PROBLEMS:

Part I

1) On December 31, 2014, the bookkeeper of Graduating Company provided

the following information:

Accounts payable, including deposits and advances

from customers of P500,000 P2,500,000
Notes payable, including note payable to bank due on
December 31, 2016 for P1,000,000 3,000,000
Share dividends payable 800,000
Credit balance in customers’ accounts 400,000
Serial bonds, payable in semiannual installments
of P1,000,000 10,000,000
Accrued interest on bonds payable 300,000
Contested BIR tax assessment 600,000
Unearned rent income 100,000

In December 31, 2014 Statement of Financial Position, how much current

liabilities should be reported?

Answer: ______________ 7,300,000

2) Brave Company sells appliance service contracts, agreeing to repair

appliances for a two-year period. Brave’s past experience is that, of
the total pesos spent for repairs on service contracts, 40% is
incurred evenly during the first contract year and 60% evenly during
the second contract year.

Receipts from service contract sales for the past two years ended
December 31, 2014 are as follows:

2013....... P500,000 2014.......... P600,000

Receipts from contracts are credited to unearned service contract

revenue. Assume that all contract sales are made evenly during the
year.

What amount should Brave Company report as unearned service contract

revenue at December 31, 2014?

Answer: ______________ 630,000

3) Bugs Appliance Company’s accountant has been reviewing the firm’s past
Mashing Machine sales. For the past years, Bugs has been offering a
special service warranty on all Mashing Machine sold. With the
purchase of the Mashing Machine, the customer has the right to
purchase a three-year service contract for an extra P600.

Information concerning past Mashing Machine and warranty contract

sales is given below:

2014 2013 o
Mashing Machine sales in units 550 460
 Sales price per unit P5,000 P 4,000
Number of service contracts sold 350 300
Expenses relating to warranties P38,520 P13,400

Bugs’ accountant has estimated from past records that the pattern of
repairs has been 40% in the year of sale, 36% first year after sale
and 24% on 2nd year of sale. Sales of service contract are made evenly
during the year.

What is the adjusted balance of the unearned service contract revenue

as of December 31, 2014?

Answer: ___________ 243,600

4) Strand Incorporated provides an incentive compensation plan under

which its president receives a bonus equal to 10% of the corporations
income in excess of P600,000 before income tax but after deduction of
the bonus. If income before income tax and bonus is P1,920,000 and the
tax rate is 32%, how much the amount of the bonus would be?

Answer: ___________ 120,000

5) Lancer Company inaugurated a promotional campaign on January 2, 2014

to promote the salability of their product. Lancer company placed a
coupon redeemable for a premium in each package of napkin sold at
P200. Each premium costs P25 and 10 coupons must be presented by a
customer to receive a premium. Lancer estimated that only 70% of the
coupons issued would be redeemed. For the 6 months ended July 31,
2014, the following transactions occurred:

Packages of napkin sold P120,000

Premium purchased 30,000
Coupons redeemed 54,000

How much should be reported as estimated liability for coupons on the

fiscal year ended July 31, 2014?

Answer: _____________ 75,000

6) A new product introduced by Ven Beauty Promotions which carries a two-

year warranty against defects. The estimated warranty cost related to
sales are as follows:

Year of sale 3%
Year after sale 5%

Sales and actual warranty expenditures for the years ended December
31, 2013 and 2014 are as follows:

Sales Actual Warranty Expenditures

2013 P 800,000 P20,000
2014 1,000,000 70,000

What amount should Ven Beauty report as its estimated liability as of

December 31, 2014?
 Answer: ____________ 54,000

7) On January 1, 2014, Trader Company issued its 8%, 5-year convertible

debt instrument with a face amount of P6,000,000 for P5,900,000.
Interest is payable every December 31 of each year. The debt
instrument is convertible into 50,000 ordinary shares with a par value
of P100. When the debt instruments were issued, the prevailing market
interest rate for similar debt without conversion option is 10%.

How much of the proceeds represent the equity component? (Round off
your PV factor at 3 decimal places)

Answer: ______________ 354,320

8) On January 1 2014, Alison Company issued its 10%, 5-year convertible

debt instrument with a face amount of P5,000,000 for P5,100,000.
Interest is payable every December 31 of each year. The debt
instrument is convertible into 50,000 ordinary shares with a par value
of P100. When the debt instruments were issued, the prevailing market
interest rate for similar debt without conversion option is 11%. The
company incurred transaction cost of P70,000 related to the issue of
the compound financial instrument.

How much of the proceeds represent the equity component? (Round off
your PV factor at 3 decimal places)

Answer: ______________ 283,059

9) On June 30, 2014, Reflex Corporation had outstanding 10 percent,

P2,000,000 face amount, 15-year bonds maturing on June 30, 2018.
Interest is paid on June 30 and December 31 and related amortization
is done on those dates. The unamortized balances on June 30, 2014 of
bond premium and bond issue costs were P110,000 and P40,000
respectively. Reflex reacquired all of its bonds at 96 on June 30,
2014, and retired them. Ignoring income taxes, how much gain or loss
should Reflex record on the bond retirement?

Answer: ______________ gain 150,000

10) On January 1, 2014, Nickel Co. signed a 10-year operating lease

for office space at 576,000 per year. The lease included a provision
for additional rent of 5% annual company sales in excess of
P3,000,000. Nickel’s sales for the year ended December 31, 2014 were
P3,600,000. Upon execution of the lease, Nickel paid P144,000 as a
bonus for the lease. How much should be Nickel’s rent expense for the
year ended December 31, 2014?

Answer: _____________ 620,400

11) On January 2, 2014, Florence Co. signed an 8-year non-cancelable

lease for a new machine, requiring P120,000 annual payments at the
beginning of each year. The machine has an estimated life of 12 years,
with no salvage value. Title passes to Florence at the lease
expiration date. Florence uses straight-line depreciation for all of
 its plant assets. Aggregate lease payments have a present value of
P864,000 based on an appropriate rate of interest. For 2014, how much
should Florence record as depreciation (amortization) expense for
leased machine?

Answer: ______________ 72,000

12) Iron Co. leased equipment for its nine year economic life,
agreeing to pay P500,000 at the start of the lease term on December
31, 2014 and P500,000 annually on December 31 for the next eight
years. The present value on December 31, 2014 of the nine lease
payments over the lease term using the rate implicit which Iron knows
to be 10%, was P3,165,000. The December 31 2014 present value of the
lease payments using Iron’s incremental borrowing rate of 12% was
P2,895,000. Iron made a timely second payment. What amount should Iron
report as finance lease liability in its December 31, 2015 Statement
of Financial Position?

Answer: ______________P2,431,500

13) On December 30, 2014, Slim Co. leased equipment under a finance
lease. Annual lease payments of P200,000 are due on December 31 for 10
years. The equipments’ economic life is 10-years and the interest rate
implicit in the lease is 10%. The finance lease obligation was
recorded on December 30, 2014 at P1,350,000, and the first lease
payment was made on that date. What amount should Slim include in
current liabilities for this finance lease in its December 31, 2014
Statement of Financial Position?

Answer: ______________ 85,000

14) On August 1, 2014, Argon Co. leased a machine to Barium company

for a 6-year period requiring payments of P100,000 at the beginning of
each year. The machine cost P480,000, with an economic life of eight
years and no residual value. Argon’s implicit interest rate is 10%.

Argon appropriately recorded the lease as a direct financing

lease. At the inception of the lease, how much shall be the gross
lease receivables account balance? (Round off your PV factor at 3
decimal places)

Answer: ______________ 600,000

15) The accounts shown below appear in the December 31, 2014 trial
balance of Hollow co.

Preference share, authorized, P50 par P10,000,000

Unissued preference share 3,600,000
Ordinary share, authorized, P20 par 4,000,000
Unissued ordinary share 2,000,000
Subscription receivable, PS 380,000
Subscription receivable, OS 360,000
Subscribed preference share
Subscribed ordinary share
 Treasury share, preference, at cost
Share premium
Accumulated Profits and Losses

All subscriptions receivable are due in year 2016

How much is the total shareholders’ equity?

Answer: ______________ 11,040,000

16) Granny Co. purchased 10,000 shares of its P10 par value ordinary
shares to put it in treasury for P120,000 on March 2, 2014. On
December 19, 2014, Granny issued all 10,000 treasury shares for
P190,000. Under the cost method of accounting for treasury share, the
reissuance would result in a credit to share premium by how much?

Answer: ______________ 70,000

17) The following capital accounts are shown in the balance sheet of
Laughing Corporation:

Ordinary share, P100 par P1,000,000

Share premium – Ordinary share 20,000
Share premium – treasury 30,000
Accumulated Profits and Losses 750,000
Treasury share, 2,000 shares at cost 250,000

The entire treasury shares were sold for P200,000

What would be the balance of Accumulated Profits and Losses account

after the sale of treasury?

Answer: ______________ 730,000

18) Leave Company was organized on January 2, 2009 at which date it

issued 200,000 shares of P10 par ordinary share at P15 per share.
During the period January 2, 2012 to December 31, 2014, Leave reported
cumulative net income of P900,000 and paid cash dividend of P460,000.
On January 2, 2014, Leave purchased 12,000 of its ordinary share at
P12 per share. On December 31, 2014, Leave sold 8,000 treasury shares
at P8 per share. What is the total shareholders’ equity as at December
31, 2014?

Answer: ______________ 3,360,000

19) Generic Corporation paid dividends of P200,000 and P300,000 at

the end of 2014 and 2015 respectively. The corporation has not paid
any other dividends since its organization on January 2, 2014. The
outstanding shares are 20,000, 12% preference shares, P100 par and
30,000 ordinary shares par P100. If preference share is noncumulative
and nonparticipating, how much would be received in 2014 by preference
and ordinary shareholders, respectively?

Answer: ______________ & _____________ respectively. 200,000 & 0.

20) Promise Company’s capital structure is shown below:

12.31.14 12.31.13
Outstanding shares of stock:
Ordinary Shares 110,000 110,000
Convertible Shares 10,000 10,000

During 2014, Promise paid dividends of P3.00 per share on its

preference share. The preferred shares are convertible into 20,000
shares of ordinary share. Net income for 2014 was P850,000. Assume
that tax rate of 32%, how much is the diluted earnings per share for
2014?

Answer: ______________ 6.54