?

a. 7,550,000
b. 7,600,000
c. 13,055,000
d. 11,150,000

Problem
East Company issued 1,000 shares with P5 par to Howe as compensation for 1,000 hours of
legal services performed.
Howe usually bills P160 per hour for legal services. On the date of issuance, the share was
trading on a public exchange at P140.
By what amount should the share premium account increase as a result of the transaction?
a. 135,000
b. 140,000
c. 155,000
d. 160,000

Problem
At the beginning of the current year, Ria company issued 10,000 ordinary shares of P20 par
value and 20,000 convertible preference shares of P20 par value for a total of P800,000.
At this date, the ordinary share was selling for P36, and the convertible preference share
was selling for P27.
1. What amount of the proceeds should be allocated to the preference shares?
a. 600,000
b. 540,000
c. 480,000
d. 440,000
2. What amount of the proceeds should be allocated to the ordinary shares?
 a. 360,000
b. 200,000
c. 320,000
d. 400,000
3. What is the share premium from the issuance of preference shares?
a. 180,000
b. 100,000
c. 80,000
d. 0
4. What is the share premium from the issuance of ordinary shares?
a. 200,000
b. 160,000
c. 120,000
d. 0

Problem
At the beginning of the current year, Cove Company, a closely held entity, issued 6% bonds
with a maturity value of P6,000,000, together with 10,000 ordinary shares of P50 par
value, for a combined cash amount of P11,000,000.
If issued separately, the bonds would have sold for P4,000,000 on an 8% yield to maturity
basis.
1. What amount of the proceeds should be allocated to the ordinary shares?
a. 4,000,000
b. 7,000,000
c. 8,000,000
d. 5,000,000
2. What amount should be reported for share premium on the issuance of the ordinary
shares?
a. 7,500,000
b. 6,500,000
c. 5,500,000
d. 4,500,000

Problem
At the beginning of the current year, Ashe Company was organized with authorized capital
of 100,000 shares of P200 par value.
January 10 Issued 25,000 shares at P220 a share.
March 25 Issued 1,000 shares for legal services when the fair value was P240 a
share.
September 30 Issued 5,000 shares for a tract of land when the fair value was P260 a
share.
1. What amount should be reported as share capital?
a. 7,640,000
b. 6,200,000
c. 7,440,000
d. 5,000,000
2. What amount should be reported for share premium?
a. 840,000
b. 800,000
c. 540,000
d. 500,000

Problem
Negros Company was incorporated on January 1, 2018 with the following authorized
capitalization:
Ordinary share capital, 200,000 shares, no par, P100 stated value 20,000,000
Preference share capital, 200,000 shares, 10% fixed rate, P50 par value 10,000,000

During 2018, the entity issued 150,000 ordinary shares for a total of P18,000,000 and
50,000 preference shares at P60 per share. In addition, on December 15, 2018,
subscriptions for 20,000 preference shares were taken at a purchase price of P100.
These subscribed shares were paid for on January 15, 2019. Net income for 2018 was
P5,000,000.
What amount should be reported as total contributed capital on December 31, 2018?
a. 28,000,000
b. 21,000,000
c. 23,000,000
d. 26,000,000

Problem
In 2018, Orlando Company issued for P105 per share, 8,000 convertible preference
shares of P100 par value. One preference share can be converted into three ordinary
shares of P25 par value at the option of the preference shareholder.
In August 2018, all of the preference shares were converted into ordinary shares. The
market value of the ordinary share at the date of the conversion was P30.
What total amount should be credited to share premium as a result of the issuance of
the preference shares and their subsequent conversion into ordinary shares?
a. 80,000
b. 120,000
c. 200,000
d. 240,000

Problem
During 2018, Hyatt Company issued P110 per share, 15,000 convertible preference
shares of P100 par value. One preference share may be converted into three ordinary
shares of P25 par value at the option of the preference shareholder.
On December 31, 2018, all of the preference shares were converted into ordinary
shares. The market value of the ordinary share at the conversion date was P40.
1. What amount should be credited to ordinary share capital as a result of conversion?
a. 1,125,000
b. 1,500,000*
c. 1,650,000
d. 1,800,000
2. What amount should be credited to share premium as a result of conversion?
a. 375,000
b. 525,000
c. 150,000
d. 0

SHAREHOLDERS’ EQUITY
Treasury shares, outstanding shares, share split

Problem
Day Company held 10,000 shares of P10 par value as treasury reacquired for P120,000.
On December 31, 2018, the entity reissued all 10,000 shares for P190,000.
What is credited for the excess of the reissue price over the cost of treasury shares?
a. Share capital P100,000
b. Retained earnings P70,000
c. Gain on sale of investment P70,000
d. Share premium P70,000

Problem
At the beginning of current year, Hanna Company reported the following shareholders’
equity:
Share capital, P10 par, outstanding 225,000 shares 2,250,000
Share premium 900,000
Retained earnings 2,190,000

During the current year, the entity had the following share transactions:
 Acquired 6,000 treasury shares for P270,000.
 Sold 3,600 treasury shares at P50 a share.
 Sold the remaining treasury shares at P41 per share.
What is the total amount of share premium at year-end?
a. 891,600
b. 870,000
c. 908,400
d. 927,600

Problem
In 2017, Rona Company issued 50,000 shares of P10 par value for P100 per share.
In 2018, the entity reacquired 2,000 shares at P150 per share and immediately canceled
these 2,000 shares.
1. In connection with the retirement of shares, what amount should be debited to
share premium?
a. 20,000
b. 100,000
c. 180,000
d. 280,000
2. In connection with the retirement of shares, what amount should be debited to
retained earnings?
a. 280,000
b. 180,000
 c. 100,000
d. 0

Problem
Vicar Company was organized on January 1, 2018 with 100,000 authorized shares of
P100 par value. On January 5, the entity issued 75,000 shares at P140 per share.
On December 31, the entity purchased 5,000 shares at P110 per share. The entity used
the par value method to record the purchase of the treasury shares.
1. What is the balance of the share premium from the original issuance of shares on
December 31, 2018?
a. 3,000,000
b. 2,800,000
c. 4,000,000
d. 3,800,000
2. What is the balance of the share premium from treasury shares on December 31,
2018?
a. 200,000
b. 150,000
c. 50,000
d. 0

Problem
During the current year, Line Company received a donation of 2,000 shares with P50
par value from a shareholder. On that date, the share market value was P350. The
shares were originally issued for P250 per share.
What is the decrease in shareholders’ equity as a result of the donation?
a. 700,000
b. 500,000
c. 200,000
d. 0

Problem
During the current year, Alto Company declared a 1 for 5 reverse share split, when the
market value of share was P100.
Prior to the split, the entity had 100,000 shares of P10 par value issued and
outstanding.
After the split, what is the par value of the share?
a. 10
b. 20
c. 50*
d. 2

Problem
The shareholders of Dorr Company approved a two-for-one split of the entity’s share
capital, and an increase in authorized shares from 100,000 shares with P20 par value to
200,000 shares with P10 par value.
The shareholders’ equity accounts immediately before the split shares were share
capital P1,000,000, share premium P150,000 and retained earnings P1,350,000.
1. What is the balance of the share premium after the share split is effected?
a. 1,150,000
b. 2,300,000
c. 150,000
d. 300,000
2. What is the balance of the retained earnings after the share split is effected?
a. 1,350,000
b. 2,700,000
c. 1,500,000
d. 2,350,000

Problem
Beck Company issued 200,000 ordinary shares when it began operations in 2017 and
issued an additional 100,000 shares in 2018.
The entity also issued preference shares convertible into 100,000 ordinary shares. In
2018, the entity purchased 75,000 ordinary shares to be held in treasury.
On December 31, 2018, how many ordinary shares were outstanding?
a. 400,000
b. 325,000
c. 300,000
d. 225,000
Problem
Seco Company was incorporated on January 1, 2018.
Jan. 2 Number of shares authorized 80,000
Feb. 1 Number of shares issued 60,000
July 1 Number of shares reacquired but not canceled 5,000
Dec. 1 Two-for-one share split

On December 31, 2018, what is the number of shares outstanding?

a. 150,000
b. 120,000
c. 115,000
d. 110,000

Problem
On January 1, 2018, Vey Company had 125,000 shares issued which included 25,000
shares held as treasury.
January 1 through October 31 – 13,000 treasury shares were distributed to officers as
part of a share compensation plan.
November 31 – A 3-for-1 share split took effect.
December 31 – The entity purchased 5,000 of its own shares to discourage an
unfriendly takeover. These shares were not retired.
1. On December 31, 2018, how many shares were issued?
a. 375,000
b. 300,000
c. 450,000
d. 125,000
2. On December 31, 2018, how many shares were outstanding?
a. 334,000
b. 324,000
c. 300,000
d. 285,000

Problem
 Nest Company issued 100,000 ordinary shares. Of these, 5,000 shares were held as
treasury on January 1, 2018. During 2018, transactions were as follows:
May 1 1,000 shares of treasury were sold.
Aug. 1 10,000 unissued shares were sold.
Nov. 15 A 2-for-1 share split took effect.
1. On December 31, 2018, how many shares were issued?
a. 220,000*
b. 110,000
c. 222,000
d. 106,000
2. On December 31, 2018, how many shares were outstanding?
a. 212,000*
b. 216,000
c. 214,000
d. 218,000
TOMLIN
COMMON STOCKHOLDERS RECEIVE – 78,000
Preferred – 63,000
Preferred stock is also – 90,000

RETAINED EARNINGS
Problem
East Company had sufficient retained earnings in 2018 as a basis for dividends but was
temporarily short of cash.
The entity declared a dividend of P1,000,000 on April 1, 2018, and issued promissory
notes to the shareholders in lieu of cash.
The notes, which were dated April 1, 2018, had a maturity date of March 31, 2019 and a
10% interest rate.
How should the scrip dividend and related interest be accounted for?
a. Debit retained earnings P1,100,000 on April 1, 2018.
b. Debit retained earnings P1,100,000 on March 31, 2019.
c. Debit retained earnings P1,000,000 on April 1, 2018 and debit interest expense
P100,000 on March 31, 2019.
d. Debit retained earnings P1,000,000 on April 1, 2018 and debit interest expense
P75,000 on December 31, 2018.
Vittly – 4,500,000
Diamond – 218,000
Gonzales – 1,242,500
Golden – 80,000 decrease
Baden – 162,000
Treasury shares – issued but not outstanding
Problem
Cyan Company issued 200,000 shares of P5 par value of P10 per share. On January 1,
2018, the retained earnings amounted to P3,000,000.
In March 2018, the entity reacquired 50,000 treasury shares at P20 per share. In June
2018, the entity sold 10,000 of these shares to corporate officers for P25 per share. The
entity used the cost method to record treasury shares.
Net income for the year ended December 31, 2018 was P600,000.
1. What is the total amount of retained earnings at year-end?
a. 4,400,000
b. 2,200,000
c. 3,600,000
d. 3,400,000
2. What amount should be reported as unappropriated retained earnings at year-end?
a. 3,600,000
b. 3,650,000
c. 3,750,000
d. 2,800,000
Vietti 100% stock dividend capital stock – 6,000,000
Problem
Lauretta Company reported the following shareholders’ equity on January 1, 2018:
Share capital 1,500,000
Share premium 3,000,000
Retained earnings 2,000,000

The entity had 400,000 authorized shares of P5 par value, of which 300,000 shares
were issued and outstanding.
On March 1, 2018, the entity acquired 50,000 shares for P10 per share to be held as
treasury. The shares were originally issued at P8 per share. The entity used the cost
method to account for treasury shares.
On December 31, 2018, the entity declared and distributed a property dividend of
inventory. The inventory had a P750,000 carrying amount and a P1,000,000 fair value.
The net income for 2018 was P2,500,000.
What amount should be reported as unappropriated retained earnings on December 31,
2018?
a. 3,500,000
b. 3,250,000
c. 3,350,000
d. 3,000,000

Problem
Global Company, a real estate developer, is owned by five founding shareholders.
On December 31, 2018, the entity declared a property dividend of a “one-bedroom flat”
for each shareholder. The property dividend is payable on January 31, 2019.
On December 31, 2018, the carrying amount of a one-bedroom flat is P1,000,000 and
the fair value is P1,500,000.
However, the fair value is P1,800,000 on December 31, 2018 and P1,900,000 on
January 31, 2018.
1. What is the dividend payable on December 1, 2018?
a. 5,000,000
b. 7,500,000
c. 9,000,000
d. 0
2. What is the dividend payable on December 31, 2018?
a. 5,000,000
b. 7,500,000
c. 9,000,000
d. 0
3. What amount of gain is included in profit or loss as a result of the settlement of the
property dividend on January 31, 2019?
a. 2,500,000
b. 4,000,000
c. 2,000,000
d. 4,500,000
Problem
On November 1, 2018, Grande Company declared a property dividend of equipment
payable on March 1, 2019.
The carrying amount of the equipment is P3,000,000 and the fair value is P2,500,000 on
November 1, 2018.
However, the fair value less cost to distribute the equipment is P2,200,000 on December
31, 2018 and P2,000,000 on March 1, 2019.
1. What is the dividend payable on December 31, 2018?
a. 2,500,000
b. 2,200,000
c. 3,000,000
d. 0
2. What is the measurement of the equipment on December 31, 2018?
a. 2,500,000
b. 2,200,000
c. 3,000,000
d. 2,000,000
3. What amount of loss on distribution of property dividend is recognized on March 1,
2019?
a. 300,000
b. 200,000
c. 500,000
d. 0

Problem

SHARE-BASED COMPENSATION
Share Options

Problem
Irish Company granted 10,000 share options to each of its five directors on January 1, 2018.
The options vest on January 1, 2022. The fair value of each option on January 1, 2018 is P50
and it is anticipated that all of the share options will vest on January 1, 2022.
What amount should be reported as increase in expense and equity for the year-ended
December 31, 2018?
a. 750,000
b. 500,000
c. 625,000
d. 125,000

Problem
In connection with a share option plan for the benefit of key employees, Ward Company
intends to distribute treasury shares when the options are exercised. These shares were
bought in 2017 at P42 per share. The par value per share is P30.
On January 1, 2018, the entity granted share options of 100,000 shares at an option price of
P38 per share as additional compensation for services to be rendered over the next three
years.
The options are exercisable during a 2-year period beginning January 1, 2021, by grantee
still employed by the entity.
Market price of share was P47 at the grant date.
The fair value of the share option is P12 on grant date. All share options were exercised
during 2021.
1. What amount should be reported as compensation expense for 2018?
a. 600,000
b. 400,000
c. 300,000
d. 450,000
2. What amount should be recognized as share premium upon exercise of the share
options in 2021?
a. 2,000,000
b. 1,200,000
c. 800,000
d. 0

Problem
On January 1, 2018, Oak Company granted share options to certain key employees as
additional compensation. The options were for 100,000 ordinary shares of P10 par value at
an option price of P15 per share.
Market price of this share on January 1, 2018 was P20. The fair value of each share option
on January 1, 2018 is P8.
The options were exercisable beginning January 1, 2018 and expire on December 31, 2019.
On December 31, 2018, all share options were exercised.
1. What amount of compensation expense should be reported in 2018?
a. 800,000
b. 500,000
c. 200,000
d. 125,000
2. What amount should be recognized as share premium upon exercise of the share
options on December 31, 2018?
a. 1,300,000
b. 1,000,000
c. 500,000
d. 900,000

Problem
On June 30, 2018, Newman Company granted compensatory share options for 30,000 P20
par value ordinary shares to certain key employees. The market price of the share on that
date was P36 and the option price was P30. The Black-Scholes option pricing model
measured the total compensation expense to be P5,400,000.
The options are exercisable beginning January 1, 2021, provided the key employees are
still in entity’s employ at the time the options are exercised. The options expire on June 30,
2022.
On January 15, 2021, when the market price of the share was P42, all 30,000 options were
exercised.
1. What is the compensation expense for 2020?
a. 2,160,000
b. 1,080,000
c. 5,400,000
d. 2,700,000
2. What is the share premium upon exercise of share options in 2021?
a. 5,400,000
b. 5,700,000
c. 4,620,000
d. 300,000
Problem
On January 1, 2018, Kline Company granted Morgan, the president, compensatory share
options to buy 10,000 ordinary shares of P10 par value.
The options call for a price of P20 per share and are exercisable in 3 years following the
grant date. Morgan exercised the options on December 31, 2018.
The market price of the share was P60 on January 1, 2018, and P70 on December 31, 2018.
The fair value of the share option is P30 on the date of grant.
What is the net increase in shareholders’ equity as a result of the grant and exercise of the
options?
a. 200,000
b. 300,000
c. 500,000
d. 700,000

Problem
On January 1, 2018, Kamagong Company granted 100 share options each to 500 employees,
conditional upon the employee’s remaining in the entity’s employ during the vesting
period.
The share options vest at the end of a three-year period. On grant date, each share option
has a fair value of P30.
The par value per share is P100 and the option price is P120.
On December 31, 2019, 30 employees have left and it is expected that on the basis of a
weighted average profitability, a further 30 employees will leave before the end of the
three-year period.
On December 31, 2020, only 20 employees actually left and all of the share options are
exercised on such date.
1. What is the compensation expense for 2020?
a. 500,000
b. 880,000
c. 380,000
d. 470,000
2. What is the share premium upon exercise of the share options on December 31, 2020?
a. 1,370,000
b. 2,250,000
c. 1,350,000
 d. 900,000

Problem