PRACTICAL

ACCOUNTING I

VOLUME TWO

CONRADO T. VALIX, BSC, LLB

Certified Public Accountant ana Lawyer
President, Review Director and CPA Reviewer
CPA Review School of the Philippines (CPAR}
Lifetime Member
Integrated Bar of the Philippines

CHRISTIAN ARIS . M. VALIX, BSME, BSA

Certified Public Accountant
Ateneo Management Engineering Graduate
Faculty Member, Ateneo and San Beda
CPA Reviewer, CPAR

2013 Revised Edition

 Copyright 2013
by
Conrado T. Valix
Christian Aris M.·Valix
Any copy ofthis b~k not l:>eanng
the signature of one · of th~ authors
on this page is unauthorized and shall
be considered as proceeding from an
illegal source.
ALL RIGHTS'-RESERVEJ).
ISBN 978-971-9919-45-2 •
~ More often, the particular Philippine Accounting Standard, Philippine
Published & Printed by:
GIC ENTERPRISES & CO., INC.
2019 C.M. Recto
u .m;l"' Philinoines
'PREFACE
This b6ok is .primarily intended as a Reviewer ih'Practical Accounting
PrOblems I in the Philippine CPA Licensure Examinations. It is prepared
in confom1ity with the CPA syllabus approved by the Board of
Accountancy and based 01,1 current PAS·, PFRS, lAS, IFRS and
IFRIC. 1\vo ch~pters on small an~ medium-sized entitjes are
included in accordance with PFRS for SMEs. ·
The problems are lifted from the following sourceS: ·
PHILCPA Philippine CPA Licensure Examinations given by the
Board ofAccountancy ·
'
AICPA Upiforrn CPAExaminations given bytheAmerican Institute
ofCertified Public Accountants
·cGAC Examinations ·offered by the Certified General
Accountants' Association of Canada
IAA Adapted problems from various intennediate accounting
b'ooks .
IFRS Problems and illustrations from Application Guidance of
International Financial Reporting Standards·
ACP Author constructed problems to exemplify Philippine
GAAP; lAS, IFRS and U'RIC
Financial Reporting Standard, lAS, International ~inancial Reporting
Standard and IFRIC are cited to authoritatively support the solution to
a problem.
This CPA Examination textbopk reviewer will definitely help the
reviewees in large measure in preparing for the Philippine CPA Licensure
Examinations in Pra~tical Accounting Problems I.
CONRADO T. VALIX
CHRISTIAN ARIS M. VALIX
June2013
CONTENTS.
1 PREMIUM AND WARRANTYLIABlLffY 1
18
2 DEFERRED REVENUE
'
.
31
,3 ACCRUED LIABlliiTIES
4 PROVISION AND CONTINGENT LIABILITY 42
-
57
5 NOTE PAYABLE
72
·. 6 DEBTRES1RUCTURE
87
7 BONPS PAYABLE
8 COMPOUND FINANCIAL INSTRUMENT 110
121
9 OPERATING LEASE
137
10 FINANCE LEASE-LESSEE
160
11 SALES .TYPE LEASE-LESSOR
12 DIRECT FINANCING LEASE-LESSOR 173
182
13 SALE AND LEASEBACK
193
14 POSTEMPLOYMENTBENEFITS
221
15 PROJECTED BENEFIT OBLIGATION
FAIR VALUE OF PLAN ASSETS
PREPAID/ACCRUED BENEFIT·COST
239
16 OTHER EMPLOYEE BENEFITS
249
17 ACCOUNTING FOR INCOME TAX
26(
18 DEFERRED TAX ASSET MlD LIABILITY
27f
19 COMPREHENSNE INCOME TAX
20 SHAREHOLDERs' EQUITY

21 RETAINED EARNINGS
29Q

312
1
~2 APPROPRIATION AND QUASI-REORGANIZATION 333 PREMIUM AND WARRANTY LIABILITY
23 SHARE-BASED COMPENSATION 345
Share options

24· SHARE-BASED CO:MPENSTAION 364 Problem 1-1 (AICPAAdapted)

· S~e appreciation rights ' .
Ii1 an effort to increase sales, Mills Company inaugurated a sales
25 · BOOK VALUE AND PREFERENCE DIVIDENDS 380 promotional campaign on June 30, 2013. The ei}tity placed a coupon
' redeemable for a premium in each package of cereal sold. Each
. 26 BASIC EARNINGS PER SHARE 398 premium cost .~20 and five coupons must be presented by a customer
408 to receive a premium. The entity estimated that only 60% of the
27 .BASIC EARNINGS PER SHARE
Average shares coupons issued would be redeemed. For the six months ended
December 31, 2013, the following information is available:
28 DILUTED EARNINGS PER SHARE 418
. Packages of Premiums Coupons
·440 cereal sold purchased redeemed
29 SINGLE ENTRY
160,000 12,000 40,000
30 CASH BASIS 458·
What is the estimated liability for premiums on December 31, 2013?
31 ACCRUAL BASIS 469
a. 160,000
32 ERROR CORRECTION 501 b. 224,000
c. 288,000
33 CASH F;:..ow- OPERATING 521 d. 384,000
~4 CASH FLOW- INVESTING AND FINANCING 545
Solution 1-1 Answer b
35 CASH FLOW- COMPREHENSIVE 558 Coupons to be redeemed (160,000 x 60%) _96,000
Less: Coupons redeemed 40,000
-36 HYPERINFlATION 587
Balance 56,000
37 CURRENTCOSTACCO~ING 603
Number of premiums (56,000/5) 11,200
38 SMEs-Parti 619
Es~imated liability (11,200 x 20) 224,000
39 SMEs- Part II -641

40 . ·SELF-TEST 665
1
 Problem 1-.z(AICPAAdapted) Solution 1-3 Answer c
During 2013, Day Company sold 500,000 boxes of cake mix under . I .
Total coupons issued and·to be·redeemed
a new sales promotional program. Each box contained .one coupon, 462,000
(600,0Q0 X 70% X 110%)
whjch entitled the customer to a baking pan upon reJ;llittance of (220,000)
Total payments to retailers
P40. The entity paid P50 p~r pan and P~ for handling and shipping
and estimated that 80% of the coupons would be redeemed, even Liability for unredeemed coupons- December 31, 2013 . 242,000
.though only 300,000 coupons had been processed during 2013.
What amounf should be reported as a liability for unredeemed Problem 1-4 (AICPAAdapted)
coupons on Dec~mber 31, 2013? Case Cereal Company distributed coupons to promote new
a. 1,000,000 products. On October 1, 201~, the entity mailed 100,000 coupons
b. 1,500,000 for P45 off each box of cereal purchased. The entity expected
. c. 3,000,000 12,000 of these coupons to be redeemed before the f.?ecember.31,
d. 5,000,000 2013 expirat.ion date. It takes 30 days from the redemption date
for the entity to receiye the coupons from the retailers. The entity
Solution 1-2 Answer b reimbursed the retailers an additional P5 for each coupon redeemed.
Net premium expense (50-:t- 5- 40) 15 On D.ecember 31, 2013, the entity had paid retailers P250,000
relat~d to theses coupons and had 5,000 coupons on hand that had
Coupons to be redeemed.(80% x SOQ,OOO) 400,000 not been processed fo.r payment. What amount should be
Less: ~oupons redeemed 300,000 reported as liability for coupons on Deceinbe~ 31, ~0 13?
Coupons outstanding 100,000 a... 350,000
t',500,000 b.-. 290,000
_Liability for unredeemed coupons ( 100,000 X 15)
c. 250,000
d. 225,000
Problem 1-3 (AICPAAdapted)
In packages of the products, Curran Company included coupons Solution 1-4 Answer a
that may be presented at retail stores to.obtain discounts on other
Curran products. Retailers were reimbursed for the face amount of Coupons expected to be redeemed 12,000
coupons redeemed plus 10% of that amount for handling cost.s. The Multiply by payment for each coupon (45 + 5) 50
entity honored requests for coJlpon redemption by retailers up to 600,000
three months after the consumer expiration date. The entity estimated Total liability for coupons
Payments on December 31, 2013 (250,000)
that 70% of all coupons issued would ultimately be redeemed. The
consumer expiration date is December 31, 2013. The total face amount Liability for coupons - December 31, 2013 350,000
of coupons issued was P600,000 and the total payments to retailers
during 2013 amounted to P220,000; What amount should be reported The coupon liability on December 31, 2013 is not reduced by the 5,000
is"liability for ~deemed coupons on December 31, 2013?
coupons on hand because the coupons had not been processed for
a. 0 payment · ·
b. 200,000
c. 242,000
d. 308,000
2 3
Problem 1-5 (CGAC) Problem 14i ~IIILCPA,A.dapted)
Topsy Company started a new promoti.onal program. For every,IO . ~eginni~~ 20 13~ Dai~y cJp~y ?eg~ ·~ark~ti~g.a_.n~ beer called
box· tops returned, clistomers receive a basketball._The entity estimated Sert:'esa . To bel~ PI"Q~ote the prodUct; the management is offering a.
that qnly-60% of the box tops reaching the market would be redeemed. spec;Ial Serl;Jesa beer m'll;g to .each. customer f& every 20 spe_tially
~ar~ed bottle'caps.of Serb~sa,The entity estimat~d that out of the
Additiqnal infonnation is as'follows:.
_300,000 bottles ofSerbesaspld during2013,.oD;Iy 5.0% ofthe marked
Units Amount bottle caps would be rede~med. Dlfriti.g 2013, the e!Jtity purchased
'Sales· of product 100,000 30,000,000 8,00Q beer ~ug~ at a tot~l C?~t ofP360,000 o:r; P45,each: During-the
. Basketballs purchased 5,500 .4,125,000 year, the entity already distributed 4,500 mugs to customers. What is
4,000 the premium liability on Decemper 31.,'20 13?
Basketballs distributed
a. . 135,000.
What is the.amount ofyear-:end estimated liability associated with this . p. 337,500 .
promotion? c. 202,500 /
d. 3.~0,000
a. 4,125,000
b. 1,500,000 Solution 1-6 :Answer a
c. 3',000,000
Beer mugs to.be distributed (so% X 300,000 I :io} 7,~00
d. 4,500,000 Beer mugs alr:eady distributed . 4,500
Solution 1-5 Answer b Beennugs outstanding . 3,000
Basketballs to be distributed (1'0(4090 x 60% /10) 6,0Q9 Estimated I'i ability- December 31,2013 (45 ·x 3,000)
Basketballs distributed 4,000 135,000

Balance 2;oo6 Problem ~-7 (IAA)

Multiply by cost ofQasketball (4,125,000 I 5,500) . 750
Bare Co~pany included on~ coupon in each box oflaundry soap sold.
Estimated liability 1,5QO,OOO A towelts offered as a premmrn to customers who send in 10 coupons
and.a remittance ofP20.
2013 2014
Boxes of soap sold 500,000. 800,000
Numbel"oftowels purchased (PIOO per towel) 20,000 25,000
. CQupons redeemed ' 140,000 200,000
The entity estimated tlrat only 30% of the coupons would be redeemed.
WJ:lat is the premium liability on December 31, 2014?
a. 500,000
b. 400,000
c. 320,000
d. 80,000
4 5
.-
Solution 1-7 Answer b Problem 1-9 (IAAj
. .
:· ~oupons to be redeemed i~ 2013 and2014
(1,300,000x30%) · 390;009 ~lam Conip4J1y ?ffeis the customerS a pottery cereal bowl ifthey send
Coupons redeemed in 2013 and 2014 (140,00.0 + 200,00) 340l000 m ~ee bo~tops from the products and P 10. The entiD' estimated that
' '
O~tstand~ng coupons - December 31, 2014 50,000 ' 60Yo of the bo~tops would be redeeJ;ned. In 20:131 'the entity solch
6.7 5,000 boxes and customer$ redeem~d 330,0.00 boxtoRs -receiving ·
Number of towels (50,000 I 10) 5,000 110,000 ?owls. J?.e cost of each bowlts P25. What is the.liability for
'80 outstanqmg prertuums on December 31, 2013?
Multiply bY cost of tower minus remittance ( 100- 20)
Premium ijability·- December 31, 2014 400,000 a. 250,000
b. 375,000
P.roblem 1-8 (IAA) . c. 625,000
m
Love Company included one coupon each.package sold.Atowel is d. 875;000
offered as a pre~um to customers \YhO send in .I 0 coupons:
Solution 1.:9 An~wer h
2013 ' 2014

Packages of cereal sold . 500,000 800,000 Boxtops outstanding (675,000 x 60%..,. 330,000). 75,000
Number of towels purchased at P40 per towel 30,000 60,000 Estimated liability - 12/3112M3 (75,000/3 x 15) 375,000
Number of towels distributed as premium 20,000 50,000
Number of towels to be distributed as Probleml-10 (IAA)
premium next period 5,000 3,000
Energy <;ooipany o~ered a cas~ reb~te ofP 10 on each P40 package
What amount should be reported as premium ex:per..se irl20 J4?
ofbattenes sold dunng 2013. Htstoncally, l 0% of customers mail in
a. 2,400,000 th~ rebate form. During 2013,6,000,000 pa~kages ofbatteries are
b. 2,000,000 sold, and 210,000 PI 0 rebates are mailed to customers. What amount
c. 2,120,000. of reb~te expense and liability for rebates should be reported
respectiVely, on December 31, 2013? · · .
d. 1,920,000
a. 6,000,000 and 6,000,000
Solution 1-8 Answer d b. 6,000,000 and 3,900,000
Premiums distributed in 2014 50,000 c. 3,909,000 and 3,900,000
Premiums to be distributed in 2015 3,000 d. 2,100,000 and 3,900,000
53,000
Total . Solution 1-10 Answer b
Premiums arising from 2013 sales distributed in 2014 ( 5,000)

Premiums applicable to 2014 48,000 Rebate expense (6,000,000 X 10% X 10) 6,000,000
Rebates redeemed (210,000 x 10) (2,100,000)
Premium expense (48,000 x 40) 1,920,000
Liability for rebates 3,100,000

7
 Problem 1-11 (IFRIC 13) .. Problem 1-12 (IFRIC 13)
. .
Ja~es Company, a· grocery .r~tailer, operates a customer loyalty Jeane Company, a retailer ofelectrical goods, participates in a customer
program. The entity grants program members loyaltypoints wh~n they loyalty pro~am. operated.b.y an airline. The entity grants program
·spend a speeified amount on groceries. Program mem~rs can rede~m member~ one a1r travel pomt for every Pl,OOO spent on electrical
the poin~ for further gr~eries: The points have no exprry date: Dunng ~~~ds. Program members can redeem the points for travel with the
2013, the entity granted 10,000 points. Management expects that 8_,0~0 atr~me sub~ect to availability. The entity pays the airline P90 for each
ofthese J,omts will be redeemed. The fair value of each loyalty pomt 1s pom~. Dunng 20 13, the entity sold electrical goods for consideration .
estimated at P100. The sales during 2013 amounted to P8,000,000 !otalmg ~5,000,~ and granted 5,000 points. The fairvalu; of a point
.mcluding the loYalty points·. On December 31' 2013, 4,000 points have ts ~1 00. Ifthe entity has collected the consideration allocated to the
been redeemed in exchange for groceries. In20 1~. tpe m~ageme~t pomts on tts own account, what i:s the revenue to be recognized in
. revised its expectations and now expects 9,ooo point:S_to be red~med 2013 in relation to the poin~? ·
. altogether. During'10 14, the entity red~emed 4,100 pQmts..What 1s ~e
· revenue earned from loyalty p'oints for the year ended Dece.n~~r 31, a. 500,000
2014? b. 450,000
c. 50,000
a, 100 000 ' d. . 0
'
b. 400,000
C. · 500,000 · Solution 1-12 'Answer a
. d. 80,000
Revenue earned from points in 2013 (5,000 x 100) 500,000
Solution I-I I Answer b
J~e C:ompany, acting as principal, has fulfilled its obli~tion by granting
· Fairvalueofpoints(lO,OOOx 100)
, r
i,OOO,QOO the p~mts. Therefore, revenue from points is recognized when the
electrical goods are sold.
· Re~enue earned from points in 2013
(1,000,000 x4,000 I 8,000) 500,000 '
. If ~ean~ Company is acting as an agent ofthe airline, the revenue from
Points redeemed in 2013 4,000 pomts IS computed as follows:
Points ~edeemed in 2014 4,H)O
Liability for points (5,000 x I 00)
Total points redeemed to date 8,100 500,000
Payment ofloyalty program expense (5,000 x 90)
(450,000)
Cumulative revenue e<.med to date Revenue from points in 20,13
900,000
50,000
·. {1,000,000x8,100/9,000) ·
Revenue earned from points in 2013 (500,000)
Revenue ~~d from points in 2014 400,000

8 9
 ·Proble~ 1~14 (AICPAAdapted) ·
Problem 1-13 (IFRIC 13)
lvfill Gompany ~~U.s washing ~achines that ca . a . ·. .
Erika Company operates a cl,lStomer loyalty program. The entity grants . w~~~~ against manuf~cturer's defects . Based~n t~~;:;he~r
loyalty points for goods purchased. The loyalty Points can be l!Sed by . =tence, warranty costs are estimated· at .P300 per machi~es
the customers in exchange for gcods of the e~tity. The points have no . g the current year, the entity sold 2,400 washin . .
expiry da~e. During 20 13·, the entity issu~ 50,000 award credits. The
paid warranty costs ofP 170 000 Wh t g machines and
• I •
.as warranty expense for the'cufr~nt y:a~~ount should be reported
fair value ofthe award credits is reliably measured'at P2,00(J;OOO. In
2013, the entity sold-goods to cus~omers for a total consideration of a. 170,000
P9,000,000 including the fair val~ ofthe award Credits. The total'award b. 240,000
credits expected to be redeemed are 80% in 2013 and 85% in 2014. ·c. ·sso,ooo
The award credits actually~eemed are 15,000 in 2013,~d 7,950 in · d. .720,000
2014. What is the revenue earned from poillis in 2014?
Solution 1-14 Answer d
a. 600,000 W~rranty expense (2,400 x 300)
b. 750,000 . 720,000
c. 330,000 ~robl~m 1-15.(AlCPAAdapted)
d. 318,000
OnApril1, 2013,Ash Co~pany. began offeri . ·
Solution 1-13 Answer c sale under a one-year warranty. Of the 50 000 ng ~ n_e~ product for
April 1 20 13 30 00 ' units m mventory on
., ' . , ' 0 had been sold by June 30 ·2013 B d ..
Points expecte<i'to be redeemed in 2013 (80% x 50,000) 40,000 Its expenence with similar pro d ucts, the entity
. estimated
' · ase on
===== avera~e w~ty cost per unit sold would be P80. Actual vi
that th
.e
Revenue earned from points in 20 13 costs mcurred from April I through June 30 20 I 3 arranty
750,000 P700,000. On June 30 2013 . ' . amounted to ·
(2,000,000 x 15,000 I 40,000)
. . liability? . , . ' wh,at ts the estimated warranty
Points expected to be redeemed in 2014 (85% x 50,000) 42,500
a. 900,000
15,000 b. 1,600,000
Points redeemed in 2013
7!}50
Points redeemed in 2014 c: 1,700,000
22,950 d. 3,300,009
Total points redeemed to date

Cumulative revenue earned to date Solution 1-15 Answer c

1,08~,000
(2,000,000 X 22,950 I 42,500) Warranty expense (30,000 x 80)
( 750,000) . 2,400,000
Revenue earned from points 201~ · Actual warranty cost ( 700,000)
330,000
Revenue earned from points in 2014 Warranty liability - June 30, 20 13 . 1,700,000

•11
10
Probleml:-16 (AlCPAAdapted)
During 20 13, Rex Company intr'oduced a ~ew product carrying a
two-year warranty against de~ec~s. The estimated wa~ranty costs · Protirem t.:ts {IAA)
related to peso sales are 2% w1thm 12 mo~ths foUowmg sale and
4% in the second 12 months following sal~. Sales are P6,00~,000 B.ass Company~anufactures high-end home.electronic systems. The
for 2013 and P 10,000,000 for 20 14. Actual warranty expenditures ·entity provides a one-year warranty ;or all product~ sold. The entity
are P90 000 for 2013 and P300,000 for 2014. On December 31, estimated that the warranty cost is P200 per unit sold and reported a
2014, what is the estimated warranty liability? liability for estimated warranty cost ofP650,000 on Januaiy 1, 20J 3.
During the current year, the entity sold 5,000 units for a total of
a. 570,000 P9,000,000 and paid warranty claims ofP750,000 on current and
b. 100,000 .
c. 450,000 . prior year sales. What is the warranty liability on December 31, 2013?
d. 0 a. 250,000
b. 350,000 . '·
Solution 1-16 Answer a c. 900,000
Warranty expense: d.. 750,000
. 2013 (6% X 6,000,000)' 360,()()(1
2014 '(6% X 10,000,000) 60~,00 960,000 Solution 1-18' Answer c
-
Actua~ ·warranty expenditures:
2013 90,000 Warranty liability- January 1 . 650,000
2014 300,000 390,000 Warranty expense (5,000 x 200) 1,000,000
Warranty-payments ( 750,000)
Warranty liability- ~ecember 31, 20.14 570,000

Problem ·1-17 (AICPAAdapted) .

• · Varranty liability- December 31
.. 900,000

Bold Co~pany estimated the annual warranty expense. af2% of

Problem 1-19 {IAA)
annual net sales. The net sales for 2013 amounted to :f4,000,000. Edffice Company provides extended service contracts on electronic
On January r, 2013; the warranty li~bility was P60,000 a~d the
warranty payments during 2013 totaled P50,000. What IS the equimen~ sold through major retailers. Tlie standard contract is for three
warranty liability on December 31, 2013? years. During the CUITeiJt year, the entity provided 42,000 such Warranty
contracts at an average.price ofP81 each. Related to these contracts,
a. 10,000 the entity spent P400,000 servicing the c<?ntracts during the current
b. 70,000 year and expected to spend P2,100,000 more·in the future, What
c. 80,000 amount <?fnet inceme should be recognized in the current year related
d. 90,{)00 to these contracts? · ·
Solution 1-17 Answer d ·a. 3,402,000
Warranty liability- January l, 2013 60,000 Q. 1,134,000
Add: Warranty ~xpense in 2013 (2% x 4,000,000) 80,000 c. 902,000
Total 140,000 d: 734,000 ··.
Less: Warranty payme11ts during 2013 50,000
Warranty liability~ December 31, 20 13 90,000 So_'lution 1-19 Answer .d ·
Contract revenue ( 42,000 x 81 / 3.) 1,134,000
12 Net income (1,1~4,000-.400,000) 734,000'
....
 .PrOblem 1~22- ~}
Problem 1-20 (IFRS)
. Biz~e Company,giv$:w~~s· at!.t.aetime of sale t~ purcM.asers
Toyo C<;>mpany owns a car dealership ·!hat it uses for servicing_c~ ohts _product. l',b.e entity_ ~!i~~rta.Res ,_t(nnake_geod, by repair or
under waiTanty. The entity's experience with warranty claims is ~t ~eplac~me!Yt, ~anufact'ttrm& defects that become apparent within
60% of all cars sold in a year have zero defect, 25% of all cars sold one year from the date of sale. Sales ofP~O,OOO,OOO were made·
in a year have normal defect, and 15% of ~11 cars sold. in a year
evenly throughout 20_13 ...,The ex.pe~ditures for warranty repairs and
have significant defect. The cost of rectifying a "normal defect" ~ a
repla~ements for the pr:oaucts sold in 201 'J are.ex'"'ected to be made
car "is p 10,000. The cost of rectifying a "significant defect" in a car
5'().%.m 2?13 and 5Q% in 2014. The 201:'4 outfl~ws dfeconomic
is P30,000. The entity sold 500 cars during the year. What is the
"expected value" of the provisipn for warranty for the current year? bJnefits related to the warranty will take :?lace on June 30,2014.
the. ~ntityestimated that 95% ofproducfs..sol:qrequire no wc:..r~mty
a. 3,500,000
.repa:rrs, :3% of products sold requ.ire minof rep1:1.irs costing 1o'% of
b. 1,750,000
t~ .s~J~.pnc~, a~d-2% ofpmducts ~o1<1 require major L"epairs or
c. 1,400,00'0
rep~cemem costmg.90% of saie price.
d. 4,000,000
The appropnate·discm.:nt factor for' cash flows expected to occur
Solution 1-20 Answer a on June_SO, 20.14 is 0.95.An approptiate riskadjust..nent facto~ to
Normal defect (25% x 500 x P10,000) 1,250,000 r~ect the uncertainties in the cash tlo\V .estimates is an incrementr.o f
Significant defect (15% x 500 x P30,000) 2,250,000 6% to the]},rob_ability~wei&hted expe~ted. c.ash fl'o,~s·. What is the
3,500,000 warrant)' prov.isioi). Of!. December 31 . ~0 lJ?
Provision for warranty
a, 210,000
Problem 1-21 (IFRS) b. 222,600
Chato Company sold electrical goods covered by a one-year c. 111~300
warranty for any defects. Of the sales ofP70,000,000 for the year, d . 1"05,735
the entity estimated that 3% will have major defect, 5% will have
minor defect and 92% will have no defect. The cost of repairs would Solution 1.-22. Answer a
be P5,000,000 if all the products sold had major defect and
M~nor repairs (3.% x 10,000,000 = 300,00~;X 10%) 30;000
P3,000,000 if all had minor defect. What amount should be
recognized as a warranty provision? Major repaus (2% x 1O.OO(t,OOO = 20Q,b()"O x 90%) 180,000
Weighted. probabilities 210,000
a. 8,000,000 Ml,lltiply by risk adjustment factor (6% increase) 1.06
b. 5,600,000
c. 300,000 Adjusted cash flows 222,600
d. 190,000 Paidill2013 (50%) (111,300)
Balance - December. 31, lO 13 111,300
Solution 1-21 Answer c
Multiply by PV factor .95
Major defect (3% x P5,000,000) 150,000 ----·
Minor defect (5% x P3,000,000)" 150,000 Warranty provision - December 31, 20 13 105,735
Total warranty provision 300,000

1..t
Problem t-'Z3 (IFRS) Solution 1-23 Answer b
Humanizer Company giyes-wananties at the time'Qf sale to-purchasers ~013

of its-produj::t. Undf:r t-Ile terms of the sale, the erttity undertakes to..~ Warranty expense 50,000
~e good, byreparr or replac~men~rnanufaeturing def.eCts tbat beoome War;~mty liability
50,000
apparent within_ one year from tl1P- date ofsa1e. '
2014
On December 31, 2013, the entitY appropriately tecog:nized PSO,OOC
warranty provision. The entity incurred and charged r l40~CJO() against Warranty liability ·5o,oob
Finance cost
the warranty provision in 2014. Out of the P 140,000~ an amount e.f 4000
Warranty expense
P80,000 related to warranties for sales made in 2014. The i~~rease Cash.·
88.000
during 2014 in the discounted arnol,lnt recognized as a provision 9n 140,000
Decembe·r 31, 2013 arising from the passage oftime is P2,000: Warranty expense rel?.ted to 2014 sales·
Warranty expense relate~ to 2013 sale's (60,000',- .52,000') 80,000
' .
On December 31, 2014, the entity estimat-ed that it woutd incur·· ~000
expenditures in 2015 to mee~ its warranty obligations on December 31, Total w.arranty expense _88",.000
2014 as follows:
Warranty expense 107,730
. 5% .Probabitityof P400,000 Warranty liability
2o% ptobabilityof P2oo,ooo i07,710
50% .probability or"- .P 8<f,OOO .Weighted probabilities:
25% ~probability of P 2o,ooo
5% X 4QO,OOO ,?0,00~
Assume for simplicit'j tl,lat the 2015 ~h flows for warranty repairs and 20% X 200,000 40,000
replacements take place o~.Jun~30,2015. 50% X 80,000 .:!.0.000
25% x ••-20;000
An appropriate .discount rate is 1.0% per.yeru:. The PV of 1 at 10% for
~:doo
one year .is .0.91 and the PVof. 1 at ·10% for 6 months 0.95. An is ·Expected Ga8h.·f'l'ows
Multiply by risk adjustment factor (1 00% + 8b/o)
~os;ooo
:1.08
appropriate risk a~justrnent factor to reflect the uncertainties in the ~h
flow estimates is an ·increment of 8% to the.probability"'weigbted Adjusted cash flows 113,400
expected cash flows. · . Multiply by PV of l at 1O% for·6 months .95
Present value- of cash flows i0},730
What is the warranty expense to be recognized in.20 14? · ···- -
a. 1:07)30 \X(arranty cost paid related to 2014 sale1; 88,000
Warranty lia~ility rela~d to 2014 S!l)es 107,730
b. 195,730
c. 187;730 Total warranty expeus~ ~n 201 4 ~95,730
d . .185,000 ~-=

16 17
 ~robl~~ 2-2 (AIC~~,t;\dapted)
2 Regal Department Store sells gift certificates, redeemab~e for stqre··
merchandise and wi~rio expiratio~ date. The entity has the follo~ ·
DEFERRED REVENUE information·pertaining to the gift certificate s<iJ~ and redemptions:
/
Unearned revenue on January 1~ 2013 750,000
2013 sales 2,500;009
Problem 2-1 (AICPAAdapted) 2013 redemptions of prior year .sales 250,000
2013 redemptions of current year si!les 1,750,000
Cobb Department Jtore sells gift certific~es redeemable only when
merchandise is purchased. These gift certificates have no expiration On December 31,2013, what amount should be reported as unearned .
date. Upon.redemption or expiration, the entity recognizes tbe
revenue?
unearned revenue as realized. ·
Infonnation for the current year is as follows: a. 1,250,000
b. 1,125,000
Unearned revenue, January 1, 2013 6~,000 c. 1,000,000
Gift certificates sold 2.250:000 d. 500,000
Gift certificates redeemed 1,9S<l.OOO
Gift certificates expected not to be redeemed 100,000
Solution 2-2 Answer a
Cost of goods sold ·6()t.4

On .December 31, 2013, what amount should be reported as Unre<jeemed- January 1, 2013 750,000
unearned revenue? Sal.es of gift certificates - 2013 2,500,000

a. 510,000 Total 3,250,000

.- ( 250,000)
b. 570,000 Redemption's of prior year sales
Redemptions of current year sales (1,750,000)
c. 850,000
d. 950,000 Unearned revenue- December 31,' 2013 1,250,000

Solution 2-1 Answer c

Unearned revenue- January I, 2013 650,000
Add: Gift certificates sold 2,250,000
Total 2,900,000
Less: Gift certificates redeemed 1,950,000
Gift certificates expected not to be
redeemed 100,000 2,050,000
Unearned revenue - December 3 f, 2013 850,000

18
19
 Problem 2-4 (AlCPAAdapted)
Problem 2-3 (AICPAAdapted)
Fell Company operates a retail grocery store that i~ required by
Marr Company sells its produc'ts in reusable containers. The law to collect refundable deposits ofP5 on soda cans. Information
customer is charged a deposit for each container· delivered and for the current year follows:
receives a refund for each container returned within two years after
the year of delivery. The entity accounts for the containers nCit Liability for refundable deposit- January 1 150,000
· returned within the time limit as b~ing retired by sale at the deposit Cans of soda sold 100,000
amount. Infom1ation for 2013 is as follows: Soda cans returned 110,000
Container deposits on December 31, 2012 from deliveries in:
During the current year, the entity subleased space and received a
2011 150,000 P25,000 deposit to be applied against rent at the expiration of the
Wl2 ~~000 580,000 lease in 5 years. What amount should be. reported as current
Deposits for containers delivered in 2013 780,000 liability for deposit on December 31?
Deposits for containers returned in 2013 from deliveries in:
a. 125,000
2011 90,000 b. 140,000
2012 250,000 c. 100,000
2013 286,000 626,000 d. 25,000
On December 31 1 2013, what is the liability for deposits?
a. 494,000 Solution 2-4 Answer c
b. 584,000
c. 674,000 Liability for refundable deposit - January 1 150,000.
Deposit made ( 100,000 x 5) 500,000
d. 734,000
Total 650,000
Solution 2-3 Answer c Less: Deposit refundr i (11 0,000 x 5) 550,000
Deposits on December 31, 2012 from deliveries in 2012 430,000 Balance - December 31 (current liability) 100,000
Deposits for containers delivered in 2013 780,000
Total 1,210,000 The lease deposit is a noncurrent liability.
Less: Deposits returned in 2013 from deliveries in:
2012 250,000
2013 286,000 536,000
Liability for container deposits- Dec·e mber 31, 2013 674,000
Deposits on December 31, 2012 from deliveries in 2011 150,000
Deposits returned in 2013 from deliveries in 2011 ( 90,000)
Ex'p ired and no longer refundable 60,000
21
?0
Prublemk-5( ATCPAA(j~pted) - ·. Solution 2-6 Answer d
Kerit Company sells magazimf subscripti~ of one to tbree:year Unearned revenue - January I 600,000
perio<;ls. Cash receipts fro~ subscribers are-credited to ma~e Cash receipts from serviee contracts sold 980,000
sub&eriptiorls collected iii _adV$1ce,_and1bis account had a~~ ~f
P2,40Q,QOO on Bece~et 31'; ·2013 before ~ar-end adjUStment Total 1,580,000
OUtstanding subscrj.ptions on Decerltber 31 ~ 2013 exPire as follows: · Less: Service contract.revenue recognized 860,000
· I)uring2014 600,000 Unearned service contract revenue - December 31 720,000
During 2015 900,000
Durlng20~6 400,000 Problem 2·7 (AlCPAAdapted)
On December JL, 20]3, what amount sh.Quld be--reported as
magazin~ subscriptions collected in advance? .. . . Ryan Company seiJs maj or household appliance service contracts
for cash. The service contracts are for a one-year, two-year, or
a. . 500,000 three-year period. Cash receipts from contracts are credited to
bl ·1,200,000 unearned service contract revenue. Tbis account had a balance of
c. 1,900,000
d. 2,400,900 P720,000 on December 31 , 20 13 before year-end adjustment.
Service contract costs are charged as incurred to the service contract
. Soiution 7-5 Answerc expense account, which bad a balance ofP 180,000 on December
·AlloftheoutstandingcontractsofP1,900,000_aredeferred. 31,2013 outstanding service contractsonDecember31~2013-expire
as follows:
Problem2_-(j (AICPAAdapted) During 2014 150,000
. .
Greene Company sells office equiP.ment service contracts agreeirig During 2015 225,000
to service equipment for a two-year period. Cash receipts from .- Durlng-2016 100,000
_contracts are credited to unearned service contract revenue and What amount should be reported as unearned service contract revenue
service contract costs are charged to servi~e contract e~pense.as on December 31, 20!3?
incurre4. Revenue from seryi'c e contracts is recogniz~d as e~ed
over .the lives of the contracts. Additional information for the year _ a. 540,000
ended December 31, 2013 is as follows: b. 475,000
c. 295,000
Unearned service contract ~evenue at January L 600,000
d. 245,000
Cash receipts from service contracts sold 980,000
SerVice contract revenue recognized. 860,'000
Service -contract expense 520,000 Solution 2.-7 Answer b

. What amount shoUld be reported as unearnedservice contract revenue OUtstanding contracts on December 31, 20 13 that wiU expire during
.onDecember3L,20L3? · . 2014 150,00(
2015 -. 225 00(
a. 460,000
2016 100,0()(
b. 480,000 '
c. 490,000 Unearned service contract revenue 475,00(
d. 7201000
- 1l...- . 23

Problem 'l-8 {AlCPAAdapted)
Dunne Company sells equiprne:-~t service contracts that cover a
, two-year penod. Tlle 3a1e pr;ice.of eaG~ contrar.t is P~OO. The past
expe6ence is that, ofthe total pesos St;>ent for repairs on. service
contracts, ~~O% is mcu1red evenly d1.~ring the first COli tract year and
60% evenly dur ing the seeond c<)ntract year. The entity soid 1:,000
.contracts evenlythrollf!.h<l"cl!:20 13 . What amount should be reported
as deferred service revenue on December 3 J, 20 i3 7
a. 540,000
b .. 480,000
c. 360,000
d: 300,000
Problem2-9 (AlCPAAdapted)
Cobb Company sells appliance service contract~ age~ing to repair
appliances fora two-y~ar p~riod. The_pastexpenence ~s ~h~t; of the
total amount spent fer re:patrs on servtce contracts, 40_% IS mcuued
evenly during the firstconh-actyearand 60% evenly dunngthesecond
contract year. Receipts from service: c~:mtract sales. are P500,0~0 for
2013 and P600,000for 2014. Receipts from contracts are credtte~ to
unearned service contract revenue. All sales are m~de evenly qnnng
tb.e year. What amount shout~ be reported as une.amed revenue on
December 31, 2014?
a. 360,000
b. 470,000
c. 480,000
d. 630,000

Sdlution 2-8 Ar..s-,•.:er·b Solution. 2-9 Answer d

First cor. tract year. (4D% x 600,000) 240,000 2013 sales ·
Second contr~.ct year (6{)~ X 600,000) I 360,000
Total contract~ ;:;;cld fn2012 600.000 40% x 500,000 equa[~P200,000. This amount~s ean'e~ one-h~lfin
----..-;
2013 or PlOO,OOO andone-ha!f in 20l4or P100,000. -
S.ip.eethe GQutlactsare: SQ!d evenly,oruyon.;:;-halfofthe40% is earned 60% x 500,000 equals P300,000. This amo'untis earned one-~1alfin
in20l3' an~.one-haifwiiJ be eai"ned:m-2014: Onc-:t1alfof the 6C)'% wili :::014 C?r P 150,000 and one-balfin201 5 or P 150,000.
_be-earned in20i4aodc~e-balfwilibc.eamedin 20 I~
Thus, ±or the 2013 sales, the amount of ~150,000 is unearned on
r,hus, thed~ferredserv.icecontract revenue on December 31;2013 is De<:ember 31, 20l4.
coffilJlited ·as follm~'s:
2014 sales
Total contracts sold (J ;000 x ~00) . 600,000
x
Less: Contracts e-ar:ne~ .in 20-13 (240~000 V2) 120;0(;0 40% x 600.000 equals P240,000. This amount is earned one-half in
Deferred s~·rv1ce rev€nue- December 3-L, 2013 .480,000 2014 or Pl20,000 and one-half in 20l5 or PI20,GOO.
Se(Vice cQntract revenu.e e.B.L·ned in 2014': 60% x 600,000equal5 P360,000. This ammmt is earned one-half in
Remaining on·e-halfof:firs-e contract year 2015 and one-half in 20!6.
(240,000 X lt2} l20,0GO
Thus, for the 2014sales, the amountuneamed on ~cember31, 2014
flirst one_-ha~f of the sc:;cond contract year .
(360,0{)0 X !/2) is P120,000 plus P360,000 or P480,000.
180,00Q
TQ;al service contract revenue earned in 2014 300,000 Total unearned revenue- De-cember 31, 2014
. (150,000+480,000) 630,000

24 25
Problem 2-10 (AICPAA.dapted) Problem2-11 (AICPAAdapted)

Hart Company sells subscriptions to a specialized directory that is

~nette Video Company sells 1- and 2-year subscriptions for us
vtdeo-of-the-month business. Subscriptions are ooUected in advance
published semiannually and shipped to subscribers on April 15 and and credited to sales. An analysis of the recorded sales activuy
October 15. Subscriptions received after the March 31 and revealed the following~
September 30 cut-off dates are held for the next publication. Ca:5h ·
from subscribers is received evenly during the year and is credited
tOll 2014
Sales
to deferred revenue from subscriptions. Data relating to 2013 are ~0.000 500,000
Less cancelatior.s )(61)00
as follows: _AQO<~
Net sales 400,0<>q _470,~
beferred revenue from subscriptions - January 1 1,500,000 -
Cash receipts from subscribers 7,200,000 Subscription e?Cpirations:
2013 120,000
On December 31, 2013, what amount should be reported as deferred
2014 155,000
revenue from subscription? 130,000
2015 125,000 200,000
2016
a. 1,800,000 140,000
b. 3,3QO,OOO
· ---
400,000 470,000
c. 3,600,000
d. 5,400,000 On December 31, 2014, what amount should be reported a<> unearned
subscription revenue?
Solution 2-10 Answer a a. · 495,000
Monthly subscriptions.(7,200,000/12) 600,000 b. 470,000
c . . 465,000
The subscriptions after the September 30 cut-off are: d. 340,000
October 600,000
November 600,000
Solution 2-11 Answerc
December 600,000 Subscriptions received in 2013 that will expire in 2015 125,000
Total unearned subscription revenue- 12/31/2013 1,800,000 Subsc-riptions received in 2014 that will expire in 2015 200,000
Subscriptions received in 20 15 that will expire in 2016 140,000
The above subscriptions will be served in the next publication in Unenrncd subscription revenue - December 31, 2014 465,000
2014.

16 27
Problem 2 -12 r .~lCPA Adapted)
Sotur ~·on 2-1 3 Answer b
Dunn Company records stamp service revenue and pra.vid.es for tlie COS+•.
Custorner s' advances -January 1 :850,000
of redemptionc; in the year st~mps are sold to Ji'cens.ees. 'fhe ,past
Advances received ( 10% x 12,400,000) 1-,240,000
.experienceindicatc;:s th.a: only go% of the stamps so!d to tioensee.&would
~e :-edcemed. The ·liab ility for stamp r edi!mp.t;i.On.iWas P6,000,000 ·en· 2,090,000
Total
January 1, 2013 . Additiorrai information for 2013 i.s as fmb.ws: (_0% X 9,650,000) ( 965,000)
S hipments made
. Stamp. service reven ue fro m. sta~ps sol d to licens·:!CS s:ooo,.ooo C anceled orders ( I 0% x. 1,208 ,000) ( 1:?.0,000)
Cost of redemption of st,amprs s o Ld prior t o H-1/2013 2.150.~0()
Customer s.' advances - December 31 l ,IJ05,000
Ifa11 L~e sta01.:ps sok1 in 20 Lr'were presented to, re demption in ~1 4 , - - -·-
the redemption .c.ost wcmtd be P2,250,000. What ·amountsbJluld be Problem 2-14 (f\...ICl>AAdapted)
reported as a liability f0r stamp redemptions em n eaem.JJer ..il, :2.0}3?
Black Company requires aavancepay!"'""'':mts with spe::cial orders for
:.1 . 7,2so,oop machine.:y construded to customer specifLeations. These,advances.
b. 5,500,000
c. 5,050,000 are )\Oiirefund2ble.-IntormatioR fo~ilie.current yea::: is-·as foUpYvs:
<.i. 3.250,COO 1\dvances from customers - Janucrry l 1.,!80~000

Advances rece-ived wrtlH:mters · l ;~40,000

Solution 2-1?. A nsw~,· ·c
Advances applied to o~:der~ ~hi pp_ed t;640,000
Liability tor stamp re·~ero ptions- J anuary · , 2J 13 6,000,000 500,000
Ad~ances applicable to 'lrders can<:kted
1\dd: Estim?...t eri. cost pf r edemptions for stam.p-s·sol,:i
in 2013 !EO% 2,250,000) L,80.Q,OOO; Wh.atamountshou:ld be reported as cUlrent liabilityfor a:ci:va,.""lces
Total 7,800,000 from custom<::ts at.y.ear-end-1
Less: Co ~ t ofreden1pt:·Jn-s l'l 2013 :l,750,000
a. ~,480,000.
Liability fiJr :namp rec.emptio ns- De-.;emba 3 i, 20 13 5:,050,000
b. 1,380,{)00
Pr oblem 2-l3 (L\A)
c. 880,000
d. 0
Gail Company rna t<.ufac tu res f:urnit u.re u ph olster y aceordino to
spccifica~ions. An{lmcfu n dat>k deposit o f 10% or the contra-ctp~ice Solution 2-14 .Answer. c..·
is reqm;cd fpJ~l ... u:;toJ"1€:r:>. This depos i~ is credited to a customers'
advances ,,~!;Oun1 ·,·;hich :::s::: a. balance of P850,0CO on January l , Advances front customer~· _, Jan~ary I. 1,t80,000
?0 13. !1'1 2013. ~.he ent: Ly rc•>:!:ived an<i acc eptert ordc:rs with a tocal Add: Afuoances rece1ved" \-~ttS ru:ders t-~840,000
co ntraci p·i.:e ofl' J'l,400,UiJ O. O n December Z l, 2013, the entity had
J,020,000
a lrc&dy !r" d.e snip:ne·lf S :ocu stom~rs :) £1>9,650,000 wh ile orders for Total
"l)l ,200,000 •... ~;; rc c.a.nc~kd and sales cfP8 90,000 w-=:r e returned for Less: Advances applied to ord~s shipped L~Mt1;\KJQ
11inor d esil::"l ir cdi ::.cations . \~That i:; th e balance o f the customer s· Advances applicable to orders cauc~led 500,00(f 2,r4o,ooo
advance.3 o~, L):;·.:~r:Jhe r 3i, 20B·? 830,000 .
Advances from c.ustomers - Decetl:lber 31.
a 1,125,0CO
o. 1,005,0 C;
c .. 1,0%,('00
!"1. 916,COO

29
Problem 2-15 {AICPAA<iapted)
Lovie Company offers three payment plans on its twelve7month
contracts. lnformation on the three plans and the number of children
3
enrolled in each plan for the 3eptcmber 1, 20 13 through August 3!,
2014 contract year is as follows: ACCRUED LIABILITIES
Initial payment Monthly fe·l! Number of
perchUd pe!"child children
#1 50.000 15 Problem 3-1 (AICPAAdapted)
#2 20:000 3.000 12 Kemp Company must determine the December 31, 2013 accruals
#3 s,O'oo· 9 for advertising and rent expense. A P50,000 advertising bill was
received January 7, 2014, comprising costs of P35,000 for
The entity receive<;I.P990,000 ofiniti~lp~yrrv:~nrs on September 1, 2013:
advertisements in December 2013 issues, and P 15,000 for
and P324,000·of monthly fe~s duting the period September 1 though
aavertisements in January 2014 issues of the newspaper. -
December 31, 2013. On .D~c~P-!bcr 31,2013. whclt ~ruount should be
reported as deferred rc·~enue? A store lease, effective December 16, 20 ~ 3, calls for-fixed rent of
P 120,000 per month, payable one month from the effective date
a. 330,000 and monthly thereafter. In addition, rent equal to 5% of net sales
b. 43S_,OCO over P6,000,000 per calendar year is payable on January 31 of the
c. 660,GOC following year. Net sales for 2013 totaled P9,000,000. On
d. 990,000 December 31, 2013, what amount should be reported as accrued
liabilities?
Solution 2-15. Answet c
a. 260,000
Plan #1 (50,000 X 15) 750,000 b. 185,000
Plan #2 (2{),000 X 12) 240,000 c. 210,000
Tota.J initial paynH~nts 990,000· d. 245,000
Deferred revenue- Dccetnb{:;r 3 J; 201.3 (990,000 x 8/J.2) 660;000 Solution 3-1 Answer d
---
(J,OGOx 12:Y. 4) Advertisement for December 2013 35,000
Plan #2 144,000
A~crued rent from December 16 to
Plan #3 (5 ,000 X 9 X 4) 180,000
December 31,2013 (120,000 x 6112) 60,000
Total monthly fees- already earne<_l 324,000 ..
~ccrued additional rent (3,000,000 x 5%) 150,000
Total accrued liabilities ~45,000

· -JO · 31
ProblemJ-2 (IAA) Problem 3-3 (AICPAAdanted)

Sonia Company reported gross payroll ofP600,000 for the month of Chester Company reported payroJI for the month o:fJanuary 2013 as· ·
follows: • · · · ·.:
January. The entity paid the payr<?ll net ofthe fol1owh1g deductions:

Income tax Total wages 500,000

70,000
·sss 10,000 Income tax withheld . 60,000
r
Philhealth 5,000
Pagibig 7,000 All wages paid were subject to SSS. The SSS tax'rates were 7% each
for employee and.employer. Chester remits payroll taxes oh the 15th of
In addition, the entity recognized its additional contributions for the the following month. In the financial statements for the month end~·
following in relation to Januruy payroll: January 31, 2013, what amount should be reported respectively as
total payroll tax liability and payroll tax expense?
sss 15,000
Phi!health 6,000 a. 60,000 and 70,000
Pagibig. 8,000 b. 95,000 and 70,000
'
c. 95,000 and 35,000
What is the total payroll tax liability? d. 130,000 and 35,000

a. 121,000 Solution ~-3 Answer d

b. 70,000
c. 92,000 Income tax withheld . 60,000..
d. 29~000 SSS- employee (7% X 500,000) 35,000
SSS -employer (7% X 500,000) 35,000
Solution 3-2 Answer a Total payroll tax liability 130,000
·. '
Salaries and wages 600,000 The pertinent entries for the month of January in relation to the payroll
Withholding tax payable 70,000 tax liability are as follows:
SSS payable- employee 10,000
i
Philhealth payable- employee . 5,000 Salaries and wages 500,000
Pagibig 'payable- employee 7,000 Withholding tax payable 60,000
Cash 508,000 SSS payable- employee 31,000
Cash 405,000
Payroll tax expense 29,000
SSS payable- employer· 15,000 Payroll tax expense 35,000
Phil health payable-· emptoyer 6,000 SSS payable-- employer 35,000,
Pagibig payable- employer 8,000
 Problem 3-4 {AICPAAdapted) Problem J-5 (AlC.P.AActa.pt!=O.J

Miyuki Company operates a retail store. AU items are sold subject to a t\1a.rieHotel collects·l5o/i [ncitysal .
to a P200Jper'room pe;night, es taxesonroomrentals, maddition
... 12% value added tax, whi.ch th.e entity collects 3-Dd records as sales month are due at tbe~ndofthefo~~~k~cy tax. Sales taxes for each
revenue. The entity files·quarterly sales tax returns when due by the are due fifteen days aftertheendofeachm~n~~nd occupancy taxes
twentieth day following the·end.ofthe saJes quarter. However, in 3,2014; the entity paid the November20cl;:res =er.dOthnJafinuary
· accordance.with state requirements, the entity remits value added tax quarter 2013 occu t .. . an e ourth
collected by the twentieth day of the.l!lor.ti:J J~tlowing auy month such quarterof20l3 is ~~~ro~:~s.Add•honal mfonnation fortlie fourth
collections exceed P~O ,DOO: The entity takes these payments as credits
OI) the quartelly sa1~11 1ax return. Tll,er v atue added taxes paid by tbe
Room rentals Ro<Jm nights
entitjarec~eda~~es reveJ'u~: Following is?.monthly s-..rnma:ry
Vctuber 1,000,000
appearin,&.iri the first _q,Ul..."ier7.G 1~ sales'rcve:;;.rue account: Novembe.r.
l,IOQ
1,100,000 1,200
Decem9er 1,500,000
Debit' Credit 1,800

January 560,000 What amount should be reported respectivelyas sales tax~ a

February 60,000 -392,000 andoccuptl!'cytaxespayableon December31, 2013? p yable
March ·44S6oo..
~

a. 390,000 and 600,000

Op. March 3 t -20 l3; wl'l at amount ·.;hould oe r~orted as valJte added b. 390,000 and 820,{)00
tax,es payable? .c. 540,000 and 600,000
d. 540,000 and 820,000
·a 150,900
o. t6s:ooo. Solution. 3-5 Answer b
~ 108,000
d. 90;000
November room rentals
1,100,000
December room rentals
Solution 3-4 Answer d 1,500,000
Total
2.600,000
January 560,QOO
Febi:Uary' ~n.ooo sales taxes payable (l5%x 2,600,000)
390,000
.Mat;"c~ . -#B,OOO
October
§iales .including VA1 L,4QP,OOO 1,100
November
Sal~s excluding.VAT ~1,400,000 /1.12) 1:25o,ooo December 1,200
15.0,000 1,800
Output VAl Fourth quarter room nights
Payment o.fVAT in February c. ~0,000). 4,100
VATpayable--Marcb:3l, 2{)1~ 9(),000 Occupancy taxes payable (4' I00 x. 20{))
-= 820,000

J4 35
 Problem 3-8 (AICPAAdapted)
Problem 3-6 (AICPAAdapted)
Ronald Company has an incentive compensation plan under: which
Under state law, Stephen Companyri1ay pay 3% of eligible gross wages a brauch manager received 10% Of the branch income after deduction
or it may reimburse the state directly for actual unemployment claims. of the bonus but before deduction of income tax. Branch income
TI1e entity believes that actual unemployment claims will be 2% ofeligible for the current year before the bonus and income tax was
gross wages and has chosen to reimburse the state. Eligible gross wages PI ,650,000. The tax rate is 30%. What is the bonus for the current
are defined as the first P 100,000 of gross wages paid to each employee. year?
The entity had five employees, each of whom earned P200,000 during
2013. On December 31,2013, what amount should be reported as a. 126,000
liability fonmemployment claims? · b. 150,000
c.. 165,000
a. 10,000 ..,d. 180,000
b. 15,000 '
c. 20,000 Solution 3-8 Answer lJ
d. 0
Income after bonus before tax (1,650,000,1110%) 1,500,000
Solution 3.:.6 Answer a
Bonus ( 10% X 1,500,000)
Total eligibie gross wages (100,000 x 5 employees) 500,000
Problem 3-9 (AICPAAdapted)
Liability for _unemployment claims (2% x 500,000) 10,000
After three profitable years, Cairo Company decided to offer a bonus
Problem 3-7 (IFRS) to the branch manager of25% of income over P l ,000,000 earned by
the branch. The income for the branch was P1,600,000 before tax and
Aubrey Company has a 12-month accounting period ending December before bonus for the current year. The bonus is computed on income in
31. OnAprill, 2013, it introduced a new contractual bonus scheme excess ofPI,OOO,OOO after deducting the bonus but before deducting
co,vering the year to March 31 each year. It is reasonably anticipated tax. What is the bonus of the branch manager for the current year?
that the bonuses for the year to March 31, 2014 will amount to
P900,000.·What amount ofliability for bonuses should be recorded on a. 120,000
De~ember 31,-20 13? h. 150,000
a. 225;ooo c. 250,000
b. 900,000 d. 320,000
c. 675,000
d. 0 Solution 3-9 Answer a

Solutio11 3-7 Answer c r.~come after bonus but before tax (600,000 I 125%) 480,000

Bomts payable from April l to December 31 , 2013 Bonus ( 25% X 480,000) 120,000
(900,000 X'}/' 2) 675,000

37
36
Problem3-10 (ACP) Problem 3-12 (PHILCPAAdapted)
The bonus agreement of Christian Company provides that the general on· J~ly 1, 2013, th~ Quezon City government issued realty tax
manager shall receive an annual bonus of 10% of the net income after assessment for the fiscal year ended June 30, 2014. On September
bonus and tax. The income tax rate is 30%. The general manager · I, 2013, Zuma Company purchased a land in Quezon City. The
received P280,000 for the current year as bonus. What is the income purchase price was reduced by a credit for accrued realty taxes.
before bonus and taX? l11e entity does not record the entire year's real estate tax obligation
but instead records tax expenses at the end of each month by
a. 4,280,000 adjusting prepaid real estate taxes or real estate taxes payable as
b. 4,000,000 appropriate. On November 1, 2013, the entity paid the first of two
c. . 2,800,000 equal installments ofP600,000 for realty taxes. What amount of the
d. 3,720,000 payment should be recorded as a debit to real estate taxes P!iyable?
a. 200,000
Solution 3-10 Answer a b. 400,000
c. 500,000
Income after bonus and tax (280,000 I 10% ) 2,800,000 d. 600,000
Income before tax (2,800,000 I 70% ) 4,000,000
Income before bonus and tax (4,000,000 + 280,000) 4,280,000
Solution 3-12 Answer b
'.
Problem3-11 (ACP) Monthly realty taxes (600,000 I 6) 100,000

Tobruk Company has an agreement to pay its sales manager a bonus Journal entries
of 5% ofthe income after bonus and after tax. The income fOr the year Sept.1 Land (100,000 x 2) 200,000
before bonus and tax is P5,250,000. The income tax rate is 30% of Taxes payable 200,00(
income after bonus. What is the bonus for the year? Accrued taxes for the months
of July and August capitalized
a. 262,500
as cost of l{lnd.
b. 250,000
c. 177,536 Sept.30 Taxes (for September) 100,000
d. 186,548 Taxes payable 100,000
Oct. 31 Taxes.(for October) 100,000
Solution 3-11 Answer c · . Taxes payable 100,000
..
B = .05(5,250,000-B-T) Nov.1 Taxes- payable 400,000
T = .30 (5,250,000- B) Taxes 200,000
B = .05 [5,250,000- B- .30 (5,250,000- B)] ··cash 600,000
B = .05 (5,250,000- B- 1,575,000 + .30B) T)le payment is charged first
B = 262,500-.05B-78,750+.015B to taxes payable and the·
B + .05B- .015B = 262,500-78,750
balance to expense.
1.035B = 183,750
B = 183,750/1.035
B = 177,536

38 39
1'1 ohll·tu1 I ' ( •\ICI'AAdapted)
I l!~ II L' Cutnpany pays al1 salaried employees on a Monday forth~
It vc-day worlmreek ended the previous Friday. The last payroll recorded
for the year ended December 31, 2013 was for the week ended 700,000
December25, 2013. The payroll for the weekended January l, 2014, 1,580,000
50,000 1,630,000
included regular weekly salaries ofP80,000 and vacation pay ofP25,000
for vacation time earned in 2013 not taken by December 31, 2013. 2,330,000
The entity has accrued a liability of P20,000 for vacation pay on 1,720,00Q
December 31,2012. On December 3 t, 201~, whatamountshouldbe 5,000 1,725,000
reported ~s accrued salary and vacation pay? Esc~('W a<:counts 1iabi1ity - December 31 605,000
a. 64,000
b. 68,000 Pr:~blem 3-15 (A]CPAAdapted)
c. 69,000
d. 89,000 On i.he first day of each month, Bell Company received from Kent
·.Company an escrow deposit of1>250,000 for real estate taxes. Be1l
Solution 3-13 Answer d Co~pan:y recorded the P250,000 in an escrow account. The 2013
rc:al e.state tax is.P2,~00;000, payable ih equal installments on the flfSt .
Januaty 1, 2014 is a Friday based on the weekly payroll. Therefore,· . d~yofeach calen,darquarter. On January l, 2013, the balance in the
for 2013 consider only 4 days from Monday, December 28 ro Thursday~ . escrow account W<!S P300,000. On September 30, 2013, what amount
December 31. sho~!d be :eported ~s escrow li~bility? . · ·
Accmed salary..,.. December 31,2013 (80,000 x4/5) 64,000 ' ~( l,l.SO,OOQ.
Vacation pay earned in 2013 25,000· : b: 450,000
c. 85~,000 .
Total 89,000 d. . 150,000

Problem 3-14 (AICPAAdapted) Solution 3.-15 Answer b

Kent Company, a division ofNational Realty Corporation maintains Escrow liability- January 1, 2013 300,000
escrow accounts and pays real estate taxes for National's mortgage· . Escrow deposit received from January l to
customers. Escrow funds are kept in interest-bearing accounts.· .September 30,2013 (250,000 x 9 months) ·2,250,000
Interest, Jess a lQ~ service -fee-; .is cre~ited to the mortgagee's
account and used to reduce.future escrow payments. Total 2,550,000
Less: Payment for real esta1:e tax from January 1
Escrow accounts liability- January l 700,000 to September 30, 2013 or three quarters
Escrow payments recei vcd during the year 1,580,000 (2,800,000 X 3/4) 2,100,000
Real estate taxes paid duri'ng the year 1,720,000
Interest on escrow funds Escrow liability- September 30, 2013 450,000
50,000
What is the escrow accounts liability on Decetnber 31 ~
a. 510,000
b. 515,000
c. 605,000
d. 610,000

40
41.
4 The amount owing to another entity is a present obligation but
technically it!'s not a provision because the amount is certain. Of
course, it is an accrued liability.
PROVISION AND CONTINGENT LIABILITY The estimated cost of relocating the employee is a future cost
because it is to be incurred in January 2014. Thus, it is not included
in December 31, 2013 provision.
The estimated cost of overhaul is not a provision because there is
Problem 4-1 (IFRS) . no present obligation. The entity may decide to sell the machine
or not to repair it.
Iriga Comp~y issued the 20 13 financial statements on March 1, 20J4.
The following data are provided by the entity for the year ended Problem 4-2 (IFRS)
December 31, 20 13:
In May 2013, Cherry Company relocated an employee from the
Amount owing to another entity for services rendered Manila head office to a branch in Zamboanga City. At the end of
during December 20 13 . 300,000 repqr:ting period on June 30, 2013, the costs are estimated at
P350,000 analyzed as follows:
Estimated long service leave owing to employees m
respect of past services ·
.
1,200,000 bost for shipping goods
Estimated cost of relocating an emt-loyee from head Airfare 30,000
10,000
office to a branch in another city (employee will Temporary accommodation cost for May and June 80,000
physically relocate in January 20 14) 100,000• Temporary accommodation cost for July and August 90,000
Estimated cost of overhauling machine every 5 years Reimbursement for lease break cost paid in July
(the machine is 5 years old on December 31_, 2013) 150,000 (lease was terminated in May)
20,006
Reimbursement for cost of living increases for the
period May 1, 2013 to May I, 2014
What amount should be recognized as provision on December 3.1, 120,000
2013? Total
350,000
a. 1,200,000
What amount should be recogn1zed as provision for relocation costs on
b. 1,300,000 June 30, 2013?
c. 1,600,000 a. 250,000
d. 1,750,000 b. 240,000
c. 160,000
Solution 4-1 Answer a d. 140,000
Long term service leave 1,200,000 Solution 4-2 Answer c
Cost of s-nipping goods
A provision is a present obligation that is uncertain in amount or Airfare . 30,000
10,000
timing. The present obligation must be both pwhable and Temporary accommodt~tion cost for May and June
Reimbursement for lease break cost 80,000
measurable. 20,000
Reimbursement for cost of living increases for May and
June (120,000 x 2112)
2o;ooo
42 Total provision for relocation costs
160,000
Problem 4-3 (IFRS) Solution 4-3 Answer c

H~len Company decided on November l, 20 l j to resttu~ture the entity's Unpaid wages of retrenched employees 1,000,000
operations as follows: Retrenchment package of Juan Cruz 150 000
Salary for administering closure of Factory A (60% x. P50,0QO) · 30:000
Factory A would be closed down and put on the market for sale.
Total restructuring provision 1,180,000
~

Employees working in Factory A would be retrenched on November

30,2013, and would be paid their accumulate.dentitlements plus six
months' wages.
Some employees working in Factory A would be transferred to Factory
B, which.would continue operating. · ~e.amount ofrestructuring provision includes only direct expenditures
On December 31, 20 13, the following transactions and events had
occuned: ·
The retrenched employees have left and their accumulated entitlements
have been paid. However, an amount ofPl,OOO,OOO, representing a
~ortion ofthe six months' wages for the retrenched employees, has stili
not been paid. · relocatmg contmumg staff, and marketing or adve1iising program
Costs of P300,000 are expected to be incuned in transferring the
remaining employees to their new work in Factory B. The transfer is
planned fo.r January 15,2014.
One employee, Juan Cruz, remains in order to complete administrative
tasks relating to the closure of Factory A and the transfer of employees
to Factory B. Juan Cruz is expected to stay until January31, 2014. His
salary for January will be P50,000 and his retrenchment package will
be P.150,000, all of which will be paid on the day he leaves. Juan Cruz
would spend 60% ofhis time administering the closure ofFactory A,
· 30% on administering the transfer of employees to Factory B, and the
remain,ing 1o% ori· general administration.
What total ani.ount should.be recognized as restructuring provision on
December 31, 2013? ·
a. l ,480,000
b. 1,500,000
c. 1'180,000
d. l ,200,000
The payment ofP300,00_0 to b~ incurre~ in transferring the remaining
employe~s to Factocy,.B IS not mcluded m the restructuring provision
because 1t relates to continuing staff as part of ongoing activities.
an~~~~ from res~cturing and not associated with the ongoing
act~v~ties ofthe entity. For ~xample, salaries and benefits of employees
to be mcurred after operations cease and that are associated with the
closure ofthe operations are included in the restructming provision.
The re~tructuri?g ~rovision does not include cost of retraining or
because these relate to ongoing activities of the entity.
Pr~blem 4-4 (AICPAAdapted)
During 2013, Manfred Company guar~mtee.d a supplier's P5oo·,ooo
loan from_ a bank. On October 1, 2013, the entity was notified that
the su~phey had defau.lted on the loan and filed forbankruptcy
protect10n. Counsel believed that the entity would probably have to
pay P250,000 und~r the guar~ntee. As a result of the supplier's
b~ptcy, th~ entity entered mto a contract in becember 2013 to
retool.Its machme~ so that the entity could ac;:cept parts from other·
suppliers. Retoohng costs are estimated to be P300,000. What
amount should be reported as liability on December 31, 2013?
a. 250,000
b. 450,000
c. 550,000
d. 750,000
$olution 4-4 Ano,)·wer a
The guarantee should be accrued as a provision because the JOSS IS .
probable ~nd the amount can be reasonably estimatefi

44
Problem 4-5 (AICPAAdapted)
Problem 4-7 (IAA)
On February 5, 2014," an employee filed a P2,000,000 lawsu(t
against Steel Compa:t:J.y for damages suffered when one of Steel's
plant exploded on December 29, 20 13. The legal counsel believed Zoe Company is preparing the annual financial statements on December
the entity would probably lose the lawsuit and estimated the loss to 3 1, 2013. Becauseof arec.entlyproven health hazard in one of the
be P500,000. The employee offered to settle the lawsuit out of products, the Pliilippine government has clearly indicated its intention
court for P900,000 but the entity did not agree to the settlement. of requiring the entity to recall all cans of this product sold in the last
On December 31,2013, what amount should be reported a"s liability rhreemonths. Theentityestimatedthatthis recall would costP580,000
from lawsuit? What accounting recognition shou Id be accorded this situation?
a. 2,000,000 a. No recognition
b. 1,000,000 b. Notedisc1osurennly
c. 900,000
c. Expense ofP580,000 and liability ofP580,000
d. 500,000
d. ExpenseofP580,000 andretainedeamingsrestrictionofP580,00C
Solution 4-5 Answer.d
Solulion 4-7 Answer c
The loss is accrued as a provision because it is probable and tbe
a~ount can be reasonably estimated. Problem 4-8 (IAA)

Problem ~-6 (AICPAAdapted)
During 2013, Beal Company became involved in a tax dispute ~ith
the BIR. On December 31, 2013, the tax advisor believed that
an unfavorable outcome was probable and a reasonable estimate
of additional taxes was P500,000. After the 2013 fmancial
statements were issued, the entity received and accepted a BIR
settlement offer ofP5 50,000. What amount of accrue<;} liability
should have been reported on December 31, 2013? . a. Debit litigation expense 1?5,000,000 and credit litigation liability
a. 650,000
b. 550,000
c. 500,000
d. 0 P2,000,000.
Solution 4-6 Answer c
The reasonable estimate ofPSOO,OOO ·is recorded. The accepted
BIR offer is not recorded because it was made after the statements
are issued. In 2014, when the BIR settlement offer ofP550 000 is
. '
accepted, an additional liability ofP50,000 will be recognized.
Nia Company is involved in lltigation regarding a faulty product spld in
a prior year. The entity bas consulted w:ith an attorney and determined
that it is possible that the entity may lose the case. The attorney. estimated
that there is a 40% cbance oflosing. If this is the case, the attorney
estimated that the amount ofany payment would be PS,OOO,OOO. What
is.the requiredjournal entry as a result ofthis litigation?
P5,000,000.
b. No journal entry is requi:;:ed. .
c. Debit litigation expense P2,000,000 and credit ]itigation liablli"t)i
d. Debit litigation expense P3,000,000 and credit litigation liability
P3,000,000.
Solution 4-8 Answer b
The loss is only possibJe and therefore it is only disclosed as a contingent
liability:

46 .
47
 Pro ble m 4-9 (IAA)
Co nco rd Co mp any sel ls mo tor
cyc le hel me ts. In 201 3, the ent Etlvironmental cos t
solc;t 4,0 00, 000 hel me ts-b efo re ity · SOQ,OOO
dis cov erin g a sig nif ica nt def ect Litigation-cost
the ir con stru ctio n. By De cem ber in 300,000
31, 201 3, two law sui ts had bee n
file d aga ins t the entity. Th e firs t Total acc rue alia bili ty
law sui t, wh ich the ent ity has litt 800,000
cha nce of win nin g, is exp ect le
ed to be set tled out of cou rt for Bo th are acc rue d as provis10n
P 1 ,50 0,0 00 in Jan uar y 201 4. Th bec(\use the loss is pro bab le an<
e leg al cou nse rbe l iev ed tha t the
ent ity has a 50- 50 cha nce of win measurable.
nin g the sec ond law sui t, wh ich
for Pl,OOO,OOO. Wh at is the acc rue is
d liability on De cem ber 31, 201 3 Pro b1e m4-11 (IA A)
as a res ult of the law sui ts?
a. 1,"500,000 Eas tern Co mp any has sev era l con
ting ent liabilities on De cembe
b. 1,0 00, 000 31, 201 3. Th e aud itor obt ain ed
the fol low ing bri ef des crip tion o
c. 2,5 00, 000 each liability.
d. 0· In Ma y 20 13; Eas tern Co mp any
bec am e inv olv ed in liti gat ion. l1
Solution 4..,9 An swe r a De cem ber 201 3, the cou rt ass ess
ed a jud gm ent for P 1,600,00<
against Eastern. ·T he ent ity is app
ealing the amount of the jud gm ent
Th e los s on the firs t law sui t is Th e ent ity' s atto rne ys bel iev ed
bot h pro bab le and me asu rab le and it is prq bab le tha t they. can reduce;
the ref ore can be acc rue d as a pro tl1e assessmeftt on app eal by 50%
vis ion . ·· .
Th e loss on the se_cond law sui t is In Jul y 201 3, Pas ig Cit y bro ugh
disclosed as a con ting ent liabilitY t act ion aga ins t Eas tern Co mp any
bec aus e the los s 1s onl y pos sib le. for pol luti ng the Pas ig Riv er wit
h its wa ste products. It is pro bab le
that Pasig City will be successful qut
Pro ble m 4-1 0 (IA A) the amount of damages Eastern
might hav e to pay should not exceed
P 1,500,000. Wh at total amount
Pri me Co mp any has lon g ow ned
a ma nuf act uri ng site tha t has now sho uld be ~ccrued as pro vis ion on
De cem ber 31, 201 3?
bee n dis cov ere d to be con tam ina
ted wit h tox rc wa ste . Th e ent ity a. 1,6 00, 000
has ack now led ged its responsibility
for the contamination. An initial b. 1,5 00, 000
clean up feasibility stu dy has sho wn
that it wi 11 cos t at lea st P50 0 000
to cle an up the tox ic wa ste . Du rin c. 3,1 00, 000
g the cur ren t year, the ent ity' has
bee n sue d for pat ent inf rin gem ent 'ti. 2,3 00, 000
and los t the cas e. A pre lim ina ry
jud gm ent ofP300,0_0~ wa s issu ed
and is und er app eal . Th e ent ity' s
attorneys agree th~t 1t 1s probable Solution 4-11 An swe r d
Wh at am oun t of pro vis ion sho uld
that the entity wil l los e this appe~
be.?-ccrued as liability'!
1. .
a. 500 ,00 0 "" .
A~sess1i1ent on app~al (50% X 1,600,000) 800,000
tlnvironrn,ental cost ·
b. 800 ,00 0 1,500,000
c. 300 ,00 0 Total provision
2,300,000
d. 0
•

48
49
 Problem 4-12 (AICPAAdapted)
On November 25, 2013, an explosion occurred at a Rex Company
plant causing extensive property damage to ~rea buildi~gs. By
March I 0, 2014, claims ha.d been asserted agamst the enttty. The
management and counsel concluded that it is probable that the entity
would be responsible for damages, and that P3,500,000 is a
. reasonable estimate of the liability. Rex's PI 0,000,000
comprehensive public liability po~icy has a PS.OO,OOO deductible
clause. What should be reported in the December 31, 2013 financial
statements, issued on March 25,2014, in relation to this item?
a. A disclosure indicating the probable loss ofP3,500,000.
b. An accrued liabilityofP3,500,000.
c. An ac.:rued liability ofP500,000. . .
d. A footnote disclosure indicating the probable loss ofP500,00G.
Solution 44-12 Answer c
The accrued amount is P500,000 only because it is the extent of
liability of Rex under the comprehensive insu~ce po.kcy.
Problem 4-13 (AICPAAdapted)
On November 5, 2013, a Dunn Comp~ny truck was in an accident
with an auto driven by Bell. Dunn re~eived notice on January 15,
2014 of a lawsuit for P700,000 damages for personal injuries
suff~red by Bell. The entity's counsel believed it is probable
that Bell will be awarded an estimated amount in the range
between P200,000 and P450,000, and no amount is a better
estimate ofpotential liability than any other amount because ea_ch
point in the range is as likely as any other. The 2013 financtal.
statements were.~sued on Match 1, 2014. What amount of loss
should be accrued on December 31, 2013?
a. 450,000
b. 200,000
c. 325,000
d. 0 d.
Solution 4-13 Answer c
Midpoint of the range (200,000 + 450,0001 2.)
325,000
so
Problem 4-14 (IAA)
Winter Company is being sued for illness caused to local residents as a
n.:suIt of negligence on the entity's part in permitting the local residents
lobe exposed to highly toxic chemicals from its plant. The entity's
lnwyer stated that it is probable that the entity would lose the.suit and
be found liable for a judgment costing the entity anywhere from
P l ,200,000 to P6,000,000. However, the lawyer estimated that the
most probable cost is P3,600,000. What amount should be accrued
.md disclosed?
n. Accrue a loss contingency ofP 1,200,000 and disclose an additional
... contingency ofP4,800,000.
b. Accrue a loss contingency ofP3 ,600,000 and disclose an additional
contingency ofP2,400,000.
c. Accrue a loss contingency ofP3,600,000 but not disclose any
additional contingency.
d. No loss accrual but disclose a contingency of Pl,200,000 to
P6,000,000.
Solution 4-14 Answer b
Problem 4-15 (IAA)
On January~, 2013, Brenda Company owned a machine with cosfof
P2,000,000. Th~ accumulated depreciation wasP 1,200,000, estimated
residual value was P120,000 and fair value was P3,200,000. On January
3, 2013, this machine was irreparably damaged by Lann Company
and became worthless. In October'20 13, a court awarded damages of
of
P3,200,000 againrt Lann in favor Brenda. On December 31,2013,
the final outcome of this case was awaiting appeal' and was therefore
uncertain. However, in the opinion ofBrenda's attorney, Lann 's appea1
would be denied. On December 31, 2013, what amount ofgain should
be accrued?
a. 320,000
b. 260,000
c. 200,000
0
Solution 4-15 Answer d
The contingent asset and related contingent gain are only disclosed
because the case is still un.d er appeal by the defendant.
51
 Proble m 4-16 (AJ CPAA dapted )
l'roblem 4-18 (AICPA Adapte d)
In May 2013 , Caso Compa ny filed suit against Wayne Compa ny
seeking P 1,900,000 damages for paterit infringement. A court verdict During Januar y 2013, Haze Compa ny won a litigation award for
in Novem ber 2013 awarde d Caso Pl,500 ,000 in damag es, but P l 500 000 which was tripled to P4,500 ,000 to include punitive
' ' .
Wayne 's appeal is not expecte d to be decided before 2Q 14. Case's damages. The defend ant, who is financially stable, has appeal ed
counse l believed it is probable that Caso will be successful against only the P3,000 ,000 punitiv e damag es. The entity was awarde d
. Wayne for an estima ted amoun t in the range betwee n P800,0 00 P5,000,000 in an unrelated suit it filed, which is being appealed by
and Pl,IOO,OOO, with P1 ,000,00 0 consid ered the most likely the defendant. Counsel is unable to estimate the outcom e of these
appeals. In the 2013 financial statements, what amoun t should be
amount. What amount should Caso record as income from the lawsuit
reported as pretax gain?
for the year ended Decem ber 3 l, 2013?
i\ . 1,500,000
a. 1,500,000 b. 4,500,000
b. 1, 100,00 0 c. 5,000,000 "
c. 1,000,000 d. 9,50Q;QOO
d. 0
Solution 4-18 Answer a
S9lutio n 4-16 Answer d
A gain ofP J,500,000 should be reported. However, the remainder of
A conting ent asset and the related contingent gain are disclos ed P3,000,000 is only disclosed because the defendant has appeale d
only where the inflow of econom ic benefits is probab le. the said amount.

Proble m4-17 (AICP AAdap ted) Problem 4-19 (AICPA Adapte d)

During 2013, Smith Compa ny filed suit against West Compa ny
seeking damages for patent infringement. On Decem ber 31,201 3,
Smith's legal counsel believed that it was probable that Smith would
be successful against West for an estimated amount ofP·I ,500,000.
In March 2014, Smith was awarded P 1,000,000 and receive d full
payme nt the;·eof. In Smith' s 2013 financi al statem ents issued
Februa ry 2014, how should this award be reported?
a. As a receivable and revenue ofPI,OOO,OOO.
b. As a receivable and deferred revenue ofP 1,000,000.
c. As a disclosure of a cpatingent asset bfPl ,000,000.
d. As a disclosure of a contingent asset ofP 1,500,000.
Tone Company is the defendant in a lawsuit filed by Witt in ZO 13
disputing the validity of copyright held by Tone. On December 31,
2013, Tone determ ined that Witt would probab ly be succ~ssfnl
against Tone for an estimated amount ofP400 ,000. Appropnately,
a P400,0 00 loss was accrue d by a charge to income for the year
ended Decem ber 31,201 3.
On Decem ber 31, 2014, Tol)e and Witt agreed to a settlem ent
provid ing for cash payme nt ofP250 ,000 by Tone to Witt, and
transfe r ofTone 's copyrig ht to Witt.· The caa:ying amoun t qf.the
copyright on Tone's accounting records was P60,000 on Decemb~r
31, 2014. What would be the effect of the settlem ent on Tone s
1nco me before tax in 20 14?

Solution 4-1 7 Answer d The contin gent asset is disclos ed only.

a. 150,000 increase
Since the case is settled in March 2014 after the issuan ce of the h. 60,000 decrease
2013 financi al statements in Februa ry 2014, the estimated amount c. 90,000 increase
ofPL5 00,000 shall be disclos ed. d. 90,000 decrease
Sl
Sl

Solution 4-19 Answer c
Accrued liability on December 31,2013 400,000
Cash settleme nt on Decemb er 31, 2014 {250,000)
Carrying arn~unt ofcopynght transferred ( 60,000)
Gain on settlement in 2014 90,000
Problem 4-20 (IFRS)
A Malaysian-based shippmg entlty lost an entire shipload ofcargo ~~ed
atP5,000,000 on a voyage to Australia. It is howeve rcovere dbyan
insurance policy.Accordingtotbereportoftbe surveyor, theamotmt is.
collectible, subject to the deductible clause in the insurance policy. Before
year-end, the shipping ent:J.ty received a letter from the ipSura."Ice entity
that a check was in the mail for90% oftbecla im.
The international freight forwardingentitythatentrusted the shipping
entity with the delivery of the cargo overseas has filed a lawsuit for·
PS ,000,000, claiming the value ofthe cargo that was lost on high seas,
and also consequential damages ofP2,000,~0 resulting from the delay:
According to the legal cou..YISel for the shipping entity, it 1S probable~
the shipping.entitywould have to pay the P5,000,000 but-it is a remote
possibility that itwouldhave to pay the additional P2,000,000 claimed
by the international freight forwarding entity, since this loss was
specifically excluded in the :freight forwarding contract.
Problem 4-ll (IFRS)
During 2013, Odyssey Company is the defendant in a~ infnngemenl
lawsuit. The entity's lawyers believe there is a Jm·eochance that the
court will dismiss the case and the entity will mcur no ou1flow of
economi{; benefits. However, iftbecourt rules in favorofthe rl.:timant.
the lawyers believe that there is a 20% chance that the ennty w11! be
required to pay damages of P200,000 and an 80% chance thar the
entity will be required to pay damages of PI 00,000 Other outcomes
nreunlikely.1becourt isexpectedtorule in late December2C'14 There
is no indication that the claimant will scttk out of court.
A 70/o risk adjustment factor to the probabJhty-weighted expected cash
flows is considered appropriate to refloct the uncertainties in the cash
flow estimates.An appropnate discount rate is 5% per year. Thr present
valueof l at5%for oneperi odis 0.95. \Vhat1s tbemcasuremtntofthe
provision for lawsuit?
a. 100,000
b. 84,000
c. 89,880
d. 85,386
Sohttion 4-21 Answer d

What provisio n should be recogni zed by the shippin g entity at Weighted probabilities:
year-en d?
2()0AJ X 200,000 X 70% 28,000
a. 5,000,000 8()0AJ X 100,000 X 7Ql'/c 56,000
b. 7,000,000
c. 500,000 Weighted cash flows 84,000
d. Multiplybyriskadjustment factor {100% ~7%) __1Qz
0
Adjusted cash flows 89,880
Solution 4-20 A..1Sl"\.'er a
Multiply by PV of 1 at 5% for one period ~
bstimated liabtlity for !awsu ·t 5,000,000 Present value of cash flows 85,386
The lawsuit claim ofP5,000,000 inecognized as aprovis10n because
it is both probable and measurable. However, the additional claim of
P2,000,000 is not recogni~ed because it is remote.
55
Proble~ ~22 (!FitS-)

-~uring'20 13,~Libya Co~~·Y is:.~h~ <fetemi~~-~ ~preac~ofpa~~t·

5
lawst1it. The la~ers beliey~ ther~ i~ an 8~~ phan<:e-~-~~.wrn,
riot dismiss tb.e ea~e and.die ent,i~ ~i~.~ ou!fi~~ ofbenefits: If~~ NOTE PAYABLE
~G:Qu.rt-rol~s -in favor o.f.tbe d.aimant;:tlie ta~ers-~lreve tba.t:the;re ~s ~
60.olcl.chanee-that tlJe· eriti~ vhlJ: be requu~d to ·~ydamages qf.
P2)).oo:oooand aztO% ch.an~tb.atthe¢nti~~iiL?ere9ui~dto pay_.
dat$_g(:s of?·l ,ooo;ooO: GtbennnolJJlts ~! ~a:ges ~eu~e~y. ~e Problem 5-1 (AICPAAdapted)
~urt.is·exp.~ct~ to rulr. m lat-e .D~mber .LQ 14~ Th~e ts no md:icatton
On September 1, 2013, Pine Company issued a note payable tc
th~t the claimant will settle o~tof ool1rt.
National Bank in the amount ofPi,BOO,OOO, bearing tnterest at
12%,. and payable in three cqua] annual princ.ipal payments of
A7% risk adjustment fictor to tbe ~h flows is _ce.nsidered approp~ate . P600,000. On this date, the bank's prime rate was Ll%. The first
tQ-refl,ect.th<:: ~certa~ies in theca5h t:Jo_w es~·rrnates. An approp~ate interest and principal payment was made on September I, 2014.
discoUnt rate.is .i &'lo_per xear. The·pres-~rJ value qf l ~t l 0% for one On.Decembcr31,2014, \"i.•hatamountshouldbe reported"'as accrued
p'eriod i;O. 91: vr.ng;t i;,tlfe.mcasurement of the·proyision on.December int_;(eStpayable? · ·
31, 2013?
a. · 44,000
b. 48,000
a. 1;28o,ooo c. 66,000
. b. 1,369,600
d. 72,000
c. 1,500,000
ci .1,246;~36.
Solution 5-1 AnSl-Ver b
Solution 4-22 Answer d Note payable- September J, 2QU ] ,:8{)0.,000
Payment on September 1, 2014
Weighted probabiH~es:
( 6oo,ooo:
BaJancc, September l, 201.4
1,200,000
60% x 2 ,(l.OO, 000 X 80% 966,000
40% X 1 ,~00,000 x.8{)% 320,000 Accrued interesfpayable -from September lto ·
1.280~000
December 3J. 2014 (J .ioo~ooo Kl2% x 4/12) 48;000
Exoected cash. Ilov.rs ·
M~ltiply byris~ adjustment factor ( iOO% + 7%) ~.07
IncidcntaJiy, the interest expense for2014is computed~ foUows:
Adjusted cash flows . 1,369,600
Multiply by PV ofl at 10% for om:: penod .91 January 'I -Augusq I, 20 [ 4 (1 ,800,1){)0 x 12%x :;111) 14' 000
September l - December 3 t, 20i4
1,246,336 __48~000
Present value of cash fl.ows ·
Total interest expense
192,000

56 57
 Proble m 5-2 (AICPAAdapted) · . Proble m 5-4 (AICP AAdap ted)
Mann Compa ny reporte d on June 30, 20 L3 a 10% note payabl e in Loob Compa ny had the following loans at" 12% interest payable at
the amoun t ofP3t6 00,000 . The note is dated Octobe r 1. 2012 and maturity. Loob repaid each loan on scheduled maturit y date.
is payabl e in three equal annual payme nts of Pl,200 ,000 plus Oate Amoun t Maturi ty date Term
interes t. The first interes t a"nd princip al payme nt was made on
Octobe r 1, 2013. On June 30, 2014, what amoun t should be · 1111/2(}12 500,000 10/31/2013 1 year
2/ 1/2013 1,500,000 7/31/2013 6month s
, reporte d as accrue d interes t payabl e? 5/1/2013 800,000 1/31/2014 9 months
a. 270,00 0 The entity recorded interest expense when the loans are repaid. As a
b. 180,0CO result, interes t expens e ofP150 ,000 was recorde d in 2013. If no
c. 90,000 correction is made, by what amoun t would 2013 interest expens e
d. 60,000 be understated?
a. 54,000
Solution 5-2 Answe r b b. 62,000
c. 64,000
Note payabl e'- October 1, 2012 3,600,000 d. .72,000
Paymen t on Octobe r l, 2013 ( 1,200,000)
Balanc e, Octobe r 1, 2013 Solution 5-4 Answe r a
2,400,000
January I- October:31, 2013( 500,000 x 12% x 10/12) 50,000
Accrued interes t payable from Octobe r 1, 2013 to February 1-July3 1,2013 (1,500,000 x 12%x6/12)~' 90,000
June 30,201 4 (2,400,000 x 10% x 9/12) May 1- December 31,201 3 ( 800,000 x 12% x 8/12) 64,000
180,000
Total interest expens e of 2013 204,000
Problem 5-3 (AICPAAdapted) Less: Recorded interest expense in 2013 150,000
Unders tatemen t of interest expen se . 54,000
On Decem ber 31 ,' 2013, Roth Compa ny issued a P 1,000,00 0 face
value note payabl e to Wake Compa ny in ·excha nge for service s Proble m 5-5 (IAA)
render ed to Roth. The note, made at usual trade terms, is due in
nine month s arid bears interes t, payabl e at maturity, at the annual Joshua Compa ny bought a new machin e on Januar y 1, 2013 and
agreed to pay in equal annual installment ofP600 ,000 at the end of
rate of3%. The market interes t rate is 8%. The compo und interes t
each of the next five years. The prevailing interest rate is 12%. The
factor of 1 due in nine months at S% is .944. At what amoun t should present value of an ordinary annuity of l at 12% for five periods is
tbe note payabl e be reporte d on Decem ber 31, 2013? 3.60.The present value of 1 at 12% for five periods is 0.567. What
is the interest expens e on the note payable for2013?
a. 1.030,0 00
q. 1,000,000 a. 259,200
c. 965,20 0 b. 187,200
d. 944,00 0 c. 360,000
d. 457,200
Solution 5·:3 Answe r b , Solution 5-5 Answer a
. \
Note payable at face value '1,000,000 . PV of note payable on 1/l/201 3 (600,000 x 3.60) . 2,160,000
Interest erpense for 2013 (2, 160,000 x 12%) . 259,200
58
 Problem S-6 (AICPAAdapted)
Problem 5-8 (IAA)
On Dece~nber 3 r, 20.1_3, Boston Company purchased a machine
fro~ l;feh~ Company m ex.change for a noninterest bearing note <>n January 1, 2013, Wisconsin Company loaned Pl ,780,000 cash
requmng eight payments ofP200,000. The first payment was made to Stone Company. The promissory note made by Stone for
on December~ I, 2013 and the others are due annunlJyon December P2,000,000 did not bear explicit interest and was due on Dece.q1ber
31. At dnte of ISsuance, the_prevailing rate of inte. .:;t for this type of 3 I, 2014. No other rights or privileges were exchanged .. J'he
not~ 'Ya:; 11%. The PV of an ordinary annuity of I at li% for 8 prevailing interest rate for. a loan of this type was 6%. The presen1
penoas 1~ 5 .I ~6, and the PV of an annuity_of I in ad_vance at 1~% value of I for two periods at 6% is .89. What amount should bE
for 8 penods 1s 5.7I2. On December 31, 2Ul3, what1s thecanymg recognized as interest expense for 2013?
amount of the note payable? ·.
a. 1,142,400 a. 106,800
b. 1,029,200 b. 110,000
1,046,200 c. 120,000
d. 942,400' d. 0
Solution 5-6 Answer d Solution 5-8 Answer a
PV ofnote payable (200,000 x 5.712)
1,142,400 Interest expense for 2013 (-1, 780,000 x 6%) 106,800
Payment on December 31, 20 J3
( 200,000) ·--
PV of note payabi.:- December 31, 20 I 3 Problem 5-9 (AICPAAdapted)

The PV of an annuity of 1 in advance is used because the date of

. On March 1, 2013, Fine Company borrowed P 1,000,000 and
purchase is December 31, 2013 and the first payment is made on same signed a 2-year note bearing interest at 12% per annum compounded
date, December 31, 2013. · annually. Interest is payable in fuJI at maturity on February 28, 2015.
P.-oblem 5-7 (AICPAAdapted) What amount shou!d be reported as accrued .interest payable on
December 31, 2014?.
On _January 1, 201), Pares Company borrowed P3,600,000 from a a. 100,000
maJor custoM~r ~v1denced l?Y a noninterest bearing note due in three
years . Thr ent1~y agreed to supply the customer's inventory needs b. 120,000
for the Ivan penod _at lower than market price. At the 12% imputed c. 232,000
mterest rat~ for th1s type of loan, the present value of the note is d. 240,000
P2,550,0v0 on January 1, 20 13 . What amount of interest expense
;hould be reported in 2013?
Solution 5-9 Answer c
a. 432,000
b. 350,000 Accrued interest from March I, 2013 to
c. 306,000 February 28, 2014 (1,000,000 x 12%)
d. 0 120,000
Accrued interest from March 1 to December 31, 2014
Solution 5-7 Answer c (1,000,000+ 120,000x 12%x J0/12) 112,000
Interest expense for 2013 (2,550,000 x 12%) A·ccrued interest payable'- December 31, 2014•• 232,000
Discount on note payable (3,600 ,000- 2,550,000) 306,000
1,050,000 If the tntercst is compounded annuaJiy, it means that the accrued
TI1e discount on note payable is amortized as interest expense using the i:,tcrest for one year will also eam interest.
er ;tive inte_rest method by multiplying the present value of the note by
tl .mputed u tterest rate.

60
61
 ProblemS-tO (AICPAAdap1ed) Prqblem 5-U (IAA)
On July 1, 2013, Cody Company obtained a P2,000,000~ 180-day
bank loan at an annual rate of 12%. The loan agreement requires Oti January 1, 2013, Solemn Company sold land to Glory Company
Cody to maintain a P400,000 ~ompensating balan<;e in its checking There was no established market price for the land. Glory gave Solemn
account. Cody would otherwise maintain a balance of only P200,000
in this account. The checking account earns iJ;)terest at an annual a P2,400,000 noninterest bearing note payable in three equal annual
rate of 6%. What is the effective interest rate on the borrowing? installments ofP800,000 with the first payment due December 31.
a. 12.00% 2013. The note has no ready market. The p~vailing rate of interest for
b. 12.67% a note of this type is 10%. The present vaiue of a P2,400~000 not€
c. 13.33% payable in three equal annual installments ofP800,000 at a 10% ~teo
d. 13.50% interest is P1,989,600. What is the carrying atno~t ofthe note payabl
on December 31, 2013?
. 5-10 Answer b
Solution .

· Interest expense (2,000,0.00 x 12% x 180/360) 120,000 a. 1,989,600

Interest income on compensating balance b.. 2,126,400
in excess. of the normal checking account c. 1,388,560
balance (200,000 x 6% x 180/36C) ( 6,000) d. 2,400,000
Net interest expense 114,000
Solution 5-l 2 Answer c
Net proceeds ofloan (2,000,000- 200,000) 1,800,000
~ffective amount ( 1,800,000 x 180/360) 900,000 Note payable 2,400,00
Effective interest rate (114,000/900, 000) 12.67% Present value . 1,989,60
ProbJem 5-11 (IAA) Discount on note payable -=..January 1, 2013 410,40
~ortization or interest expense (100/o x 1,989,600) ( 198,96t
On Jan'uary ' , 20 13 , Monk Company purchased equipment. There
was no established market price for the equipment which has an 8-year Discount on note pa}'able -December 3 r, 2013 211.~
life and no residual value. The entity gave a P5,250,000 noninterest-
bearing note payable in three equal annuat installments ofP 1,750,000 Note. payable- Jantiary 1,.2013 • 2,400,00
with the first payment due December 31, 2013. The prevailing rate of Annual payment on December 31, 2013 ( 800,001
interest for a note of this type is 8%. The present value of the note at
8% was P4,509,950. What amount should be reported for interest Note payable- December 31,2013 1,600,()()(
expense in 20 13? Discotmt on note payable- December 31, 2013 ( 211,44<.
a. 360,796 Carryfug amount - December 31, 2013 1,388,56()
b. 420,000
c. 220,796
d. 0

Solution 5-11 Answer a

Interest expense (8% x 4.509.950) 360,796

62 63
Problem 5-13 (AlCPAAdapted) Problem 5-l4 (AlCPAAdapted) .
Jason Companyo:ffereda<::ontestin which the winner would receive; On July 1,2013, Justine Compao.yh\:lrrowedPl,OOO,OOO on a 10%,
Pl,OOO,OOO payableovertwentyyears. OnDecember31, 2013, Jason five-year interest-bearing note. On.December~ l, 2013, tbe.fair value
Company armounced thewinner oftbecon.test and signed a note payable
of the note is determined to be P975,00 0. The entity has elected the
to the winner for Pl,OOO,OOOpaya.blcin FSO,OOO installments every
Janl-lary 2. Also on December 31, 20 13~ Jason Company purchased fair varueoptl.on forreportingfi.nancialliabiliti.es. On .December 31,
an annuity f9r P4,1.8,250 to provide the P9SO~OOO prize reinain,ing after 20 l 3, what amounts should be presented for this note?
the (irst P50,000 installment which was paid on Janumy 2, 2014. .
Interes t e.}:pense Note .(1ayable Gain (loss)
1. OnDC%ember31,20L3, wbatamountshouldberepmted as note a. 100,000 1,000,000 0
payable-contest winner, net of current portion? b. 100,000 975,000 25,000
a. 368,250 . c. 50,000 975,000 25,000
b. 418,25C d. . 0 97~.000 (75,000)
c. 900,000 .
d. ?50,000 Solution 5-14 Answer c
2. What~ shoultl be reponed as contest prize~ for 20 13?
lfthefai rvalue option ise!ected for reporting afinancialliability, the
a. 1,000,000 liability isrcporte datfairv alueatev eryyear- endwi1h resulting cbanges
b. 4L8,250 in fairvalue induood in profit or Joss.
c. 468,250
d. 0 l. Cash 1,000,000
Note payable l,OOO,QOO '
Solution 5-13
2. Note payable 25,000
Question 1 Answer b Gain on note payable 25,000
Contest prize ex.pe~ (1 ,000,000 - 975,{)00)
418.2SO
Discount on note payable 531,750 . . 3. Interest expense (10% x 1~000,000} so,ooo
Note payable - noncurrent 950,000 Cash 50,000
Contest prize ex.peruu: 50,000
Note payable - ~rrent Under the fair value option. any disco-unt or premium on the nore payable
50,000
is not recognized. Therefore, any di soount or premium does not affect
The noncurr ent note payable ofP950 ,000 is presented minus the the interest expense.
discoun t on note payable ofP53 1,750 or P4 L8,250. ·
Question 2 Answer c
Contestpriz~upensc {418,250 + 50,000)

64 65
 Prob lemS -15 (AIC PAA dapt ed) . Prob lem 5-J 1 (:\IC PAA dapt ed)
On January I, 20n , Jona than Com pany borrowed P500 Wi ll Com pany reported tbe following liability acco unt balan
noninterest..bearing not.e due in four years. The prese 000 8%, ces on
nt Wiue oftbe D.:cc m ber3 1 ~10 13:
note on January 1,2013 was P367,500. The entity elects the
meth od for reporting financ1alliabilities. On DeCember fair value
31, 20 L3, the (i% note paya ble issue d October I, 2{) 12 •
fair value oftlie note is P408, 150. At what amou nt shou
on note payable be presented on December 31, 20 13?ld the disoollllt matu ring Septe mber 30 . 2 01 4
500,000
!-;%note paya ble issue d April I, 1012
a. 132,500
b. 103,100 matu ringA prill , 2014
800,000
c. 91,850
d. 0 l'hc Dece mber 31, 2013 finar«:ial statements \'l•ereis sued
on Marc h
Solution 5-15 Answer d ) I , 20 14. On Janu ary 15, 2014 , the entlr e P 80 0,000
bala nce·o f
,8•!{, no te was refm ance d by is,suance of a long -term
Ifthe fair value optio n is el«:t~ for reporting a financial oblig at ion
accounting rules for reporting discount or pret!llum no longeliability, the paya ble m a lump sum. )n addit ion, on Mar ch 15, 2014
, the entity
Thus~ theno~e payable sooul<l be reported on Dece r apply. cons u.mm ated a n onca ncel able agr eement w ith
mber 31,2 the lend er to
the fair value ofP4 08, 150 and a net gain ofP500,000 minus 013 at 1 e fina nc e the 6%, PSOO,OOO n ote
on a long -term basis . On
or P91 ,850 is repo rted in 2013. P408, 150
.. Dece mbe r 31, 2013 , what amou nt ofth e notes paya ble
s houl d be
Problem S-16 {AICPAAdapted) classi fied as curr ent?

On J~uary 1, 2013, LizeUe Company signe P100,0

beanng note due in three years at a discountd arate 00 noninterest-
of 10% . The entity
1. I ,300,000
elects tfie fiUr value tion for b. 500,0 00
~1, 2013, thec.redii'r atin g~
rtq :financialliabititi.es. On~
riskf acto n indicated thattb~ rate of c. 800,0 00
mtemrt applicable to its borrowings was 9%. Thepresen d. 0
at 100/o ana ~/o are as follows~ tvaluefactocs
.
PV factor .l00/0, 3 perio ds .7Sl PV factor 90/o, 3 perio ds Solution 5-17 Answer a
PV factor lOOAa, 2 periods .772
.826 PV factor 911/o, 2 periods .842
PV factor 10%, 1 perio d .909 PV factor 9%, l perio d h% note paya ble 500,000
.917
X1'1o no1e p ayabl e
Wha t is the carry ing amount ofth.e note payable on 800,000
2013? December 31,
- 1otal curre nt liab ilities 1,300,000
a. 75,100
b. 77,200 I'AS !, paragraph 72, provides that an entity shall classify a
c. . 82,610 financial
liability as curr ent when it is due to be settled within
d..84,200 twelve months
,lll Cf the end ofrep ortin gper iod even if
an agree ment to refinance
or resch edul epay men tona long -tenn basis is comp leted
Solution 5-16 Answ erd after the
e nd of repo rting perio d and befo re the frnancial
state ment s are
Fair value of note - 1/112013 (1 00~000 X. 751) authorized for issue.
Fair value of note - 12/3112013 · 75,100
!(100 ,000 X .842) 84.200
Loss on note paya ble
{ 9,100 )

66 67
 Prob lem 5-18 (AIC PAA dapte d)
Ptobl em 5-19 (AIC PAA dapte d)
.Eliot Comp any reported liabilities on December 31,20 13
as follows: Able Com pany had the follo wing amou nts of long-
term deb
Acco unts payab le and accru ed intere st \lin stand ing
on Dece mber 31, 2013 :
1,000;000
12% note payab le issued Nove mber 1, 2012 l4°'o term note, due 2014
' 30,00(
matur ing July 1, 2014
2,000,000 II ex, term note, due 2016
10% deben tures payab le, next annua l princ ipal 1,070,00(
X% note, due in 11 equal annua l princ ipal paym ents,
instal lmen t ofP50 0,000 due Febru ary 1, 2014 plus intere st begin ning Dece mber 31, 2014
7,000,000 1,100,000
tty., guaranteed deben tures, due 2015 1,000,000
On Dece mber 31,20 13, the entity consu mma ted a nonca
ncela ble l(ltal
agree ment with the lende r to refina nce the 12% note payab 3,200,000
le on a
long-!~r'm basis . The Dece mber 31, 2013 finan
cial statem ents were 'I he annual sinking-fund requirement on the guaranteed
issue d on Marc h 31,20 14. In the Dece mber 31,20 13 statem debentures is
ent of l'1l{) 000 per year. What amount should be r:eported as curren
fi-hanciai positi on, what total amou nt shoul d be repor ted t maturities
as curre nt 11Ciong-term debt on Dece mber 31, 2013 ?
liabil ities?
n. 40,00 0
a. 3,500 ,000 h. 70,00 0
b. 3,000 ,000 ~ 100,000
c. 1,500 ,000 d. 130,0 00
d. 2,500 ,000 ,\'ofution 5-19 Answer d
Solution 5-18 Answ er c l'ot;tl curre nt matur ities (30,0 00 + 100,00 0)
130,000
Acco unts payab le and accru ed intere st
1,000,000 Probl em 5-20 (AlC PAA dap,t ed)
Debe nture s payab le - curre nt portio n
500,000 On Dece mber 31,2 013, Largo Com pany had a P750
Total curre nt liabilities ,000 note
1,500,000 payab le outst andin g, due July 31, 20 14. The entity
plann ed to
rcrma nce the note by issuin g long- term bond s. Beca use
the entity
An oblig ation that matu res withi n one year sl;lall be class temp orari ly had exces s cash, it prepa id P250 ,000 of
ified as the note on
curre nt liabil ity regar dless of refin ancin g that \Yas cons .1.1nuary 15, 2014 . In Febru ary 2014 , the entity comp
umm ated leted a
after the end .of repo rting perio d and befo re issua P 1.500 ,000 bond offer ing On Marc h 31, 2014 , the entity
nce of issue d
finan cial state ment s. !he 2Q 13 finan cial statem ents. Wha t amou nt of the note
payab le
'>hould be Inclu ded in curre nt liabil ities on Dece mber
3 I, 20i 3?
How ever, if the refin ancin g occu rs on or befo re a. 750,0 00
the end of
repo rting perio d, the refina ncing is an adjus ting event h. 500,0 00
, mean ing,
the oblig ation is classified 8S noncu rrent liability. c. 250,0 00
d. 0
Accord~ngly, the 12% .note paya ble shall be class ified as
nonc urren t bc;cause the refin ancin g is made on Dece Solution 5-20 Answer a
mber 31,
1013 . I
'l'hl' entir e amou nt of P750 ,000 is repor ted as curre nt
liabi lity
b~::cause the note payab le is due to be settle
d withi n one year
regar dless of the issua nce of bond s payab le.
68
69
Problem 5-21 (AICPAAdapted) r•roblem 5-23 (IAA)

Dean Company had a P2,000,000 note payable due June 30, 2014. On December 31, 2013, Ace C.ompany had P6,000,000 note payable
On December 31, 2013, the entity signed an agreement to borrow up due on February 28, 2014. On December 31, 2013, the entity arranged
to P2,000,000 to refinance the note payable on a long-term basis. The a Ime ofcredit with City Bank which allows the entity to borrow up to
financing agreement called for borrowing not to exceed 80% of the 1''5,000,000 at 6% per annum for three years. On February 1, 2014,
value ofthe collateral the entity wac; proviCling. On December 31, 2013, the entity borrowed P4,000,000 from City Ba'lk and used P2,000,000
the value of the collateral was ·p 1,500,000. On December 31, 2013, additional cash to liquidate the note payable. The 2013 financial
what amount of the note payable should be reported as current liability? statements were issued on March 15, 2014. What amount of note
payable should be reported as current on December 31, 2013?
a. 2,000,000
b. l ,500,000 a. 6,0.0.0,000
c. -goo,ooo b. 5,000,000
d. 500,000 c. ·4,000,000
d. 2,000,000
Solution 5-21 Answer. c
Solution 5-23 Answer a
Note payable 2,000,000
Refinanced on December 31,2013- noncurrent Problem 5-24 (AICPAAdapted)
(80% X I ,500,000) 1,200,000
Dana Company had P2,000,000 note payable due on June 30,
Note payable-notrefina need, current 800,001 ) 2014. Under the existing loan facility, the entity had the discretio·n
Problem 5-22 (IAA) to refinance or roll over the note payable for at least twelve months
' after the end of reporting period. On December 31, 2013, what
Jam Company had P5,000,000 note payable due on March l, 2014. amount of the note·payable should be reported as noncurrent
The entity borrowed P3,500,000 on Februa1y I, 2014 which had a liability?
five-year term ana used the proceeds to pay down the note and used a. 2,000,000
other cash to pay the balance. The December 31 , 20 13 financial b. 2,400,000
statements were issued on March 3 l, 2014. What amount of the note c. 3,000,000
payable should be classified as noncurrent on December 31, 2013? d. 0

a. 5,000,000 Solution 5-24 Answer a

b. 3,500,000
The entire amount of the note payable is classified as noncurrent
c. 1,500,000
liability. PAS l, paragraph 73, provides that if an entity bas the-
d. 0
discretion to refinance or roll over an obligation for at least
twelve months after the end of reporting period, it shall classify
Solution 5-22 Answer d
the obligation as noncurrent, even if it would otherwise be due
within a shorter period. .
The entire amount is current liability because the refinancing was made
on February I, 2014, which is after the end of reporting period..

70 71
 • Pro blem 6-1 (AI CPA Ada pted )
6 The foJl owi ng info rma tion per tain s
to the tran sfer of real esta te
pur sua nt to. a deb t rest ruc turi ng by
Kno b Com pan y to Me ne
DE BT RESTRUCTURE Com pan y i~ full l i~uid~tion.of Kno b's
liab ility to Mene:
Car rym g amo unt- of liab il ity liqu idat ed
Car ryin g amo unt of real esta te tran sfer 1,500,000
red 1,000,1)00
Fair valu e of real estate transferred
1,200,000
Pro blem 6-1 (Al CPA Ada pted ) What amo unt of pretax gain sho u:d Kno b
repo rt as cmn pon ent of
IJul t Com pan yts inde bted to Ape x u·-:.d income from continuing ope rati ons ?
er a P5,0 00,0 00, 12%, thre e-
yea r not e date d Dec emb er 31, 201 . a. 300 ,000
Bec aus e ofH ulr s fi~ancial
diff icul ties dev elop mg in 20 13, H uli b. 500 ,000
owe d acc rue d mte rest of
P60 0,0 00 on the 110tc on Dec emb c. 200~000
er 31, 201 3. Und er a deb t -
rest ruct urin g 0~1 Decem be;: J ~- '20 13, d.
Ap·:!~~ agre ed to sett le tl1;; ~o e 0
and accrued mr;:re st for a tr:lc~ of larJ.d
h:1vmg a fe1ir \-::Jlue of
PL1,500 OCO. Hul l '.: ..Jrryi.lg amo unt Solution 6-2 Ans wer b
of th~ lard is _P3.~00,000
Ign orin g inco me ux, wha t amo unt o~
gain on extmgui~hm~nt Ca rryi ng amo unt of liab ility
sho uld Hul i rep ort as com pon ent of 1,500,000
mcorr1e from con nnm ng Car ryin g amount of rca' esta te tran sfer
ope rati ons in 20 13? red (I ,000 ,000)
Pret ax gain
a. 2,00 0,00 0 . 500,000
b. l ,400 ,000 Pro blem 6-3 (JAA}
c. 1' 100 ,000
d. 900 ,000 Versatile Company, after hav mg exp erie
nce d financial difficulties in
201 3, neg otia ted with a maj or cred itor
and a.."'Tived at an agreement
Solution 6-1 An.sw£r a to rec;t ruct ure a note pay able on Dec emb
er 31,2 013 . The cred itor
was owe d prin cipa l o0? 3,60 0,00 C and
Not e pay able 5,000,000 inte rest ofP 400 ,00 0 buL
agre ed to acc ept eqttipment wor th P70
Acc rued inte rest raya bl:! 600,000 0,00 0 and not e re~eivable
from a Ver sati le Com pan y's cust orr.
er wit h carr ying amo unt of
Total liability 5,600,000 P2, 700 ,000 . Lnc't;. ...,-:-.,..:oE"rthadan orig
Less: Car ryin g amo unt ofla nd inal cos t ofP 9 00,0 00 and
acct.Jll'.ulated dep recl atlo n ol ~ Jvv_,-
3,600.000 - T,r~-,.,!_Wount sbo uld be
recognized as gain from deb t ex.tmgmshmenr
Qain on extingui.s_hmzot 2,000,000 on '-•·- _ "~ 1 'l?
a. 700 ,000 _
PFR S 9, para grap h 3.3.3, pro vide s that b. 600 ,000
the diff eren ce betw een the
~a rryii1o am oun t of a financia i ]lab c. 400 ,000
ility ex~ingl' ishe d and tb.c
~ons ideC:tion patd. incl udinga~1y noncash asse: ~ans d. 0
fcrrcal or iiabilit:>
tssu med shal l be reco gniz ed in pro tit o:-
Joss.

72 73
 Solution 6-4
Solution 6-3 Answer a
~estion I Answer b
3,600,000
Note payable
400,000 Note payable 2 ,500,000
Accrued interest payable
4,000,000 Fair value of shares (200,000 x l2) 2,400,000
Total liability
Assets transferred: Gain on debt extinguishment 100,000
Note receivable 2,700,000
Equipment at carrying amount Under IFRIC 19, ~hen ~~ity instruments are issued to extinguish all
(900,000- 300,000) 600,000 3,300,000 or part of a fmancJal hab11ity, the equity instruments issued shall be
700,000 measured initially at the following in the order ofpriority.
Gain from debt extinguishment
a. Fairvalueoftbe equityinsbuments issued
. Problem 6-4 (IAA) b. Fair_valueofthe liability extinguished
Seal Company is experiencing financial difficulty and is negotiating c. Carrying amount ofthe liability extinguished
debt restructuring with its creditor to reheve its financial stress. Seal Thedifferencebetweenthecarryi:ngamountofthe'liabilityandtheinitial
has a P2,500,000 note payable to United Bank. The bank accepted measurement of the equitymstruments_issuedshall be recognized in
an equity interest in Seal Company in the form of200,000 ordinary profit o'i1oss.
shares quoted at P 12 per share. The par value is P.l 0 per share.
Question 2 Answer c
The fair value of the note payable on the date of restructuring is
Fair v:tlue of shares . 2,400,000
P2,200,000.
Par v.alue of shares (2 00,000 x 10) 2.000,000
1. What amount shouiJ be recognized as gain from debt
3hare premium 400,000
extinguisbmentasa resultofthe "equity swap''?

a. 400,000 Jbe excess of the fair value ofthe equity instruments issued over the
b. 100,000 par value· is accounted for as share premium.
c. 500,000
d. 200,000 Journal entry to record the equity swap
:. What amount should be recognized as share premium from the
Note payable 2,500,000
issuance of the s)J.ares? Share capital 2,000,000
a. 500,000 Shm:e premium 400,000
Gain on debt extinguishment )00.000
. b. 100,000
c. 400,000
d. 200,000

74
"*"
J •
Probler.n 6-5 (fAA)
Problem 6-6 (IAA)
On December 31, 2013, Sunshine Company showed the following
data with respect to its matLU"ed obligation: Ques~ Company is threatened with bankruptcy due to its inability to
meet mterest payments and fund requirements to retire P6;000,000
.Note payable 5,000,000 note payable with accrued interest payable ofP600,000. The entity
Accrued interest payable 500,000 has entered into an agre·ement with the creditor to exchange equity
The entity is threatened with a c~:mrt suit if it could not pay its maturing mst.ruments for the liability. The terms of the exchange are 300,000
ordmary shares with P5 par value and PI 0 market value, and 25,000
debt. Accordingly, the entity entered into an agreement with the creditor preference shares with P 10 par value and P60 market value.
tor the issuance of share capital in full settlement of the note payable.
I. What is the gain on the extinguishr~1cnt ofthe note payable?
The agreement provided for the issue of35,000 shares with par value
ofPlOO. The share is currently quoted at P 130. The fair value of the a. 2,100,000
b. 1,500,000
note payable on the date of restructuring is P4, 700,000. Under the
c. 2, 750,000
"equity swap", what amount should be recognized as gain from d. 0
extinguishment ofdebt?
2. What js the total share premium fron1 the issuance ofthe prefeJ.;nce
a. 1,OOU,l\00 and ordinaty shares?
b. 2,000,000 a. 2,750,000
c. 950,000 b. 4,850,000
d. 800,000 c... 1,500,000
d. 2,100,000
Solution 6-5 Answer.c
S&lution 6-6
Note payaiJle 5,000,000
Accrued interest payable 500,000
Question 1 Answer a

Total carrying amoun~ uf liability Note payable

5,500,000 6,000,000
Fair value ofsha.-es (35,000 x 130) 4,550,000 Accrued· interest payable
600,000
Gain on extinguishment of debt Total carrying amount of liability 6,600,000
950,000
f Fair value of shares:
Fair value of shares Ordinary (300,000 x 10) 3,000,000
4,550,000
Par value of sh".res (35,oqo x 100) Preference ( 25,000 x 60) 1,500,000 . 4,500,000
3,500,000
Share premium · Gain o~ extinguishment 2,100,000
1,050,000
Joun1al entry Question 2 ·'4nswer a
Note payable 5,000,000 Fair v'a.lue o( ord~11ary sh~res 3,000,000
Accrued interest payable 500,000 Par value of ordinary shares-(300,000 x 5) 1,500,000 1,500,000
Share capital 3,500,000 Fair value of preference shares 1,500,000
Share premium 1,050,000 Par value of preference shares (25 ,000 x 10) 250,000 1,250,000
Gain on extinguishment of Jebt 950,000
Total share premium 2,750,000
76
77
 .Problem 6-8 (AICPAAdapted)
Problem 6-7 (IAA)
Sunset Company had bonds payable with face value ofP5,000,000 Due to·extrerrie finaiJ.cial oifficulties, Armada Company had negotia~
.and a carrying amount ofP4,800,000. fu addition, unpmd interest on a restructuring of a 10% P5,000,000 note payable due on Dece~ber
the bonds was accrued in the amount ofP250,000. The creditor had 31, 2013. The unpaid interest on the note on such date is P500,000.
agreed to the settlement of the bonds payable in exchange for 50,000 The creditor had agreed to reduce the face value to P4,000,000~
shares ofP50 par value. The shares have n9 reliable measure of fair forgive the unpaid interest, reduce the interest rate to 8% and extend
value. However, the bonds are quoted at P3,500,000. the due date three year~ from December 31, 2013 .'The PV of 1 at
10% for three periods is 0. 75 and the PV of an ordinary annuity of
1. What is the gain on the extinguishment of the bonds payabl~? . 1 at 10% for three periods is 2.49.
a. 1,500,000
b. 1,300,000 1. What is the gain on extinguishment of debt in 2013?
c. 1,550,000
d. 0
a. 1, 703,200 . '•
b. 1,203,200
2. What is the share premium from the issuancetthe s~ares? c. 2,000,000
d. '540,000
a. 2,300,000
b. 1,000,000 2. What is the interest expense for 2014?
c. 1,500,000
d. 0 a. 320,000
b. 379,680
Solution 6-7 c. . 400,000
d. 500,000
Question 1 Answer c
Carrying amount of bonds payable 4,800,000 Solution 6-8
Accrued interest on bonds payable 250,000
PFRS 9, paragraph 3.3 .2, provides that a substantial
Total 5,050,000
modification of terms of an exi's ting financial liability shall be
Fair value of bonds payable i.3,500,000)
accounted for as an extinguishment of the old liability and the
Gain on extinguishment of bonds payable 1,550,000 recognition of a new liability. · .
Question 2 Answer b Under Application Guidance B3 .3 .6 ofPFRS 9, there is substantial
Fair value of bonds payable 3,500,000 modification of terms if the gain or loss on extinguishment is at
Par walue of shares (50,000 X 50) 2,500,000 least 10% of the total carrying amount of the old liability.
Share premium 1,000,000, Application Guidance B3.3.6 further provides that the difference
between the old liabilitY and the present value of the new liability
be
which is discounted using the old effective rate shall accounted
for as gain or loss on extinguishment.

7R 79
 Question 1 Answer a
Problem 6-9 (AICPAAdapted)
PVofprincipal (4,000,00Qx .75) 3,000,000
PV of annual interest payments (320,000 x 2.49) 796,800 Granada Company had an overdue 8% note payable to First Bank.at
Total present value of new liability P8,000,000 ancf accrued interest of P640,000. As a result of a
3,796,800
restructuring agreement 011 January I, 2013, F irst Bank agreed to the
Note payable- old followin.gprovisions :
5,000,000
Accrued interest payable 500,000 TI1e principal obligation is r educed to P7 ,000,000.
Total old liab1lity 5,500,000 The accrued interest ofP640,000 is forgiven.
Present value of new liability 3,796,800 The date of maturity is extended to December 31,2016.
Gairi on extinguishment of debt Annual interest of I 0% is to be paid for 4 years every December
1,703,200
31.
Note payable - new 4,000,000
Present value of new liability The present value ofl at 8% for4periods is 0.735 and the present
3,79{),800 valueofanordinaryannuity of I at 8% for4 periods is 3.31 .
Discount on note payable 203,200
1. What is the gain on extinguishment of debt to be recognized for
Journal entry 2013?

Note payable - old a. 1,000,000

5,000,000
Accrued interest payable b. 1,178,000
500,000
Discount on note payable 203,200 c. 1,640,000
Note payable -new 4,000,000
d. 538,000
Gain ou extinguishment of debt 1,703,200 2. What is the interest expense to berecognizedfor20 L3?
Question 2 Answer b a. 746,200
Interest expense for 2014 (10%x 3,796,800) b. 700,000
379,680
·Interest pai~ ( 8% x 4,000,000) c. 596,960
320,000
d. 640,000
Amortization of discount 59,680

to
The entries record the payment of interest on December 31,
2014
are:
andal'norti:zation.t>fthe dlSCOUnt On not~ payable for 2014

Interest expense 320,000

Cash 320,000
Interest expense 59,680
Discount o.n note payable 59,680

80
81
 Solution 6,.9 l••·oblem 6-10 (lA A)
Quetion 1 Answer b 1luc Lo adverse economic circumstances and poor management,
lagaytay Highlands Company had negotiated a restructuring of its 9%
PV of principal (7,000,000 x .735) 5,L45,000 }>(,,000,000 note payable to Second Bank due on January 1, 2013.
~V of annual interest payments (700,000 x 3.31) 2,317,000 '[here is no accrued interest on the note. The bank has reduced the
Total present value of new liability 7,462,000 princ1pal obligation from P6,000,000 to P5,000,000 and extend the
n1 1turityto 3 years or on December 31, 201 5. However, the new interest
Note payable- old 8,000,000 t •Le is J3%payableannuallyeveryDecember31. Thepresentva1ueof
Accrued interest payable 640,000 I at 9% for thr.ee periods is .77 and the present value of an ordinary
Total old liability 8,640,000 unnuity of 1 at 9% for three periods is 2.53. What is the gain on
Present value of new liability 7,462,000 extinguishment ofdcbtto be recognized for 20 13?
Gain Gil. extinguishment of debt 1,178,000 II.1,000,000
I
h. 350,000
Note payable - new 7,000,000 c. 505,500
Present value of new liability 7,462,000 d. 0
Premium on note payable 462,000
Solution 6-10 Answerd
I'V of principal (5,000,000 x .77) 3,8~0,000
Question 2 Answer c
I'V of annual interest payments (650,000 x 2.53)" \644,500
. Interest paid (10% x 7,000,000) 700,000 .
Total present value of new liability 5,494,500
Interest expense for 2013 ( 8% x 7 ,462,000) 596,960
Premium amortization 103,040 Note payable- old 6,000,000
!'resent va[ue of new liabil ity 5 ,094,500
l ,,li n Ol" extinguishment- no1 recognized 505,500
Journal entries for the payment of interest on December 31,2013
and amortization ofthe premium on note payable for 2013: J'he gain is less than LO% of the old liability ofP6,000,000.
Accordingly, the gain is not recognized because the modification
Interest expense 700,000 Jll not considered a;~t. extinguishme;nt of the old liability.
Cash 700,000
Premium on note payable 103,040 'I he old liability is simply continued as follows:
TntPrPc:t e')(nl"n<:l' 103.040 !'.olepayable- old 6,000,000
Note payable -new 5,000,000
Premium on note payable 1,000,000

82 83
However, a new effective rate should be compLlted. By means of Problem6-J2 (AlC:PAAdapted)
interpolation or use of a fi·nancial calculator, the new effective rate is-
5.58%. On January l,20l3,Mara Compatlyenterediilto a debt restructuring
agreement with Clara Company which \Vas experiencing financial
Interest paid ( 13% x 5,000,000) 650,000 difficulties. Mara Company restructured a P1,OOO,OOOnote receivable
Interest expense ( 5.58% x 6,000,000) 334,800 as follows:
Prem1um amortization 315,200
Reduced theprincipalo~ligatjon to P700,000.
Journal entries on December 31,2013
Forgave P120,000 of accrued interest
Interest expense 650,000
Ca~h 650,000 Extended the matuJitydatefrom January L,2013 toDecember3l,
' 20l4.
Premium on note payable 315,200
Interest expense 315,200 Reduced the interest rate from 12% to 8%. Jnte.rest is payable
annually on December3J, 2013 llnd 20 ~4.
Problem 6-11 (AICPAAdapted)
Relevant present-value factors :
During 2013, Mann Company experienced financial difficulties and
is 1ikely to default on a P5,000,000, J 5% three-year note dated
Single sum, two years at 8% . .857
January I, 2011, payable to Summit Bank. On December 31, 2013,. Singl<~ sum, 1:\•,;o years at 12% .797
the bank agreed to settle the note and unpaid interest ofP750,000 0 rdinary annuity, two years at 8% 1.783
for 2013 for P4, 100,000 cash payable on January 31, 20 L4. What
Ordinaryaonuity, two years at 12% 1.690
amount "should be reported as gain from extinguishment of debt in
2013?
L Wbat is tb.dmpairment (()sson the note receivable for 20 13?
a. 1,650,000
b. 900,000 a. 347,460
c. 750,000 b. 467,460
d. 0 c. 442,100
d. 562,100
Solution 6-11 Answer a
2. What is the mterestincome for20l3?
Note payable 5,000,000
Accrued interest payable 750,000 a. 56,000
Total liability 5,750,000 b. 78,305
Less: Cash settlement 4,100,0o"O c. 81,155
Gam on extinguishmem: of debt d. 80,000
1,650,000

85
84
$olution 6-12

Question 1 Answer b
7
Reduced annual interest (8% x 700,000) 56,000 BON"'DS PAYABLE
PV of interest using original L2% rate ( 56,000 X 1.69) 94,640
PV of principal usi11g original 12% rate (JOO,OOO X •797) 557,900 Problem 7-1 (AICPAAdapted)
Total PV ofnotereceivable 652,540 Glen Con1pauyhad.the following long-terr.q.debt:
Carrying amount of note receivable: Sinkj:Jgfundbonds, maturing tn ins:allments 2,2fW,OOO
Principal 1,000,000 lcuiustrial revenr:e.bonds, matc.r.ing inin:>tallmems 1):00;000
Accrued interest 120,000 1,120,000 SuLordinated bonds, maturing on a single date 3,000,000

Impairment loss on note receivable ( 467,460) \\'hat is the total amm.mt of -serial bo11.ds?
u. 3:000,000
Note receivable - new 700,000 b. 4,000,000
Present value of note receivable 652,540
c. 4.800,000
tl. 7,0~0~000
Unearned interest income 47,460 Solution 7-l Answer b
Note receivable - new ~'erial bo'ldS arc bt:>nds thattnaturein.a series or by iil~t!.i.Uill>2.ltS.
Impairment loss ·,mal serial bonds (2,2.~0.000 + J,80~,000) ~.000,000
Note receivable - <Jid 1'000,000
Accrued interest receivable 120,000 SubQ.r.d,J..rlated j;)onds are bqnds that rankbelcw the an1ounts owing to
47,46{)
general cr~ditq.£?. .
Unearned interest income
Prubfem 1-2 ~AJCPAAclapted)
Question 2 Answer b Zola Company had the following long-term debt:
Bonds maturing in installments, secured by machinery l,OOO,OOO
Present value ofnote receivable- 1/1/2013 652,540 Bonds m~!:uring on a single date, secured by realr-: l,SOO,OOO
Amortization of unearned interest income for 2013 : Cvllt-teral trus t bonds 2.000,000
Int_erest income for 2013 (12%-x 652,540) 78,305
What is the total amcuntofdebeo1ure bonds?-- ·
Interest. {'eceived for 2013 .~8% x ?00,000) 56,000 22,305
Present value- December 31, 2013 674,845
I, 2,000,000
b. 1,000~000
Amortizationofuneamedinterest income for 2014: c. 1,800,000
Interest income for 2014 (12% x. 674,845) 81,155* d. a
Interest received 56.000 25,155
Solution 7-2 Awer d
Present value- December 31, 2014 700,000
Jclx:nture bonds are unsecured bonds-or bonds v,?ithout collateral
* 12% xP674,845 equals P80,98L There1s a difference ofP 174due to security. Collateral trusti:onds.an: bonds secured by mvestments in
rounding of PV factor. · · shares and bonds. · ·

S1
Probiem"1-3 (AICP~Adapt:;d~
Problem 7-4 (AICPAAdapt~d)
l31uc Company reported the follo"':'ing long-tenn debt on December .On April -I; 2013, G~eg. Companyissued at 99·pl~saGciued·interest,
3J, 2013: 2,000 of8%·l> 1,000 face·value bonds. The bonds are dated January:
I, 20l3, mature on January I, 2023; arid pay interest on Ja.n uary 1.
and July 1. The:entitypaid·bond issue cost ofP70,COO. From the
9% re(nstered debentures, callable in~Ol4, due in2015 . 3,500,000 bond issuance, what is the rtet ·c ash received? . .
. .
11% collateral trust bonds, convt:::til?le into.. ordinary a: . 2,020.,000 .
shares beginning in 2014, d1.1e m 20 J 5 3;000,000 b. 1,980,000.
. . ... c. 1,950,000
l 0'7o subordinated debentures (P 500,000 p:iaturing
d. 1,9.10,000
annually beginning in2014) 1,~00,000

Solution 1-:4 Answer. c

\Vhat 1S the total an:.ount ofterm bonds?
Issue pnce (2,'000,000 x: 99%) · . ._ . ·1,980,0QO
Accrued interest frorri January 1 to Apijl I~ 20·13
....,
3,000,000
'
(2,000,000 X~% X ~_112) . 40,000
b. .1,500,000 . Total 2,020,006
c. 5,000;000 Less·: Bond issue cost . 70,000
d. 6,500,~00 · Net cash received from bqild issuance 1,950,000

.Solution 7-3 Answer d Problem.7 -5 (AICPAAdapted)

. .

9% registered dcben.tuccs 3.500, >00

On Match 1, 2013, Cain .Company r.ssued at. l03 .plus accrued
interest 4,000 of 9%, P l ,000 face val'ue bonds: The bonds. are
l i% coliatera1 trust bends 3,000,000 ·dated January 1, 2013 and mature on January 1, 2023. Interest is •
Total term bonds 6,500,000 · payable semiannually on Jariuary 1 and ~uly .I. The entity paid .
·bond 'issue cost of P200,000: What is the net c..flsh received
from the. bond issuance?
Term bonds ~re bends that mature on a single dat.e.
a. 4,~20,000
b . 4,180,000
c. 4,120,000
d. 3,980,000

Solution 7-5 Answer d

Issue price (4,000,000 x 103%) 4,120,000
Accrued interest from January 1 to March 1, 20 13
(4,000,000'x 9% x 2/12) 60,000
Total 4,180,000
Lt:ss: Bond issue cost _100,000
Net cash received from bond issuance 3,980,000
88
 Problem 7..6 (AIC:~AAda~t~) Problem i-8 (AICPAAdapted)
the
Dwing the Cu:rre~~ year;.~dyGo~~ incurred following costs m On January 31, 2.0 13, Be::<m Company i::suecl PJ~OCO,OOO •n<.:~turity
connectionWiththeissu.anceofbon~ : · · · · ··· va lue, 12% bonds f9r P3 ,000,C0t) casb.. 1'hc bonds an: dated
Decemher 3: ,20 12 a.,d rncu.ure o., December 31. 2022. Irtcrr.st is
. Promotio·n cost _.2oo,ooo· p.ayabJe semiannually on J t.me 30 Jnd O;:;cembe1 Jl. What arnount
Printing and engn,.i"ng . 150,000 of accrued i ':l:erest pay2.ble shouict be repertP:d 0 !1 s~pte..z:nbcr
Legal ·fees . . 8pcl,OOO 30, 201J?
Fees paid to in-;fepend~nt acconntants· fqr regis,ration 100~000 a. 270,JOO
Commissions paid to~nderwri~er . : _1,500,000 ' b. 240,000
. ·. . . ....
What amount should be reeorded as bond 1ssue costs to be amortized C. 1~0,00()
o_ver the tcim of the bonds? d. 90,000

a. · 2,550-,000 Solution 7-8 .Answer d

b. ' 2,750,000 Accrued interest payabie from June 30, 20i 3 "'::.J
c. 1,500,000 Se}ltcn!b~L" 30,20 l3 (3-,000,0CO x 1:!% ~J111)
·d. 1,050,000
:Prabtcm 7-9(ArCPAAdavi"ed}
Soluti'on 7-6 Answer b
· On Juue 30,2013, HuffComp:lllyissuedat 99, fivctf!.(JUSa.1tl-of8%,
All costs mcurred ·are treated as bond issue costs tQ be amortized as Pl,OI}O face value b(Jnd3. Tbe bonds wc:re l.S~ueci through an
intere'st ~?(pense over the life·ofthebonds. . undetwri"ter to wh()m the -entity paid bc!id j~~ue co:;t ~~f ?415.000.
On June 30, 20 13:~. what am<n:mt should be n:ported_i.£ ·b ond
Problem 7-7 (AICPAAdapted) · u3buw;? ·
a. 4,525,00.0
On November I, 2013, Mason ~ompany issued P8_,000,.0.00 of.
b. "1J~50":000
10-year, 8% term bonds dated October 1, 2013-. TI1e bonds w·ere c. 5,000,000
sold to yield I 0% with total proceeds ofPJ,OOO,OOO plus accrue~· d. 4,575,000
interest. Interest is paid every April I and October I. What amount
should be reported fo.r: accrued interest payable on December ~ l, 2013?
Solution 7-9 Ans-yver :.~
a. 175,000
Issue price: ('i .OO{),OOO x 9~%) 4, S'~(l ,00')
b. 160,000 -.-----
c. 116,667 Bonds payable· 5,C10u,OOO
d. 106,667 Discount on bonds payable ( 50,000)
Bond issue c~st ( <125,000)
Sotu.Lion 7-7 AnS'-1-'er b
Carrying amount of bonds payabJc ~.$25 ,000
Accrued interest payable from October 1 to
December 3!, 2013 (8,000,000 x S% x 3/12) 160,000 PFRS 9, paragr.rph 5 .1.1, pr-ov:ides that tra::t.:>a.:: tion costs sl:nll be mclndcd
The nominal interest of8% is used in determining the accr:Jed in the initial me~suremeni.. of:.~ fbaud.al Jial:.d!itj' il'nt :ii:. f~.t.r vai.ue
interest payab~c from the last interest date on October 1, 2013. through profi( or J.Jss. Accordingly, boJ1q. i:s::;ue co::;·t is a d.;:iur.tion from
bonds payable
90 91
rrobleP.t ?-10 (AICPA.Ad.aptet!) Pr(tblem 7-12 (IAA)
On July l, 20:3, Can· Company issued at :04 fi-:re thousand of lOo/~ Aye Company is authorized to issue P5,000,000 of6%, 10-year.
P1,000 face n lt•e bunds . The bonds were·~ssued th•ough an honds dated July 1, 2013 with'interest payments on June 30 and.
unde~ w.:iter [O whnm the cnt!ty paid bond issue cost ofP1_2 5 ~~QO. Uc•ccmber 31. When the bonds are issued on November 1, 2013,
On July 1, 20i 3, what 11:riouatshou~d be reported as bond habtltty? lh<.' entity received cashofP5,150,000 including accrued interest.
:::~. 4,875.000 What is the discount or premium from the-issuance of the bonds
b. 5~075 ,000 p.tyn.ble? ·
c. 5,200,COO n. 150,000 bondprem.ium
d. 5,325.000 h. 50,000 bond premium
c. 150,000 bond discount
Solution 7 TU Answer b d. No bondpremiumanddiscount
lssue. pric!-! (5, 000,000 x 104%} 5,200,000
Solution 7-12 -Answer b
B~mas pa.yabl~ 5,000,090 ("'ush received . 5,150,000
Premium OTI bonds psyable 200,i)00 Accrued interest from June 30 1o November 1, 2013
Bond is:.•Jc r.;cst ( 125,000) (5,000,000 X 6% X 4/12} - ( 100,000)
::.~arrying i:Hr.o ..mt ofb011ds payab}e 5,1J75,000 l~sue price of bonds payable 5,050,000
l·uce value -5,000,000
jJroo!em 7-::i (r.Ha.CPAAd apterl; Premium on bonds payable 50,000
On January l, 20l3, BcrgComprulylssued4,000of8'1c f'2,000 face
value bcr:-is at 97 ul'.13 2c::rw:dinterest The bonds are.dated October Problem 7-13 (IAA)
1, 20i2 and n'i:ttur ::: en October ·!, 2022. ht~er~~t is payable
semiannually on Ap r: i 1 an d October 1. A.ccruedmterest fur the · On July l, 2013, Tara Company issued 4,000 of8%, Pl,OOO fa~e
period October 1, 2012 to_Jan11ary 1,_2013 amoun~ed toP i 60,000<) value bonds payable for P3,504,000. The bonds were :issued to
On Jan'm1ry i, 20L3, whatJ.s the carrymgamountofbonds pa;yable, yield 10%. The bonds are dated July' I, 20B and mature on July 1,
2023 . Jnterest is payable semiannually on January I arid July ·1:
n. _7,84C,D00 Using the-effective interest meth<td, what amount of the bond '
b. 7,766,000 discou-nt should be amortized fqr the six mop_ths ended Decemb'
s. 7,606,000 1 1,2013? .
d. 7,760,00{)
n. 30,400
h. 24,800
Solutf.o;l 7- 1I Ar..')w.er d
c. 19,840
1ssuc pric~ (P ,OOO,OJC x 97%) 7,760,000 d. 15,200..

:3onds pnj:1uic (4,00.0.,. P2,000) 8,000,{)00 Solution 7-13 Answer d

Dtscoi.4nt on bC'nds payable ( 240,000)
----- Interest expense (3,594,000 x_IO% x 6/12) l. 75,200
7,760,000 Interest paid (4,000,000x 8%x6/12) 160,000
Discount amortizatio·n for six months _15,200

9J
 Solutio11 7-15 Answer a·
Effective interest method
Interest Interest Discount Carrying
_Und~r the·effective inter;est method, the difference·between the interest llnte paid expense amortization amount
expens"e and interest paid is the discount or premium amortization. ·. ·
. . 1-1 2013 886,000
The interest expense is equal to the carrying amount ofbonds payable 7- 1 2013 50,000 53,160 3,160 889,160
multiplied by the effective"interest rate. 1-1-2014 50,000 53,350 3,350 892,510
The interestpaid is equal to the face value ofbonds payable multiplied 100,000 106,510 6,510
by the nominal interest rate.
Interest paid (1,000,000 x 10% x 6/12) 50,000
~roblem 7-14 (IAA) . ·
On J~uary l, 2013, Marsh Company issued 10% bonds P'!-Yablein Interest expense for 2013:
the .face amount ofP6,QOO,OOO. The bonds·mature on January 1, 2023. 886,000 X 12% X 6/12 53,160
~e bends were issued for P5,316,000 to yield 12%, resulting in bond 889,160 x 12% x 6/12 (rounded) 53,350
di~ount ofP684,000. The entity used the effective interest method
ofamortizing bond discount Interest is payable January 1 and July 1. 106,510
For the six montqs ended June 30, 2013, what amount" should be
reported as bond interest expense? · llroblem 7-16 (AICPAAdapted)
a. 300,000 On January 1,-2013, West Company issued 9% bonds in the face
b. 318,960 omountofP5,000,000, which mature on January 1, 2023. The bonds.
c. 334,200 were tssued for P4,695,000 to yield 10%. Interest is payable
d. 341,040 onnually on December 31. The entity used the interest method of
nmortizing bond discount. On December 31, 2013, what is the
Solution 7-14 Answer b currying amount ofthe bonds payable?
. .
Interest expense from January '! to ·June ·30, 2013 1\,4,695,000
(5,316,000x 12%x6/12) . h. 4,714,500
c. 4,704,750
Problem 7-15 (AICPAAdapted) d. 5,009,000
On January 1, 2013, Carrow Company issued 10% bonds in the
face amount ofP1,000,000 that mature on January 1, 2023. The Solution -7-16·Answer. b
bonds were issued for P886,000 to yield 12%, resulting in bond Ink rest expense (4,695,000 xl 0%) . 469,500
discount of P 114,000. The entity used the interest method of
amortizing bond discount. Interest is payable on January 1 and July lutncst paid (5,000,000 x 9%) 450,000
1. For the year ended December 31,2013, what amount should be A morhzation of discount for 2013 19,500
reported as bond interest expense? ·
a. 106,510 Bonds payable 5,000,000
b. 100,000 Discount on bonds payable (305,000 -19,500) ( 285,500)
c. 53,160
Cunying amount- December 31, 2013 _4,714,500
d. . 50,000

94 95
 rrool em 7-17 (AlCP AAda pted) Solution 7-18 AnS'>i'erc
On Janua ry I, 2013, Wolf Comp any issued !0% bonds m the lntere st expen se (5,250,QOO x 6%)
face 315,000
amount ofP5,0 00,00 0, which matur e on Janua ry 1, 2023. 1l1e bonds lnlere st paid (5,000 ,000 x. 7%) 350,000
were issued for P5,67 5,000 to yield 8%, result ingu1 bond premi
um Ptt!mium amort izatio n for 2013
ofP67 5,000 . The entity used the intere s1 meth od of amort 35,000
izing
bond premium. Intere st is p<:yable annua lly on Decem ber
31. On Premi um on bond payab le- Janua ry l, 2013
Decem ber 31, 20 13, what_is the adjus ted unam oi1ize d 250,000
bond Premi um amort izatio n for 20 13
premium? ( 35,00 0)
Premi um on bond payab le- Decem ber 31,20 13
-~fl.675,0 00 215,000
b. 629,0 00
c. 607,5 00 Probl em 7-19 (AICPAAdapted)
' J. 507,5 00 On Janua ry 1, 2013, Ward Comp any issued 9% bonds in face
amou nt ofP4, 000,0 00, which mature on January I, 2023. The
bonds
Solution 7-17 Answ er b were issued forP3 ,756,0 00 toyie} d 10%, result ing in bond discou
nt
ofP24 4,000 . The entity used the intere st metb od of amort
Intere st expen se (5,675,000 x 8%) izing
454,000 bond discou nt. Intere st is payab le annually ori Dece mber 3!.
Intere st paid (5,000,000 x 10%) On
500,000 Decem ber3 1, 2013, what is the unam ortize d bond discou llt?
Premi um amortization for20 l3
46,000 a. 228,4 00
b. 208,0 00
Premi um on bonds payab le
675,000 c. 206,440
Premi um amort ization for 2013
( 46,00 0) d. 204,0 00
Premi um on hond.s payab le- Decem ber 31, 2013
629,000
Solution 7-19 Answ er a
Probl em 7-18 (ATCPAAdapt~d) Interest expense (10% x 3,756, 000)
375,600
Intere st paid ( 9% x4,000,{l00)
Webb Comp any had outsta nding a 7%, 10-ye ar PS,OOO,OOO face 360,000
value bond. The bond wasor iginal lysold to yield6%~mnual interes Disco unt amort ization for 2013 15,600
t.
The entity used the effective inter est metho_d to amort ize
bond O[sco unt on bonds payab le
244,000
premi um. On Janua ry i, 20 13, the carry ing amou nt of the Disco unt amort izatio n for 20.\3
bond ..... . ( l5,600 )
payab le was P5,25 0,000 . What amou nt of unam ortize d premi Disco unt on bonds payab le- Decem ber 31, 2013
um 228,400
on bond payab le sb.ould be repor ted on Decem ber 31, 2013?
a. 225,0 00
b. 172,500
c. 215,0 00
d. 52,50 0

96 97
Problem 7-20 (IAA)
Problem 7-21 (IAA) ·
Moon Company reported on December 3 1, 20 12 9% bonds
payable of P4,000,000 less unamortize d discounro fP320,000 . On December3 1,2013, Mari~Companyreported· ~onds payable of
Further examinatio n revealed that these bonds were issued to yield P7,360,000 and accrued interest payabieofP 200,00Q. The bonds are
10%. The amortization ·ofthe bond discount was record~td using retuedon January I, 2014 for P8,160,000 excludinga cciued interest.
the effective interest method. Interest was paid on Januaiy l and What amount should be reported as gain or loss on extinguishment of
July 1 of each year. On July·l,201 3, the entity retired the bonds at bonds payable? · - ·
103 before maturity. What iS the loss on retirement ofbonds payable
on July 1, 2013? a. 800,000 gain
b. 800,{)00 loss
a. 436,000 c. 600,000 gain
b. 440,000 d. 600,000 loss
c. 432,000 ..
I·
d. 120,000 Solution 7-21 Answer b
. ' .~

Solution 7-20 Answer a Lossonexting11jshment {8,160,000- 7.,360,000) 800,000

Interest expense (3,680,000 x 10%) 368,000 Problem 7-22 {IAA)
Interest paid (4,000,000 x
9%) 360,000 .·
An11~al amortizatio n of discounf ·8,000 On Cecember 31, 2013, Boheme Company reported a 9% bonds
payable due December 31, 20I9 with a .carrying amount' of
Amortization from January! io Jllly 1, 2013 (8,000x 6112) ·p]5,405,00 0. The txmdswere issued. on December 3 1,2009.-andhad
a face arnountofP 15,000,000 with imerest payable$em iannually on·
Bo~ds payable 4,000,000 June30 andDeeeiJ?l>er31 of each;·~ On Jarmary 1:2014, the entity
Discount on bonds payable {320,000- 4,000) ( 316,000) retired PS,OOQ,OOO of these bond<: at 98. What amount should be
Carrying amount- July 1, 2013 3,684,000 reported as gain or loss onth~retirementofthebonds for2014?
Retirement price {4,000,000 xI 03) 4, 120,000 I
J
Loss on retirement a. 235,000 gain I
( 436,0001 !'
b. 235,000 loss
c. 100,000 gain
d. iOO,OOO l~ss

Solution 7"-2 2 Answer" a

Carrying amount retired (15,405,000 x 1/3) ~.1~5,000

Retirement price (98% X 5,000,000) 4,900,000
Ga~n- on r:etirement - 235,000

98
Problem 7-23 (I FRS)
Problem 7-24 (lFRS)
On !anuary I, 2013,. ~uyang Company luued3-year bonds with .. .
face value ofP5)000,000 at 98. Additionally, the entity paid bond On Jan!Jary l, 20 13 , Masbate Company issued 5-year bonds with
issue cost ofP140,000. The nominal rate is 10% and the effective face value of P5,00::>,000 at l lD: The entity paid bone issue cost of
ra.te is 12%. The interest is payable annually on December 31. The P80,000 on sarQe d ate. The- stated inte rest rate on tbe bond s is 8%
entityusedtb.eeffectivejot.erestmethod in amortizing bond discount payable annually everyDecember3 l. The bonds are "issued to yield
and issue cost. What is the carrying amount of the bonds payable 6% per annum. The entity usecl the effectiv e 1ntterest method of
on December 31, 2013? . amortization. 01,1 December 31, 2013, What is the Ca..LYUlg amount
ofthe bonds payable?
a. 4,840,000
b~ 4,831,200 a. 5,000,000
c. 4,848,000 b. 5,1JOO,OOO
d. 5,000,000 c. 5,345,200
d. 5,430,000
Solution 7-23 An.nver b
[."olution.l-24 Answer c
Issue pric~ (5,000,000 x 98) 4,900,000
:Issue price (5,GOO,OOO x 110) 12Q_O,OOO
Bonds payable 5,000,000
.Discount on bonds :payable ( 100,000) Bonds payable :1,600,000
Bond issue cost ( 140,000) Premium<J n bomis payable 500,000
Band issue cost ( &0~000)
Carrying amount-January J, 2013 4,760,000
Car rymg amount -J anuary 1,.20 13 5;>~0.000
Interest expense ( 12% x 4, 760,000) 57,1 ,200
~--=

Interest paid ( JOO/o x 5,000,000) 500,000 Interest cx..pense (6% x 5,420,000). 325,200
1n.: erest paid· ., (8% x 5,000,(l00) ?00,000
Amortization of discount and issue cost 71,200
Amortization ofp remium o.n. bonds payab le 74,800
Bonds payable 5,000,000
Bond discount and issue cost (240,000 - 7 L,200) ( 168,800) Bonds payab1e 5,000,000
Premium on bonds payable (!120,000- 74,800) 345,200
Carrying amount - December 3 I, 20 I 3 4,831,200
Carrymg amount- Deccmoer 31 , 20i3 5.345,200
Note that under tb.e effective interest method the discount on bonds
payable and bond issue cost must be "lumped" together. Note that under the effective interest metho d , the bond [ssue cost
•nust l1e "netted" against the prem ium on bo1•.:is payabJe.

lOG
101
Problem 7-25 (IFRS) Problem 7-26 (PHILCPAAdapt~d)
On 1anuary 1, 2013, San1al Company issued P 5',000,000, 8% serial On January 1, 20 13~ Dome Co~p~yissued P4,000,000:, 8% serial
bonds, to be repaid in the amount ofP 1,900,000 each year. Interest bondS, to be rei)aid in the amount ofP800,000 eac}l.yea~. I~terest
~~ payable amiually on December 31. The bonds were issued to
is pay~ble annu~lly sm December 31. The bonds were issued to
yield 10% a year. The eQtity amortized .the bqnd discount b>' the
yield "10% a year.. The bond proceeds were P4,757,000 based on
interest method. The bond proceeds totaled P3,805,600 ·based
the present value at January 1, 2013 of five annual.payments. The on the present value on January 1,'2013 of five ~ual payments as
entity amortized the bond discount by the interest method. On ~~: . .
December 31,2013, what is the carrying amount of the bonds
payable? Due date Prin~ipal Interest PV at 1/1/2013
·
12/31/~3 800,000 320,000 1,018;000
a. 4,832,700 12/31/2 4 800,000 256,000 872,200
b. 3,832, 700 .· 12/31/2015 800,000 192,000 745,000
12/31/2016 800,000 128,000 633,80.0
c. (805,600 12/3112017 800,000 64;000 ~36,600
d.. 3,805,600
01\December 31,2013: what is tre carrying amount of the bonds
Solution 7-2"5 Answer b p~ble? ·
Interest expense (IO% .x 4,757,000) 475,700 a. 3,005,600.
Interest paid ( 8% x 5,000,000) 400,000 b. 3,066,160
Amortization of discount 75;700 c 2,982,000
d. 21787,600
Bonds payable 5,000,000
Annua~ payment on December 31, 20i3 (1 ,000,000) . Solution 7-26 Answer b
Face value- December 31,2013 4,000,000 Interest expense for 2013 (3,805,600 x 10%) 380,560
Discount on bonds payable - Decembe: 31, 2013 Interest paid for 2013 320,000
(243,000-75,780) ( 167,300) Discmmt amortization 60,560.
Carrying amount- December 31, 2013 3,832,700
Discount on bonds payable- January 1, 2013 194,400
Am01 tization for 2013 60,560
Discount on bonds payable- December 31, 2013 133,840

Bonds payable _4,000,000

Annual payment on December 31,2013 .( 800,000)
race value- December 31, 2013 3,200,000
Dtscount on bonds payable ( 133,840)
Carrying amount - December 31, 20 13 3,066,160

102 103
 ,Problem 7-29 (AICPAAdapted)
·. Preble~.
. . . 7-27 (A.I CPAAdapted)
.
.Oi1 January 1,.2013,.C~Ii <:;ompany i&sued ten~year: boi1qs with a fac~ · Margaret Company provided the following information in relation
·. amount ofP5~000~000 and a stated interest rate of8% payable annuaiiy to the issuance of bonds on July L, 2013 .
on Janu~ry1 . The ~onds wen~ priced to yield 10%.
. .
. .py of 1 for .1 0 periods at 10% . ·0.3&55' Face amount P800,000
PV -ofat:i ordinary annuitY of 1 ,for .l 0 periods at 10% '6. 145 Term Ten years
. What is the jssue price of the bonds? Stated interest rate 6%
Interest payment date Annually on July 1
a:. ·.5~ooo,ooo 'Yield
b. 1,927,500 9%
.c. 5.,6 14,500..
cl. -4,385,500 At 6% At 9%
Present value of 1 for 10 pe riods 0.558 . 0.422
Solution 7~2 7 Answer d . Future value of 1 for 10 per iods 1.791 2.367
PV of principal (5,000,000 x .3855}. 1,927,'500 Present. value.of an ordinary annuity of
P.V of annu al interest payme_n ts (400,000·.x 6..145) . 2,458,000' . .l for ro periods 7.360 6.4 18
Total pr~sent valu~ ·o r. issue pr·ice of.b o'nds. 4)8i,500
What is the jssue price for eacq P 1,000 bond?
Problem 7-28 (IAA) ·
. a. 1~000
Whit~ Company issued P2,000,000 face va.Iue of 10-year-bonds b. . 864
cin January 1. The bonds pay interest on January 1 and July 1 and
had a stated·rate of 10%. If the market rate of interest is 8%, what c . .. . 807
is the issu·e price ofth~ bonds? · . d. 700
a. 2,262,000
b. 2,113,000 Solutign 7-29 Answer c
c. 2,159,000
d. 2,279,000 PVofprincipal ( 1,000 x .472) 422
PV of interest ( 1,000 x 6% = .6 0 x 6.418)
Solution 7-28 Answer d
PV of 1 at 4% for 20 periods . .46
Issue price -385

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 semiannuaJ interest payments (1 00,000 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 interesrperiods. Accordingly,
the present value factor should be for the semiannual effective rate
. of 4% for 20 interest periods.
] 05
104
Problem 7-30 (AICPAAda pted) Solution 7-30
Question 1 Answer b
On January l, 2013, P:zekiel Company received Pl,077 ,200 for
P1,000,000 face amount l2% bonds. The bonds were s~ld to yield
..
Carryingamo unt-January 1,2013
10%. Interest is payablesemia nnuaJlyevery January Land July] .. 1,077,200
The entity has elected the fair value option for valuing
Question 2 Answer a
financial liabilities. On December 31, 201'3, the fair value of the
bonds is detennined to be Pl~064,600. Interest expense for 2013 {12% x 1,000,000)
1:20,000
1. What is the carrying amountofthe bondspayabl eon January 1, Vnderthefair vaJue option, the interest expense is computed using
2013? the nominal rate.
a. 1,000,000
Question 3 Answer c
·b. 1,077,200 ·.
c. 500,000 Fair value- January 1, 2013 1,077,200
d. . 538,600 l·air value -December 31,2013 1,064,600
Gain from change in fair value
2. What is the interest expense for 2013 7 12,600

a. 120,000 I' FRS 9,paragraph.4.2.2~ allo~s the meaSurement of a fmancial

b. 100,000 ltability at fair value. · · · ·
c. 107,720
d. 129,264 Underthe fair value option, the bond payabte is measured at fair
vatue ateveryyear-e ndand any change infairvalueis recognized in
3. What is the gain or loss fromchangei nfair va1ue of the bonds profit or loss. The accounting rules for discount or premium
for20L3? nmortization no longer apply. · ·
a. 64,600 gain Question 4 Answer a
b. 64,600 loss
c. 12,600 gain (' (•crying amount- December 31, 2013 1,064;600
d. 12,600 loss
lJ nder the fair value option, the carrying amount ofthe bonds payable
4. What is the carrying amountofthe bondspayabl e on December i:~ a lwa)'S the fair va1u.e at every year-end.
31,2013?
a. 1,064,600
b. 1,077,200
c. 1,000,000
d. 1,064,920
106
107
 Problem 7-31 (AlCPAAdapted)
A casl1 flow ofP2,000,000 may be rece1ved by Marvi~i Company Co~putation 9f effective rate byinterpohitioo
in one year, two years, or. three years, with probabilities of20%, The PV of l at 11% for 3 periods is .7312, and tbe PV of an
50%, and30%, respectively. TherateofLnterest on default risk-free ord inary annuity ofl at 11% for 3 peri ods is2.4437. The present
investments is 5%. The pres em value factors are: value ofthe.bonds using 11% is: ·
PV of I at -5% for 1 year .952 PV of principal (5,000,{)00 x. 7312) . 3,656,000
PV of l at 5% for 2 ye~r's .907 l?V of annual intereSt payments (500,000 x 2.4437 1,221,850
PV of I at 5% for 3 years .864
. Total present valne of bonds 4,877,850
What is th.e expected present value ofthe cash flow?
The PV of I at ·12%-for 3 periods is .7ll8', and the PV of an
a. 1,904,000 ordinary annuity of I at 12% (or 3 periods is 2.4018. The present
b. 1,806,200 value of the bonds using 12% is:
c. 1,814,000 PV of princjpal (5.,000,{)00 x. 7 I 18) 3,559:o6o
. d. I, 728,000 ,PV of annual interest payments (500,000 x 2.40 18) 1,2{)0,900

Solution 7-31 Answer b Total present value of bond s. 4,759,900

2,000,000 X. 20% X .952 380,800 Let X = the effective rate

2,000,000 x.5-0% x .901 907,{)00 X 4,800,{)00
2,000,000 X 30% X .864 518,400 11% 4,877,850
Total present value of cash flow 1,806,200 12% 4,759,900
This means that the effective rate is higher than L1% but lower
Problem 7-32 {ACP)
than 12%. Th1,1s, by interpolation, 'the interest differential is
On January 1, ion, Tagui:g Company issued ::3-year '9onds with determined as follow's:
face value.ofP5 000 000 at 99. The nominal rate is 10% and the
interest is payabl~ ann'ualiy on December 31. Additionally, the entity
X-11%
. paid bond issue cost ofPLSO,OOO. ~Vhatistheinterestexpensefor
2013 using the effective interest method? 12%-11%
a. 550,000
. ·b. 528,000 4,800,000 -4,877,85{)
c. 576,000
d. 559,680 4,759,900-4,877,850

Solution 7-32 Answer d 77,850

= .66
Carrying amount ofbot1ds (~,000,000 x 99%- 15\J,QOO) 4,800,000 117,950

' 559,680 Thus~ the effective rate is ·I L% pIus the differential of. 66 or 11.66%
Interest expense (4 ,800,000 x 11.66%)

108

8 financial instrumeatshallclassifytheltabilityandeqmtycompon~nt
COMPOUND FINANCIAL ~STRUMENT
Problem 8-I (AICPAAdapted)
On December 3 L,20B, FortCompanyissued5,000of8%, 10-year,
Pl,OOO facevaJuebonds with detachable share warrants at 110. Each
bond carried a detachable warrant for ten ordinary shares of Fort
Company at a specified optionpriceofF25 per share. The par value of
the ordinary share is P20 . .l!nmediatety after issuance, the market value
of the bonds without tbe warrants was P5,400,000 and the market
valuet>fthe warrants was P600,000. On December 31,2013, what is
the carrying amount of bonds payable?
PAS 32,' paragraph 28, mandates tha! th.e~issuer of~ compo und
separately. This standard does not differentiate whether the equtty
component is detachable or nondetachable .
Whether detachable or nondetachable, the warran ts have a value
and therefore shall be accounted for separately.
PAS 32, paragraph3l > furtherprov~des tha~ equity instruments ~re
ins1rnments that evidence a residual mterest mthe assets ofthe entity
after deduct ing all of its liabilities.
Accordingly, the bonds are assigned an amount equaJ to the "market
value of the bonds ex-warrants" regardless of the market value of
the warrants. Tbe remain der 9f the issue price shall then be
allocated to the warrants.
rssue price of bonds with warrant s. (5,000,000 x 1 10) 5,500,000
5,400,000
Market value of bonds with oat warrants
Residual amount allocated to warran ts- equity component 100~000

a. 5,000,000
b. 4,950,000 Actually, the entryto recordtbeissueofthe bonds payable with share
c. 4,900,000 warrants is as follows :
d. 5,400,000 Cash 5,500,000
Bon.ds payable 5,000,000
Solution 8-1 Answer d Premium on bonds payable 400,000
Share warrant s outstan ding 100,000
Issue price of bonds payabl e- equal to market
value withou t the warran ts 5,400,000 · share warrants are exercised by the bondbo lders, the J·ournru
Ifall ofthe
entry is:
The issueo foonds payable with share-warrants is accounted for as
a compound fi. ~ancial instrument. Cash (5,000 x 10 x P25) 1,2~0,000
Share warran ts outstan ding 100,000
Share warran ts attach ed to a bond may be detach able or Share capital (50 x 10 x P20) t;ooo,ooo
nondetachable. Share premiu m 350,000

Detachable warrants can be tra~ed separately_ from the bond and

nondetachabJe warrants cannot b'e traded separately.

1 ' 1'\ 111

Problem 8-2 (AICPAAdapted) Journal entry to record the issue of bonds with share warrants
On December 31. 201J, J\1oses Company issued P5,000,000 face Cash 5,450,000
value, 5-year bontls at I 09. Each P J,000 bond was issued with 50 Discount on bonds payable 170,000
detachable share warrants, each of\yhich entitled the bondholder to Bonds payable 5,000,000
purchase one ordinary share ofP5 par value at P25. Immediately after· Share ·warrants outstanding 620,000
issuance, the market value of each warrant was P5. The stated interest
rate on the boi:Ids is 11% payable annually every December 31. Journal entry to record. the exercise of all of the share warrants
Ilow~ver, the prevailing market rate ofinterest for similar bonds \vithout
warrants is 12%. The present value pf 1 at 12% for 5 periods is 0.57 Cash (5,000 x 50 x P25) 6,250,000
and the pttsentvalue o,fan ordinaryannuityof J at 12% for 5 periods Share warrants outstanding. 620,000
is 3.60. Ctn December 31,2013, what amount should be recorded as Share. capital (250,000 x P5) 1,250,000
discount or premium on bonds payable? Share premium 5,620,000
a. 170,000 discount
b. 450,000 premium Problem 8-J(AlCPAAdapted)
c. 450,000 discount On March 1, 2013, Case Coravany issued P5,000,000 of 12%
d. 800,000 discount
noncon:Vertible bonds at 103 which are due on Febi'miry 28,2018.
In addition, each P 1,000 bond was issued with 30 detachable share
Solution 8-2 Answer a
warrants, each of which entitled the bondholder to purchase, for
PV of principal (5,000,000 x .57) 2,850,000 PSO, one ordinary share of Case Company, par value P25. On March
PV of annual interest payments (550,000 x 3 .60) 1,980,000 1, 2013, the quoted market value of each warqmt was P4. The
Total present value of bonds payable market value of the bonds ex-warrants at the time of issuance is 95:·
4,830,000
What amount of the proceeds from the bond issue should be
Bonds payable 5,000,000 recognized as an increase in shareholders' equity?
Present value of bonds payable 4,830,000 a. 600,000
Discount on bonds payable· 170,000 b. 300,000
c. 2do,ooo·
If the maket value of the bonds without warrants is unknown, the d. 400,000
amount allocated to the bonds is equal to the present value of the
principal bond liability plus the present value of future interest Solution 8-3 Answer d
payments using the market rate of intcrest.for similar bonds without
the warrants. Issue price ofbonds with warrants (5,000,000 x 103%) 5,150,000
Market value of bonds without warrants
Issue price ofbonds with warrants (5,000,000 x 109%) 5,450,000 (5,000,000 X 95%) 4,750,000
Present value of bonds payable 4,830,000
Residual amount allocated to warrants Residual amou~t allocated to warrants- equity component 400,000
620,000

112 113
Problem 8-4 (IAA) J•roblem 8-5 (IAA)
Moriones Company issued P5,000,000 face value 12% convertible Su~ Company issued 5,000 convertible bonds on January 1, 2013.
bonds at 110 on January 1, 2013, maturing on January 1, 2018 and The bonds have a three-year term and are issued at 110 with a face
paying interest semiannually on January 1 and July 1. It is estimated value ofP 1,000 per bond. Interest is payable annually in arrears at
that the bonds would sell only at 103 without the conversio n II nominal6% interest rate. Each bond is convertible at anytime up
feature. Each P1,000 bond is convertible into 10 ordinary shares to maturity into 100 ordinary shares with par value GfP5. When the
with P 100 par value. What is the increase in shareholders' equity bonds are issued, the prevailing market interest rate for similar debt
arising from the issuance of the convertible bonds on January 1, mstrument without conversion option is 9%. The present value of 1
2013? ut 9% for 3 periods is .77 and the present value of an ordinary
a. 350,000 annuity of 1 at 9% for 3 periods is 2.53. What is the equity ·
b. 500,000 component of the issuance of the convertible bonds on January 1,
2013?
c. 150,000
d. 0 a. I, 150,000
h. ! ,650;000
Solution 8-4 Answer a c. 891,000
d. 391,000
The issue of convertible bonds payable is also accounted for as a
compound fmancial instrument. Solution 8-5 Answer c
Accordingly, PAS 32, paragraph 29, mandates that the original PV of principal (5,000,000 x .77)
issuance of convertible bonds payable shall be accounted for as 3,850,000
PV of annual interest payments (300,000. x 2.53) 759,000
partly liability and partly equity.
Total present value of bonds 4,609,000
The liability component is equal to the market value of the bonds
without the conversion privilege. The equity"component is the Issue price of convertible bonds (5 ,000,000 x 11 0)
remainder or residual of the issue price of the bonds with conversion 5,500,000
Present value of bonds 4,609,000
privilege.
Equity component - Share premium 891 ,000
Issue price of bonds with conversion privilege
(5,000,000 x 110) 5,500,000
Market value ofbonds without conversion The liability component is equal to the market value ofthe bonds
privilege (5,000,000 x 103) 5,150,000
without conversion privilege.
Residual amount allocated to conversion privilege 350,000 If the market value of the bonds without the conversion privilege
Actually, the journal entry to record the issuance of the convertible is unknown , the amount is equal to the present value of the
bonds payable is: pnncipal bond liability plus the present vaiue of the future interest
payments using the market rate of interest for similar bonds without
Cash 5,500,000 the conversion privilege.
Bonds payable 5,000,000
Premium bonds payable _150,000
Share premium- conversion privilege 350,000
 Problem 8-7 (JFRS)
Problem 8-6{AlCPAAdapted) On December31, 20 13, Green Cdmpany issued 2,000 convertible
.Spare Company had outstanding share capital with par va lue of bonds with a nominal interest rate of7% at P2,000 each. Each
PS0,000,090 and a 1_2% convertible bo11d payabl e in the face bond can be converted into 5 new equ ity shares or redeemed for
cash, a t the option oftheholder, in 5 years.' time. 'Ihe fa irvalue at
amount of PI OlOOO,OOO. Jnterest payment dates of the bond that date of similar bonds without tlle convert ibility option was
issue are June 30 and December 31. The conversion clause in the cstimatedatPl,500each. What is the amount recognized inequity in
bond indenture entitled the bondholders to receive 40 shares of rcspectoftheissuanceofcopvertible bonds on December 31, 2013?
P20 par value in exchange for each Pl,OOO bond. On June 30, a. 4,000,000
2013, the holders of P5,000,000 face value bo nds exercised tbe b-... 3,DOO,OOO
conversion privilege. The market price of the bonds on that date c. 1,000,000
d. . 0
wasP 1,100 per bond and the market price of the share was P30.
The total unamort ized bond discount at the date of convers ion was Solution 8-1 Answer c
P500,000. The share premium from conversion privilege has a [ssue price (2,000 x. P2 ,000) 4,000,000
balance of P2,000,000 on June 30, 2013. "What amount of share Fai r value of bonds·witb.o11 t opti-o·n (2,000 x P 1,5{) G) 3,000,000
premium should be recognized byreason ofthe<:onversionofbonds
Equity component 1;000,000
payable into share capital?
..
Ji: . 2,000,000 Problem8-8 (AICPAAdapted)
b. 2,750,000 Clay Company had P600,000 convertible 8% bonds payable
c. 3,000,000 outsta:qding on June ~0, 2013 . Each P J ,000 bond was convertible
d. 1,750,000 into I 0 ordinary sbar~s of PSO par value. On July L, 20 13, the
interest was paid to bondholders, and the bonds were convertetf
Solution 8-6 Answer a into ordinary shares, which had a fair value ofP75 per share. The
unamortized premium on these bonds was P l2,000 at the date of
Bonds payable LO,OOO,OOO conversion. No equity component was recognized when the bonds
Discount on bonds payable ( 500,000) were originallyissued. What is the increas~ in the share capital and
Carrying amount . 9.500,000
share premium, respectively>as a resuJt.ofthe bond conversion?
n. 300,000 and 312,000
Carrying amount converted (5/1 0 x 9,500,000) 4,750,000 b. 306,000 and 306,000
Applicable sharepre.mium from conversion privi1ege c. 450,000 and 162,000
(5/10 X 2,000,000) 1,000,000 d. 600,000 and 12,000
Total consideration 5,750,000 Solution 8-8 Answer a
Par value of shares issued 600,000 .
Donds payable
(5,000 x 40 =200,000 shares x 20) 4,000,000
Premium on b on ds pay able 12,000
Share prem.lum from conversion . 1,750,000
C'arrying.amount . ._ 612,000
O rdinary shares issued at par va lu e (6,000 shares x. 50) 300,000
Share premium 312,000

H7
116
Probl em 8-9 (AIC PAAd apted )
On Dece mber 31,-2 013, CeyC ompa ny had outsta nding 10%,
P 1,000 ,000 face amou nt conve rtible bonds payab le matur ing on . Young Comp aey issued 5,000 convertible bonds at the beginning
of
Decem ber 31,20 16. Intere st is payab le on June 30 and Decem the current year. The bonds had a four-year term with a stated rate
ber of
31. Each P 1',000 bOnd js conve rtible into 50 sba.res of P l 0 interest of 6%, and were ~ssued at par with a face value of~ L,000
par per
value . On Dece mber 31., 2013, the unam or1iz ed prem ium bond. Interest is payable annually on December 31. Each bond
on is
bond s payab le was P~O,OOO. On Dece mber 31, 2013, 400 bonds convertible into 50 ordinary shares wii:h a par value ofP L0. The marke
t
were conve rted when Cey's share had a mark et price ofP24 rate ofinte reston simila rnonc onver tible bond is 90~ . Attbe issuan
. The ce
entityincurred.P4,000 in connection wi!h the conversion. No equity date, theam ounto fP485 ,000w ascre dited to share premi um from
component ~as recognized when the bonds were origin ally issued conversion privilege. The bends were not conve rted and instea
.
d,
Wh~t is the share prem ium from the issua nce
th.e entity paid off the conve rtible bondh older s as mamrity. What
of share s as a nmount shoul d be recorded as gain or loss on the full payment oftbt
r«?sult of the bond conve rsion on Dece mber 31, 20 13?
convertible bonds at matwity1
a. 176,0 00
b. 220,000 a. 2,500,000 ~
c. 276,0 00 b. 485,0 00 loss
d. 280,0QO c. 485,000 gain
d. 0
Solution 8-9 Answ er b
Bonds payable
Solution 8-JG Answ er d
1,000,000
Premi um on bonds payable
60,0{)0 To record the issuance oftheC()!!vertible bonc}s:_
Carry ing amount
1,060,000
Cash 5,000,000
Carry ing amount converted (400/1,000 x 1,060,000)
424,000 Discount on bonds payable 485,000
Par value ~f shares issued (40() x 50 x PJO)
200,000 Bonds payab le 5,000,000
Share premi um Share premi um- conve rsion privilege
224,000 485,000
Conve rsion exp~ses
{ 4,000 )
Net share premium To record the settlement oftbeconvertible bonds at maturity date:
220,000
Bonds payable 5,000,000
[nterest expense (6% x 5,000,000} 300,000
Cash. 5,300,000
Share prerru um-co nversi on privilege 485,000
Share premi um- issuance 485,000

[18 119
Problem 8-11 (IAA)
On January 1, 2013, Arlene Company issued convelt.ible bonds wi~· et
face value ofPS ,000,000 for P6,000,000. The bonc!s are c~nve':1tblc
9
into 50,000 shares with PI 00 par vaiue. The bonds have a s·.year life
with 10% stated interest rate payable annually every December 31. OPERATIN G LEASE
The fair value of the convettible bonds without conversion option is
computed atP5,399,300 on January 1, 2013. OnDecember31,2015,
the convertible bonds were not converted but fully paid for P5,5 50,000.
On such date the fair value ofthe bonds without conversion privilege is
P5,400,000 ~d the carrying amount is P5, 178,300. What is the loss Problem 9-1 (AICPAAdapted)
on the extinguishment ofthe convertible bonds on December 31, 20 15?
Ou December 1, 20 1_3, TeH Company leased otfice space for five
a. 221,700 years at a monthly rental of P600,000. On the same date, the entity
b. 371,7{)0 JMid the lessor the following amounts:
c. 150,000
d. 0 !~onus to obtain lease ·300,000
J·in;t month's re"nt 600,000
Solution 8-11 Answer a l.asl month's rent 600,000
6,000,000 S~~urity deposit refundable at lease expiration 800,000
Issue price .
Fair value of bonds without conversion option 5,399,300 Installation of new walls and offices 3,600,000
Share premium- conversion privilege 600,700 What total amount of the expenses relating to utilization ofihe office
space should be reported for 20 13 ?
Total payment - December 31, 2015 5~550,000
Payment applicable to bonds payable (5,400,000) I, I,400,000
Equity component .. 150,000 h. l ,200,000
l'. 665,000
Carrying amount of bonds payable • 5,178,300 d. 600,00Cl
Payment applic.ablc to bonds payable (5,400,000)
Loss on extinguishment ( 221,700) Solutio11 9-1 Answer c
Journal entries on December 31,2015 \11tor1intion of lease bonus (300,000 I 5 x 1/12) 5,000
Bonds payable · 5,000,000 l'l'tll for December 600,000
'Premium on bonds payable 178,300 n~prcciation of leasehold improvcm<!nt
Share premium - conversion privilege 150,000 (3,600,000 I 5 X II 12) qO,OOO
Loss on extinguishment 221,700
Cash 5,550,000 I otal December 20 t 3 expenses '165,000
Interest expense (10% x 5,000,000) 500,000
Cash 500,000 I he lease bonus is prepaid rent of the lessee to be amort1zed over
tltc lease term
Share premium- conversion privilege 450,700
Share premium - issuance 450,700 I he last month's rent is als.o a prepaid rent. The sect.rity deposit is
(600,700 - 150,000) 11 noncurrent asset.
120 121
Problem 9-l (AICPAAdapted) Problem 9-J (AICPAAdapted)
On July 1, 2013, Kemp Company leased offjce space tor tlve years On January 1, 2013, Pa!'k Company signed a 10-year operating
at P150,000 a month. On that date, the entity paid the lessor the kasc for office space at P960,000 per year. The lease included a
following amounts: provision for additional rent of 5% of annual company sales in
350,000 L'xcess ofP5,000,000.The sales for the year ended December
Rent security deposit
150,000 ~ 1, 2013 totaled P6,000,000. Upon execution of the lease, the
First month's rent
Last month's rent • 150,000 entity paid P240,000 as a bonus for the lease. What is the rent
Nonrefundable reimbursement to lessor for expense fu~ the year ended December 31, 2013?
modifications to the leased premises 900,000
a 984,000
1,550,000 b. 1,010,000
c. 1,034,000
The entity made timely rental payments from August 1 through d. 1,250,000
December 1, 2013, What portion of payments to the lessor should
be deferred on December 31, 2013? Solution 9-3 Answer c
a. I ,400,000 Annual rent 960,0QO.
0. 1,310,000 1\,lditional rent (5% x 1,000,000) 50,000
c. 1,250,000 Amortization of bonus (240,000/1 0) 24,000
d. 500,000 Total rent expense · 1,034,000

Solution 9-2 Answer b Problem 9-4 (AICPAAdapted)

Leasehold improvement 900,000 Kcw Company leases and operates a retail store. The following
Less: i)epreciation from July 1 to December 31, 20 13 · information relates to the lea~e for the current y~ar:
(900,000 /5 X 6/12) ~00
The store lease, an operating lease, calls for a base monthly
Leasehold improvement, December 31, 2013 810,0;'' rent ofP15,000 on the first day of each month.
Rent security deposit 350,00·" Additional rent is computed at 6% of net sales over P3,000,00v
Last month 1 S rent 150,000 up to P6,000,000 and 5% of net sales over P6,000,000, per
1,310,000 calendar year.
Total amount to be deferred
Net sales for the current year amounted to P9,000,000.
The entity paid executory costs to the lessor for property taxes
ofP120,000 and insurance ofP50,000.
What total amount of the expenses :should be reported for the yea!?
a 710,000
h. 680,000
(' 540,000
d 350,000

122 123
Solution 9-4 Answer b
Problem 9-6 (lfRS}
Annu ~ l
ren t (15,000 x 12) 180,000
Additional rent · Jana Company leased a building tor 20 years with effect from Janllar;
6% X 3,000,000 180,000 1, 2013. Tbe useful life of the buil_ding is 40 years. As part oft he
5% ·~ 3,000,000 150,000 negotiations for the lease, the lessor granted Jan a a rent-free period.
Property taxes 120,000 Annual rentals ofP I ,600,000 are payable in advance on January I ,
Insurance 50,000 commencing in 2015. What amount of rent ~xpense shou(d be
Tot::~.! expenses 680,000 recognized for the vear ended December 31. 20 13?
a. 1,600,000
Problem 9-5 (AICPAAdapted)
b. 1,520,000
As an inducement to enter a lease. Arts Company. a lessor, granted c. I ,440,000
Hompson Company, a lessee; :nine months of free rent U...Tl.der a five d. 0
year operanng lease. The lease was effective on July l, 2013 and
provided formo11tblyrenta. ofP 100,000 to b~ginAprill , 2014.ln Solution 9-6 Answer c
-thr. income statement for the year ended Jun~ 30,2014, what amount
Total rental (1 ,600,00{) x 18 years) 28,800 ,000
should be reported as rent expense?
Average annu al rental (28,800,000 I 20 years) 1,440 ,000
a. 1,020,000
b. 900,000 Problem 9-7 (AICPAAdapted)
c. 300,000 On October L 2013, Dean Company leased office space at a
d. 255,000 monthlyrental ofP300,000 for JOyears expiring·September30,
2023. As an inducement for Dean to enter into the lease, the lessor
Solution 9-5 AnwJ?r a pennitted.Dean to occupythe pre~ses rent-fr~e from October 1
Total rent expense (100,000 x 51 remaining months) 5,100.000 to December 31, 2013. For the year ended December 3l, 2013,
what amount should be reported as rent expense?
Average annral rent expense, July I, 2013 to a. 900,000
June 30,2014 (5. 100.000/5) 1.020,000 b. 292,500-
c. 877,500
Paragraphs 33 and 50 of PAS 17 provide that the total rentals in d. 0
an operating lease shall be recognized by the lessor and lessee
uniformly on a straight line basis over the lease term unless another Soluli011 9-7 Answer c
systematic oru:is !<;representati ve ofthe time pattern ofthe user's Total rent expense (P300,000 x 11 7 rema-ining months) 35,100,000
~efit.
AYeragc annual rent (35, t 00,000/10) 3.,_510,000

Rent expense f!·cm OctoiH:r l to December 31, 2013

(3,510,000 X 3/Jl) 877,500

124
125
Problem 9-8 (PHILCPAAdapted) Problem 9-10 (IFRS)
-
On July l, 2013, Walton Company leased office premises for a As an incentive to emer a honcat)celable operating lease for office
three-year period at an annual rental ofP360,000 payable on July premises for 10 years; Valley Company as (essor has offered the lessee
1 ea~? year. The first rent payment was made July 1, 2013 . a rent-free period of two years. Annual ~enta{ paymentut:lder the lease
commencing in the third year is PSOO,OOO. What amount of lease income
Add1t1onally on July I, 2013, tl1e entity paid P240,000 as a lease
should be recognized by Valley Company in the first year? ·
bonus to obtain a three yearlease insteaa of the lessor's usual tem1
of six years. On December 31, 2013, what amount should be a. · 400,000 \[
reporte? as prepaid rent? · b. 500,000
c. 450,000
a. 180,000
d. 0
b. 220,000
c. 240,000 Solution 9-10 Answer a
d. 380,000
Total rental (500,000 x 8 years) 4,000,000
Average annual rental (4,000,000/1 0) 400,000
.Solution 9-8 Answer d
Rent payment on July l , 2013 (360,000 x 6/12) 180,000 Problem 9-11 (AICPAAdapted)
Lease bonus (240,000 x 30/36) 200,000 .
Wall Company leased office premises to Fox Company for a five-year .\
Prepaid rent .:. _ December 31, 2013 380,000 term begiruiingJanuary 1, 2013. Under the terms ofthe operating lease,
rent for the first year is P800,000 and rent for years 2 through 5 is
Problem 9-9 (IFRS) P1,250,000 per annum.'However, as an inducement to enter the lease,
Wall granted Fox the first six months ofthe lease rent-free. What amount
As an incentive to enter a four-year ope~ating lease for a warehouse, should Wall report as rental income for 2013?
Dunhill Company received an upfront cash ofP60,000 upon signing an
agreement on January 1, 2013. The aruma! rental is P1,115,000. What a. 1,200,000
amount should be recognized as lease expense for20 13? b. 1,160,000
c. 1,080,000
a. 1,115,000 d. 800,000
b. 1,100,000·
c. 1,055,000 Solution 9-11 Answer c
d. 0 First year (800,000 x 6/ 12) 400,000
. Second year 1,250,000
Solution 9-9 Answer b Third year 1,250,000
. Fourth year 1,250,000
Annual rental 1;115,000 Fifth year 1,250,000
Amortization ofupfront cash received (60,000/4) ( 15,000) . . 5,400,000 "
Total rental feve·nue
Lease expense for 2013 1,100,000
Average annual rental revenue (5,400,000 I 5) 1,080,000

1.,.C 127
Problem 9-12 (AICPAAdapted) Solution 9-13 Answer c
Conn Company owns an office building and nonnallycharges tenants Average annual rent revenue (360,000/3) 120,000
P3,000 per square meter per year for office space. Because the
occupancy rate is low, Conn agreed to lease lOO.square 11].~ters to Rent revenue from July 1, 2013 to June 30, 2015
Hanson Company at P 1,200 ,per S€Juare meter for the first year of a (120,000 X 2) 240,000
three-year operating lease. Rent for remaining ye~rs will be at the , Less: "Rerrtals received:
P3,000 rate. Hanson moved into the building on January 1, 2013, · First 12 months 60,000
and paid the first year's rent in advance. What amount of rental
Second 12 months 90,000 150,000
revenue should Conn report from Hanson ia the income statement
for the year ended September 30, 2013? Rent receivable - June 30, 2015 ~_QQ
a. 90,000
b. 120,000 Problem 9-14 (IAA)
c. 180,000
d. 240,000 Abe Company, lessor, leased an equipment under an operating lease.
The lease term is 5 years and the lease payments are made in
Solution 9-12 Answer c advance on Janu~ry 1· of each year as shown in the following
First year (1,200 X 100) 120,000 schedule:
Second year (3,000 X 100) 300,000 January 1, 2013 1,000,000
Third year (3,000 X 100) 300,000 January 1, 2014 1,000,000
Total rental revenue 720,000 January 1, 2015 _ 1,400,000
January 1, 2016 1,700,000
Av.erage annual renta~ (720,000 I 3) 240,000 January 1, 2011 1,900,000
Rental revenue from January 1 to September 30, 2013 On December 31, 2014, what amount should be recognized as rent
(240,000 X 9/12) 180,000 receivable?
Problem 9-13 (AICPAAdapted) a. 1,400,000
b. 800,000
On July 1, 2013, Gee Company leased a delivery truck from Marr
Company under a 3-year operating lease. Total rent for the term ofthe c. 400,000
lease will be P360,000, payable as follows: d. 0
12 months at P 5,000 == P 60,000
Solution 9-14 Answer b
12 months at P 7,500 == 90,000
12 months at P17,500 == 210,000 Average annual rental (7,000,000/5) 1,400,000
All payments were made when due. On June 30, 2015, what amount .
sh~uld be reported as accmed rent receivable? Rent income for 2013 and 2014 ( 1,400,000 x 2) 2,800,000
Rent received fer 2013 and 2014 ( l,OOO,OOO + 1,000,000) 2,000,000
a. 210,000
b. 120,000 Rent receivab!e- December 31, 201-i 800,000
c: 90,000
d. 0
129
128
Problem 9-15 (IAA) Solution 9-16 Answer a
On Janu'ary l, 2013, Abba Company leased a building to Bee Rent income 500,000
Company under a four-year operating lease. The monthly rental for Less: Amortization of finder fee
2013, 2014; 2016 and 2016 is PlOO,OOO, Pl50,000,_ P200,000 . .(150,000110) . 15,000
and P250,000, respectively. Rentals are payable at the end of each Depreciation 120,000
month. All rental payments within the year were made when due. Insurance and property tax 90,000 225,000
On December. 31, 2014, what amount should be reported as rent ·.
receivable? Net rent income 275,000
a. 1,000,000 PAS 17, paragraph 52, provides that initial direct costs incurred
b. 1,200,000 by the lessor shall be aQ.ded to the carrying amount of the asset
c. 600,000 and recognized as expense over the lease term on the same basis as
d. 900,000 lease income:

Solution 9-15 Answer b Problem 9-17 (AICPAAdapted) .

2013 (100,000 X 12) 1,200,000 Rapp Company leased a pew machine to Lake Company on January
2014 (150,000 X 12) 1,800,000 1, 2013. The lease expires on January 1, 2018. The annual rental is
2015 (200,000 X 12) 2,400,000 P900,000. Additionally, on January 1, 2013, Lake paid P500,000 to
2016 (250,000 X 12) 3,000,000
Rapp as a lease bonus and P250,000 as a securicy deposit to be
Total rent over the lease term 8,400,000 refunded upon expiration ofthe lease. What amount of rental revenue
·should be reported for 2013?
Average annual rent (8,400,000 I 4) 2,100,000
a. 1,400,000
Rent income for 2013 and 2014 (2,100,000 x 2) 4,200,000 b. 1,250,000
Rent collected in 2013 and 2014 (1,200,000 + 1,800,000) (3,000,000) c. 1,000,000
d. 900,000
Rent receivable -December 31, 2014 1,200,000
Solution 9-17 Answer c
Problem 9-16 (AICPAAdapted)
On January 1, 2013, Wren Company leased a building to Brill under Annual rental 900,000
an operating lease for ten years at P500,000 per year, payable the Amoctization oflease bonus (500,000 /5) 100,000
first day of each lease year. Wren paid P 150,000 to a real estate Total rental r~venue 1,000,000
broker as a finder fee. The building is depreciated P 120,000 per
year. For 2013, Wren incurred insurance and property tax expense The lease b'onus received by the lessor is accounted for as unearned
totaling P90,000. What is the net rent income for 2013? rent income to be amortized over the tease term.
a. 2~,000
b. 290,000 The security deposit is a noncurrent liability of the lessor.
c. 350,000
d. 365,000

130' t "1
 Soluliun 9~19 Answer<.:
Problem 9-18 (AICPAAdapted)
Rcnlal from April 1 to December 31, 20 I 3
Jade Company purchased a new mac~ine for P4,800,000 ?D January (50,000 X 9)
I 20 13 and leased it to East the same day. The machme has an 450,000
c~timated 12-year life and will be depreciated P400,000 per year. Less: Depreciation (1 ,600,000- 100,000 I S) 300,000
Jhe lease is for a three-year period expiring January 1, 2016, ot an Commission (120,000 I 2 x 9/12) 45,000
annual rental of P850,000. Additionally, East paid P300,000 to · Rcpuirs · 15,000
Jade as a lease bonus to obtai.n the three-year lease. Jade incurred
insurance expense ofP80,000 for the leased machineduring20l3.
What is the operating profit on the leased a~~et for 20 13?
Transportation
..
Net rc11t r!!vcnue --10,000 370,000
80,000
a. 670,000 The depreciation is computed from January I, 2013, date of
b. 550,000
c. 470,000 i.lcquisition, and not from the date of the lease, April 1, 2013, because
d. 370,000 the tractor is available for the intended use on January 1, 2013.

Solution 9-18 Answer c Problem 9-20 {AJCPAAdapted)

Annual rental 850~000 On January I, 20 L3, Glen Company leased a building to Dix
Amortization oflease bonus (300,000/3) 100,000 Company for a ten-year term at an annual rental ofPSOO,OOO. At
Total 950,000 . inception ofthe lease, Glen received P2,000,000 covering the first
Less: Depreciation 400,000 two years' rent ofPl ,000,000 and a security deposit ofP J 000 000.
Insurance 80;000 48(),000 This deposit will not be returned to Dix upon expirati~n o'fthe
lease but will be apphed to payment of rent for the last two years of
Operating profit 47(),000
the ]ease. What portion of the P2,_000,000.should be reported as
current and noncurrent liability jn Glen's December 3l 2013.
Problem 9-19 (PHILCPAAdapted) statement of financial position? '
MYriad CQmpany purchased a tractor on January l, 2013 at a cost Cunent liability Noncurrent llabUity
ofP ~ ,600,000 for the purpose.ofleasing it. The tractor is estimated
to have a useful life of 5 years with residual value ofPlOO,OOO. a. 0 2,000,000
Depreciation is on a straight line basis. On Aprill, 20n. Myriad b. :500,000 1,000,000
entered into a lease contract for the .lease of the tractor for a term of c. · I ,000,000 1,000,000
two year~ up to March 31 ,.20 15. The lease fee is P50,000 mont~ly d. ~.000,000 500,000
and the lessee paid P600,000, the lease fee for one year. Myr1ad
paid Pl20,000 commission associated with negotiating the lease, Solcilw11 9-20 Answer b
P 15,000 minor repairs, and P 10,000 transportation of the tractor The second year's rentofPSOO,OOO which was received in 2013 is
to the Jessee during 2013. What amount of net rent revenue should unearned rent income and therefore shown as a cun·ent liability on
be reported for 20 13? December 31,2013. ·
a. 160,000 The deposit of P 1,000,000 is uneamed rent deposit classified·as
. b: 235,000 noncurrent li ability because it is applird to paYITlent of rent for the
c. 80,000 last two years of the lease. ·
d. 85,000
133
132
Problem 9-21 (IFRS) l,roblem 9-22 (IAA)
On Januacy 1, 2013, Simplex Company leased a machine to another [ lutch Company leased equipment to Elder Company on July 1, 2013
entity for a four-year period. The annual rentals will be paid by the for a one-year period expiring June 30, 2014 for P60,000 a month. On
lessee beginning Decel'!lber .31, 2013. The lease agreement called July l, 2014, Hutch·leased this piece of equipment to Toil Company
for a 10% increase in annual rental per annum. The rental due on for a three-year period expiring June 30, 2017 for P75,000 a month.
De~ember 31,2016 was P133,100 .. The origimil cost of the equipment was P4,800,000. The equipment
which bas been continually on lease since July 1, 2009 is being
1. What is the rental payment due on December 3 r, 20-14? depreciated on a straight line'basis over an eight-year period with no
.. residual value. 'Both the lease to Elder and the lease to Toil are
a. 100,000
b. 121,000 . appropriately recorded as operating lease. What is the amount ofnet
c. 110,000 - rental income that would be report~ by Hutch Company for the year
d. 90,909 ended December 31, 2014?
a. 210,000
2. What is the rental income for the year ended December 31, 2013? b. 450,000
a. 100,000 c. 810,000
d. 360,000
b. 116,025
c. .105,477 Solution 9-22 Answer a
d. llO,OOQ Rent income- Elder (60,000 x 6) 360,000
Rent income- Toil (75,000 x 6) 450,000
Solution 9-21
Total rent income for 20.14 810,000
Depreciation (4,800,000 /8) (600,000)
Question 1 Answer c
Net rental income for 20 14 21Q,OOO
Future value of 1 for 3 periods at 10% 1.331 l»roblem 9-23 (AICPAAdapted)
Rental payment due on December 31, 20 13
(133;10 ~
,') 'l3l) 100,000 Barnel Company owns and manages apartment complex. On signing a
Rental payment due on December 31 , 20 14 lease, each tenant must pay the first and last months' rent and a P50,000
(100,000 X 1.10) refundable security deposit The security deposits are rarely refunded
110,000 in total, because cleaning costs of P 15,000 p'er apartment are almost
•Iways deducted. About 30% of the time, the tenants are also charged
Question 2 Answer b for damages to the apartment which typically cost P 10,000 to repair. If
1'one-year lease is signed on a P90,000 per month apartment, what
2013 - 100,000 l n10unt shouii be reported as refundable security deposit?
2014 (1 00,000 X 1.1 0) 110,000
2015 ·'· 140,000
(llO,OOO X 1.10) 121,000 b. 50,000
2016 (121,000x 1.10) 133,100 c. 35,000
Tot.1l rent~:ols d. .)2,000
4~,100
Solution 9-23 Answer b
·Annual rental income ' (464,100/4) ll6.025 Refundable security deposit 50;000

134 135
Problem 9-14 (IAA)

H~g Company leased equipment Lo Rave Company on May 1~ 2013.

10. .·
The lease expires on May I, 20 14. Rave could have bought the
equipment from Hug for P3,200,000 instead of leasing it. Hug's FINANCE LEASE - LESSEE
accounting records showed a carrying amount for the equipment on
May 1, 20113 ofP2,800,000. Hug's depreciation on the equipment in
2013 was P360,000. Owing 2013, Rave paid P720,000 in rentals to
Hug for the 8-month period Hug incurred maintenance and Qther reiated
Probleml0-1 (IFRS)
costs under the terms of the lease ofP60,000 in 2013. After the lease
with Rave expires, Hug will lease the equipment to another entity for · Elysee Company1eased~machinewitha fair value ofPl,650,0QQ for
twoyears. · a period of5 years under a finance lease. The initial direct costs included
in negotiating the lease amounled toP 12,500. The present value ofthe
1. What is the rent e~pense incurred by Rave for 20 13?
minimum lease pa}1Ilents discounted at the rate impl kit in the lease iS
a. 300,000 P1,584,000.Atwhatamountshouldthemachineberecognizedinitially
b. 360,000 in Elysee's :financial statement?
c. 660,000 a. 1,650,000
d. 720,000 b. 1,596,500
c. 1,662,500
2. What is the pretax income derived by Hug for 20 13?
d. 1,584,000
a. 300,000
b: 360,000 Soluti,on 10-1 Answer b
c. 660,000 Present value of minimum lease 1Jayruents
d. 720,000 1,584,000
Initial direct costs 12,500
Solution 9-24 Total initial cost of machine 1,596,500

Question 1 Answer d PAS 17,paragraph20, provides thaHmentitysball recognize a finance

lease as asset and liability at the fair value of the leased property or
Rent expense from May 1 to December 31, 20 13 720,000 pre5ent valueofminimumleasepayments, whichever is lower.
Question 2 Answer a
Paragraph 24 further provides that in itia I direct costs incurred by the
Rent income from May 1 to Dec~mber 31, 2013 720,000 lessee are added to the amount recognized as an asset.'
Depreciation for 2013 (360,000)
Maintenance and other ·costs ( 60,000)
Pretax net rent inco_ne 300,000

136 137
Proble m 10-2 (IFRS) Proble m 16-3 {lFRS)
Mindoro Company leased a land and buildmg for_20 years, the liseful Ca~anova Company leas~d a \Varehouse wilh adjoining )and
for a
life ofthe building, with effect from January 1, 2013. At that date, the penod of 15 years. The fa1rvalues of the leasehold interests in the
fair value of the leasehold interest was P7,500,000 and ofwhic h land a~d the wareh ouse are PS,OOO,OOO and P2,SOO,OOO
P6,000,0CJO was attributable to the building. Annual rentals ofP800,000 respecbvely. The land bas an indefmite economic life whereas the
are payable in advance on January I. What amount should be recognized warehouse has a useful life of 15 years. Title to the land is not
expec~edto p~ss at the end ofthe lease. At what amount should
as an operating lease expense for 2013? the
ass~t m relatiOn to fmance lease be recognized in the financi
al
a. 800,000 statements ofthe lessee?
b. 640,000 a. 7,500,000
c. 160,000 b. 5,000,000
d. 0 c. 2,500,000
d. · 0
Solution 10-2 Answe r c
Solution 10-3 Answe r c
The annual rental should be split between the land lease a!!d building
lease based on the their relative fair value. !he warehouse lease is a finan~ lease and therefore the leasehold
mterest ofP2,500,000 is recogn ized as an asset
Leaseh old interest 7,500,000
Attributable to building 6,000,000 The land lease is an operating lease and therefore the leasehold Interest
of~5,000,00Q is not recogn ized as an asset.
Attributable to land 1,500,000
Proble m I 0-4 (AICP AAdap ted)
Operat ing lease expens e
(1,500,0 00/7, S00,000 X 800,000) 160,000 On January 1, 2013, Ashe Company entered into a ten-year
non~~celable lease requ~ng.y~r-end pa~ents of Pl,OOO,OOO.
A land and building lease should be separated into t:Wo components ~he s mcrementa1 borro\Vlng rate Is..12%, white the 1c~ssor 's implicit
mterest rate, knO'w\'D to Ashe~ is 10%. Present value factors for an
namely, the land lease and the building lease.
ordinary annuity for ten periods are 6.145 at lOo/o, and 5.650 at
In genera l, a land lease is classified as an operating lease if title is not 12%. On same date, Ashe Company paid initial d1rect cost of
expected to pass to the lessee by the end ofthe lease term. P200,00~ in negotiating and securing the leasing arrangement.
Owners hlp ofth~ property !emains with the.lessor at expiration of
However, under the amendment to PAS 17, a land lease of severa l the lease. ~re1sno bar~ purchase option. The leased property
decade s (more than two) or longer may be classified as finance lease has an estrmated econormc life ofl2·years. What amount should be
even if Litle will not pas'S to the ]~see at the end of lease term. capital ized as cost ofrbe leased property on Janua"Y ' ~ 2013?
The building lease is a finance Je~ ·oecause in this case1he lease term a. 6,145,000
extends to the end ofthe building·s useful life. b. 6,345,000
c. 5,650,000
d. 5,850,00~

138
139
Solution I 0-4 Answer b
Present value of rentals (1,000,000 x 6.145) · 6,145,000 Problem 10-5 (IAA)
lni tial direct cost 200,000 On December 31, 2013, Tiger Company leased equipment from Zebra
Total cost of property 91345,000 Company.
• The estimated seven:year useful equipment life coincides with the
To qualify as a finance lease, the lease must satisfy any of the lease ten'n.
following major criteria: • The first ofthe seven ~qual annual P200,000 lease payments was
paid on December 31, 20 13.
1. Th~!re is transfer ofownership or title to the lessee at the end of • Zebra Company's implicit interest rate of 12% is known to Tiger.
the lease term. • Tiger's incremental borrowing rate is 14%.
2. There is a bargain purchase option, meaning, the lessee can • Present value of an annuity of 1 in advance for seven periods is
purchase the asset at an amount that is significantly lower than the- 5.11 ~t 12% and 4.89 at 14%.
fair value of the asset at the end of the lease term. • Tiger Company paid 'initial direct cost ofP1 00,000.

3. The lease term is for tl;le major part ofthe life of the asset or at least What amount should be recorded by Tiger Company initially as cost of
75%. the equipment?
4. The present value of the minimum lease payments amounts to a. 1,400,000
substantially a11 ofthe fair value ofthe asset at the inception of the b. 1,022,000
lease or at least 90%. q. 1,122,000
d. 1,078,000
Even ifthere is no bargain purchase option and Uie ownership ofthe
property remains with the lessor at lease expiration, the lease is Solution 10-5 Answer c
treated as finance lease because the term is at least 75% of the life Present value. of rentals (200,000 x 5.11) 1,022,000
ofthe asset (10/12 equals 83 1/3%). rnitial direct cost 100,000
PAS 17, paragraph 20, provides that in a fi~ance lease, the lessee Total cost of equipment 1,122~000
shall record an asset and liability equal to the fair value of the leased
property or present value ofthe minimum lease payments, whichever, The commencement of the lease·is December 31, 2013 and the first
is lower. annual payment was made·on December 31, 2013 in advance.
The present value of the r J.inirnum lease payments is computed using ·l'hus, the present value ofan annuity of 1 in advance factor applicable
implicit rate ( 10%), ifthis is practicable to determine. to the .implicit interest rate of 12% is used in determining the present
. .
Otherwise, the lesse~'s incremental borrowing rate (12%) may be value ofrentals. ·
used.

140
141
 Problem 10-0 (AICPAAdapted) Scolution 10-7 Answer b
Neal Company entered into a nine-year finance lease on a Present value of rentals (500,000 x 4.60) 2,300,000
warehouse on December 31,2013 . Lease payment ofP520,000
which includes· real estate taxes and other executory cost of
P20,000, are due annually, beginnil)g on Dece!Dbe~ ~ 1_; 2014 and The "PV o:f"ap.nuity of 1 in advance" factor is used because the rental is
every December 31 thereafter. The interest ~ate 1mphc1t m the .lease payable at the beginning of each lease year.
is 9%. The rounded present value of an ordinary annuity of 1 for This is a fmance-lease because the term is at least 75% ofthe life ofthe
nine years at 9% is 5.6. What amount should be reported·as lease asset (6 years divided by 8 years equals 75%).
liability on December 31, 2013?
a. 2,800,000 Problem 10-8 (AICPAAdapted)
b. 2,912,000 Robbin Company leased a machine from Ready Leasing Company.
c. 4,500,000 The lease qualifies as a finance lease and requires 10 annual payments
d. 4,680,000 ofP I 00,000 beginning immediately. The lease specifies an interest rate
of J 2% and a purchase option ofP I 00,000 at the end of the tenth year,
·Solution 10-6 Answer a even though the machine's estimated value on that date is P200,000.
Lease liability (500,000 x 5.6) 2,800,000
Present value of an annuity due (in advance)
·of 1 at 12% for 10 periods 6.328
PAS 17, paragraph 4, provid~s that the minimum lease payments in~lude .!?resent value of 1 at 12% for 10 periods 0.322
annual rental, bargain purchase option, and any guaranteed reszdual
value if there is·no bargain purchase option. The executory costs, such '
as real estate taxes and insurance, are outright expenses and therefore What amoun·t should be recorded as lease liability at the beginning of
,. no~ capitalized as part ofthe lease liability. the lease term?
a 621,600
Problem 10-7 (AICPAAdapted) b. 648,600
On January 1, 2013, Day Compan~ leased a new machine from Parr c. 665,000
with the following pertinent informatton: d. 697,200
Lease term 6 years
Annual rental payable at beginning of each year · 500,000 Solution 10-8 Answer c
Useful life of machine . 8 years Present value of rentals (100,000 X·6.328) 632,800
Implicit interest rate in le~se . . · . 12%
Present value of bargain purchase option
Present value of an annmty of 1 m advance for 6 penods at 12 Yo
0
4.60 (100,000 X .322) 32,200
Present value of an ordinary annuity of I for 6 periods at 12% 4.11
l'otai lease liability- beginning of lease term 665,000
The lease is not 1enewable, and the machi~e reverts t~ .Parr.at !he
termination ofthe lease. The cost of the machine on Parr.s accountmg I'he purchase option of Pl 00,000 is a bargain purchase option because
records is P3,755,000. At the beginning ofthe lease term, what amount
lt 1s significantly lower than the estimated fair value ofthe.asset at the
s~ould be recorded as lease liability?
end ofthe lease term. Accordingly, this is included in the Computation
a. 2,055,000 of the initial lease liability.
b. 2,300,000
c. 3,755,000 If lhe purchase option is P200,000 which is equal to ~he fair value of .
d. 2,800,000 the asset, it is excluded in the computation of the lease liability.
142 143
Problem 10-12 (AICPAAdapted) Problem 10-13 (IFRS)
On January 1, 2013, Kosovo Company entered into a 10-year l~st: Nova Company has ieased an asset on a finance lease." The present
for~ equipment. The entity accounted for the acquisition as a finance value ofthe minimum lease payments is P686,000 and the fair value of
lease for P4,900,000 which included a P200,000 guaranteed residual the asset is P700,000. The asset has a useful life of 5 years and the
value. At rhe end of the lease., the asset will revert back to the lessor. lease is for a period of 4 years, after which the asset tan be acquired
for a near zero cost, which is substantially below the expected value of
It is estimated that the a$set's fair value at the end of the 12-yeaniseful the asset at that date. The asset is depreciated on a straight line basis.
life will be PI 00,000. The entity regularly used _the straight line What is the amount of the annual depreciation expense?
depreciation on similar equipment. For the year ended December
31, 2013, what amount should be recognizea as depr~ciation a. 175,000
expense of the leased asset? b. 140,000
c. 137,200
a. 490,000 d. 171,500
b. 400,000
c. 470,000 Solution 10-13 Answer c
d. 480,000 Annual dcp::eci&tion (686,008/5 years) 137,200
Solution 10-12 Answer c The present value of the minimum lease payments ofP686,000 is
recognized as an asset beeause it is lower than the fair value. The
Deorec.iation for 2013 (.4,700,000 I 10 years) 470;000 nscfullife ofthe asset of5 years is used in computing annual depreciation
because there is a barg~in purchase option. ·
Cost of leased equipment A,900,000_'
Guaranteed residual value c 200,000) flr·oblem 10-14 (ITRS)
Depreciable amount 4,70U,OL.I<T On January 1, 2013, Diamond Company leased a van with 8 (airvalue
'11' [J3,600,000 tmder a fmance lease. Th~ lease term is 6 years and the
The guaranteed residual value is deducted· frqm cost 'in present value ofthe minimum lease payments is P3,552,000..The useful
determining depreciable amount because the machine will reyert life •)fthe van was estimated at 8 years with no residual value. The
back to the lessor upoh the lease expiration. L'ntity csed straight line depreciation. What is the depreciat~on charge
on the van in 2013?
The lease term of 10 years is used in computing'depreciation
because there is no bargain purchase option and no'transftir of title. I 600,000
IJ. 450,000
Th~ lease is a finance lease because tne lease terni ts- at least 75% \.., 592,000
of the life of the asset (10/ 12 or83 1/3). d. 444,000
\'olution 10-14 Answ~c
\nnual depreciation (3,552,000 I 6 years) 592,000
l'hc lease term of 6 years is used in computing depreciatiQn because
1l1crc is no transfer of !he title and no bargain purchase option.

146 147
 Problem 10-15 (IAA) Soluti011 ·1()-i6 A~a
Pr~sent value of rentals {1',300,000'x 4.24) 5,512,000
Helen Company is. a le56ee under a finance lease. The asset is record.ed' Present value of guaranteed residual va-lue
at P4,500,000 and has an economic life of8 years. The leaseterrnis-5· (I ,000,000 X 0.65) 650,000
years. The asset.is expected to have a fair value ofP1,500,000 attbe
end of5 years and a fair value ofP500.,.000 at the endof8 year.;. rife Total lease [iability- January 1, 20l3 6,162,000
lease agreement provides for the transfer of titl~ of the asset to tbe Less: First payment on January I, 2013
lessee at the end ofthe lease tem1. Wha;t amount-of depr~ciation.ex~nse (all app.licab[e to principal) 1,300,000
should be recorded for the first year of the lease?
Lease liability- January I, 20 t3 4,362,000
a . . 900,000
b. 800,000 The present value for an :'annuity due" factor is used in the computation
c. 600,000 because the.rental is payable in advance.
d. 500,000
Problem 10-17 (AICPAAdapted)
Solution 10-15 Answer d
On December 31, 2013, Action Companys1gneda 7-yearfinanc~
Cost 4,5(X),OOO lease for an airplane. The airplane's fa1rvalne was P8,415,000.
Residual value after 8 years ( 500,000) The entity made the first an_nual iease payment ofP 1,530,000 on
Depreciable amount 4,000,000 De~ber 31, 20 13. The enti~'s incremental bo~owing rate was
12%, and the interest rare implicit in the lease, which was .known by
Annual depreciation (4,000,000 I 8) 500,000 Action, was 9%. The rounded present value factors for an annuity
due are: ·
· Problem 10-16 (AICPAAda.pted)
9% for 7 years 5.5
On January 1, 2013; Babson Company leas~d tw<Jautomobiles for 12% for 7 years 5.1
executive use. The lease requires Babson to ~ake five an'imal
payments ofP1,300:ooobegiiming January 1,'2013. At the end of \¥hat amount should be reported as fmance lease liab11ity on December
the lease term, December31, 2017, the entity guaranteed tlie residual )1 , 2013?
value cfthe automobiles at PI ,000,000. The lease qualifies as a
finance lease. The interest rate implicit in the lease is 9%. Present a. 8,415,000
value factors for the 9% rate implicit in the ]ease are as follows:· b. 7,803,000
c. 6,885,000
For an annuity due with 5 payments (in advance) 4.240 d. 6,273-,000
For an ordinary annuity with 5 payments 3.890
Present value of I for 5 periods 0.650 Sohttion I 0-17 A11Swer c
What is the fmance lease liability immediately after ~he first required Present ":atue-=- December 3 1, 20 13 (1 ,530,000 x. 5.5)
payment? · 8,415,000
Less: First payrnenl on December 3 I, 20 i3
a. 4,862,000 {all applicable to principal) 1,530.000
b: 4,407,000 '
Lease liat..ilily- December 31, 2013 ·-6,885,000
c. 3,562,000
d. 3,107,000
149
148
Problem 10-18 (AICPAAdapted) i'roblem"l0-I9.lJAA)
Oak Company leased equipment for the entire nine-year usefut life, Newton Company 1eased machmery with a fair value ofP2,500,000
agreein_g to ,pay P500,000 at the start of the Lease term on D~ember from anotheremityonDecember 3 r, 2013. The .contract is a six-year
31, 2013, and P500,000 annually on each December 31 for the noncancelable lease wi.tb an implicit interest rate of 10%. The lease
next eight years. The·present value onne·cember 31,2013 of the. required annual payment ofP500,000 beginning December 31,2013.
nine lease payments over the lease term using therate implicit in the The entity app:-oppriatelyacccunted for t.11e lease as a tmancc lease.
lease which Oak knows to be lO%wasP3,i65,000. The December The incr~mental borrowing rate is 12%. The present value of an
31, 2013 present value ofthe lease payments using Oak :s incremen1al annuity due ofl for 6 years at 1()% is 4. 7908 and the presect value
borrowing rate of l2% was P2,98S,OOO. Oak made a·timely second of an annui ty due of l for 6 years at 12% is 4.6048. What is the
lease payment. What amount should be reporte<l as Lease liab~Licy · lease liability that should be reported on DeccrnhPr ·; 1, 2014?
on December 31 '· 20 14? a. 1,895,400
b. 1,700,000
a~ 3,500,000
c. I ,584,940
b. 2,431,500
d. 1,5 18,688
c. 2,283,200
d. 2,485,000
Solution 10-19 Answer c
Solution 10-18 Answer b Present value- December 31, 20 i3
• (500,000 X 4 7908) 2,395,40C
Present value- December 31, "2013 ~165,000
First payment on December 31, 2013
Less: First payment on December 31,2013 (all applicable to pr:ir.cipal) 500,000
(all applicable to principal) 500,000
.. Lease liability- Decembcr31, 2013 1,895,400
Lease liability- December 31,2013 2,665,000
Less: Second payment on December 3l, 2014 500,.000 Second payment on December 31, 2·0 14 500,000
Interest for 2014 (iO% x 2,6~5,000) (266,500) 233,500 Interest for 2014 (10% x 1,895.400) (189,540) 3l0,460
Lease liability_: December 31, 2014 2,431,500 Lease liability - December 31, 2014 1,584,940

The initial lease liability is equal to the present yaJue of.the lease The initi al le2..se liability is equal to the present value of the lease
payments using the lessor's implicit rateoflO%. · pa}ments because the amount is 1ower than the fair va-lue of the
leased asset ofP2,500,000.

150
P~bl~m 10-20 (AIC PAA dapte d) Probl em 10-2~ {AICPAAdapted).
On Dece mber 31, 20 13, Roe Comp any leased a machiti~ On Dece mber 3.1 , 2013 , Ames Company leased equipme~t
from Colt' . under a
for a five-y ear perio d. Equa l annu al paym ents und~r the finance lease for 10 years. It contracted to pay P400,000 annua
p J..,OSO,OOO inclu ding P50,0 00 annual execu tory cost and
lease are l r~nt
are due on Dece mber 3l, 2013, and on December 31 ofeac hofth enex
tnine
on Dec-embe.r 31 of each year. The first paYJUent was years . The finance lease liability was recorded at P2,70
made on 0,000 on
Dece mber 31, 2013 , and the secon d paym ent was I?ec~mber 31, 2013, be~ore the first payment. The
made on equipment's useful
Dece mber 31,2 014. The five lease paym ents are disco hfe.Is 12 years, and.the I~terestrate implicit in the lease is
unted at 10%. The
10% over the lease term. The prese nt value of mini mum entity ~sed the straight lme method to depreciate all equip
lease ment. ln
paym ents at the incep tion of the lease and befor e the first recording the De~e~~er 31,20 14 payment, by wh~t amou
annu al nt shoul d
payr-1ent was P4,1' 70,00 0. The lease is appro priat ely accou the f!nance lease hab1hty be reduced?
nted ·
for as a fmance lease. Qn Dece mber 31, 2014, what amou a. 270,000
nt shoul d
be repor ted as lease Hability? ·· b. 230,000
c. 225,000
a. 3,170 ,000 d. 1.70,000
b. 3,150 ,000 SOlution 10-21 Answer d
c. 2,853 ,000
d. 2,487 ,000 Lease liabil ity- Dece mber 31, 20 1'3
2,700,000
Less: First payment on Dece mber 31 , 2013
(all applicable to principal)
Solution 10-20 Answer d . 400,000
4,170,0 )0 Lease liabil ity- December 31,'20 13
Prese nt value - D~cember 31, 20 l3 2,300 ,000
First paym ent 0::1 Dece mber 31, 2013
1,000,000 Secon d payment on Dece mber 31,20 14
(all applicable to principal) :400,000.
Interest for 2014 ( 10% x 2,300,000) .
3,170,000 ( 230,000)
Lease liabil ity - Dece mber 31,20 13
Secon d paymc ~~c O" Dece mber 31, 20 14' 1,000,000
Reduc tion of lease liabil ity on December 3 I,2014 170,000
Intere st for 2014 '( 10% x 3, 170,000) ( 317,000) 683,000
Prob lem 10-22 (IFR S)
Lease liabil ity - Dece mber 31, 2014 2,487,000
Mi.racle Company leased machinery with useful life of 10
years for
The execu tory cost ofPSO,OOO is an outright expe~se and 10 ye.ars on Janua ry I, 20 13. At that date, the fair valqe
of the
therefore
dedu cted from Pl ,050, 000 to get annua~ le~se paym machmery was P4,90Q,OOO. Annual rentals ofP70 0,000 are
payable
ent of
m advance.on January 1 and the ~tere st rate implicit in the
1' 1,000, 000. lease is
9%. What ts the total lease ~iability (principal and intere
st) whic h
~hould be recog nized on December 31, ~01 3? 1

,I. 4,578 ,000

h 4,64 1,000
l!. 700,0 00
d. 0
152
153
.Solr!-tion 10-22-Answ~r a Problem 10-24 (AICPAAd apted)
Lease liability- January· l, ~f3
First.paym ent on January 1, 2013 On December 3_1, 2013, Rafferty Company leased equipment under
(all applicable to prinCipal) c 700,000) a finance le?se. Annuallease.payrnents ofP200,000 are due Dec.ember
4,200,000
31 for 10 years. The equipment's useful life is 10 ye~s and the interest
Lease liability- Dec~mber 31, 20 13
rate implicit in the lease is 10%. The lease obligation was tecorded on
Accrued interest payable - December 31, 2013
(4,200,000 X 9%) . 37S;OOQ: December 31, 2013 at Pl,350,000 and the first lease payment was
made on that date. What amount should be included in current liabilities
Total lease liability- December 31,2013 4,5-78,006_ in relation to_the finance le<!se on December 31, 2013?

Problem .10-23 (AIEPAAd apted) a. 65,000

On January 1, 2013, Day Company eutered into a Hl-yeB:f lease b. 85,000
agreement with Wcrd Company. for industrial equipment. Ariimal-lease c. 115,000
payments of P1,000,000 are payable at the end of each yea(. The d. 200,000
entity knows thattht,.; lessor expects a 10% return on the lease w.hich..is
the implicit rate in the lease. The equipment is expected to have an Solution I 0-24 Answer b
estimated useful life of 10 years. b addition, ~third party has guarahteed
to pay Ward a residual value ofPSOO,OOO at the end of the lease, Lease liability - December 31, 2013 1,3-50,000
Present va!ue of an ordinary annuity of tat lU% Less: First payment on December 31,2013
for 10 periods 6.14 (all applicable to pr..ncipal) 200,000
Present v~lue of 1 at 10% for 10 periods 0.39 Lease liability - December 31, 2013 1,150,000
On December 31,2013, what is the principal lease liability? Less: Second payment on December 31, 2014:
Payment . 200,000
a. 6,335,000 Interest for 2014 ( 10% x 1, 150,000) 115,000
b. 6,140,000
c. 5,754,000 Principal payment 85 ,000
d. 5,968,500 lease liability - December 31,2014 b.Q§~_QQ

Solution 10-23 Answer c L ease liability -December 31, 20 13 1,150,000

6,140,000 Current portion (represented by the principal
Lease liability-ll l/2013 (1,000,000x 6.14)
1,000,000 payment on December 31, 20 14) _85,000
First payment on December 31, 2013
Interest cxpc;nse for 2013 (10% x 6,140,000) ( 614,000) 386,000 Noncurrent portion 1,065,000
Lease liability- December 31, 2013 5,754,000

The rni.-n.imum lease pa)mcnts shall include the guaranteed residual value
£(guarante..?d by the lessee. In this case, the residual value is guaranteed
by a third party and therefore excluded in computing the lease liability.

154 155
Problem 10-25 (AICPAAda~t~} 2. On June 30,2014, what would Trojan Company record in relation
to the lease?
On January 1, 2o1~, Hairo~ Cc;)Jnp~py"a5.lesse·e .~ign~ ~rfi':'.e-year.
a. An interest expense ofP9 ,851
nopcancelable equipment l~ase.with annrial.p~ytnehts.'of~ l~O~,O<~l: b. An interest expense of nil
beginning December 31, 2013.l)_e·entity treat~ this.trarisactiQti ~_a c. An interestpayableofP9,851
fmance lease. The Jive lease.: payments· hav~ a pr~sent value of d. AI]. ~n~.~r~stpa~able ofP7,836 .
P3,790,0Q9atJan~: l, 20.13 basedon·~terestofl0%.:WJ1at·amo~t
sheuld.b<; reported as interest.expense. for.tl)e ye·ar en~ed December 3. What is the annual deprecia.tion expense?
3~; 2013? .
a. 24,628
a. · ·.3:79,000 b. 16,419
b. •' 279,000 c. 15,585
c. . 242,000 d. 23,378
d. . . 0 .
Solution 10-26
Solution
' '
'J0-25 Answer
. a · Question I Answer a
'•

Interest expense for 20"13 ( 10% ·X 3, 790,000). ~79,000 Remaining lease payments for three years (33,000 x. 3)
• ,'' • • •• I, 99,000
Guaranteed residual value · 5,000
Problem ~0-26 (IFRS)
Total amount to be disclosed - June 30, 2015 104,000
Tr~jan COmpany prep~ the following lease payments schoo'ule ~<?r
·the lease ofa machine from another.entity.The machine l}as an ecQnonil~ Aimuallease payment . 33,000
life ofsix years. The lease ~ment requires four annUal pa)'inents of Minimum lease payment 30,000
P33,000 and the mac~e will be returned to.the l~r at the end ofthe
Executory cost 3,000
leasetenn. - --
- -
Minimum l~se , Interest Reduction of . Balance of Lease payment on July 1, 2017 3s;oo.o
payment expense . liability liability Minimum lease payment 30,000
I

July 1, 2013 98t512 Guaranteed residual value

July 1, 2014 30,000 9,85-1 20f149 78,363 · 5,000
July1,2015 . 30,000 7,836 22,164 . 56,199 Question 2 Answer c
July 1, 2016. · 30,000 5,620 . 24,380 31,819
July·I, 2017 35,000 3,181 31,819 There is an accrued interest ofP9,851 from July I, 2013 ro June 30,
125,000 26,488 . 98,512 2014 to be paid on July 1, 2014. The best an·swerisin·fe~estpayable
rather than interest expense because the question is on June.3 o. 2014,
1. In the notes to financial statements o~riun~ 30, 2015, Trojan
rather than for the year 20 14'. ·
Compariywould disclose future lease payments ofwhat amount? Question 3 Answer d
'I

a. '104,000 Annual depreciation (93, 51 2/4 years) ·

b. 65,000 ·-=---
c. . 99,000 Depreciable amount (98,512- 5,000) 93,512 .
d. 95,000
156 157
Problem 10-21 {IAA} Problem 10-28 {IFRS)
At the current year-end, Mercedez Company purchased a machinery
that it had been leasing under a fmance arrangement. The leased asset .Yemen Company leased an equipment for 6 years from another entity
and lease liability were originally recorded at P2,000,000. At the tine on January 1,2013. The entityrecorded the assetatP4'800'OOOwhich
of the purchase, the accumulated depreciation on the leased asset was
.
inch;ded a ~~n pqrchase option ofP 100,000.' The equipmenthad
P800 >000 and the remaining balance of the lease liabilitY was
I
an eight-year useful life and ::t fair value ofP300,000 at end of the useful
P 1,300,000. The leased asset was purchased for P 1,440,000 Cl\Sh. lite. On January 1, 2019, the entity did not exercise the bargain pU.rchase
What amount is debited as cost of the machinery on the date of option. What is the loss on finance lease to be recognized in.20 19?
purchase?
a. 1,325,000
a. 1,340,000 1,425,000
b.
b. 1,440,000 c. 200,000
c. 1,200,000 q. 0
d. 0 ,2,000,000
Solution 10-28 Ans.wer a
Solution 10-2 7 Answer a
Cash payment 1.440,000 Costofequipment'-January I, 2013 4,800,000
Carrying amount cfleased asset (2.0CO,OOO- 800,000) 1,200,000 Accumulated depreciation -January I, 2019
2,640,opo (4;800,000 - 300,000 I 8 x 6 years) (3,375,000)
Total consideration
Balance of lease liability 1,300,000 Carrying amount-January 1, 2019 1,425,000
Cost of machinery purchased 1,340,000 Lease liability- 11112019 (bargain purchase option) ( 160,000)
Loss on finance lease 1,325,000 °

Journ~l entry to rec-r.rd the actuc.1! purchase

Machinery (purchased) 1,340,000 The entry to record the return of the asset to the lessor as a result of the
Lease liability 1,300,000 nonexercise ofthe bargain purchase op~on is as follows:
Accumulated depreciation 800,000
1,440,000 Accumulated depre.ciatfon 3,375,000
Cash
Machinery (leased) 2,000,000 Lease liability 100,000
Loss on fmance lease 1 ,325;000
·. Equipment 4,800,000

On January 1, 2019, the bala~ce of the lease liability is equal to the

bargain purchase option ofP1 00,000. ·

If the bargain purchase option is not exercised, a loss is reco'gnized

equal to the difference between the carrying amount of th~ asset and
the lease liability.
158
159 ·
 Problem 11-2 (IFRS)
11 Liza Company is a car dealer. On January l, 2013, the entity entered
into a fmance lease with a customer under which the customer would
'
pay P200,000 on January l each year for 5 years, commencing in
SA-LES TYPE .LEASE ~LES SOR 2013. The cost of the car is P600,000 and the cash selling price was
P750,000. The entity paid legal fees of P20,000 to a law firm in
connection with the an·angement of the lease. What amount of gross
profit on sale should be recognized for 20 13-?
Problem 11-1 (AICPAA dapted) .a. 150,000
Howe Company leased equipment to Kew Company on January 1, b. 130,000
c. 20,000
2013, for an eight-year period expiringDecember31,.2020. Equal d. 0
payments under the lease are P500,00Q ·and are due on January 1
of each year. The first payment was made on J an-..:ary 1, 2013. The Solution 11-2 Answer b
selling price of the equipment is P7. ,900,000 and tJ:le carrying amount
is.P2,000,000. The lease is appropriately accounted for as a sales Sales revenue 750,000
Cost of sales (600,00C)
type lease. The present value of the lease paymeP.ts at an implicit Legal fees- initial direct cost (_20,000)
interest rate of 12% is P2,780,008. What amount of gross profit on
sale should be reported for 20 13? Grqss profit on sale 130,000
....,........,_

a. 900,000 Problem 11-3 (IFRS)

b. 780,000
Valerie Company used leases as a means ofmarketing its products. On .
c. 240,000 January 1, 2013, Valerie leased an equipment to Ann Companyfor
d. 333,600 P500,000 per year for 10 years, payable·on December 31 t ()f each
year. The cost of the equipment is P2,000,000·arid the fatr v:alue is
Solution 11-1 Answer b P3,072,500 on January 1, 2013 using an impJjcit rate ofl 0%. The.fair
Sales re-venue equal to the present va!ue value of the equipment approximated the present value oftentals. At
of lease payment s- lower the expiration ofthe lease, title to the equipment passes to Ann Company.
2,780,000
Carrying amount of equipment sold What is the interest income for 2013?
2,000,000
Gross profit on sale a. 200,000
780,000
b. 192,750
PAS 17, paragraph 44, provides that the sales revenue r~cognized at c. 307,250
the commencement of the lease term by a manufacturer or dealer d. 257,250
lessor is equal to the fair value of the asset or the present value of
the minimum lease payn:ents, whicheve r is lower. Solution 11-3 Atf!wer o
Interest income for 2013 (10% X 3,072,500) 307.250

160 161
 1
Problem 11-4
,
(AJtPAAdapted) I
Problem 11-5 (Al~PAAdapted)
Meg Company leased equipment fr0m Wee Company on July 1, Hitech Company, a dealer in machinery and equipment, ·leased
2013 for an eight-year period expiring June 30, 2021. Equal equipment to Quality Company on July 1, 2013. The lease is
payments under the lease are P600,000 and are due on July 1 of appropiiate1y accounted for as a sale by Hi tech and as a purchase by
each year. The first payment was made on July 1, 2013. The rate-of Quality. Th~ lease 1s for ·a ten-year period equal to tlle useful life of the
··i nterest contemplated by Meg and Wee is 10%. The cash selling asset expiri.rlg June 30, 2023. The first often equal annual payments of
· price ofthe equipment is P3,520,000 and. the car~ying amount is P250,000 was made on July 1, 2013. Uitech had. purchased the
P2,800,o·oo. The lease is appropriately recorded as a sales type equipment for P1,33 7,500 on January 1, 2913, and established a list
lease. What amount of profit on the sale and interest revenue should selling price of P 1,6 87, 5'00 on the equipment. The presentvalu~ on
be recorded for the year ended December 31, 20 13? July 1, 20 13 of the rent"payments over the lease te1111 discounted at
Profit on sale Interest revenue 12% was Pl,582,500. What amount of profit on sale-and.interest
income should be recorded.for the year ended December 31, 2013,
a. · 720,000 176,000 respec~ively?
b. ·, ' 720,000 146.000
176,000 a. 245,000 and 94,950
c. 45,000
45,000 146,000 b. ·245,000 and 79,950
'd.
c. 350,000 and 79,950
Solution 11-4 Answer b d. 350,000 and 94,950
Cash selling price 3,520,000
-Cost of equipment sold 2,800,000 Solution ll-5 Answer b
Profit on sale 720,000 Present value of rentals - Sales revenue 1,582,500
Cost of equipment 1,337,500
The cash selling pricG is usually equal to the present value of the Profit on sale 24d,OOO
minimum lease payments.
Present value -July 1, 20 13 1,582,500
Lease receivable- July 1, 2013 (cash selling price) 3,520,000 Payment on July 1, 20 t3, all applicable to principal ' 250,000)
Less: First payment on July 1, 2013
(all applicable to _Principal) 600,000 Lease receivable- July .1, 2013 ' l,J32,500

Lease receivable- July 1, 2013 2,920,000 Interest income from July 1' 2013 to June 30, 20 r.:::
Interest revenue from July 1, 2013 to (12% X 1,332,500) 159,900'
June 30,2014 (2,920,000 x 10%) 292,000
Interest income from July 1, 2013 to December 31., 2013
Interest 'revenue from July 1, 2013 to (159,900x6/12) 79,950
December 31,2013 (292,000 x 6/12) 146,000

162 ·'
163
 Problem U -6 (L4.)'
Solution 11-6
Yanderbilt Cqmpa_ny·rs-a d-eale(.in~, Opfmwacy 112Ql3,
Question 1 -Answer a
.a rnicb.inery was· le~~d ,(Q anothet. e~t1ty .~iJ~ ~he· feflP~i:Qg ·
}#dvi$ions~ . · Gross rentals ( 3,000,000 x 5) 15,000,000
Rcsi?ual value- unguaranteed 1,000,000
AnnuaHen~ {>.ayab~e..at..the. end .o.feaon ~ .3_,00o,ooq
tease term and useful .fife of. mMhihe'ry 5 years Gross investment 16,000,000
Cost of machinery 8,!)00,000 Present value or net investment:
Residual value-un~guaranteed Rentals (3,000,000 x 3.60) 10,800,000
t,OOO,OOO
Residual value ( 1,000,000 x .57) 570,000 11,370,000
bnpli~it i.[l'tere~frafe 12%
· pV·oHm erdtnary a!lnuity of Lfor 5 pedods at 12% . 3.60 Unearned ir.terest income·- January 1, 2013 4,630,000
BV of 1 for 5 perioqs at 12% 0 .57 The difference between the gross investment and net investment is the
unearned interest income. The gross investment is the sum in absolute
At the end of the lease term on December 31, 2017, the machin~ry amount ofthe gross rentals and the.residual value, whether guanmteed
will revert to Vanderbilt Vanderbilt incurred initial direct cost of or unguaranteed. In a sales type lease, the net investment is equal to the
present value of rentals plus the present value of the residual value,
_ PJOO,OOO in fi~alizing th.e lease agreement. whether guaranteed or unguaranteed. Thus, whether the residuai value
is guaranteed or unguaranteed the uneame~ interest income is the
· 1. What is theunearnedinterest income on January 1, 2013? same.
a. 4,630,000 , Question 2 - Answer .b
b. 4,200,000' Guaranteed Unguaranteed
c. 5,200,000 Sales 11,370,000 !9;800,000
d. 3,630,000 Cost of sales ( 8,000,000) ( 7,430,000)
Initial direct cost ( 300,000) (~~000)
2. What amount should be reported as gross profit on sale in 2013' Gross profit on sale 3,0'70,000 3,070,000
· a. 7,700,000 The amount of sales is equal to the net investment or sum of the
b. 3,070,000 present value ofthe rentals ar..d the present value ofthe residual
c. 2,500,000 value.
d. 3?370,000 Note that whether the residual value is guaranteed or unguaranteed,
the profit on sale is the same. The only difference .is in the reporting
of sales and cost of sales. If the residual value is guaranteed, the
3. What is the interest income for 20 13? sales and cost of sales should include the present vatue of the
a. 1,364,400 residual value. Otherwise, as in this case, if the residual value is
unguaranteed, the sales and cost of sales should exclude the present
b. 1,296,000 value of the residual value.
c. 1,800,000
In a sales type lease, the initial dire~~ cost incurred by the,lessor is
d. 926,000 expensed tmmediatet'y as component-of cost of sales.
Question 3 -Answer a
Interest income for 2013 (11,370,000 x 12%) 1,364,400
164
165
~ableni ll;-7..(lAAJ So/utirm·'n-7 ·
Reagan Company used leases as a method of selling products. In Question 1 -Answer a
2013, the entity completed construction of a passenger ferry. On Gross rental~_ . ( 1,500,000 x 20) 30,000,000
January 1, 2013, the fenywas leased to the Super Ferry Line on a Present value or fai'r value of asset ( 1,500,000 x 8.37) 12,555,000
CQ"ntract specifying that ownership of the ferry will transfer to
the lessee at the.end of the lease period. Annual lease payments Unearned interest income- January 1, 2013 17,445,000
do not include executory costs.
Observe that the present value ofrentals is the same as the fair vallle of
Other terms of t."'le agreement are as follows: the asset.
Original cost of the ferry 8,000,000
Fair value of ferry at l~ase date 12,555,000 Note also that the residual value is ignored because the pwnership
Lease payments payable in advance 1,500,000 of the asset will transfer to the lessee at the end of the lease
Estimated residual value 2,000,000 t~rm.
ImpliCi~ interest rate 12%
Date of first lease payment· January 1, 2013 Question 2- Answer b
Lease·term , 20 years
Pr~nt value of an annuHy dne of 1 at 10% for 20 periods 8.37 Fair value ·of asset- sales revenue 12,555,000
"'tost of sales 8,000.000
Present valye of ~ at 12% for 20 periods 0.10
G ross profit on sale 4,555 ,000
1. What is the unearned interestincome on Jt'l.nuary 1, 20 13?
a. 17,445,000 Question 3 -Answer c
b. 19 ,245,000
PV of rental~ equ~l to the fiir value of asset 12,555,000
c. 19,445,000
Payment on January 1, 2013- all applicable to principal . 1,500,000
d. 2?,000,000
Lease receivable- Janaury 1, 2013 11,055,.000
2. What is the gross profit on sale for 2013?
a. 6,555,000 Interest income for 2013 ( 11,055,000·x 12%)
b. 4,555,000
c. 4,755,000
d. 4,355,000
3. What is the interest income for 2013?
a. 1,506,600
b• . 1,524-;600
p.~ 1,326,60'0
d.~ 1,3:>0,oDO
"'
4-

166 167
 Solution l it8
Problem 11-8 (IAA) .
Questiop F-ATJ~YWU a
Marianas Company adopted the policy ofleasing·as the primacy .
Sale price
· method of selling-its product~. The entity's main product is a smal1 14,875,000
Cost of sales . ( 8,500,000)
belioopter that is very.popular among politicians and entitY qtanagers; .
Initial.direet cos.t
Mariana~ Company constructed such a helicopter for Jade Company ....... ( . 500,000)
. at a cost ofP8,500~000. G~..o~s. profit
.. o.p sale
.. 5,875,000
Financing the construction was at a 14% rat¢. Th~ term~ of'the fduestio'! 2.-Answer. a
'tease provided for annual.advance payments ofP2,~00~0.oo' to ·b e
·pa'i d over 10 years with the own~rship transferring to the lessee
I ~ •
Gross rentals (2,500,000 X 10) 25,000,000
at the end of the lease perio~. It is estimated that the heli~opter . Present value of rentals - equal to the sales price· 14,875,000
..
will have dresidual va~u~ ofP 1,600,000 at thatdate. Unearned interest income -January 1, 2013 10,125,000
The lease paym~nts began January·1, 2013. Marial)as.Com~any
incurred initial direct cost of PSOO,OOO in financ~ng the tea$e The residual value is ignored-·because the ownership of the· asset will
agreement with Jade. The ~ale price of. the helicopter .is transfer to the lessee at the end of the lease term . ·
P14,875,000. The present value of an annuity due of1~ at.l4% fo~ '
10 periods is 5.95. Question 3 -Answer b
. . · · · -
. \ . . .
P.-esent value of re ntals
.1. What is the gross profit-on saJe that shqufd be recognized by 14,875,000
Marianas Company?' · .. Advance rental payment 69 January 1, 2013 2,500,000
lease receivable- January ( 2,013 g~75,000
a. -5,875,QOO
· b. 6,375,9QO
Inccrest incon~e for 2013 ( 12,375,000 x 14%) 1,732,500
~. 4,275,000 .
d. 4,775,000
2. What is the unearned mterest income·on January~, 20 13?
a. 10,125,000
b. - 11 ~725 ,000
c. 9,625,000
d. - 8,525 ~000
3. What is the intereSt income for 20 13?
a. 2·,082,500
b. 1,732,500
c. . 2,306,500
d. 1,956,,500

. 169
168
 Problem 11-10 (AICPAAdapted) .
Prob lem 11-9 (IA.A)
. ~to Faye Com pany on Janha .
ry vn January 1, 2013, Gallant Company entered into a leas
East er Com pany le~~fed equlp~~~ca- oerioC. expi e
1, 2013. The lease 1s ~o~ an eig _-. · ~ual aymt':nts ring Dec emb er agreement with :Blacksheep Corvpany. for amachin~
ofP9 00,0 00 which was
31, 2020. The first or etgh~~f~at~re cntlty had carried on the accounting recor4_S of Galtantat,P2,000,
000. Total
purc
was mad e on January ~'"- ~o12 for 'P4 800 000. hased tr:e payments under the lease which expires gn Decembe
r 31, 2022 ,
. "qui pme nt on December .... ~' L. The lease lS
"' h-,;..,.le'a'"e' The oresent value· aggregate P3,550,800 ofwhi.chPZ,.400;QOO represents
d fo-
appropriately ac~ou~ c f \ ,. sa.es
t as a 1
"H"' v . ~
.~ost ofth e
t payments over the lease term machine to Blacksheep. Payments otP355T080
0~ Janu a"y 1 LOU 0 1
a .en • 80 noo are d~.e each
l·~~·.,. oo~i
dl~scou ntea c.1...,. 1 11 nterestrate·wasP5,2 ,J ·
January 1 of each year. The interest mte of lOCAl which
was stipulated
O'J? in the lease is considered fair and adequate compensation
1. Wha t i::. the gross profit on sale for 2 l . for the use of its funds. Blacksheep expects the mach
to Gallant
me to have a
a. 1,92 0,00 8 10-year life, no residual value and be depreciated on
b. 2,40 0,00 0 a straight line
basis. The lease is conceived as a sales type lease
c. 480, 000 . Whl!.t is tbe
total inco me before income tax derived by Gall
d 240,000 ant from the lease
· . .
h .ld be recorded m 2014 ? for the year ended December 31, 2013?
2. Wha t am0u .ht cf u.;,terest reve nues ou,
a. 204,492
a. 490, 000 b. 604,492
b. 480,000
c. 438,000 c. 355,080
d. 39t, 800 d. 755,080

Solu tion Jl-9 Solution 11-10 Answ er b

Que stion 1 Answ er c Pres ent value of rentals
5,280,000 2,4·00 000
Pr~sent va1uv
~
of rent als- 5alcs reve que
1- Fir"t p~yment on January 1, 201 3 all ~ppl icabl c
• • · 4,800,000
Cost of sales to prir.cipai
480,000 Lease rece ivab le- Janu ary 1, 2013
Gros s profit on sale 2.04~ 920
---
- - ·--·
·-
Que stion 2 Answ er d · !.mer est inc om·~ for 2013 (2,04 4,920 x l 0%)
Pres ent va~uc- Janu ary 1, 2013 5,280,000
First payment on Janu ary 1. 2013 900,000 Present value of renta ls- cost to B!acksheel? (lesse
e) 2,4:.i\i,ODO
4,380,000 Cost of asset to Gall ant (lessor·)
Leas e rece ivab le- Janu ary 1, 2013 ~~QOO,COO
'·eco nd oaym ent on Janu ary 1, 201 4 900, 000 Gross profit on sale
, ."'"'
400,000
~nterest.for 2013 (10% x 4,38 0,00 0) (43g,OOO) 462,000 lntcr est incom e for 2013
•';~l",'-+~::
.,:-_
Leas e receiv~ble- Janu ary f, 2014 3,918,U00 Total mcomc of Galla nt for 2013
Third paym ent O"' Janu ary 1, 201~ 900, 000
Ir:\erest for 2(',14 (10% x 3,91 8,00 0) (391 ,800) 508,200
Leas e r\!ce; vabl c- Janu ary 1. 2015 3,409,800
·'·
1'70 171
l'tuhkm 11:11 (IAA)

Hazel Company leased machinery to Anne Company on July 1, 201 ~

for a teh-year period expiring JW1e 30; 2023. Equal annual payments
Wlder the lease are P750,000. and are. due on July 1 of each year. The
12
first payment was made on July 1, 2013. The implicit rate of interestis
9%. The cash selling price of the machinery is P5,253,0UO and the DIRECT
. ~ANCil'JG LEASE-
. LESSOR
carrying amount is P4,650,000. The lease is appropriately recorded as
a sales type iease. ·
Problem 12-1 (IAA)
1. What is the gross profit on sale for 2013?
· Company is· in the b'us mess
Camia · 0 f "easmg·
1 •
new sophishcated
equipment. As lessor,_ the entity expects a 12% retl'!m. At the end ofthe .
a. 600,000 lease tenn, the equtpment will revert to Camia Co " •0
b. 30"0,000 J~nurutfi·y 1' 29131 an equipment is leased to another en~ty"u~er ~
c. 472,500. d1rec mancmg ease. ·
d. 0 Cost of equipment'to C~mia
Residual value- unguarauteed 5,500,000
Annual rental payable in advance 4CO,OOO
. 2. What amOWlt of int~rest revenue should be recorded for 2013? Useful life and lease term 959,500
Implicit interest rate 8 years
a. 175,500 First lease payment 12%
. . January 1, 2013
b. 236,250
I. What is the unearned interest income en Jar.umy _1, 201~?
c. 405,000
d. 202,500
a. 2,576,000
b. 2;176,000
c. 1,776,000
Solution JI-ll d. 1,616,500
Question I Answer a 2: What is the interest income for2013?
Sales revenue 5,250,000 a. 322,000
4,650,000 b. 544,860
Cost of sales
c. 660,000
Gross profit on sale 600,000 d. 496,860
Solution 12-1
Question 2 Answer d
Question 1 -Answer a
Interest income 7/1/2013 to 6/30/2014
(5,250,000- 750,000 X 9%) 405,000 Gross rentals (959,500 X 8)
Residual value 7,67G,OOO
400:000
Interest income July 1, 2013 to 12/3112013 Gross investment
202,500 8,076,000
(405,000 X 6/12) Net investment- equal to the cost of the eq~:ipmcnt 5,500,000
Unearned interest income_!anuary 1, 2013
172 2,576,000

1"7'1
The difference between gross investment and net investment in the •Problem 12-3 (AICPAAdapted)
lease is the unearned interest income. The gross investment is the . OnJanua?' 1, ~0 l3, Gla~e Company leased computer equipment to
sum in absolute amount of the gross rentals and residual value, Bl~~s Cou.panyunder a dtrect financing lease. The equipment has no
whether guaranteed or unguarant~ed. In a direct fmancing lease, restd~al value at the ~nd ofthe lease and the lease does not contain
the net investment is simply the cost of the leased ~sset plus any
initial direct cost. · ~argam purchase o~t!On. The .eoti:tY wishes to earn 8% interest on a
of equmm ent w;th a cost of P3 ,234,000 . The present
Whether ~anteed or unguaranteed, the residual value is included
1 lease
5-year f . · ·
va ue o an an~wty due of 1 at 8% for 5 years is 4 112.
in computation of total financial income ifthe leased asset will revert
to the lessor at the end of the lease term. Otherwise, the residual 1. What? is the total interest revenue that Glade will earn over the 1ease
value is ignored if title pass~s to th~ lessee at the end of lease term.
term. a. J ,293,600
b. 1,394,500
Questi on 2 - Answe r b c. 516,000
d. 75Q,OOO
Pr~sent value of rentals ·- equal to the cost of the
equipment or net investtnent , 5,500,000 2. What is the interest revenue to be reported by Glade !"or2013?
First paY"ment on January 1, 2013 (all principal payment) 959,50 0
.. a. 258,720
Lease receiv able- Jariuary 1, 2013 4,540,500 b. 198,720
c. 103,200
Interest income for 2013 (4,540,500 x 12%) 544,860 ·d. 646,800
Solution 12-3
Proble m 12-2 (PHILCPAAdapted)
Question 1 -Answ er c
On January 1, 2013, Nueva Company, acting as a lessor, leased an
equipment for ten years at an annual rental of:P 1,200;000, payable by thP. a 1
This is mathe matic.al. . proced
h The . ure is to detenn1·ne ., nnua
Caster Company, the lessee, at the beginning of each year under a t I t h
~en a paYJ31en w IC ts equal to the "cost of the asset or net
t
direct financing lease. The equipment had a cost ofP8,400,000 with an mvestment to be recovered from lease rentals divided by the
estimated life of 12 years and no residual value. The implicit rate is 90/o. value factor of aJJ?':lity of 1".Accordingly, the annual rental i~~~~~ l
What amount of interest income should be reported in 20 13? to P3,234,000 dtvtded by 4.312 or P750~000.
a. 500,000 OrQss rentals (750,009 x 5) 3,750,000
b. 648,000 Present value of rentals (cost of the asset) 3,234,000
c. 756,000 Total interest revenue over the lease term 516,000
d. 360,000
9uesti on 2 -Answ er b
. Solutio n 12-2 Answe r b Present value of rental s- Tanuary 1, 2013 3,234,000
Present of rentals equil to the cost of asset 8,400,000 Advance rental payment on January 1, 2013 750,000
Advancf' payment on January 1, 2013 1,200,000
Lease receivable- January 1, 2013 2,484,000
7,200,~
Lease receiv able- January 1, 2013
Interest revenue for 2013 (2,484,000 x 8%) 198,72().
Interest income for 2013 {7,200,000 x 9%) 648,000

175
174
 Problem 12-4 (IAA): Solution 12-5 Answer c
Cost of asset 5,239,000
Cassandra Company acquired a spec~alized'packagmg ma9hine for
PV of guaranteed res idual value (2,000,000 x .68) (1 ,360,000)
P3,000,000 cash and leased 'it for a period of six years, after which the
machine is to be returned to Cassandra Company. The :unguaranteed , Net investment to be recovered from ren(als 3,R79,000
residual value ofthe machine is P200,000. The lease terms are arranged Divide by PV of an annuity of 1 in advance at 8%
so·tliat a t:etum ~f12% is ea@ed by Cassandra, The PV of 1 at 12% for 5 periods 4.31
fDr,six periods is .51, andtlie PV.of an annuity in.advapce ofl at q% Annual lease payment 900,000
for s.i x periods is 4.60. wbat is tlle annuaUease payment payable in
· advance required t9 yield the desired return? . .
. ' Problem 12-6 (IAA)
a. 630,000
b. 652,174 Irene Company decided to enter the leasing business. The entity
c. 608,695 acquired a specialized packaging machine for P2,300,000. On
d. 732,000 January l, 2013, the entity leased the machine for a period of six
years, after which title to the machine is transferred to the
l~ssee. The six annual lease paymertts are due each January l and
Solution 12-4 Answer a
the first payment was tp.ade on January 1, 2013. The residual value
Cost of as·set ·. 3,000,000 of the machine is P200,000. The lease terms are arranged so tbet a
PV of unguaranteed residual value (200,000 x .51) ( 102,000) return of 12% is earned by Irene Company. The present value of 1
Net investment to be recovered from rentals . 2,898,000 at 12.% for.six periods is 0.51, and the present value of an annuity in
Divide by PV of an annuity in advance of 1 at 12% 4.60 advance of 1 at 12% for six periods is 4.60. What is the annual
lease rental payable in advance required to yield the desired retum?
Annual rental payable -in advance 63~,000
a. 500,000
Whether guaranteed or unguaranteed, the residual value is b. 477,826
deducted from the cost of the asset if the leased asset wilt revert to c. 383,333
the 1ess.o r at the end of lease term. d. 460,00D

Problem 12-5 (IAA) Solution 12-6 Answer a

.Magnum Company had an asset costing P5,239,000. Th(( asset is leased Cost of asset 2,300,000
on January 1, 2013 to another entity. Five.annualleasepayments are Divide by PV of an annuity in advance of
due each 1anuary 1' beginning January 1' 2013. The lessee ~teed 1 at 12% for six periods 4.60
the P2,000,000 residual value of the asset as of the end of the lease Annual lease payment 500,000
term on :pecember 31, 2017. The implicit interest rate is 8%. The.PV
of 1 at 8% for 5 periods is .68, and the PV of an annuity of 1 in advance
The residual value is ignored because title is transferred to the
at 8% for.S.periOds is 4.31. What is the annual lease payment?
lessee at the end of lease term.
a. 1,215,545.
b. 1;s31;090
c. 990,000
d. 751,500
1'711:
177
 ..
Problem 12-7. (!A.A.}
OnlanuarYl;l{}ll_, Y0lkCompanysi~ed a ten-year noncancelable
I~e:~greem&tto Iease~ stora~e buildmg from Warehouse Company.
TheagJeei!lenl. reqt:rimj. equal rental payments at the eJ?d of each year.
"fbe fair vahie oftlie building on January 1, 2013 1~ P2,949,?00.
However, the carrying ame.untto War~h~use Company 1~ P2,458~000.
The building has an ~ted economic life ~f 10 years ~th ~ores~dual
value.At the termination of the lease, the title to the b~tldmg w11l be-
transferred to Yolk Company. The incremental·borrowmg rate ofYolk
Companv is 12% per year. Warehouse Company set the mm';lal rental
to insure Ja 10% rate of return. The implicit rate o.fthe lessor IS known
by the lessee. The an."l.ual total lease payment mclud,ed P20,000 of
executory costs re~ated to tax~s on the property. Round off present
value factor to three decimal places. ·
Problem.l'2-8 (IAA)
On January 1, 2013, Lessor Company leased a machine to Lessee
Company. The machine had an original cost ofP6,000,000. The
lease term was five y~ars and the implicit interest rate on the lease
was 15%. The lease is properly classified as. a direct financing lease.
The annual lease payments ofP 1,730,541 are made ~ach December
31. The machine reverts tq Lessor at the end of the )ease term, at
which time the residual value of!he machine will be P400,000. The
residual v'alu~ is unguaranteed.
The PV of 1 at 15% for 5 periods is .4972, <1nd the PV of an
ordinary annuity of 1 at 15% for s .penods is 3.3522. At the ·
commencement of me l.ease, what would be the lease .receivable on
.t~e part of the lesser and lease liability on the part of the l.;ssee?

1. What is the minimum annuall~'\Se ?ayment? Lease receivable Lc:ase liabitity

a. 400,000 a. 6,000,000 6,000,000
b. 435,044 b. 5,801,120 5,801,120
·c. 480,000 ~. 6,000,000 5,801,120
d.. 522,053 d. 5,801,120 6,000,000
2. What is the total annud lease payment?
Solution! 2-8 Answer c
a. 420,000 Lessor
b. 455,044
c. 542,053 PV of lease paym~nts (1,730,541 x ·3.3522) - 5,801,120
d. 500,000 Unguaranteed residual value (4QO,OOO x .4972) 198,880
Lease recei-vable equal to the cost of asset 6,000,000
Solution 12-7
Gross lease payments (1,730,541 x 5) 8,652,705
Question 1 Answer c
Unguaranteed residual value 400,000
Fairvalue 2,949/'10
Divide by PV of an ordinary annuity of 1 at l 00Yo Gross investment 9,052,705
6.145 Net investmt:nt (cost of asset) 6,€100,000
for ten periods -- -
:v!inimum annual k:ase payment 480,000 Unearned iPterest income 3,052,705

Question 2 Answer d Lessee

Minimum annual lease payment 480,000 Lease liability (1,730,541 x 3.3522) 5,801,120
Exectory costs 20,000
Total annual lease payment 500,000 The residua t value is not included in the lease liability because 'it is
unguaranteed.

178 179
 Problem 12-10 (lAA)
PnJblem 12~9 (~)
1

On December 31, 2013, Benz Company, a le'ssot, sold a machinety

Lyle Company entered'irito a firumee''ltase on "Jim,;ary 1)},0 I3. A third that it had been leasing under a direct fmancing lease. On January
party guaranteed the residual Vafue ofthe assetunder the lease estimated 1, 2013 after receipt of the lease payment _for the year, the followtng
to be.Pl20,.000 on Janua.rY (;20'18, the end of the lea.se term. Annual account balances were associated with the lease:
·lease.. payments ar~ PlOO,OOO dbe each Dece;rnber 31,, beginning
·December 31 , 2013. The last payment is due December 31, 2017. Gross lease receivable 5,850,000
Bot~ ~h~iessor and lessee used-1 0% as the-interest rate. The remaining Unearned interest income 1.000,000
·useful life oftbe asset was six years at the comm~ncement of the lease. Present value of lease receivable 4,850,000
·The PV.of 1 at 10% fo~ 5 periods is .62, and the PV of an ordinary The interest rate implicit in the lease is 10%. On December 3 I,
anni1tcy of 1 at 10% for 5periods is 3.79. What is the lease receivable 2013, Benz Company sold the leased machinery to the lessee for
~fH1el~~or and lease liability ofthe lessee at the commen~ement ofthe P3 ,250,000 cash. What is the loss on sale of mach.inerythat should
lease?'.
be recognized on December 31, 2013?
Lease receivable Lease liability a. 2,085,000
· a. 453,400 453,400 b. . 1,600,000
b 379,000 379,000 c. 2,600,000
c 453,400 379,000 d. ·2,015,000
d. 3.79,000 453,400
Solution 12-10 Answer a
Solution 12-9 Answer c Interest income for 2013 (10% x 4,850,000) 485 ,000
Les~o.r
Sale price 3,250,000
Pre.s ent·vaiue of rentals (IOO,OOOx 3.79) 379,000 Carrying amount of lease receivaQle:
Gu.arilnteed residual value (120,000 X .62} · Lease receivable 5,850,000
74,400
.Unearned interest income
Lease-receivabl e (1 ,000,000- 485,000)
~~ ( 515,000) 5,335,000
Loss on Sqle of machinery (2,085,000)
The ieas e tenn'is from-January 1, 2013 to Decembe r 31 , 2017 or .5
·years: Thus, the present value factors are determined fer 5 periods. Entries on December 3:1., 2013
Lessee
1. Unearned interest income 485,000
Lea.s e liability (1 00,000 x 3. 79) 379,000 Interest income ·4:85 000
' '. .
Th~ guaranteed residual value is not included in the lease hahllity 2. Cash 3,250,000
·becaus~ it is guaranteed by a third party. Unearned interest income 515,000
Loss on sale of machinery 2;085,000
Lease receivable·
• I

181
-180 '
1.3 Journal entries on the books ofthe seller-le~see

1. To record the sale on January 1; 2013·:

SALE AND LEASEBACK' Cash 1,500,000
Equipment 1,000,000
b~ferred gain on sale-and le~seb~ck 500,000

.Prnblem ~3-1 (AICPAAdapt~) 2. To record the leaseback a$ !i-t41ance 1¢as~

..
On January 1, 2013, Hooks Oil Company sold equipment. with a Equipment l,soo,aoo.
carrying amount ofP 1, 000,000 and a remaining useful life of 1o· Lease liability 1,500,000
years to Maco Drilling for :Pl,500,000. Hooks immediately-leased
the equipment back under a 10-year finance lease with a pr.esent 3. To record the first rental payment on December 31, 2013:
value ofP1,500,000 and will depreciate the equipment using the
stcaight line method. Hooks made the first annual lease payment Interest expense 1~0,000
ofP244,120 on December 31,2013. The implicit interest rate in Lease liability 94,120
the lease is 10%. In Hooks' December 31, 2013 statement of Cash 244,120
financial position, what amount should be reported as unearned gain
on equipment sale? · Rental payment 244,120
• Applicable to interest ( 10% x 1,500,000) 150,QOO
a~ 500,000
b. 450,000 Applicable to principal 94,120
c. 255,880
d. 0 4. To amortize the deferred gain over the lease term:
Solution 13-1 Answer b Deferred gain on sale and leaseback 50,000
A sale and leaseback transaction is an arrange~ent whereby one party Gain on sale and leaseback 50,000
sells a property to another party and then immediately .leases the (500,000/10 years)
property back from its new owner. Thus, the seller becomes a lessee
and the purchaser becomes a lessor. · 5. To record the depreciation for 2013:
I '
Sale price 1,500,000 Depreciation 150,000
Carrying amount of equipment sold 1,000,000 Accumulated depreciation 150,000
Deferred gain on sale -January 1, 2013 50<;),000 t 1,500.000/10)
Less: Real1zed gain in 20i3 ($00;000/10) 50,000
Deferred gain, December 31, 2013 450,000

PAS 17, paragraph 59, provides that if the leaseback is a finance

lease, .any gain on sale is deferred and subsequently amortized over
the lease term.

182 183
 Pro)Jlem 13-2 (PHILCPAAdapted) .
- '
OnlJecember 31, 2013, Alpocasse.r Company p1:1rchased a tractor
Solution 13-3 Answer c
from CheliffCompany. Simultaneous with the sale, Cheliffleased U 1warned income - January 1, 20 13
back the tractor _for 12 years for use in the new .farm that it is (5, 700,000- 4,500,000) 1,200,000
developing. The sale price of the tractor was P7,800,000, while the Realized ;n 2013 (40% x I ,200,000) 480,000
earrying amount in the books of Cheliff on the date of the sale
Unearned income...: December 31, 2013 _2~0,000
was P5,850;000. Cheliff's engineers have estimated that th~
remaining economic life of the tractods 15 years. Cheliff is a Straight lin~ rate (100% /5} 20%
wholly-owned subsidiary of a US entity. It is required to follow US Double declining rate
generally accepted accounting principles in the reporting package
for consolidation. Wha.t is the amount that Cheliff'should report
(20% X 2)
----
Since tbe entity is using the double declmingmethod of dep~eciation,
40%

as ·deferred gain from the sale of the tractor on December 31, 2013?
U1e same method should be ~pplied in recognizing the incomefi·om sale
a. 1 ~950,000 and leaseback.
b. 1,820,000
c. 1,787,500 Problem 13-4 (IAA)
d. 0
' . On Januazy 1, 20 13~Accord Company sold a building with-a ca.rry1l1g
Solution 13-2 Answer a ~moun~ ofP4,200,0_00 toan~ther entity for P4,050,000. The entity
tmmed1ately entered mto a leasmg agreement wherein it 'vVould lea5e the
Sale price . 7,800,000 building back for an annual payment ofP640,000. The term of the
Carrying amount 5,850,000 lease is 1.0 years, the expected remai..'ling us~~ Ilife oft~e building. The
Deferred gain - December 31, 20 13 1,950,000 fir;stannua! lease payment is to be made irrunediately, and future payments
~II be mao~ on January 1ofeach succeeding year. The lessor's implicit
The leaseback is a finance lease because the lease term is 80% of the mterest rate 1s 12%. What amount ofloss on sale and li>.asebackshot!ld
. life of the asset (12/15). be recognized for 2013? ·
a. 150,000
Problem 13-3 (IAA) b. 135,000
On January 1, 2013, Baker Company sold equipmentto an unaffiliated c. 15,000
entity for P5,700,000. The equipment had a carrying ~ount of d. 0
P.4,500,000 and a remaining life of five years. On the same date, the
entity leased back the equipment at P 1,350,000 per year payable in Solution 13-4 Answer a
advance for a 5-yearperiod. The lessor's implicit interest rate in the
lease is 10%. The entity u5ed the double declining balance method of Sale price 4,050,000
depreciation. What is the unearned income on the sale and leaseback Carrying amount of building 4,200,000
on December 31, 2013? ·
Loss on sale and leaseback (__!_50,000)
a.l ,200,000 ---
b. 960,000 If the leaseback is a finance lease, any los<; on sale is not deferred
c. 720,000 but recognized immediately.
d. . '0
184
185
 Probletn.13-6 (lfi"'RS)
Problenlff-5 (IFRS)
ln an attempt tO"'tlleviate liquidity problems, Banco Company entered
Sensible Company sold an item ofplant and machinery.o:n Jan~ 1, into anagre.er.oent on ~uary 1, 2013 to sell the processing plant to
20:3 for P2,500,000 which is equal to fair value. The carrying amount another entity for P3,500,000 which is the fair value ofthe plant. At the
ofthe asset was_P2,000,000. The entity leased the item back on ~t date of sale, the plant had.a canying amount ofP2,750,000. The entity.
date for remaining usefulljfe of 5 years. Lease payments are P700,000 immediately leased theproces$ingplant back from the b,uyer. The terms
of the le3$e agreement were:
Of! Janu~ 1 each year.
Annual payment in "'arrears, commencing
1. What is the gain on disposal to be ~ognized for 2013? December 31 , 2013 700,000
Rei -.~bursement to the lessor for maintenance cost
a. 500,000 . included in the annual payment 35,000
b·. ' "1 00,000 . Lease term 6 years
Economic life ofpiant .8 years
. C; 250,000 ·
d. . 0 1. What is the deferred gain on the sale and leaseba'ck on Decenber
31~2 013?
2. What is the total finance charge over the lease tenn? a. 750,000
b. 625,000
a. 1,.500,000 c. 656,250
b. 1,000~000 ' d. 0
c. . .500,000 2. What is the total fmance charge overihe lease term?
d. 0
a. 1,240,000
b . 1,820,000
Solution .13-:5 c. 700,000
Question 1 Answer b d. 490,000

Sale price 2,500,000 Solution 13-6

Carrying amount 2,000,000
Question 1 Answer b
Deferred gail\- January 1, 2013 500,000
Sale price 3,500.000
Carrying amount 2,750,000
· ReaUzed gain on disposal for 2013 (500,000/5) 100,000
Deferred ~a in- January 1, 2013 750,000
Realized gain in 2013 (750,000/6) ("j25,000)
Question 2 Answer b
Deferred gain- December 31, 2013 ~~
Gross rentals (700,000 x 5) 3,500,000
Present value of rentals equal to fair value. of asset 2,500,000 Question 2 Answer d
Total finance charge 1,000,000 Gross rentals (700,000 -· 35,000 x 6) 3,990,0(.1;
Present value of rentals equal to fair value of asset '-~--"''')
'"'\..2..u·__
on
Total finance charge 490.000
---·--
-
187
186
 Proble m13-7 (IAA)
ProbJcJ1113-8 (AICPAAdapted)
On January 1, 2013, Halo Companysoldacomputersystem to Lark On December 3), 2013, Bain Comp any sold a machi ne ~lith
C.ompany for P2,550,000 and immediately leased the computer system
back. The computer was carried on Halo's books at an amount 'of 12-year useftl life to a not he~· entity and simultan€ously leased it
P2,250,000. The term of the noncancelable lease is 10 y~ars and title back for one year.
will transfer to Halo at the end of the lease term. The lease agreement Sale price
required equal rental p~ymei?ts ofP415~000 at the end ~f each year
360,000
Carryi11g amount
The incremental Wc:-owmg rate for Halo tS 12% bl!t Halo ts aware that J30,ooo
Lark set the annual rental to ensure a rate ofreturn of 100/o. The computer ·Present value of reasonable lease rentals ·
has a fair value ofP2,550,000 on January l. 2013 and an estimated '(P3.000 for 12 month s@ 12%) 34,!00
economic life ofl2 years. Halo paid executory cost ofP45,000 for the
current year. Which of the following would be recorded by Halo on What revenue from the sale should be reported in 2013?
Decem ber 31, 2013? ·
~.
a. 34,100
a. Debit leased computer P2,550,000 b. 30,000
.. b. Credit deferred gain P300,000 c. 4,100
c. Debit deferred gain P25,000 d. 0
d. Debi:t deferred gain P30,000
Solution 13-8 Answe r b
Solution I 3-7 Answe r d
Sale price 360,ooo
To·record the s~le and leaseback as a finance lease on Janua ry 1, Carrying amount 0

330 000
--L_
2013: Gain on sale and leaseback 30ooo
----L_;_, ;,

Cash 2,550,000 ~

PAS 17, p~~~ph 61, provides that ~[th~ le&seb~ck i >an operating·.
Comp~ter
·2,250,000
300,000
Deferred gain lease ~nd 1t Is cl~ar that the transact10n ts estabhshed at fair value
- '
any gam on sale IS recognized immed iately. .,
Leased computer 2,550,000
Lease liability 2,550,000
Problem 13-9 (ACP)

Journ al entrie s on Decem ber 31, 2013 On De~ember 31, 2013, ~fae Company sold an equipment \vith
useful hfe of I 0 years and s1mul taneously leased back the equipm ent
255,000 for2 years. ·
Interest expense (2,550,000 x 10%)
Lease liability 160,000
415,000 Sale price · 7;500~000
Cash Carrying amount 5,ooo,ooo
Depreciation (2,550,000 I 12) 212,500
.212,500
Fair value of equipment on date of sale 6;ooo,aoo
Accumuhted depreciation
What amount of gain should be reported in 2013?
.i..Jeferred gain (300,000 /1 0) ::,o,ooo
Gain on sale and leaseback 30,000 a. 2,500,000
b. 1,500,000
Executory costs 45,000 c. 1,000,000
Cash 4S,OOO. d. 1,750,000
188
189
Sulutiun 13-9 Answer c Probfem 13-lt (AICPAAdapted)
Fair value of ~quipn:tent 6,000,000 OnJune-30, 2Q13, Lee Company~ol.danequiptnent for P5,~00,000.
Carrying amount 5,000,000,
: Theequtpment had a carrying amount of~5,000,000 and a remaining
Outright gain 1,000,000' 'life of 10 years. That same day, ~e entity le..ased back the equiprrrent .~t
Pl5,00P per month for 2 years with no option-to renew the lease or
Sale price 7,500,000 repurdhase th~equipment. The present value ofthe lease payments
Fair value 6,000,000 using tile appropriate interest rate was P318,650 en June 30,2013.
Defer-red gain :._ December 31, 2013 1,500,000 What is ther~nt expense fortheyearended Decerrber 31, 2013?
a. 110,000
pAS 17, paragrapl:t 61, provides that if the sale price is above fair
b. 90,000
value, the excess- of sale price over fair value is defep-'ed and
amortized O\fer the period for which the asset is. expected to be c. 50,000
used (by the les-see) which is actually the lease term. 'fhu~, the d. 40,000
deferred gain ofPl,500,000 is amortized over 2 years or P750,000
annually, starting 2014. The exce~s ofthe fair value over carrying , Solution 13-11 Answer' b
amount is recog:ni.Zed.as .gain immediately. Rent expense- July to December 2013 (15,000 x 6) 90,000
Proble.,n 13-10 (IFRS) Outright gain (5,500,000 - 5,000,000) 500,000
On December 31, 2013, Thunder: Company sold land with a cost of
Pl,SOO,OOO to Victoria Company for P2,300,000 when the tand'-s fair The leaseback is an operating lease because the lease tennis 2 years
value wasP2,.150,0i)O. Thunder Company immediately entered into a and the remaining life is 10 years, or a ratio of20%.
cancelable lease agreement to use the land for 2 years at an annual
rental ofP20,000. What amount ofprofit should Thunder record on, Problem 13-12'(IAA)
the sale oflano for 2013? On June 30,2013, Pam Company sold equipment for P3,500,000.
a~ 150,000 The equipment had a call)']ng amount ofP3, 150,000 and a remaining
b T 800,000 useful life of 10 years. That same day, the entity leased back the
c. 650,000 equipment at P35,000 per month for 5 years with no option to renew
d. 725,000 the lease or repurchase the equipment. What amount should be reported
as rent expense for 20 13?
Solution 13-1 0 Answer c
Fair vame of land 2,150,000 a. 420,000
Cost of land 1,500,000 b. 210,000
c. 175,000
0\.ltright gain in 4013 650,000
d. 140,000
Sale pnce 2,300,000
Fair value ofland 2,150,000 Solution 13-12 Answer b

Defexrtsd gain - Decemb~ Jl, 2013 150,000 Rent expe.nse- July to Decem)Jer 2013 (35,000 x 6) . 210,000

190 191
 On ~an~ary 1, 2013, Tripoli Companys~ta amachine for P3·,ooo,ooo.
14
·The fair value 'On the date of sale was P3,500,000. The machine had a
cmying aniount ofP4,000,000 and remaining life of 10 years. The
entity immediately leased back the machine at .an annual rental of
POSTEMPLOYMENT BENEFITS
P60,000 for four years. It was determined that the annual rental is
sufficiently lower compared to the market rent of a similar asset.
Wb.at total amount should be recognized in profit or loss for 2013? Proble~ 14-1 {IA.f\)

Silay Company has established a defined benefit p'ension plan for the
a. 1,060,000
employees. Annual payPlcnts under the pension plan are equal to 3%
b. 310,000
·of an employee 's.highest lifetime salary multiplied by the number of
c. 185;000
ye~rs with the entity. An employee's salary in 2013 was P500,000.
d. 60,000
The employee is expected to retire in 10 years, and the salary inCJ::'...ases
are expected to average 4% per year during that period On December
Solution 13-13 Answer b
31, 2013, the employee has worked for 15 years. The future value.o f 1
Sale price at4% for 10 periods is 1.48. What is the annualpensionpaymenttlw.t
3,000,000
Carrying amount should be used in computing the projected bene.fit obligation on
(4,000,000)
December31, 2013?
Loss on sale (1,000,000)
a. 555,000
PAS 17, paragraph 61, provides that if a sale and leasebac~ classified b. 375,000.
as an operating lease results in a loss when the sale pric~ is below the c. 333,000
fair value of the asset, and such ioss is compensated by below market d. 225,000
rentals, the loss is deferred and amortized over the period for which the
asset is expected to be used. Solution !4-1 Answer c
Future salary (500,000 x 1.48) 740,000
Rent expense 60,000 Annual pension payment- PBO
Amortized loss (1 ,000,000/4) 250,000
(740,000 x 3% x 15 years) 333,000
: T~tal amount in profit a loss 310,000
Annual pension payment- ABO
(500,000 x 3% x 15 years) • 225,000

The projected benefit obligation (PBO) is based on future salary

while the accumulated benefit obligation (ABO) is based on current
salary. ·

192 . . 193
Problem 14-2 (IAA)
Woodstock Company has established a defined benefit pension
plan for a lone employee. Annual payments under the pension plan
are equal to the employee's highest lifetime salaiy multiplied by 2%
multiplied by number of years with the entity. On December 31,
2013, the employe.e had worked for Woodstock Company for 10
years. The salary in 2013 was P500,000. The employee is expected
to retire in 25 years and the ~alary increases are expected to average
3% per year during t~at period. The employee is expected to live
for 15 years after retiring and will receive the first amiuafpension
payment one year after retirement. The discount rate is 8%. The
relevant present value and future value factors.are:
Future vaiue of 1 at 3% for 25 periods 2.094
PV of an ordinary annuity of 1 a.t 8% for 15 periods 8.559
PV of 1 at 8% for 25 periods 0.146
P..roblem 14-J{IAA)
Jessabel Company has established a defined benefit ~nsion plan for a
lone employee. Annual payments under the pension plan are eqqal to
-the employee's highest lifetime salary multiplied by 3% multiplied by
number ofyears with the entity. On December 31,2013, the employee
bad worked tor 1.5 years. The current salary is P500,000. The employee
is expected to retire in 5 years and the salary increases are expected 'to
average 4% per year during that period. The employee is exp~ted to
live fot 6 years after retiring and will receive the first annual pension
payment one year after retirement. The discount rate is 12%. The
relevant present value and future value factors are:
Future value of 1 at 4% for 5 periods 1.217
PV of an ordinary annu~ty of 1 at 1--2% for 6 periods 4.111
~V of 1 at 12% for 5 periods 0.567

What is the projected benefit obligation on December 31, 7013? What is the projected benefit obligation on December 31, 2013?
a. 209,400
a 638,269
b. . 261,669
b. 225,000
c. ' 100,000
c. 524,460
d. 124,961
·d. 608,500 ' .
Solution 14-2 Answer b
Solution 14-3 Answer a
Future salary- PBO (500,000 x 2.094) · 1,047,000
Future salary (50Q,OOO x 1.217) 608,500
Annual pension payment - PBO
(1,047,000 x 2% x 10 years). 209,400 Annual pension payment (3% x 608,500 x 15) 273,825
Multiply by PV of an ordinary annuity of 1 at 8% for Multiply by P.V of an ordinary annuity of 1 at
15 periods 8.559 12% for 6 periods 4.111
Present value - December: 31, 2038 1,792,255 Present value- December 31, 2018 1,125,695
Multiply by !(V of 1 at 8% fQr 25 periods 0.14'6 Multiply by PV of ~ at 12% for 5 periods 0.567
Projected benefit obligation- Deeember 31," 2013 261,669 PBO - December 31, 2013 638,269

194 195
 Problem 14-4 (IFRS)" • The projected benefit obligation at the end of each year is as follows:

Adite.ctor of Easy Company shall receive a retirement benefit of 10% Current In ter est P resent
Date
of.$e final salary per annum for a contractual period ofthree years. service cost co st valu e
the 'director does not contribute to the scheme. The anticipated salary 12/31/20 13. 130,608 130,608
ov~~-"tfuee years is J;l1,000,000 for 2013, P1,200,000 for 2014 and 12/31/2014 137,146 6;530 274,284
i>1;#o,ooo for 2015. The discount rate is 5%: Using the projected 12/3 1/2015 144,000 13,716 432,000
unit·credit method, what is the estimated pension liability on December
3r,"2014? The inte~est cost is 5% of the beginnmg balance. Thus, for 20 l4
5% times .P13 0,608 equals P6,530, and for 2'015, 5% time~
a:.- 274,284 ~274,284 equals P 13,7 14. There is a difference ofP2 bet\Vcc::.r. the
_i;: ·. ~8.8,000 mterest cost ofP13,716 and Pl3,714 due to rounding ofPV factor.
C, :144,000
d;.··: .130' 608 Problem 14-5 (IAA)
.. .
. .
-~Si:ilu(ion
14-4 Answer a On January 1, 2013, Alpha Company agreed to pay a lump sutn pension
. . to the employees equal to 5% of their .final·salary times the number of
-T~e ~ual b~nefit is 10% ofP1,440,000 or P144,000 or a tota~ of years_worked after January 1, 20 13. It is estimated that the sa!aryofa
.-~432,_06~ for three years. · certam employee for 2022, the last year with thf': entity will be
P1,500,000. The appropriate interest rate is 12%. The PV'of 1 at
The
.
present value of 1 at the discount rate of 5% is a's follows:
. 1~% is .452 for se: en peri~d~, .404 for eight perio~; and .3ol for
Fotorie period .9524 rune penods. What 1s the estimated pension liability on December 31
2015? . . '
F_~r two periods .9070
a. 101,799
:Tli~annual benefi~is discounted from the endof2015, which is the b. 150,000
'yeci!·!)fretirement c. 225,000
d. 91,275
lJl.~; the 20 13 benefit is two years aw.ay from 2015 and discounted
·fvr·tw.o periods and the 20 14 benefit is one year away from 2015 and Solution 14-5 Answer a
'.Qi~o~ted for one period.
Current service cost 'PV f-etor DiSCOUilte4

(ax b) 2013 (5%x 1,500,000) 75,000 361 ' 27,075

(a) (b)
2014 75,000 30~00
Present value · .404
0 0 : • • •

Benefit PVfactor 2015 75.(XX) .452 -33,900

ioi3 144,000 .9070 ·130,608
2014 144,000 .9524 137,146 Date <.:urrect service cost Interest cost 12% Liabi,lit:y
·-20is ~· 144,000 1.0000 144,000 i2/31/2013 27,075 27,075
12/3112014 30,300 3,249 ·60,624
432,000 411,754 12/31/2015 33.900 7ZJ5 10'1,7~

197
196
Proble~ 14-6 (IAA) Solution 14-6
On January 1, 2013, Shiela Company bad the following balances related Ouestion ; Answer a
to a defined benefit plan:
Curre.:1t service cost
Fair value of plan assets . 5,750,00() IntP-rest expense (10% x·6,500,000)"
P.rojected benefit obligation •6,500,000 . Interest income (10%x 5,75(},000)
Emplov~ benefit expense
The actuary provided the following data for the current year: . ·
Current service cost 600,000: Note that the. expected retum-et.8'% oii plan asset9'fs·fgnored
Settlementdi~~untrate · 10% ccmpletely. There is no more·concept of expected return lln"Q.'ei''PAS
Expected return on plan assets - 8% 19R. .
Actual return on plan ·assets . 700,000 .·.
Contribution to the plan 900,000·. Components of defined beo.efit cost
Benefits paid to retirees . 100,000.
.{:ervfce cost .Y!hicb..Comprises:
1. What is the employee benefit expense?·
a. LUr!ent service cost
a. 675,000 : b. Past service cost
'b. 600,000 c. Any gain Gr loss on plan settlement
c. 700,000
d. 650,000 2. Net'i'nterest which comprises:
2. What i~ the remeasurement gain on plan assetS? a. Interest expense on defined benefit liability
b. Interest income on plan assets
a. 700,000 c. ll.lterest expense on the effect of asset ceiling
b. 125,000
c. 575,000 3. Remeasurements which comprise:
d.. 240,000
a. Actuarial gain and loss
3. What is the defined ~enefit cost? b. Actual re~ on plan assets less interest income on plan assets
c. Any change ·m the effect of asset ceiling
a. 435,000
b. 900,000 The service cost and net interest are included in profit or l(\SS as
c. 550,000 component ofemployee benefit expense.
d. 675,000
The net interest expense or net interest income is the differenee betWeen
4. What is the prepaid/accrued benefit cost on December 31? the interest expense on defined benefit obligation and interest income
on plan asse~s using the same discount rate.
a. 1,100,000 prepaid
b. 1,100,000. accrued Accordingly, the defined benefit cost is partly profit or loss
c. 400,000 prepaid representing service cost and net inter~st, and partly other
d. · 400,000 accrued comprehensive income or OCI representing the remeasuremeuts.

198 199
Question J Answer b Problem 14-7 (JAA)
.
Actual rerum on plan assets 700,000 On Januarj_r, 20 13, Rachel Company reported the fair value of plan
1nterest income on fai! value of plan assets 575,000 assets at P6, 700,000 and projected benefit obligation at P7,600,000.
125,000 The entity reveale.d the following for the current year:
Remeasurement gain on plan assets
Current service cost 1.4~0,000
The amount of remeasurement is equal to the actual return on Past service cost 300,000
plan assets minus the interest income on che fajr value of the plan Discount rate . 10%
assets at the beginning of t~e reporting period. Actual retum on plan assets 5002000
. . Contribution to the plan 1,500,0:00
Benefits paid to retirees
Note that ifthe actual return on plan assets is higher than interest income, 800,000
the difference is a reme.asurement gain.
1. What is the employee benefit expense?
However, ifthe interest income is higher than the actual return on plan a. 1,840,000.
assets, the difference is a remeasurement loss. . . 'b. 1,540,000
~· c. 2,510,000
Question 3 Answer c d. 1,750,000
Employee benefit expense 675,000
Rem~surement gain on plan assets (125,000) 2. What is the remeasurement gain or loss on plan :1ssets?
Defmed benefit cost. 550,000 a. 170,000 gain
Contribution to the plan 900,000 b. 170,000 loss
. ' c. ·670,000 gain
Overfunding- prepaid 350,000
d. 670,000 loss
~oumal entry
3. What is the fair value of plan assets on De~rmber 31 ':
Employee b~nefit expense 675,000
a. 8,070,COO
Prepaid/accrued benefit cost 350,000
900;000 . b. 7,400,000
Cash
Remeasurement gain - OCI 125,000 c. 7,900,000
d. 8,200,000
Question 4 Answer d
4. What is the projected benefit obligation on Deccmbe·· 31?
Prepaid/accru~..~
benefit cost- January 1 (credit) (750,000)
Debit adjustment 350,000 a. 8,250,000
b. 9,050,000
Prepaid/accrued benefit cost.- D~cember 31 (credit) (400,000)
c. 9,010,000
d. 9,310,000

200 201
Solution 14-7 Problem 14-8 (IAA)

Qu~stion 1 Answer a On January 1, 2013, Pedro Company reported fair value ofplan assets
Current service cost '• 1,450,000 at P6,500,000 an.d proj~cted bene.fit obiigati.on at P7,500,000. D¢ng
Past service cost . 300,000 the cu1rent year, the entJ.ty deterrnmed that the current serv.ice coot wai
Interest expense . (10%x7,600,000) 760,000 P 1,200,000 and the discount rate is 10%. The actual return on plan
Interest income ( 10% X 6, 700,000) ( 670,000) assets was P800,000 du1ing the year. Other information durinO' the
Employee benefit expense, · .
... - 1,840,000 year related to the defined benefit plan is as follows: ...,

All past service c~sts, whether vest~d or !invested,. shall be Contribution to the plan l,200,000
recognized as an expense immediately as component of employee Benefits paid to retirees 1.5@0,000
benefit expense. · · Decrease in projected benefit obligation due
to change in actuarial assumptions 200,000
Question 2 Answer b
500,000.
. \
. Actual return· 1. What is ~he employee benefit experse?
Interest income . 670,CXXJ
a. 1,300,000
Remeasurement loss on plan assets (170,000) b. 1,950,000
Journal entry c. 1,200,000
d. 1,100,000
· Employee benefit expense 1,840,000
Remeasurement loss - OCI 170,000
Cash . · 1,500,000 2. Wht:t is the total remeasurem.ent gain?
Prepaid/accnied benefit cost 510,000
a. 350,000
Question 3 Answer. c b. 150,000
FVPA - January 1 6,700,000 c. 200,000
Contribution 1,500,000 d. 800,000
Actual return 500,000
Benefits paid . ( 800,000)
3. "Nhat 1.s the fair value of plan assets on December 3] ?
FVPA- December 31 7,900,000
a. 7,000,000
Quesdon 4. A~wer d b. 8,500.,000
7,600,000 c. 8,350,000
PBO -.January 1
Current serVice cost 1,450,000 d: 7,550,000
Past service cost ;300,000
Interest expense 760,000 4. .'What is the projected benefit obligation on December 31?
Benefits paid ( 800,000)
a. 7,750,000
PBO - December 31 9,310,000 b. 8, 700,0QO
Prepaid/accrued benefit cost - December 31 (credit) ~. 9,250,000
(7,900,000- 9,31 0,000) (1,410,000) d. 7,950,000

202 21)3
Solution 14-8
Question 1 A,nswer a
Current service cost 1,200,000 . On January l,20 i3, 1risb.a.Coijlpahy repo1ted ihi6 fair value of p Jan
Interest expen~e (10%x 7,500,000) . ' . 750,000 asset$ at P6,,000,000 and projected-be}jefit ooli&ation'atP8·,ooO,QOO .
Interest income {10% X 6,500,000) ( 650,000) ·During the year, th~'entity inade a l~p._sum payment to certaiq. plan
Employe~ benefit expense .1,300,000 participants in ex~hange for _their' rights tQ rectyi ve specified
postemploymentbev.efits: The lumpsumJ?aymentw~s· P800,QOO and
Question 2 Answer a the, pr~~nt: vatue of _the de~~~d- .tJ~nefi~. obligation settled .was
Pl,OOO,OOO. In a4dition, the follewing data ace gathered dilljng the
Actual return 800,000
Interest income 650,()()()' . current year:
. .
Remeasurement gain . · 150,000 . Current' service cost 900,000
Decrease in PBO ·- actuarial gain . 200,000· Actual return on plan assets 800,000
' . '
Total re1neasurement gain - OCI 350,000 Contribution to the plan 700,000
I . •
Discount rate 12%
Remeasurements are fully recognized'iri other comprehensive income
and permanently exclud~d from profit or loss. 1. What is the employee benefit expense?
a. 1,140,000
Question 3 Answer a b. 1,860,000
c. 900,000
FVPA - January 1 , 6,500,000 d. .940,000.
Contribution 1,200,~
Actual return .800;000 2. What is.the fair value of plan assets on December 317
Benefits paid (1,500,000) a. 7,500,000
FVPA - December 31 7,000,000 b. 6,700,000
c. 6,000,000
d. 5,900,000
·Question 4 Answer a
PBO- January 1· 7,500,000 3. What is the projected benefit obligation on December 31?
Current ser-Vice cost 1,200,000 a. 8,900,000
Interest expense 750,000 b. 8,860,000
Decrease . in PBO ( 200,000) c. 9,860,000
Beneflt~yaid (1 ,500,000) d. 9,060,000
PBO - December 31 7,750,000
4. What is the accrued benefit cost on December 31?
a. 2,160,000
Prepaid/accrued benefit cost - December 31 (credit) b. 2,000,000
(7,000,000-.7,750,000) ( 750,000)
c. 3,160,000
d. 2,240,000
204
2'05
 Solution 14-9 ..'roblem 14-10 (IAA)

Question 1 Answer d · Charlton-Company provided the following information on Janu~-y 1,

2013 pri01· to the adoption ofPA~ 19R:
Present value of defined benefit obligation settled .1,000,000 .
Lump sum payment 800,000 Fair value of plan assets 4,750,000
Gain on plan settlement Unamortized past service cost 1,250,000
200,000 ' Projected b~nefit obligation 5,500,000
Unrecognized actuarial gain 850,000
The gain or loss on plan settlement is the difference between the
settlement price and the present value of the defined ·benefit obligation The tr'd.Ilsactions for the current year are as follows:
on the date of settlement.
Current service cost ..:5 \100
Any gain or loss on plan settlement is fullyrecogruzetl~JD.d inclt~ded in
Discount rate 6%
service cost in the computation of employee benefit exp~nse. · 48.5,000
Current service cost
-·9oo,ooo
. A0tual return on plan assets
Contribution to the plan 1,350,000
Interest expense (12% x 8,000,000) 960,000. .... cnefits paid to retirees 995,000
Interest income (12% x 6,000,000) (720,000) Increz.se in projected benefit obligation due to
Gain on plan settlement change in actuarial ass-umpti01'1S 150,000
(200,000)
Employee benefit expense 940,000 1. What is the empioyee benetit expense?
Question 2 Answer b a. 1,255>000
FVPA- January 1 b. 1,540,000
6,000,000
Contribution . 700,000
c. 970,000
Actual return 800,000 d. 925,000
Lump sum payment for plan settlement ( 800,000)
FVPA - Decembet 31
2. What is the net remeasL.lfement gain?
6,700,000
a. 200,000
Question 3 Answer b
~- 150,000
PBO - January 1 8,000,000 c. 350,000
Current service cost 900,000 d. 50,000
Interest expense 960,000
.Present value of defined benefit obligation settled (1 ,000,000) 3. What is the prepaid/accrued benefit cost on Decvember 31?
PBO - December 31 · 8,860,000 a. 480,000 prepaid
Question 4 .,J,nswer a b. 480,000 accrued
c. 320,000 prepaid
Accrued- December 31 (6,700,000- 8,860,000) (2,160,000) d. 320,000 accrued
207
 Solution 14-W
Pro ble m 14-11 (IFR S)
Q'uestion 1 Ans wer c ·
Cur rent service cost R.aqhelleen Company provided the followin
g infom1ation during2013:
Interest exp ense 925,00o
(6% x 5,500,000)
Interest inco me 330,000
·(6% x 4,750,000) Jan uar y 1 Dec emb er 1
(285,000)
Employee· ben efit expense. Fair v~lue of plan asse ts ·. 6,000,000
970,000 Proj ecte d ben efit obligation 7,900,000
5,000,000 5,900,000
Qu~tion 2 Ans wer d Prep aid/ accr ued ben efit cost - surp lus
'•,
1,000,000 2,000,000
Ass et ceil ing
Actual return 700,000 1,200,000
. Interest inco me ' 485,000 .Effe ct of asse t ceil ing
(285,000) 300,000· 800,000
Remeasurement gain on plan assets During ~e curr ent year, the following data are
200,000 - gathered:
. .
Increase in PB9 - actu aria l loss
.
Net rem easu rem ent gain - QC I
(150,000)
Cur rent serv ice cost .
.
• 700,000
~ Pas t serv ice cost
Act ual retu rn on plan asse ts 200,000
Question 3 Ans wer ·d · 900~000
Con tribu tion to the plan
Under the transitional provision of PAS 19R Dec reas e in proj ecte d ben efit obli gati i.~~ ·
, the unamortized past on due
service cost and the unrecognized actuarial gain chan ge in actu aria l assu mpt ions
which is the re~t of Disc oun t rate 500,0,00
t,he corridor approach shall be eliminat
ed and, accounted for. 10%,
retr osp ecti vely as an adjustment ofretained
earnings. 1. Wllllt Is ~e employee bertefit expense?
Reta ined earn ings
1,250,000
Prep aid/ accr oed .ben efit cost a. 830 ,000
1,250,000
Prepaid/accrued. ben efit cost b. 900 ,000
850,000 c. 800,000
Retained earn ings
850,000 d. ~70,000
Employee 9en efit exPense
970,000
Prepf1idlaccrued ben efit cost 2. What is the net remeasw:ement gain?
430,000
Ca~h
· Rem easu rem ent gain - OC I
1,350,000
~0,000 a. 330 ,000
Prepaid/accrued' benefit cos t- Janu ary . b. 800 ,000
1 (cre dit) ( 350,000)
Transitional effect..::.credit c. 300 ,000
{1,250,000)
Transitional effe ct-d ebit d. 500,000
Debit adjustment. 850,000
430,000
Prepaid/accrued bcmefit cost - Dec emb
er 31 '(cre dit) ( 320,000)

208 109
 .
Solution 14-11 Problem 14-12 (IAA)
Question 1 Answer a
On January 1, 2013, .Maximus Company had a projected benefit
Current service cost 700,000 obligation of P 10,000,000 and a pension fund with a fair value of
Past service cost 200,000 P9,200,000. The entity provided the following information during the
Interest expense on PBO (10% x 5,000,000) 500,000 current year:
· Interest income on FVPA (16% X 6,000,000) (600,000).
Interest expense on effect of asset ceiling ( 10% x 300,000) 30,000
Current service cost ]..,200,000
Employee be~efit expense 830,00C Actual return on pension fund. 250,000
Bt-.1efits paid to retirees 1,100,000
Note that the interest expense on the effect of the asset ceiling is a Contribution to pension fund 1,050,000
component ofnet interest and included in employee benefit expense. Discount rate 9%
Expected return on pension fund 10%
Question 2 Ans~er a

Actual return 900,000 1. What is the pension expense fer the current year?
Interest income 600.000
Rerneasurement gain on plan assets a. 1,272,000
300,000
b .. 2,100,000
Decrease in PBO - actuarial gain 500,000 c. 1,85Q,OOO
d. 1,050,000
Effect of asset ceiling - December 31 800,000
Effect of asset ceiling- January 1 . 300Jl00
I 2. What is the fair value of pension fund on Decem".. ~r 31? •
Total change in the effect of asset ceiling . 500,000· .
Interest expense on effect of asset ceiling (10% ~ 300,000) ( 30,000) a. 9,400,000
Remeasurement loss on the effect of asset ceiling · 470,000 b. 9,450,000
c. 8,350,000
Th~ interest on the effect of the asset ceiling is part of the total : d. 9,150,000
change in the effect ofthe asset ceiling and is determined by multiplying
the effect of the asset ceiling at the beginning ofthe period'by the
discount rate. 3. What is the projected benefit obligation on I.;ecerr:ber 31?
The difference between the total change in the effect ofthe asset ceiling a. 11,000,000
and the interest on the effect of the asset ceiling is considered the
remeasurement b. 12,100,000
c. 11,200,000
RemeasU{,ement gain on .plan assets 300,000 d. . 10,100,000
Actuarial gain on PBO 500,000
Remeasurement loss - asset ceiling (470,000)
Net remeasurement gain 330,000

210
'211
 Question 4· Answer b
4. What is the remeasurement gain or loss.on December 31.?
Actual return .250,000
a. 578,000 gain }9-terest income (828,000)
b. 578,000 lo.ss
R.emeasurement loss (578,000)
. c. 250,000 gain
d. ·25~000 loss . Question 5 Answer a
'
5. What is-the pension asset orlia?ilityonDecel:nbe.r'31? Prepaid/accrued benefit cost- January 1 (credlt) ( ~Qo}OOO)
Credit adjustment . ( 800,000)
a. 1,900,000 liability Balance- December 31 (11,000,000- 9,400,000) (1,~00,000)
b. 1,600,000 asset
c. 800,000 liability, Employee benefit expense 1,272,000
d. 800,000 asset Remea~urement loss 578,000
Cash 1,050,000
Solution 14-12 Prepaid/accrued benefit cost 800,000
Question I Ansvver a Problem 141.3 (IAA)
Current ser\rice cost .
1,200,000
Jnterest e:x pense '(9% x !o,eoo,ooo) 900,000 Liberty Company provided the following L.tfom1ation conceniing the
Interest income (9% X 9,200,000) ( 828,000) defined benefit plan on Ja1uary 1, 2013 prior to the adoption ofPAS
19R:
Pension expense 1,272,()()()·
. Fair value of plan assets
Question 2· Answer a Unamortized past service cost
9,500,000
2,600,000
Projected benefit obligation (12,000,000)
Fair value of pension fund- January 1 9,2oo;oo()
Actual return Unrecognized actuarial gain ( 1,800,000).
250,000.
Contribm~ on to th~ fund _ Prepaid/accrued oenefit cost- credit ( 1,700,000)
. 1,050,000
Benefits paid
(1,100,000)•
Trans~.ctions for the cGrreni year
Fair val';Ie of pep.s1on fund - December 81 9,400,0001
Current service cost 1,800,000
Question 3 Answer a Actul'l.l retum on plan as:;ets 1,100,000
PBO - January 1 . Contribution to the plan 2,700,000
10,000,000 . Benefits paid to retirees
Cum~nt sen·ice cost 1,200l.QOQ' 2,000,000
lnt'!rest expense Increase in projected benefit obligation due to change
900,000 in actuarial assumptions
Benefits paid ( 1,100,000) 400,000
Pre~entvall.le of defined be::~efit obligation settled 600,000
PBO - December 31 11,000,000 Settlement price of defined benefit obligation 800,000

. 212 213
1. \Vhat amo unt sl1ould be reponed as employee bcr.efit expense for Soiution 14-13
the cmrent year?
Question 1 Answer a
a. 2,250,00Q Current service cost 1,200,000 .
b. 2,100,000 Interest expense (1 0% X 12,000,000) 1,200,000
c. 3,000,000 Interest income (10% X 9,500,000) .c 950,000)
d. 3,200,000
Loss on plr.n settlement 200,000
Empioyee benefit expense 2,250,000
2. "What is the net amount ofremeasurem~n~s for 2013?
Present value of defined benefit obligation settled 600,000
Settlement price or payment ' 800,000
a. 250,000
b. 400;000 • Loss on plan settlement . Q_OQRQQ)
c. 550,0CO
d. 450,000 Question 2 A[.lswer a
Actual return 1,100,000
3. Vlhat :s the f2.irv(llue of plan assets on December 31? Interest income ( 950,QCO)
a. 10,500,000 Remeasurement gain on plan assets . 150,000
b. 11,300,0QO lllcrease. in PBO - actuarial !I)SS .( tiQ{)L~)

c. 13,300,000 Net ren1easurement loss ( 250,000)

d. 12,5 ;10,000
Question 3 Answe:· a
4. 1Vhat !'3 6e projectd bend"it c.bligation on December 31 ?. FVPA- Januaf'J 1 9,)00.000
Contribution to the plan z;;ro,ooo
a. 12,~00,000 Actual r~tum 1,!00,000
b. 13,0C0,0()0 , Ben?.fits paid (2.000,000)
'v · 13,400,000 Settlement price ofbenefit obiigation (_ 8UO,OOO)
d 15,000,000 FV~:A- December 31 ~o2:oo,ooo

5. What is the bala..'1ce of the prepaid/accrued benefit cost on Question 4 Answer a

December 31 , 2013?
PBO - January 1 1'1.,000,000
Current service' cost i,800,000
a. 2,300,00 ~l credit Interest e'cpense 1,7.w,OOO
b. 1,900,000 credit Increase jn PBO .-v.;'()'000
c. 2,300,000 debit Benefits paid ( 2,00G,('10)
d. 1,900,060 debit Present value of defined benefit obligation settl~c. ( ·--~~;,() ~)
PB0 - December 31 ~2,8CO,LJO
~--- --

214 215
 Question 5 Answer a 1. ~at amount shoufdbe recogni~ed ~s employee benefit expense
2,600,000 10r the current year? . ·
Retau;ted earning~
Prepaid/accrued benefit cost 2,600,000 a. 150,000 ·
.
Prepaid/accrued benefit cost b. 145,000
ReUtined earnings · c. 1!5,000
d. 140,000
0 ~mployee l;>enefit expense 0 2,250,000
Remeasurement loss ...,. OCI 25Q,00(}
· .Piepaid/accrued benefit cost 200,000. 2. What is the actual retun~ on plan as$.ets?.
· Cash 2,790,000
a. 310,000
·p/ABC·..,.. January 1; c~edit (1,700,000) b. . 147,000
Transitional effect- credit (2,.600,000) 0

c. 163,000
Transitional effect :.'debit· 1,s~;ooo
200,000 d. 341,000
Debit adju..stmeri.t
P/ABC- December 3l, ·credit :.(2,30\f,OOOJ
3. What is th.e a~tu arialloss arising from the increase in projected
Reconciliation benefit obligation?
FVPA -December 31 10,500;000." a. 191,000
PBO - December ~ 1 (12,800,000). b. 300,000
. ' .. ··~.

c. 185,00Q
Prepaid/accrued benefit cost - credit ( 2,3oo',oo0)
d. 76,000
Problem 14-14 (IFRS)
4. What is the net rerneasurement gain or loss on December 31' 2013?
Danica Company provided the ±orowing inforrnationre!ated to a defined
benefit plan for the yenr ended December 31, ,2013: · a. 281,000 gain
b. 281,0001oss
Current service cost. 30,000
Benefits paid 31,00Q c. 129,000 gaiP
Contribution to the fund 21,000 d. 129,000 loss
Fair value of plan assets:
January l 2,100,000 5. What amount should be reported as prepmd
· or accmect.benefit
·
December 31 2,400,000 cost on December 31, 2013?
Projected benefit obligation:
January 1 2,200,000
December 31 2,500,000 a. 150,000 accrued
Past service cost for the cu rrent year 115,000 °
b. 150,000 prepaid
c. 100,000 accrued
On January 1, 2013, ~he discount rate and expected rate of return are d. 100,000 prepaid
5% and 7% respectively. On January 1, 2014, the discount rate and
expected rate of return are 6% and 8% respectively.

216
0

217
Solution 14-i 4 Problem 14-15 (IFRSJ
Question 1 Answer a
Ultimate Company provided the followmg information for 2013:
Current servic~ cost . 30,000
Interest expense (5% x 2,200,000) 110,()()0 January 1 December 31
Interest income (5% x 2,100,00p.) (105,000) Fair value of plan assets
Past service cost for the current year 115,000 2,600,000 3,000,000
Projected benefit obligation 2,000,000 2,100,0Q(f
Employee benefit expense 150,000 Prepaid/accrued benefit cost- Sl.l rp1us 600,COO 90:),000
Asset ceiling ~DO,()(X)
Question 2 Answer a 300,COO
Effect of asset ceiling 400,000
FVPA- January 1, 2013 2,100,000 600,{)()0
Conbibution 21,000 Current service cost
Actual return (squeeze) 310,000 Contribution to the plan 100,00)
Benefits paid 350,COO
Total 2,431,000 150,C()(J
Discount rate
Benefits paid ( 3 i,OOO) l()OA,
FVPA-DGcembe:r 31,2013 2,400,000 l. What is the actualrecu.rnonplanassets forthecurrentye~?
Question 3 Answer d a. 200,000 ~..

PBO-Janua.ry 1, -:!013 2,200,000 b. 350,000

Current service cost 30,000 c. 150,000
Interest expense 110,000 d. 260,000
Past service cost for the currer.t yegr 115,00Q
Incre<tse in PBO - aduarial ioss (sC;_u(:eze) 76,000 2. What is the actuarial gain due todecrease:n PEa"?
To~a~ 2,531,000 a. 50,000
Benefits paid { 31,000) b. 40,000
PBO- December 31, 20i3 2,500,000 c. .'30,000
.d. 0
Question 4 Answzr c
Actual retum 310,000 3. What is the emp!oyeebenr!.fitexpensefor 2.013?
Interest income 105,000 a. 200,000
Remcasurement ga~n on phm assets 205,000 b. 100,000
Actuarial loss on PBO ( 76,000) c. 80,000
Net rcmeasurement g<Jtn 129,000 d. 40,000

Question 5 Answer c . 4. What is the !letremeasurement loss :or2()I3?

FVPA - De~mber 31 2,400,000 a. 110.000
PBO - December 31 (2,500,000) b. 220.000
Accrued benefit cost - .Jecember 3 1 ( 100,000) c. 270,000
d. 170,000
118
219
..
 Solution 14-15
Question 1 Answer a
EVPA - January l
'Contribution
2,600,00Q
350,000
15
"Actual retuin (SQUEEZE) 200,000
Benefits paid ( 150,000)
FVPA- December 31
PROJECTED BE.N EFIT OBLI .;ATION
3,000,000
FAIR VALUE OE PLAN ASSETS
Question 2 Answer a
PREPAID/ACCRUED BENEFIT COST
PBO - January 1 2,000,000·
Current ser·ice cost foo,ooo Problem 15-1 (AICPAAdapted)
1'1terest experts : (10% :;<: 2;ooo~OOO) 200,000
Benefits paid . · ( 150,000) Seda Company provided the following information pertai1 ng
Actuarial gain due to decrease in PBO (SQUEEZE) ( 50,000) to the pens.ion plan for the current year:
PBO - December 31 2,100,000 .Projected benefit obligation on January 1 7,200,000
Question 3 Answer c Assumed discount rate · 10%
Service cost 1,800,000
Current service cast 100,000 Pension benefits paid 1,500,000
Jnterest expense (10% x 2,000,000) 200,000
Interest income · (10%x2,600,000) . Ifno change~ actu~al estimate occurred in the current year, what is
(260,000)
Interest experise on effect of asset ceiling ( 10% x 400,0"00) 40,000 the projected benefit obhgaticn on December 31?
Employee benefi.t expense 80,000 a. 6,42{),000
. b. 7,500,000 •
Question 4 Answer d c. 7,920,000
Actual req..tm d. 8,220,000
200,000 .
Interest income 0 0% x 2,600,000) (260,000.)
Solution 15-1 Answer d
RemeasL:rement .ioss on pia..~ assets ( 60,000)
Actuarial gain- decrease in PBO 5o,ooo· PBO- January 1 7,200,000
Rcmeasurement lo~s "n effect of asset ceiling (160,000) Service cost . 1,.800,000
Interest cost ( 10% x 7,200,000) 720,000
Net remeasurcment loss (170,000) Benefits paid ( 1,500,000)
Change in the effect of asset ceiling (600,000- 400,000) 200,000 PBO - · December 31 8,220,000
Interest expense on effect of asset ceili:1g
(I 0% x 4001000) ( 40,000) The PBO is increased by current service cost and interest cost,
Rcn:easurem~nt loss Orl effect of asset ceiling 160,G00 u.:1d decreased by benefits paid.

Of course, if there is a co.ange in actuarial assumptions, any increase

220 i~ PBO is added and a1:y decrease in PBO is deducted.

221
 Problem 15-2 (iAA)
Solution 15-3 Answer a
On January 1, 2013, Phoenix Company estimated a projected PRO - January 1 3,500,000
l?enefit obligation ofP4.400,000 based on a settlement rate of LZ%. Cuneni service cost (SQUEEZE) 600,000
Pension benefirs patd to reti:rees totaledP600,000. Service cost for Interest expense (10% x 3,506,000)· 350,000
2013 amounted toP !,480,(100. The fa1rva!ue of plan assets totaled Total 4,450,000
P3,500,000 and P<1,000,000 on January I, 2013 a11d December Benefits paid ( 250,000)
31,2013, respectively. What !S tbe projected benefit obligatwn on . PBO - December 31
December 31, 2013 ? 5.~QQQ
a. 5,280,000 The currentservicecostis "sq~eezed"bysimplyworklngl:Jcckfrom
b. 5,808,000 the ending PBO.
c. 6,308,000
d. 6,408,000 Problem 15-4 (!..;..A)
Brousoil Company had a nonr.ontributory defined benefit penn: :m
Solution 15-2 Ansl".-er b
plan. On December 31, 2()13, the entity received the p1ojected
PSO - January 1 4,400,000 benefit obligatior. report from tb.e independent actuary.
.Service cost
1,48D,OOO Pension benefits pa~d 13.3)000
Interest expense (12% x 4,4GO,OOO) 528,000
Benefits paid PBO or• December 31, 2013 2;16\1,000
(_..§.00,000) Interest expense 120,000
PBO ·- December 31 5,808,000 Discount rate 8%
Problem 15-3 (AICPAAdapted) What is the current sen ice cost for20B?
•
Winter Company provided the fo1lo-...vingp1an informati.~n for the current a. 675,000
year: b. &10,000
. c. 540,0GO
January 1 Projected benefit obligation 3,500,000
Accumulated benefit obligatiorl d. 255,0GO
2,800,000
During the year Pensior. bencrits paid to retired
employees 250,000 Solution 15-4 4n~vver a
December 31 Projected benefi: obligation 4,200,000 PBO- January l ( t20,00{) I 8%) t;500,000
Accu..Jlu 'ated benefit obligation 3,100,000
Discoilllt or settlement rate Current service cost (SQUF;EZE) 675,000
10% Interest expen~e 120,000
There is no change in actuarial assumptions during the year. Vv'b.at is Total 2,2~5.,000
the current service cost for the current year?
Pension benetits ;>aid ( 135,000)
a. 600,000
FBO - DecHnber 31 2,1~0.000
b. 95~,000
c. 250,000
d. 270,000

222 223
 Problem 15-5 (AICPAAdapted)
Solution 15-6 Answer b
Manaoag Company provided the following data:
FVPA- January 1 3,500,000
January 1. FVPA Actual return (SQUEEZE)
8,750,000 370",000
M~rket-:related value of the pension fund . 7,150,000 Contribution to the plan 280,000
During ye_ar Pension benefits paid
600,000
Contribution made to the fund 700,000 Total 4,150,000
Actual return on.plan assets 950,000 Benefits paid ( '250,000)
What is the fair value ofplan assets en:ne~ember 31? FVPA- December 31 . 3,900,000
a . ...8,200,000
b. 9,800,000 The actual return on plan assets is "squeezed" by Rimply working back
c. 7,250,000
d. .8,850,000
from FVPA on December 31.

Solution 15-5 Answer b Prob~ein 15-7 (AICPAAdapted)

FVPA- January 1 Anna Company amended the pension plan at.the beginning of the
Contribution to the fund 8,750,090
700,000 r:urrent year.
Actual return on plan assets
950,000 Before amendment After amendment
Total
Benefits paid 10;400,000 ' Accumulated benefit obligation 950,000 1,425,000
( 600,000)
.FVPA- December 31 Projected benefit obligation 1,300,00<1 1,900,000
9,800,000

The FVPA is in~reased by c9ntribution to the fund and actu~l Wrat is tb.e total amount of past service cost as a· result of the
amendment? '
.return on plan assets, and decreased by benefits paid .. ·

Problem 15-6 (IAA) a. 950,000

b. 600,000
Caticlan Company pr?vided the following information:
c. 475,000
January 1 . December 31· d. 125,000
Fair value of plan assets 3,500,000 3,900,900
Market related value of plan assets . 2,800,000 2,900;000· Solution J5-7 Answer b
Contribution to the plan
280;000
Benefits paid to retirees PBO after amendment 1,900,000
250,000 PBO before amend.•11ent 1,300,000
.What is the actual return on plan assets for,the current year?
Past service cost 600,000
a. 400,000
b. 370,000
c. 430,000
d. 100,000

224 225"
Problem 15-8 (IAA) Problem 15-9 (AICPAAdapterl)

Ronald Company provided the fo}lowing.infoimation for the clirrent Jellie Company provided the following information pertaining to the
year: .
defined benefit plan for the current year: ·

Projected benefit obligation, January 1 5;600,000 Current serv"ice cost 1,500,000

·Fair value of plan assets, January 1 . 5})()(),000 Actual return on plan assets 350,000
Current service cost ,l)lO,~
Interest income on plan assets 400,000
Actual return on plan assets 450,000 Past service cost during the year 50,000
Actuarial gain 'durin·g $e y~ar fso,ooo . Annual interest on pension liability 500,000
Employer contribuiic 425,000
Benefits paid to ref4"ees 390~000
What is the total defmed benefit cost?
Settlemen~ r~te . 10% a. 2,150,000
b. 1,700,000
What is the total defined benefit cost?
• I .
c. 1,800,000
a. 1, 120"'000 d. 1,750,090
b. 1,100,000
c ... 1,170t000 . Solution 15-9 Answer c
d~. 1,~70,000 Current service cost 1,600,000
Interest income ( 400,000)
Solution 15'-8 Answer d Past service cost 50,000
Current service cost Annual interest on p~nsion liability 500,000
.1,110,000
Interest expenSe (10% x 5,600,000)' 560,000 Total pension expense l,'750,000
Interest income (10%x 5,0001000) ( 500,000)
Actual return on plan assets 350,000
Employee benefit expense 1,170~000
Interest income on plan assets 400,000
Acfua1 return 450,000 Remeasurement loss ( 50,000)
Interest income 500,000
( . 50,000) Pension expense 1,750,000
Remeasurement loss on plan assets
Remeasurement loss 50,000
~ctuarial gain 150,000
Total defined berrefit cost
Net .i~measurement gain 100,000 1,800,000

Employee benefit expense 1,170,000

Net remeasurement gain ( 100,000)
Defined benefit cost 1,010,000

226 227
 Solution 15-10
Problem 15-19 (IAA) Question I Answer d

Brad C~panyprovided the following information for the current year:

Current service cost s2o;coo
Interest expense on PBO 590,000
Interest income on plan assets ( .350,000)
Current service cost 520,000
Loss on pl!!JI settlement 240,000
Actual return ·on p.lan assets 810,000
Past service cost . 360,000
Interest expense on PBO 590,000
Interest income on plan assets 350,000 ,Ifmployee benefit expense ~Q!QQQ
Loss on plan settlement · 240,000
Past ser.rice cost during the y~ar 360,000 Question 2 Answer b
Contribution to the plan 1,500,000
Actuar'return on plan. assets 810,000
1.. \Vhat is the employee bel;lefit expet;se·for the current year? Interest in<;ome on plan assets 350,000
---
. Remeasurement gain 460,000
a ..
b.
1,710,000
1/r70,tl00
.
Question 3 Answer b
_....._

c. 1,350,000
d. i,360,000 Employee benefit expense 1,360,000
Remeasurement gain ( 46~,000)
2. What is the femcasurt:ment gain or loss? Total defined benefit cost .900,000
a. 4(0,000 loss Question 4 Answer b
b. 460,000 gcin.
c. 220,000 los.s Contribution to the plan 1,500,000
d. 220,0CO gain Total defined benefit cost . 900,000
Prepaid benefit cost- overfunding ~QQQ
3. Vlhat is the total defined.benefit cost?

a. 1,820,000
b. 900,000
c. ';40,000
d. 960,000

4. What is the prepaid or accrued benefit cost for tne year?

a. 600,00.0 a::cmed
b. 600,000 prepaid
c. 140,000 e1ccmed
d. 140,000 prepaid
229
228 .• ,: .:
Problem 15-11 (AlCPAAdapted) Problem 15-13 (PffiLCPAAdapted)

On January 1, 2013, Rosearme Company established a noncontributory Elaine Company adopted a defined benefit plan on January 1, 20_13.
defined benefit plan covering all employ~ ancicontnb.tited P 1,000,000 The pension nmding paymentis made to the trustee on December 31
to tb,e plan. On December 31, 2013, the entity determined that the
current service cqst and interest expense .on the;benefit obligation totaled each year.
P620,000. The discaunt rate \V'aS 10%-. ·nr~~ntJ remeas.urement 2013 201.4
gain or loss du.ririg the year. What an:toun~ sho.uJd be< reported on
1,500,000 1,650,000
December 31, 2013 as prepaid pen~ ion cost1 Service cost
1,850,000
Fundine pP.yment 1,700,000
a. 280,000 Interest on defmed benefit obligation 150,000
b. 380,000 I.ntcrest in:oroe and actual r'i!turn on plan assets 170,000
c. 480,000
d. 620,000 What is the ?repaid pension cost on December 31. ?.0 14?

Solution 15-11 Answer:: a. 200,000

Current service ::ost and interest expense 620,000 b. 250,000
Interest income on plan assets (10% :x. \,'JOO,COO) (100,000) c. 420,000
Employee benefi,t expense 520,000. d. 220,000

Contribution to the plan l,ooo·,ooo Solution ~5-13 Answer c

Employee benefii..expense 520,000 1,700,000
Cor..trlbution or funding in 2013
·Prepaid .benefit cost 480,000 .lj00,000
Servi<:e cost in 201:
Prepaid pension cost- December 31, 20D. 2QO,OOO
Problem 15-12 (PI-I:il:'CPAArlapted)
On J anuzry 1, 2013, yhezyll Company adopted a defined benefit plan. Servi.ce cost in 2014 1,650,000
The current service cost ofP750,000 was f..llly flJnded at the end of ~50,000
Interest expense
2013. Pastservice cost was funded by a contribution ofP300,000 in ( 1/0,000)
interest income
2013. Past-service cost was Pl20,000 for 2013. Whatis tr<.: ,r;
1,630,000
p·~nsior:. cost on December 31, 2013? Employee benefit expense in2014 '
a. 180,000 1,85!>,000
b. 300,000 Contribution or funding in 2014
Employee benefit expense in 2014 1,630,000
c. 420,0CO
d. 540,000 Prepaid pension cost in 7.014 220,000
Prepaid pension coo:t.- December 31,2013 200",000
Solution 15-12 Answer a ~QO_Q
Prepaid pension cost- December 31, 2014
ContnbutiOll for past ~crv!-:e cost 300,000
Past service cost during t'l.e year 120,000
Prepaid pension cost 180,000

230
- 2'31
 Problem 15-14 (IFRS)
. .
Problem 15-16 (AICPA Adapted)
Waileen Company had ther ollowing balances relating to the defined
benefit plan on December 31, 2013 : Angela Company pr~vided the following information pertaining to the .
de(med benefit pension plan for the current year:
FaJr value ofplaa.asstts 37,000,000
Projected benefit obligatjon 33,000,000 Prepaid pension.cost, January 1
Asset ceiling · 20,000
"2,500,000 Current service cost 19G,QOO..
Interest expens~ on PBO ~80>,00¢
What is the prepaid benefit cost o~ December. 31,--20 13?. Interest income and actual return on plan assets 400;000
Past service cost during the year · 50fHXJe
a. 4,000,000 · Employer contribution , I .
400,9')0
b. 1,500,000
c. 2,500,000 What is the a·ccrued pen,sion cost at year-end?
d. 0
a. 250,000
Solution 15-14 Answer c b. 299,00'0
c. 270;000
Asset c;:eiling 2,500,000 d. 400,000
'
Problem 15-15 (AICPAAdlJpted)
Solution -15-16 Answer a
On ::December 31, 2013, Kerr Company provide;d the following
information: Current service cost 190,000
Fair value plan :1ssets Interest expense 380,000
3,450JOOO Interest income
Accumulated benefit ob ligation 4,300,000 (400,000)
Projected benefit obligation Past service cost 500,000
5,700,000
Employee benefit expense · 67",000
\Vhat is the accrued liabiltty en December J;, 2013 <> Contribution or funding 400,000
a. 5,700,000 Acc..r:ued benefit cost in 2013
b. 2,250,000 :-.70,000
Prepaid benefit cost- January 1 20,000
c. 1,400,000
d. 850,000 Net accrued benefit ccst·- December 31 250,000
Solution 15-15 Answer b
Fair value of plan assets 3,450,000
.. Proj ected bcne!' 1•.obligaticn ,5,7Q9,000
Accrued benefit co:;t - credit i.lzlan•.::e {2,250,000)
..
23 2
233
 Problem l S-17 (AICPAAdaPted) · PfoblemlS-18 {IAA)
Webb Company implemented a defined benefit plan for the employees On Januacy I, 2013, Kamille Company provided the following
on January 1, 2011. Duripg 2011 ~d2012, tPe contrib~tio,ns fully information pertaining to a defined benefit plan prior to the adoption of
funded the plan. Thefollowingaataareprovided.for2013 and2014= PAS I9R:
2014 2013 Fair: value of plan ass<:ts 8,000,000
Projected benefit obligation 7,000,000
Projected b.enefit obligation, December 31 7,500,000. 7,000,000
Unrecognikd actuarial g~n 1,500,000
Pla:1 assets at fair value·, December 31 6,750,000 6,000,000
Projected benefit obligation Other relevant information for the current year:
in excess of plan assets 750,000 1,000,000
Defined benefit cost 900,000 800,000 Cutrept service cost 1,800,000
Employer contribution ? 500,COO Discount rate 10%
Contribution to the plan 400,000
What amount should be contributed to the p tan m order to report an Actual return on plan assets I,OOO,OOO
seemed pension liability of P200,00·o in the Decemqer 31, 2014 Average seiVice period ofemployees 5 years
st.:..ternent offillar.c1a 1position?
I. What is the employee benefit expense?
a. 1,000,000
b. 700,000 a. 2,500,000
. c. 600,000 b. I,700,000
d. 500,000 c. 1,800,QOO
d. 1,900,000 •
Sclutzon 15-17 Answer c
2. What is the remeasurement gain or loss?
Dc.Jned benefit cost in 201 J 8CO,OOO
Contribution to the plan in 2013 500,000 a. 300,000 gain
Accrued benefit cost - Deccmb~r 31, 20 13 :JW,OOO b. 300,VOO loss
Defined benefit ~ost in L.O Jl!. 9oo,ooo c. 200,000 gain
---- d. 200,000 loss
Total 1,200,000
Accrued benefit co~t- December 31,),{\l-t 200,000
3. What is therprepaid or fCCiUed benefit cost on December 31, 2013?
Contribution to the plan in 201 ·i l,OOO,OOC
a. 300,000 accrued
b. 300,000 prepaid
c. 100,000 accrued
d. 100,000 prepaid

234 235
 Problem 15-19 (AICPAAdapted)
Solution 15-18
Question 1 Answer b · Shirley Company obtained the following infonnati.on at the beginning of
the current year prior to the adoption of PAS 19R:
Current service cost 1,800,000
·lhtercst expense ( 10% X 7,000,000) 700,000 Projected benefit obligation 9,000,000
Inter'est income (10% X 8.000,000) ( 800,000) Fair value of plan assets 10,000,000
Employee benefit expense 1,700,000 ·unrecogni~ed a~tuarialloss 1,500,000

Question 2 Answer c Durlng the current year, the actuary determined the current service-cost
at P2,500,000 and the discountrate at 10%. TI1e actUal return on plan
Actual return 1,000,000 assets was P 1,200,000. Contribution to the plan arrwunted to
In tercst income 800,000 P500,000. The actuarial loss due to increase in PBO during the year
Remeasurement gain on plan assds 200,000 is
was F900,000 and the average remaining service period 10 years.

Question 3 Answer c 1. What is the employee benefit expense?

,Journal entry on Janu~ry 1, 2013 a. 3,400,000

b. 2,500,000
Prepaid/accrued benefit cost 1,500,000 c. 2,40(},000
· Retained eamings 1,500,000 d. f1,,400,000
Journal entry on December 31, 2013
2. What is the net remeasurement gain or loss~
Employee benefit expense. 1,700,000
Cash 400,000 a. 200;000 loss
Remeasurement gain - OCl 200,000 b. 200,000 gain
Prepaid/accrued benefit cost 1,100,000 c. 700,000 loss
PIABC- January 1, credit ( 500,000). d. 700,000 gain
Transitional effect- debit 1,500,000
Credit adjustment- credit (1, 100,000) 3. .What is the prepaid or accrued benefit cost at year-end?
Pi ABC - December 31 ,·.credit ( 100,000)
a. 2,600,000 accrued
b. 2,600,000 prepaid
c. 1,600,000 accrued
d. 1,600,000 prepaid

237
236
 ~olution 15-19
Question I Answer c 16
Cu.rrent service cost 2,500,000
Interest expense
Inte:t:est income
(10% x 9,000,000)
(10% x·10,000,800)
900,000 OTH ER EMPLOYEE BENF.FITS
(1,000,000)
Employ:!e benefit expense 2,400,000
Problem 16-1 (IFRS)
0'Jestion 2 Answer c · Kamille Companyr~orted that the ~mployees are each en!:J.t!ed to two
weeks of Qaid vacation leave. Purin2 the ~lL."Tent year, the emplo~es
Actual returrt earned 1;soo weeks of vacation leave and used 1 000 weeks. The
1,200,000 current salary ofthe employees is an average ofP3,000 per week a....'ld
Interest income l,OOO,OOQ the salary is expected to increase by P300 per week or a future weekly
salary ofP3,300. .
Remcasur~m~::nr gam on plan assets 200,000
Actu:-:-i.alloss during the year ( 900,000)
1. Wh~t is the vacation pay expense ifthe benefit is accuml.ilatmg and
vesting?
Net reme<:~$urement loss ( 700,000) a. 3,000,000
b. ·4,500,000
Question 3 Answer c c. 4,650,000
d. 4,950,000
Employee b;.:rtcfit expense 2,400,000 2. What ic; the yacation pay expense. tfthe benefit IS nonaccumulating
Net remca"liremcnt !oss 700,000 and nonvestmg?
T0tal define~ benefit cost
a. 3,000,000
3,100,000. b. 4,500,000
CoQtributio::l to the plan 500,000 c. 4,650,000
d. 4,950,000 •
Accrued benefit cost during the year 2,600,000
Solution 16-1
Employee be~1efit expense 2,400,000 Question 1 Answer c
Remeasur ement loss - OCI 700,000 Vacation weeks used (1 ,000 X 3,000) 3,QOO,OOO
·cash 500,000 Vacation weeks unused ( 500 X 3,300) 1,650,000
Prepaid/accrued benefit cost 2,600,000 4,650,000
TQt~l V!iCatioc pay expense-
Retained earnings 1,500,000 Accumulating and vesting paid absences are those that can be carried
Prepaid/accmed b enefit cost 1,500,000 forward and the employees are entitled to a cash payment for unused
entitlement upon leaving the entity.
PIABC- January 1, debit 2,500,000 Question 2 Answer a
Credit a<.ljustment (2,600,000)
Vacation pay expense (1 ,000x3,00 0) 3,000,000
Transition al effect- credit (1,500,000)
PIABC- December 31, credit (1,600,000) Nonaccumulating and non vesting paid absenc-.:s are chose that cannot
be carried forward and the employee s arc not entitletJ to a cash
payment for unused entitlemen t upon leaving the entity.

238 239
 Problem 16-2 (TFRS) Problem 16-3 (IM~
\ .
Klaudi~e Compan~ has a profit sharing bonus plan which requires Pope Companyprovided the fallowingmfonnationabout the earned
the ent!ty to pay 12 Yo of the income for the year to employees who vacation days during the first year ofopetatio~:
srrve througho ut the current year and who will continue.to serve ~mployee Aver~ewage Vacation «fays Vacatio.D'day.s taken
througho ut the followin g year. The entity· reported income of pet~ay earned thiS year ·t~~year,
P80,000, 000 for 2013. The entity expects to save 5% of the l 400 10 10.
maximum possible bonus payment through staff turnover. The bonus 2. 600 '15 10
will be paid on December 31, 2014. What is the bonus expense for 3 800 20 5
20f3?
What amount should be reported as accrued vacation pay on
a. 9,600,00 0 December 31?
b. 4,800,00 0
c. 9,120,00 0 a. 29,000
b. 14,000
d. 4,560,00 0
c. 15,000
d. 0
Solution 16-2 Answer c
Maximum possible bonus ( 12% x. 80,000,000) Solution 16-3 Answer c
9,600,000
Saving throu.gb staff turnover (1% x 9,600,000) Employee 2 (600 x 5 days not taken) 3,000
( 480,000)
.~mployee3 (800 x 15 days not taken) 2,000
· Estimated liability
9,120,000
Accrued vacation pay ]5,000
PAS 19R, paragraph 19, provides that an entity ~hall recognize the
expe~ted CO'i t of profit sharing and ~onus payment when all of the
Problem 16-4 (PHILCPAAdapted)
following co_nclitions are present: 0n January 1, 2013, Maricar Comp~y agJ;eed to grant the employees
' ten vested vacation days each year, with the provision that vacation
a. The entity has a present legal or ~onstructive obligation to make
days earned in aparticular year could not be taken 1mtil the following
such payment.as a result of past event.
year. For the year ended December 31, 2013, all of the 50 emplbyees
b. A reliable estimate ofthe obligation can be made. earned P400 per day each and earned ten vacation days each. These
vacation days were taken duri.rig the last halfof2014. What total expense
A present obligation exists when the entity has no reaustJ.c alternative should be reported for compensated absences in 2013?
but to mak~ the payment.
a. 200,000
b. 100,000
c. 50,000
d. 0
Solution 16-4 Answer a
Compensated apsences (50 x 10 dayS'x P400) 200,000

240 241
Problem 16-5 (PHILCPAAdapted) Problem 16-7 (AICPAAdapted)
West Coml?any determined that it has an obligation relating to Gavin Company granted all employees 2 weeks of paid vacation
emP.loyees rights to receive compensation for future ab~en~es for each full year of employment. Unused vacation time can be
attnbuted to employees' services already rendered. The obhgatlon accumulated and cariied forward to succeeding years and will be
relates to rights that vest, and payment of the compensatiOn is
probable. The obligations on December 31, 2013 are reasonably ;?aid at the salaries in effect when vacations arc taken er when
estimated as follows: · employment is tenninated. There was no employee turnover in 2013.
Vacation pay 1,100,000 Additional information relating to the year ended December 31,
Sick pay 900,000 2013 is as follows:
On December 31, 2013, what amount should be reported as liability
for compensateq absences? . Liability for accumulated vacations on January 1, 2013 350,000
Pr-?.~2013 accmed ncations taken from
a. 1,100,000
b. 2,000,000 January 1, 2013 to September 30, 2013,
c. 900,000 the authorized period for vacations 200,000
d. 0 Vacations earned fc!- workin 2013 (adjusted
to current rate) 300,000
Solution 16-5 Answer b
Vacation pay 1,100,000 The entity granted a 10% salary increase to all ernp:oyce>< •ut October
Sick pay '900,000
1, 2013, the annuai salary in~rease date. For the y~ar ended
Liability for compensated absences 2,000;000 . as
D~cember 31, 20 13, what amount should be reported vacation
Problem 16-6 (AICPAAdapted) pay ex:pense?
North Company has.an employee benefit plan for· compensated a. 450,000
absences that gives employees 10 paid vacation days and 10 paid sick •
days. Both vacation and sick days can be carried over indefinitely. b. 335,000
Employees can elect to receive payment in lieu of vacation days. c. 315,000
However, no payment is given for sick days not taken. On December d. 300,000
31, 2013, the unadjusted balance ofliability for compensated absences
was P21 0,000. The entity estimated that there were 150 vac~tion days Solution 16-7 Answer c
and 75 s~ck days available on December 31, 2013. The employees
earn an average ofP1,000 per day. On December 31, 2013, what LiRbility for accumulated vacations-January 1, 2013 350,1)00
amount ofliabilityfor compensated absences is required to be reported? Less: Payment for pre-2013 accr~ed vacati::ms 2op,ooo
a. 360,000 Balance 150,000
b. 225,000
c. 210,000 Vacations earned for work in 2013 300,000
d. 150,000 Adjustmentofpre-2013 Hcations (150,000 x 10%) 15,000 '
Vacation pay expense in 2013 315,00(:)'
Solution 16-6 Answer d
Liability for compensated absences. December 31, 2013
(150 vacation days x P1,000 per day) 150,000

243
242
 Problem 16-8 (IAA),
Solution 16-9 Answer b
Cola .Company I?ays all salaried employees on a biweekly basis. Vacation days in 20 13 12
Overtime pay, however, is paid in the next biweekly period. The entity Vacation days in 20 14 . 12
accrueS salanes·expense only at the December 31 year-end Last payrOll Total 24 .
was paid on D~cember 26, 2013, for the 2-week period ended Vacation days taken in 2014
' December 26, 2013. Overtime pay earned in the 2-week period el)ded
U)
· December 26, 2013 was P50,000. Remaining. work days in 2013 were Vacation days not taken- 12/311?0 i 4 15
December 27, 28, 29, on .which days there was no overtime. The
Accrued 1iabi,Iity-12/31/20.14 (50 x 15 x 8 hours x P80) 430,000
recurring biweekly salar'ies total P900 1 000. The entity follows a .
five-day work week. What amount should be recorded as liability
Note that the entity's policy is to accrue liability at end of ec:tch year at
for accrued salaries on December 3.1, 2013?
the wage rate for that year.
a. 270,000
Problem 16-10 (IAA)
. b. 320,000
...c·. 540,000. Vanessa Company has 35 employees who work 8 hours a day and are
d. 590,000 paid hourly. On January 1, 2013, the entity began a pr;ograrn of gramP1g
the employees 10 days ofpaid vacation .each year. Vacatio11 days earned
Solution 16-8 Answer b in 20 13 may first be taken on January l, 2014.
Accrued overtime 50,000 Hourly Vacation days earned Vacation days used
Accrued salaries (3/10 x 900,000) 270,000 Year wage by each employee by each employee
Total accrual 320,000· 2013 129.00 10 0
. . 20H 135.00 10 8 •
Problem 16-9 (IAA) 2015 142.50 10 lO
Elaine Company gives each of the 50 employees 12 days ofvacation a The entity has chosen to accme the liclbility for compensated absences
year if they are employed at the end of the year. The vacation at the current rate of pay in effe(ft when the compensated time is
accumulates and may be taken starting January I ofthenext year. The earned.
employees work 8 hours per day. In 2013, they ma,de P70 per hour
and in 2014 they made P80 per hour. During 2013-,.they took an average 1. \Vhat is the vacation pay expense for 2013?
of9 days ofvacation each. The entity's policy i$ to record the liability a. 361,200
existing at the· end of each y-ear at the wage rate f9r that year. b. 378~000
What amount ofvacation li~.bilitY should be reported on Decem~er 31, c. 344,400
2014? d. 0

a. 468,000 2. What is the accmed liability on December 31, 2015?

b. 48Q,OOO a. 474,600
c. 336,000 b. 453,600
d. 384,000 c. 399,000
d. 478,800
244 245
 Solution 16-10 Solution 16-11 Answer c
Question I Answ~r a
Employees leaving before clos;ure (130 x P2.0,000 3,000,000
)
Vacation pay expense for 2013 Employees leaving ~ntil closure ( 50 x P60,000) 3,000,000
(35 x 10 days x 8 hours x P129)
. 361.200 Total cash outflow 6,000,000
Question 2 Ans wer a The total amount of P6,000,000. shall be acco
UPted for as partly
FIFO termination benefit and partly short-term emp
loyee benefit.
Vacation days earned in 2013,2014 and 2(}15
30 As term inat ion benefit
Vacation days taken in· 2014
Vacation days taken in 20 15 ( &) The termination benefit provided in exchange
(!Q) for t~rrnination of
er;.1ployment is P20,000. This is the ~ou
Vacation days not ta~en (20 14- 2, 201 5- 10) nt that the e~tlty would have
12 to pay for tenninating·employment Wlthout future
semce.
Vacation days earned in 2014 not taken
Tewination benefit 20,000
(2 x P135 x 8 hours x 35 e~ployees) Multiply by the tota l num ber of employe
75,600 200
·Vacation days earned in 2015 not taken es -- --
(10 x P142.50 x 8 x 35 employees) Liabiiity for termination benefit :1_~.000
399,000 ---
Accrued liability- December 31, 2015 This amount ofP4·,000;000 shall be paid rega
474,600 rdles~ ofwheti:J.er tbe
employees leave before closure or render service
Problem 16-11 {IFRS) until closure.
On January I, 2013, an entity'announced the As shn rt-te rm employee ben efit
decision to close the
factory located in Mindanao a...d tenninate all2
00 employees as a result The incremental benefit that employees shall
rec~
services frr the full eight-month period are reco ive if they render
of economic downturn. The entity shall pay
P20,000 per employee
upon termination. However, to ensure that the gmzed as short-term
windup of the factory
occurs smoothly and all rerl!aining customer orde employee ·Jenefit.
rs are completed, the
entity needs to retain at least 20% of employe
es until closure of the
factory in eight months.As a result, the entity anno Total payment for 8-month period 60,000
unced that employees
who agree to stay until the closing of the factory Tcn:rjnation benefit (_ 20,000)
shall receive P60,000
pa):'Illent at the end of eigh t mon ths in add
ition to receiving their Short-term employee benefit 40,000
current wage throughout the period of closure Multiply by employees leaving until closure
instead ofthe P20,000. 50
Based on this offer, the entity expected to retain
50 employees until the
fdctory is clo; .:d. What is the amountofterminat Short-tenn employee benefit 7.QQO,OOO
ion benefit?
a. 6,000,000
b. 2,000,000
c. 4,000,000
d. 3,000,000

246 247
 Problem 16-12 (AICPAAdapted)
On September 1, 2013, Howe Company offered special termination
~ene:fits to employees who had reached the early retirement age specified
m t_he entity's pension plan. 'D1e tem1i.nation bene£ts consisted oflump
Slim and periodic future payments. Additionally; t.he employees accepting
17
the entityoffer receive the usual early retirement pension benefits. The
offer expired on November 30, 2013 . Actual or reasonably estimated ·ACCOUNTING FOR INCOJ\t1E TA,.X
amcants on December 31, 2013 relating to the employees accepting
the offer are as follows:
.
Lump sum payments made on January 1, 2014 475.000
Problem 17-1 (IAA)
Present value of periodic payments ofP60,000 annually
· for 3 years which will begin January 1, 2.014 155,000
.
Hilton Companyteported:pretax financial incoiPe ofP6,200,000 for
Reduction of accmed pension cost on December 31, the current year. Included in other income was P200,000 of interest
2013 for the terminating employees 45,000
;-evenue from gov~rtunent bonds held by the entity.Tne income statement
On December 31, 20 t3, what amount shou!cl. be reported as total included depreciation expense ofP500,000 for a machine with. cost of
Uabilityforterminati.on benefi.ts? . P3,000,00Q. The income tax return reported P600,000 as depr~ciation
a. 475,000 o.n the machine. The enacted tax rate i:> 30% for the current }'ear and
b. 585,000 future year~.· What is the current tax expens=. for the current y~ar?
c. 630,000 a. .1,860,000
d. 655,000 b. 1,800,000
c. 1,770,000
Solution 16- ll Answer c d. 1,830,000
Lump sum paym~nts . 475,000
Presept value of periodic payments Solution 17-1 Answer c
155,00_2
Total liability Financial income 6,200,000
630,000 (
Interest revenue on government bonds \ 200,000)
A loss a.11d liability must be recognized when ~pecial termination benefits Tax depreciation in excess of financial depreciation
(600',000- 500,000) ( 1002000)
arc offered to employees ..However, the loss is reduced L"Y the reduction
of accrued pension cost for the terminating employees. The jourml Taxable income· 5,900,000
e11try is as follows:
Current tax expense (30% X 5,900,000) 1,77_0,00Q
Loss from termination benefits
----
585,000,
Accrued pension cost 45.000 The current tax expense is based on taxable income.
Liability for termination benefits 630,000
249

248
 Problem 17-2 (IAA)
Tantrum Company began operations at the .beginning of the current Solution 17-3 Answer d
year. At the end of the first year of operation s, the entity reported Financial income 5,000,000
P6,000,000 income before income tax in the income statemen t but Nontaxab le life insurance proceeds ' . : 900,000)
onlyP5,1 00,000ta xable income in the tax return. Analysis ofthe Life insurance pren, ium for an officer 200,000
P900,000 differenc e revealed that P500,000 was a permane nt Financial income subject to tax
differenc e and P400,000 was a temporar y tax liability differenc e 4,300,000
Estimated warranty expense 1,200,000
related to a current asset. The enacted tax rate for the current year
and future years is 30%. What is the total income tax expense to Taxable income 5,500,000
be reported in the income statemen t for the current year?
Ir:come tax payable (30% x 5.500,000)
a. 1,800,000
b. 1,530,000 The income tax payable is actually the cerri:nt tax exp~c::e since
c. 1,650,000 the1 c is no income tax payment duri.i1g ihe year.
'd. 1,950,000
Prob!em 17-4 (PHILCP AAdapte d)
Solution 17-2 Answer c
Viking Company reported in the income statement for th~ yea;: ead&f
Accou .•ting or fmancial income 6,000,000 Decembe t 31, 20 13 pretax income ofP l ,OOO,OPO.
Permanen t differenc e .( 500,000)
Tax r.:turn Acc~nmFr!g record
Accounti ng or financial income subject to .tax 5,500,000 Rent incorr.e 70,000 .120,1...00
Total income tax expense Depreciat ion 280,000 220,00()
(30% X 5,500,000 ) 1,650,000 Premiums on offic.ers' life i..rlsumnce 90,00Ll
Income tax rate :.?0%
The total income tax expense is based on accounti ng or financial
income subject to tax. In computin-g financial income subject to tax) What is the cur cent provision for incmr..e tax for 20 13?
permanent difference is excluded.
a. 360,000
Problem 17-3·(1AA) b. 300,000
c. 294,000
In 2013, Tiger Company reported pretax fmancial income of d. 3'27.000
f5,000,00 0. Incfuded in the pr~tax fmancial income are P900,000 of
nontaxab le life insuranc e proceeds received ·as a result of the
death of an officer, P 1,200,00 0 of estimated warranty expense Solution 17-4 Answer c
accrued on Decembe r 31,2013 , and P200,000 oflife insuranc e Prt:tax accountin g (nccme 1,000,000
. premium s for a policy for an officer. No income tax was previoJJsly Premium on officers' life insurance - nonde..::uctiblc 90,000
paid during the year and the income tax rate is 30%. What is the ---
income tax payable on Decembe r 31, 2013? Accounting ;r.cotnc subj ect t~ tax 1,090,000
Rent income- tcrnpora<y difference ( 50,000)
a. 1,500,000 Depredat ion - tempurar y ti i fferencc ( 60,000)
b. 1,230,000
Taxatle ir.corne
c. 1,290,000 ~~
d. 1,650,000
Current provis ion fer income tax (980,000 x 30%)
.~QQ
250
251
Problem 17-5 (PHILCPA Adapted) Problem 17-6 (!FRS)

~or th~ Y~ e~ded December 31, 2013, Everlasting Company reported Canterbury Company made ah accounting profit of P4,000,000 for
accountmg mcome of P9,000,000 before income tax. Selected the year ended December 31, 2013 which included the foll owing items
·information for the current year is available as follows: of income a11~ expense:
Donation to political parties (nondeducti ble) 1,000,000
Interest income on governmen t bonds 700,000
Depreci at ion- 70% 1,600,000
Depreciatio n claimed on tax return in excess 700,000
of depreciatio n per book Annual leave expense
1,300,000 1,200,000
Rent revenue
Warranty expense on the accrual basis ··· 600,000 30o/t
Actual warranty payment Income ta·z rate
300,000
Income from installment sale reported for tax .
For tax purposes, the depreciation rate is 25%, the anneal leave paid is
purposes in ex<;ess of income recognized per book 200,000
Income tax rate · · P800, 000 and the rent received is P 1,000,000. The entity followed the
30%
cash basjs for tax purposes. What is the current tax liability on
What is the current tax liability on December 31, 20 13? December31, 2013?
a. 2,700,000 ·. a. 1,200,000
b. 2,250,000 b. 1,290,000
c. 2,490,000 c. 1,368,500
d. 2,130,000 d. 1,150,000

Solution 17-5 Answer b Solution 17-6 Answer b

Accounting income Accounting profit (000,000
9,000,000
Interest income Donation - nondeducti bie 1,000,000
( 700,000)
Tax depreciation in excess of accounting depreciatiol'l { 400,000)
Tax depreciatio n in excess of depreciatio n per book (I ,300,000)
Warranty expense per book 600,000 Annual leave pa.i<:i in excess of amount recognized ·
Actual warranty payment . (800,000- 700,000) ( 100.000)
( 300,060)
Income from installment sale reported for tax but Rent revenue in excess of rent received
not recognized per book (1,200,000- 1,000,000) ( 200,000)
200,000
Taxable income Taxable income 4,300,000
7,500,000

Current tax liability Current tax liability (30% X 4,300,000) 1,290,000

(30% X 7,500,000) 2,250,000

Carrying amount ( 1,600,000/20%) 8,000,000

The current tax liability is equal to the current tax ·expense
Tc.X depreciation rate 25%
because there is no income tax payment dlJring the year. .,
Tax depreciation 2,000,000
Accounting de,Preciation 1,600,000

Excess tax depreciation 400,000

--·-

252 253
 Prob lem 17-7 (ACP )
Aris Comp any comp uted a preta x ac~ounting incom e ofP5, Solution 17-8 Answer b
000,0 00
for the first year of operations. The tax rate is 30%. Cumulative taxable temporaryllliffer~nce- 12~31(:0 13 1,350,000
Nond educt ible expen ses Cumulative taxable temporary difference -12~ 31/ L.O 12. ( 960.000)
200,000
Nont axabl e reven ue
500,000 Taxable temporary difference in 2013 390,000
Gross incom e ori instal lment sales repor ted in
accou nting incom e but not in taxab le incom e
Provi sion for doubt ful accou nts Taxable income in 2013 2,400,000
Ta}..able temporary difference in 201 3 :j90,000
What is the curre nt tax expen se?
Prc.tax financial income 2,79C,~
a. 1,140 ,000'
b. 1,410 ,000
c. 1,500 ,000 Prob tem 17-9 (AIC PAA dapte d)
~: 1,110 ,000 Dunn Comoany repor ted in the 2013 incom e statc nen'
.: P900,00l'
income bef~re provisio!l for incom e tax. The tax. rat~ 1s 30%.
Solution 17-7 Answ er a
Preta x accou nting incom e Rent received in advan ce 150,000
Nond educt ible expe nses- perm anent 5,000,000 Intere st income on time depos it :-:oo,oco
. Nonta xable reven ue - perm anent 200,000 Denrectation ded~cted for income tax purpc scs
( 500,000)
Acco untin g incom e subje ct to tax in excess of financial depre ciatio n 100,000
Gross incom e on instal lment sales - temp orary
4,700,000
(1,000,000) What is the curre nt provi sion for income tax for 2013 ?
Doub~ful account~ - tempo rary
100,000
Taxab le incom e a. 270,000.
3,800,000
b. 225,000
Curr ent tax expen se (3,800,000 x 30%) c. 210,000
1,140,000 '
Total incom e tax expen se (30% x 4,700,000) d. 255,000
1,410,000
.. Prob lem1 7-8(I AA) Solution ]7-9 Answer b
Net income per book. 9GC,OOO
Herb ie Com pany had cumu lative taxab le temp orary differ Intere st income on time depo 'lit- ;:::ermarH:nt (200,000)
ences on
Dece mber 31, 2013 and Dece mber 31, 2012 of P1,35
0,000 and Accounting income subje ct to tax 700 ODO
P960,000, respectively. The~ rate for 2013 is 40% while
the tax rate
for future years is 30%. Taxa ble incom e for 2013 is P2,40 Temporary differences:
0,000 and 150,000
there are no perfnanent differences. What is the pretax fman Rent received in advance
cial incom e
for20 13? Exces s tax depre ciatio n flOC 000)

a. 3,750 ,000 Taxable income 750,000

b. 2,790 ,000
c. 2,010 ,000
Curr ent provi sion for incom e ts:-: (750,000 x 30~{) _L2s,::oo
. --·- ·-
d. 1,050 ,000

254
255
 Prob lem 17-10 (PHI LCPA Adap ted)
Probl em 17-11 (PHI LCPA Adap ted) ·
Casc ade Com pany is deter minin g the amou nt of the
preta.~ On January 1, 2013, Midla nd Comp any purch ased a mach
accounting income for 2013 by making_adjustmentto taxab ine fort
le income P 1,400,000. This machine has a 5-yearusefui life, a residu
from the 2013 incom e tax return. The tax return show al value of
ed taxab le P200;000.and is depreciated using the straight line method for
incom e ofP4 ,000, 000 on whic h a tax liabi lityo fPI,2 00,00 fmancial
0 has state.mcnt purpo.ses. for tax purposes, depreciation ~as P500
been recognized. Follo wing is the list of items that may be ,000 fol.i
requi red 2013 and P400,000 for 2014. The 2014 incom e befor
to deter mine preta x accounting incom e from the amou nt e tax and
of taxab le depreciation was P2,000,000 and the tax rate \·vas 30%. The
income: · ~ntity.
made estimated tax payment ofP20 9l000 during 2014.
• Acce lerat ed depre ciatio n for incom e tax purp oses 1. What is the-income tax paya ble onDecembet:31 ., 2014
was ?
P500 ,000. Straig ht line fmancial depreciation on these asset
s is a. 480,000
P400 ,000.
b. 230,0 00
• Goodw·ill impa irmen t loss ofP3 00,00 0 was not inclu ded c. 450,0 00
as a
dedu ction in the tax return but may be dedu cted in the incom
e d. 2so,ooq
statement.
2. What is the total income tao;: ex,Pense that is repcrtedk~th~20
14
• Inter est incom e on treas ury bills was not inclu ded in income statement?
the tax
retur n. Durin g the year, P600 ,000 was recei ved on
these a. 480,ooo·
investm~nts. ·
b. 450,000
Wha t is the preta x acco untin g incom e for 2013 ? c. 528,000
d. :540,000
·a. 4,100 ,000
b. 4,200 ,000
Solution 17-11 Question I Answer b Question 2 Answ er c
c. 4,300 ,000
d. 4,400 ,000 Income before tax and depreciation
2,000,000
Tax depreciation for 2014
E 400,G:)O)
Solution 17-10 Answ er d Taxable income 1,600,000
Taxable income '4,000,000
..
Excess tax depreciation (500,000 -400, 000) Current tax expense (30% x i ,600,000)
100,000' 4~0,000
Goodwill impairment loss Payment during 2014 ·
( 300,000) ( 200,000)
Interest income on treasury bills Incom e tax payabl~
600,000 280,000
Pretax accounting income
4,400,000 ' Income before tax and depreciation
2,000,000
The pretax accounting income is the ac~ounting income per Financial depreciation (1 ,400, 000-2 00,00 0 I 5) ( 240,000)
book and
not the accounting income subject to tax. Accounting income 1,760,000
The accou nting incom e subje ct to tax is equal to P4,00
0,000 plus Total income tax expense (30% x 1, i60,000)
PI 00,000 or P4, 100,000. The pem1anent differences are exclu . 528,000
ded.

256· 257
 Problem 17-12 (IAA) Problem 17-13 (AICPAAdapted)
Jasco Company is .in the ~i~~ year of operation:;. The entity reported
Punk Company reported the following partial income statement after .pretax accounhng rncome or P-1,000,000 and proyided the following
the first year ofoperations: ttems. .

Income before income tax 3,750,000. Premium on life insurance of key offi~er · 100,000
·. Income tax expense Depreciation on ta~ return in excess of book depreciatioc 120,000
Current 1,035,000 Interest on municipal bonds 53,000
Deferred 90,000 1,125,000 Warranty expense 40,000
Actual war:ranty ·repairs 33,000
Net income 2,625,000 Bad debt expense 14,000
Beginning bal9nce in allowance for.uncollectible accounts 0
The entity used the straight line method of d~r~iation for fin~cial E~ding baiance in allowance for uncollectible accotmts 8,000
· reporting purposes and accelerated depreciati0n for tax purposes. The Rent received in advance that will be recognized evenly
::lver the next three years 240,000
amount charged to depreciation expense per book was P1,500,000.
No other differences existed betw.een book income and taxable income What is the taxable income for 20 13?
except for the amount of depreciation. The income tax rat~ is 30%:
What amount was deducted for depreciation in the tax return for the a. 4,18f,ooo.
·cUI'I'ent year? · b. 4,102,000
c. 4,047,000
a. 1,200,000 d. 4,082,000
b. 1,425,000
c. 1.~00,000 Solution 17. . 13 Answer a
-d. 1,800,000
Pretax accounting income 4,000,000
Solution 17-12 Answer d . Premium on life insurance 100,000
Interest on municipal bonds ( 53,000)
Excess tax depreciation ( 120,000)
Depreciation per book . 1,500,000. Excess warranty expense (40,000- 33,000) 7,000
Taxable temporary difference (90,000 I 30%) 300,000 Excess of bad debt ~xpense ov~r writeoff ( 14,000 - 6 000) 8,00{)
Depreciation for tax purposes 1,800,000 Rent received in advance ' 240,000
·raxable income

Begimting allowance for uncollectible accounts 0

Bsu:f. debt expense ]4,0{)_Q
Total 14,000
Writeoff (squeeze) ,• UQQQ)
Ending ailowance for uncollectible accounts 8,00_Q

259
 Problem 18-2 (.U.A)
18 Zambal Company reported depreciation ofP2,500,000 in the 2013
•ax ren.~m. However, in the 2013 income statement, the entity reported
~ ' tlcprectatto~ of Pl.OOO,OOO. The difference ir depreciation is a
temporary difference that will reverse over time. Theta'{ rate is 30%.
. .
DEFERRED TAX ASSET AND LIABILITY
What amount should be added to the deferred ta'{ liability on Dec;ember
31,2013? .
a. 300,000
Proble~ 18-1 (AICPAAdapted)
b. 750,000
c. 450,000
On June ~0, 20B,AnkCompanyprepaidaPl,OOO,OOO premium on d. 0
an annual .insurance policy. The premium payment was a tax
Solution 18-2 Answer c
deductible expense in the 20 13 cas)). basis tax return. The accrual
basis income sta~ement wilf
report a P500,000 insurance expe~se Tax depreciation
Book depreciation
2,.)01·.000
in2013 and2014. The income tax rate is 30%. On December 31, l,OGO,OOO
2013, what amount related to the insurance sho.u lq be reported as Future taxable amount _!_2QQ,~
deferre.d tax liability? - -
Increase in qeferrcd tax liability (30% x ',500,000' 450,000
a 300,000
b. 150,000 Problem 18-3 (AICPAAdapted)
c. ' 200,000
d. ' 0 West Company leased a building and received P4.000,000 annual
rental payment on June 15,2013. The begipning of the lease was
July 1, 2013 . Rental income is taxable when received. The incQme
Solution 18-1 Answer b tax rate is 30%. The enhty had no other.permanent or tempomry
1
Deferred tax liability (500,000 X 30%) 150,000 differences. What amount of deferred tax ~sset should be reported
on December 31, 2013?
Since the impact ofthe temporary difference is a higher accounting a. 1,200,000
incom~ than taxable income, there is a deferred tax liability. b. 300,000
c. 600,000
.t\yJ'IJ.ally, a deferred tax liabiJi~y arises from a future .taxable d. 0
tempo.rary difference. ·
Solution 18-3 Answer c
The prepaid insurance ofP500,000 is a future taxable amount Deferred tax asset (2,000,000 X 30%) 600,000
and therefore will result to a deferred tax liability. •
Since t~ impact of the temporary difference is a hiohcr tuxablc
income than accounting income, there is a deferred ~x asset.
Actually, a deferred tax asset arises from a future deductiblu
temporary difference.

260 261
 Problem 18-4 ({AA) Problem 18-6 (AICPA Adapted )
Regal Company paid P?OO,OOO in January 2013 for fire msurance Caleb Co!Upany has three .cinancial statement elements for which
premiums on a two-year policy. Additionally, the financial st?.tem~nts the December 31, 2013 carrying amount is different frcm the
for the year ended December 31, 2013 revealed that the entity paid
December 31,2013 tax basis:
P 1,050,000 in income tax during the year and also accrued estimated
litigation loss ofP2,000,00.0. The lawsuit was reso lved in Febmary Carrying amount Tax. bas1s Differen ce
2014 at which .time a P2,000,000 loss was recogni zed for tax
Equ(pment 200,000 L20,000 . 80,000
· PtL."POscs. The entity used the cash basis fer tax purposes. The tax
Prepaid officers'
r~ te is 30% for both 2013 and 2014. What amc~1nt shou!d be
r.:!ported as rleferce d tax asset on December 3 i, 2013? insurance policy 75,000 0 75,.,000
Warranty liability 50,000 .0 5()~
a. 630,000
b. 540,000 ·.,\That is the totai amount of{uture taxaole diffetellce·s?
c. 600,000
d. 570,000 a. 205,000
b. 155,000
Solution 18-4 Ansi-Yer c c. 80,000
Deferre d tax 3sset (30% x 2,000,00 0) 600,000 d. 50,000

Only the estimated litiga~ion lo<:s will result to a ctetened tax qsset
because it i.s a future deduct: hle amoLn t The pr~paid insu:-a...1~e
ofPl OO,t100:V~ili res.ult to a deferrec! tax l iab~~~ty be~c:.use it is a
future ~·xab!e amount .
~blem 18-S'(IF'ilS)
Solution 18-6 Answer c
If the carrying amount of an ass et Is higher than Jhe tax base, the
difference is a future taxable amount and therefore there is a deferred
tax liability.

In a:aivmg a! the profit befor~ ta.< for the year ended December 31, T.nus, the difference in the equipment 9fP80,0CO is a tuture taxable
20.13, Jerry. Company has accrued royalties rccei·v·able ofP200,000 nmount .
an"tl interest payable ofP250,000. Both royalt[es and ir tcrest are dealt
The diffe;:-cm:e ofP75,000 is a perman ent difference because the '
urith on a cash basis in tax computations. ¥/hat is 6e net tempora ry
difference en December 31, 2013? ofiicers ' insunince premium is nondeductible. Therefore, this
· ·
difference h... s no deferred tax consequence.
a. 45 0,000 taxable temporary differei~Ce
b. 450,000 deductibletemporarydifference If the carrying amount of a liability is higher than the true base, the
c, 50,000 cteductibletemporarydifference difference is a ftl,ture deductible amount and therefure there is a
d. 50,000 taxable tempor::>.... ry difference deferred tax asset.
Solution 18-5 Answer c Thus, the difference of P50,000 in warranty liability is a future
Taxable temporary differep ce 200,000 deductible amount.
Dedu~;tiblc tempora ry differen ce
?.50,0(:0
--·-
Net deducti ble tempora ry differencf" 50,000

262 263
 Problem 18-9 (IFRS)
Problem.l8-7 (IFRS)
• I • ..,

GemCompany has interest receivable which has a carrying amount of lillian Company has a noncurrent asset which, had a carrying amount
Pt,OOO,OOO on December 31,2013. The related interest revenue will ofP1,800,000 on December 31,2013. The tax written down value or
be taxed on a cash ~asis in 2014. The entity h~ trade receivables that tax ba~e ofthe asset at that date was P900,000. The tax rate is P30%.
have a carrying amount ofP5,000,000 on December 31, 2013. the· What IS the deferred tax balance in respect of the asset on December
related revenue has been recognized in profit orloss'and for tax purposes 31, 2013? -
· for 2013. What is the total tax base of interest receivable and trade
receivables on Decemt.r 31, 2013? a. 900,000 asset
b. 270,000 liability
a. 5,000,000 c. '270,000 asset ·
b. 6,000,000 d. . 900,000 li~bility
c. 1,000,000
d. 0 . Solution 18-9 Answer b

Solution 18-7 Answer a Future taxable amount · ( 1,800,000- 900,000) 900,000

The carrying amount ofthe.lnterest receivable is P1,000,000 for Deferred tax liability (30% x QOO,OOO) 270,000
accounting purposes but the tax base is zero because the related '
revenue is taxed on a cash basis. The carrying amount of the trade Problem 18-10 (IFRS)
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. On Dece~ber 31, ~0 13, So~th Company has revalued a property and
has recognized the mcrease in the revaluation in the financial statements
Problem 18-8 (IFRS) The carrying amount ofthe property was P8,000,000 and the revalued
On January 1, 2013, North Company has spent P600,000 in developing· amount wa.s P 10,000,?00. However, the tax base ofthe property was
a new product. This cost meets the definition ofan intangible asset. The only P6,000,0p0. The mcome tax r.ate is 30%. What is the deferred tax
tax law allows this cost to be deducted for tax purposes when paid. asset or liability on December 31, 20 13?
Thus, the entity has recognized this amount as expense in 20 13 for tax a. 1,200,000 asset
purposes. On December 31, 2013, the intangible asset is deemed
b. 1,200,000 liability
impaired by P50,000. What is the tax base for the intangible asset on
December 31, 2013? c. 600,000 asset
d. 600,000 li~ility
a. 600,000
b. 550,000 Solution 18-10 Answer b
c. 650,000 Future taxable amount ( 10,000,000- 6,000,000)
d. 0 4,000,000
Deferred tax liability (30% x 4,000,000) 1,200,000
Solution _1 8-8 Answer d
The carrying amount of the intangible asset is P600,000 less the
impairment loss of P50,000 or PSSO,OOO but the tax base is zero
because the total amount is expensed in the curr~nt year for tax purposes.
265
264
 Problem 18-9 (IFRS)
Problem.l8-7 (IFRS)
• I • •
6eni Company has interest receivable which has a carrying amount of lillian Company has a noncurrent asset which had a carrying amount
P t,OOO,OOO on December 31, 2013. The related interest revenue will ofP 1,800,000 on December 31, 2013. The tax written down value or
be taxed on a cash ·~asis in 2014. The entity h~ trade receivables that tax b~e of the asset at that date was P900,000. The tax rate is P30%.
have a carrying amount ofP5,000,000 on December 31,2013. The· What IS the deferred tax balance in respect ofthe asset on December
related revenue has been recognized in profit or loss'and for tax purposes 31, 2013? -
· for 2013. What is the total tax base of interest receivable and trade
receivables on Decemt.r 31, 2013? a. 900,000 asset
b. 270,000 liability
a. 5,000,000 c. '270,000 asset
b. ~,000,000 d. ' 900,000 li~bility
c. 1,000,000
d. 0 . Solution 18-9 Answer b

Solution ·1 8-7 Answer a Future taxable amount · (1,800,000 .:._ 900,000) 900,000
The carrying amount ofthe.l.nterest receivable is Pl,OOO,OOO for Defer~ed tax liability (30% x QOO,OOO) 270,000
accounting purposes but the tax base is zero because the related
revenue is taxed on a cash basis. The carrying amount of the trade Problem 18-10 (lFRS)
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. On Dece~per 31, ~0 13, S~~th Company has revalued a property and
has recognized the mcrease m the revaluation in the financial statements
Problem 18-8 (IFRS) The carrying amount ofthe property was P8,000,000 and the revalued
On January l, 2013, No~ Company has spentP600,000 in developing· amount was PIO,OOO,?OO. However, the tax base of the property was
anew product This c0st meets the definition ofan intangible asset. The only P6,000,090. The mcome tax mte is 30%. What is the deferred tax
tax. law allows this cost to be deducted for tax purposes when paid. asset or liability on December 31, 20 13 ?_
Thus, the entity has recognized this amount as expense in 2013 for tax a. 1,200,000 asset
purposes. On December 31, 2013, the intangible asset is deemed
b. l ,200,000 liability
impaired by P50,000. What is the tax base for the intangible asset on
December 31, 20 13? c. 600,000 asset
d. 600,000 liability
a. 600,000
b. 550,000 Solution 18-10 Answer b
c. 650~000 Future taxable amount (10,000,000- 6,000,000)
d. 0 4,000,000
Deferred tax liability (30% :x: 4,000,000) 1,200,000
Solution .18-8 Answer d
The carrying amount of the intangible asset is P600,000 less the
impairment loss o(P50,000 or P550,000 but the tax base is zero
because the total amount is expensed in the current year for tax purposes.

264 265
Problem 18-11 (IFRS)
Problem 18-12 (IFRS)
Aloha Company provided the.followinginfo~tion 'on December 31,
2013: West Company reported the following carrying amount of assets and
liabilities on December 31, 2013:
Carrying amount ·Tax base
Property 10,000,000
Accounts receivable 1,500,000 1,75Q,OOO . Plant and equipment 5,000,000
Motor vehicle ., 1,650,000 1,250,000 Inventory 4,000,000
Provisionfo~;warranty 120,000 0 Trade receivables 3,000,000
150,000 0 Trade payables 6,000,000
Deposit received in advance Cash 2,000,000
The depreciation rates for accounting and taxa:tion are·15% and 25%
respectively. The deposits are taxable when recetved and warranty costs The value for tax purposes for property and for plant and equipment
are deductible when paid An allowan~ for doubtfulqeb~ ofP250,000 was P7,000,000 and P4,000,000, resp~ctively. The entity has made a
bas been raised against accounts recetvable_for accbuntmg purp?ses provision for inventory obsolescence of PL.,OOO,OOO wh<cn is not
but such debts are deductible only when wntten off as uncollectible. allowable for tax purposes. Further, an impairm~·1t loss aga!nSt rrade
The tax rate is 30%. What amount should be reported as deferred~ receivables ofPl,OOO,OOO has been. niade. This charge'wiHnor. be
ljabilityonDe eember31, 2013? allowed in the current year for tax purpvses. The ta.-x rate is 30%. What
amount should be recognized as deferred tax expense for 2013?
a. 120,000 a. 1,400,000
b. 156,000 b. 1,200,000
c. 81,000 c. 350,000
d. 36,000 d. 300,000
Solution 18-11 Answer a Solution 18-12 Answer d
Carrying amount of motor \oehic]e 1,650,000 Property:
Tax base 1,250,000 Carrying amount 10,000,000
400,000 Tax base 7,000,000 3?900,000
Future taxable amount Plant and equipment:
Deferred tax liability (30% x 400,000) 120,000 Carrying amount 5,0GO,OOO
Tax base 4,000,000 1,000,000
Accounts receivable: Future taxable amount 4,000,000
Tax base 1,750,000
Carrying amount ' 1,500,000 250,000 . Inventory:
'Provi::;ion for warranty: Tax base 4,000,000
Carrying amount 120,000 Carrying amount 2,000,000 2,0CO,OOO
Tax base 0 120,000 Trade receivables:
Deposit received in advance:
Tax base · 3,000,000
Carrying amount · 150,000 Carrying amount 2,000,000 1,0UO,OOO
Tax ba:>e 0 150,000 Future deductible amount 3,000,000
Total deductible amount 5io,ooo
Deferred tax Ii"ciliitity(30% x 4,000,000)
--
- --
-
1,200,000
'Deferred tax asset (30% x 520,000) i56,000 Deferred tax asset (30% x 3,000,000) _.2_00,000
Net deferred tax expense 300,000
266
267
Prob~em 18-13 (AICPAAdapted) Solution 18-14 Answer a
Tower Company began_operations on January 1, 2013. ·For fmancial To record the current tax ·expense and increase in deferred tax asset:
reporting, the entity recognized revenue from.all sales under accrual
method Howe~er, in the _income tax return, the entityreported qualifying lncome tax expense 130,000,
sales under the mstallment method The gross prq.fit on these i.nStallment Income tax payable 130,000
sales under each method was: 50,000
Deferred tax asset (200,000- 150,000)
Accrual method· Installment method Income tax benefit 50,000
2013 . ' ~,200,000 1,200,000 Current tax expense 130,000
2014 5,200,000 2,soo;ooo Income tax benefit ( 50,000)

Total income tax expense 80,000

The income' tax. rate is .30%. There are ·no other temporary or
permanent diffe~nces. On December 31, 2014, what.amount should
be ~eported as deferred tax asset or liability? Problem 1S-15 (PHILCPAAdapted)
a.. 1,320,000 asset Boom Company prepared the following reconciliation ofthe financial
· b. 1,320,000 liability ·
c. · 720,000 asset . statement and taxable income for 20 14:
..,.
d. . 720,000 liability 6,000,000
Pretax accounting income
Permanent difference ( 50o,o"oo)
Solution 18- I 3 Answer-b
Temporary difference-c.apitali:z;ed interest
Accrual method - fmancial.or accqunting income
Installment method - taxable income
8,400,000
4,000,000
for book and expensed for tax ( 200,000)
5,300,000
l
~.
Taxable income
Future taxable amount . 4,400,000
Cumulative temporary differences -amo~nted to P300,000 and
Deferred tax liability, Dec.e mber 31, 2014
{4,400,000 X 30o/o) 1,320,000 PSOO,OOO, respectively on December 31,2013 and December 31,
2014. What amount should be reported as deferred tax liability
I
Problem 18-14 (AICPAAdapted) on December 31, 2014? · ·
In the December 31, 2013 statement of financial position, Shin a. 150,000
Company had income tax -payabl~ ofP 130,000 and a deferred tax b. 90,000
asset ofP290,000. The entity had reported a deferred tax asset of c. 60,000
· 1;'15_Q,OOO on January 1, 2Q13. No estimated tax payments were d. 0
made· during 20 13. What amount should.be reported as total
income tax expense for 20 13? Solution 18-15 Answer a
Deferred tax liability -12/ 31/2014 (500,000 x 30%) 150,000
a. 80,000
b. 180,000 The permanent difference has no deferred tax consequ_ence.
c, 100,000
d. 130,000
268 . 269
 Problem 18-16 (IAA)
Soluticm 18-17 Answer a
On January 1, 2013, Bolton Company reported a deferred tax: liability
ofPl ,OOO,OOO and a deferred tax asset ofP400,000. At the end of The bad debts expense is a futUre decluttible temporary difference
2013, the entity reported a deferred tax liabilityofP1,500,000 and and tbcr~fore will result to a deferred tax asset.
.
a deferred tax asset ofzero. What is the deferred tax expense for Deferred tax asset (30% x 400,000) .
2013? . 120,POO
Income tax benefit 120,000
· a. 500,000
b. 900,000 T~e profit fron:t instalJmont sale is a future taxable temporary
c. 400,000 difference and there~ore wUI result to a def~d tax liability.
d. 100,000 Income tax expense . 300,000
Deferred tax liability (lO% x 1,OOO,ooQ) · 300,000
Solution 18-16 Answer b
Increase in deferred tax liability ( 1,500,000- 1,000,000) 500,000 ~ecordingly, the deferred'tax eXJKDC is P180,000 (P300,000 nlinus ·
.. Decrease in deferred tax asset ( 400,000 - 0) . 400,000 tnco~etax ~etit ofP320,000). · ·
. Deferred· tax expense 900,000
Problem 18-18 (AICPAAdapted)
The deferred tax expense is the net effect of the changes in deferred Ori December 31, 2013, Th<U11 Company reported the tax effects
tax 'liability ~d deferred tax asset. Actually, the adjustments on of temporary differences as follows:
December31,2013 are: . ·
1. To record the fucrease in deferred tax liability:_ Deferred tax Related asset
.asset (Habllity) classificalioR
Income tax expense 500,000
Deferred tax liability 500,000 Accelerated tax depreciation (75,000) Noncurrent
Additional cost in mventoty
· 2. To record the decrease in deferred tax asset: for tax putposel 25,000 Current
Income tax expense 400,000 {50,000)
. Deferred tax asset 400,000
The entity anticipated that P 10,000 of the deferred tax liability will
Problem 18-17 (AICPAAdapted) reverse in 2015. On December 31,2013, what amount should be
Sh;earCompanybegan operations in 2013. Included in the 2013 financial reported as noncurrent deferred tax liabilitY?
statements were bad debt expense ofP400,000 and_ profit from an a. 40,000
installment sale ofP 1,000,000. For tax purposes, the bad debts will be .b. 50,000 ·
deducted and the profit from the installment sale ~11 be recognized in c. 65,000
2014. The tax rate is 30%. In the 2013 income statement, what amount d. .75,000
should-be reported as deferred tax expense?
a. 180,000 Solution 18-18 AliS'tVer d
b. 300,000 A deferrc:d tax liabilitY sh:all b_e classified lis noncurrent liability
c. 120,000 and a deferred tax asset shall be classified as noncUrrent asset.
d. 0

270 %71
Problem 18-19 (PIDLCPAAdapt~) Problem 18-20 (AICPA Adapted)
... i • \

QmterburyCompany has one t~poi'ary differen~ at the·end of20 13
that will reverse and cause taxable ·amounts .o fP 1,100,000 in 2014,
P1,200,000 in 20,15 arid P1,200,QOO i~ 2016. The entity l;las also a
qeductible tempo~ difference ofP 1;50~000. The pretax.accounting
income for 2013 is P6,000,000 and th~ tax rate is 30%. There are no
deferred taxes at the beginning of2013.
1. What is the current tax expense for 2013?
~eylisa Company, oiganized on January 1, 2013, had pretax acool.Ulting
mcome·ofP-500,000 and t~~ble inco.me ofP800,000 for the year
ended Drcember 3-1., 201 3'..llte only temporary difference is accrued
product warranty; 6Qsts'that are'e:xpected to be paid in 2014 pi 00 000
2015 P50,000, 2916 P5_0,000 and 2017 1;>100~000. The enticy h~
never had any' net ope~fing losses and does not expect any in the
future. The enacted income tax rates are 35% for 2013 30% for 2014
through 2016, and·25% for 2017. On Decembet 3'1 2013 what
amount should be reported as deferred tax asset? ' · ' ". . ·.,

:a. 1,800,000
a. 105~000·
b: 1,920!000 b. 70,000
c. 1,200,000 c. 85,000
·d . . 2,400,000 d. 60,000
2. Wliat is the net deferred tax expense for 2013? :
Solution .18-20 An.sWer c
a. 1,050,000
2014 (100,000 X .30%) . 30,000
b. 1,200,000
2015 ( 50,000 X 30%) 15,000
c. . 600,QOO 2016 . ( 50,000 X 30%) 15,000
d. 450,000 2017 · (lOO,OOOx25%)
,
~
Solution 18-19 Total deferred tax asset 8~,000

Question. 1 Answer
.
c. Problem 18-21 (IAA)
' Accounting income 6,~,000
Lara Company reported P5,000,000 in revenue in 2013 of which
Future taxable amount ,
(1,100,000+ 1,200,000+ 1,200,000) .· (3,500,000) P2,200,000 will not be included in the tax return until20 14. The enacted
· Future _deductible"amo~t ·12500,000 tax rate is 30% for 2013 and ~5% for 2014. What amount should be
< reported on December 31, 2013?
Taxable income 4,000,000

1,200,000 a. 550,000 deferred tax liability

·Current tax expense . (3~% X 4,000,000)
b. 550,000 deferred tax asset
:
' c. 660,000 deferred tax liability
Question 2 An~er c d. 660,000 deferred tax asset ·
Increase in'deferred tax liabilitY (30% X 3,500,000) ·1,050,000
Increase in deferred tax asset· . (30%x 1,500,000) ( 4502000) Solution 18-21 Answer a
Net deferred tax expense·. 600,000
' ,·.'·
' . J . ' . •
~eferred tax liability'. (25% ~ 2,200,000) . · 550,000

... 272 ' .·. 273

 ,,

Probkm 13-22 [AJCPAAdaj)t-;d) Problem.18-24 \IAA)

On December 31,2013, Ramona Company reported a defe1Ted tax

Aries Company reported a deferred tax asset ~fP9,000 on January 1, liability ofP90,000 which was attributable to a taxable temporary
2013. The 0ntity reported pretax financial income ofP300,000 for difference ofP300,000. The temporary difference is schedu:ed to
2013. Tempora:.-ydifferences ofPJOO,OOOresultcd in taxable income reverse in 2015. During 2014, a new tax law increas,ed the corporate
of P200,000 for 2013. On D~;;cerr:ber 31, 2013, tLe entity had tax rate from 30.% to 40%. What account and amount should be debited
cumulative tz.xabl~ differences ofP70.COO and ro cumulative deductible to record the change in tax rate?
· differences. The income tax rate is 3b%. What amount should be
!·epori.ed as deferred tax expense for 2013: a. Retained earnings P30,000
b. Retained earnings P9,000
a. 12,000 c. Income tax expense P9,000
b. 2l,OCO d. 1-lcome tax expense P30,000
c. 30,000
d. 60,000 Solution 18-24 Answer d

Solution 18-22 .Answer c fncome tax expense (10% x 300,000) 30,000

Deferred tax liability 30,000
Decrease in defer.ec tax asset 9,000
Increase in deferred tax liability (30% x 70,000) 21,000 Problem 18-25 (IAA)

Deferred ta~ expens~ 30.000 NoyCompany had a deferred tax liability due to a temporary difference
.on January 1, 2013 related io excess t1.x depreciation ofP600,000. In
Problem 18-23 (AICPAAdapred) December 2013, the income tax rate is reduced from 30% to 25%
effective January 1, 2015. The taxable amount related. to the'
On Janumy 1, 2011, Marilyn c;ompanypurchased a P:SOO,OOO machine, temporary difference is to be reversed by P300,000 each year for
with a five-yearusefullife and no residual'. alue. The machine was 2014 and 2015. What is the amount of increase or decre-11se in the
depreciated by a.1. accelerated method for book and tax purposes. The deferred tax liability on December 31, 2013?
carrying amount was P240,000 on December 31, 2012. On January
1, 2013, the entity changed to the straight-line method for financial a. 30,000 decrease
reporting purposes. The income t.:rx rate is 30%. On Ja1mary 1, 20 13, b. 15,000 decrease
what amount should be reported as deferred t2x liability ~s a result of c. 15,000 L"lcrease
the change? d. 30,000 increase
a. 120,000 Solution 18-25 Answer b
b. 72,000
c. 36,000 Deferred tax liability- December 31, 2013:
d. 0 2014 (300,000 X 30%) 90,000
2015 (300,000 X 25%) 75,000 165,000
Salution 18-23 Answers d Deferred tax liability- January 1, 2013:
(600,000 X 30%) 180,0Dq
A change in depreciation method lli accounted fer as a change in estimate. Decrease in deferred tax liability '(_~)
Since the treatment is prospective, there is no defened t1.X liability.

274 115
 Solution 19-1

19 Question 1 Answer c
Current tax ~xpense (30% x 7,000,000) 2,1 00,000

COMP~HENSIVE INCOME TAX .. Question 2. Answer c

Increase in deferred tax tiability ( 1,000,000 x 30%) 300,000
Increase in ·deferred tax asset ( 200,000 x 30%) ( 60·,000)
Problem 19-1 (PHILCPAAdapted)
Deferred tax expense 240;,000
Chamber Company reported .the following differences between the
book basis and tax basis of assets and liabilities on December 31, Question 3 Answer c
2013:
Carrying amount Tax base Taxable income , o'ooo
T.oo·
Installment accounts receivable 1,000,000
Installment accounts receivable 1,000,000 0 Litigation liability ( 200,000)
Litigation liability 200,000 0
Accounting income subj ect to tax M.QQ,_OOO·
It is expected that the litigation liability will be settled in 2014. The
- difference in accounts receivable will result in taxable amounts of
Total tax exp~nse .· (7,800,000 X 30%) 2,340,000
P600,000 in 2014 and P400,000 in 2015. The entity has a taxable
income of P7 ,000,000 in 2013 and is expect~d to have taxab~e ·
income in each of the following two years. The income tax rate ts Another approach
.30%. This is the first year of operations and the operating cycle ~f Current tax expense
the business is two years. · 2,1001000
·
Deferred .tax expense 240,000
1. What is the current tax expense?
Total tax expense 2,340,000
a. 2,400,000
b. 2,040,000
c. 2, I 00,000
d. 2,4.60,000
2. What is the deferred tax expense?
a. 300,000
b. 360,000
c. 240,000
d. 60,000
3. What is the total tax expense?
a. 2,460,000
b. 2,400,000
c. 2,340,000
d. 1,860,00b
277
276
Problem 19-2 (AICPA Adapted ) \'n/wion 19-2

ZeffCompanyprepared the following reconciliation ofpretax financial Questio n 1 Answer b

statement income to taxable income for the year ended Deeember 31, Cu!"rent tax expense (1.400,000 x 30%) 420,000
2013, thefirsty earofop erations :
Pretax financia l income Question 2 Answer c
1,600,000
Nontaxa ble interest received ( 50,000) Deferred tux liability (250,000 x 30%)
Long-ter m loss accrual in excess of deductible amount 75,000
100,000
Depreci ation in excess of financia l deprecia tion ( . 250,000)
The excess tax depreciation will result t<;> a deterred tax liability
Taxable income 1,400,000 because it is a futu:e taxable amount.
l; Ifth~ income tax is 30%, what amount should be reported as Questio n 3 Answer a
income tax expens e- curren t portion in.the 2013 income
Deferre d ta~ asset ( 100,000 x 30%)
statement?
a. 465,000 The long-term loss accrual will result to a ceferred tax asset because
b. _420,000 it is a future deductib le amount.
c. 480,000
d. 390,000 Questio n 4 Ansv.er b

2. What amount sliould be reported as deferre d tax liability on Prcta:x financial income !,600,00 0
~ontaxable interest received
Decemb er 31, 2013? ( 50,000)
finan ·::ial income subject to tax !,550,000
a. 30,000 ·- - - -
b. 45,000 .
Total ~a:~ expense (30% x 1,550,00 0)
.
465,000
c. 75,000
d. 0 Anothe r approac h
3. What amoUnt.:should be reported ·as deferre d tax asset on
Increase in d~ferre:d tax liaoitity 75,000
Decemb er31, 2013? !ncre~se in defer;cd tax asset
(30,000)
a. 30,000 Deferred tax expense 45,000
b. 75,000
c. 45,000 Curren~ tax expense
420,000
d. 70,000 Deferr"d tax expense 45,000
4. What amount should be reported as total tax expense for 2013? 465,000
a. 480,000
b. 465,000
c. '420,000
d. 435,000
279
' 278
 Pr.oblem 19-3 (PHILCPAAd~pf~) : Solution 19-3
Bond Company started to manufacture in 2013 copy ~achines t9at
Quf!stion 1 Answer a
are sold _pn the installment basis. The entity recognized revenuewhen ·
equipm ent is ·sold for -financial reportin g J?Urposes, an4 w);>.en Pretax account ing income
2;000,000
in.St,lllment paymen ts are rece~ved for tax purpose s. In 201 J, the Permanent differen ces:
entity recognized gross profit ofP6,000,000 for financial repOrting Interest income . ·
( 500,000 )
puq>Oses, and Pl,500,000 for tax purposes..The an;1ounts of gross- Insurance p~emium
100,000
profit expected ~o b~·recognized for tax purposes in 1014 and 2015
Accountir~ income subject to .ta .
are P2,500,000 arid P2,000,000, r~pectively. Temporary differen ces: x I,600,ooo
The entity guaranteed the copy machin es for two years. Warranty Gross profit on installm ent sale
(4,?00,000)
. CQsts are recognized on the accrual basis for fmancia l account ing Warranty liability
2,000,000
purpose s and when paid for tax purpose s. Warranty ~xpense Operatin g loss carryove r
accnie,d in 2013 is P2,500, 000, but only P500,00 0 of warrant y ., ' ( 900,00Q)
cost is-paid in 2013. It is expecte d that in 2014 and 2015, Warranty liability ·
P 1,000,000 and PI ~000,000 respectively, of warrant y costs will (2,000,0 00 X 30%) 600,000
Operatin g loss carryov~r ( 900,000 X 30%)
. be p~id.'_In addition during 2013, P500,000 interest , net of 20% ''270,000
final _income ~ax, was receive d and earned, and P 100,000 Deferre d tax asset
870,000
insu~ce premium_on life insuranc e policy that covered the life
of the preside nt was paid. The entity is the benefic iary. The tax . Questio n 2 Answ_er b
'rate is 30% ..Pretax accounting income in 2013 was P2,000, 000. Deferre d tax _iiability - (4,500,0 00 X 30%)
Any 2013 operatin g loss will be carried to 2014. 1,350,000
1. What is the deferre d tax a:sset on December 31, QO13? Ques.tion 3 Answer c

a. 870,000 Ac~unting income subjeot to tax 1,600,000

Mu1tip1yby
b. 600,000 30%
c. 270,00_0 Total tax expeo.se
. ~8(!,00(}
d. 480,000
Another approa ch
2. What is the deferre d tax liability on D~em.ber 31, 2013?
Increase in deferred tax liability
a. 1,800,000 1,350,000
Increase in deferred · tax asset
b._- 1,350,000 ( 870,000)
c. 1,500,000 Deferred tax expensa'
480,000
d. 1,32Q,OOO
Current tax expense
3. What is the total ~ax·expense? Deferred tax expense 0
480,000 ·
a. 600,000 Total tax expense
b. 630,000 480,000
c. 480,000 ·
J'he curren t tax expens e·IS zero because .
loss. . . there is an operatin g
d. 0
280
 Solution 1!:J-4
Problem 19-4 {IAA)
Stabilizer Company reported taxable income ofP8,000,000 in the Question I Answer b
income tax return for the year ended December 31,20\3, the flrst Oeferred tax asset - 12/31120 13 .f3 Oo/t
, .., ' 0 (< 1,200,?00) . 360,000 •
year of operations. Temporary differences between financial income.
and taxable income for th.e year are as follo~s: t he accrual for product liab .1.ty .
deductible amount and th 1 ~ m e~cess of a~tual claim a fut,l•·e is
ere ore will result to a deferred tax asset~
800,000
Tax depreciation in excess of book depreciation
Acaual for p1oduct liability claim in excess of Qu~stion 2 Answer a
1,200,000
actual claim Excess tax dep~eciation
Revorted instl\llment ~ales income in excess of 800,000
2,600,000 Installment' sales income
taxable installment sales income 30% 2,.600,000
Income tax rate Total future taxable amount
3,400,000
-·- --
l. What is the def~rred tax asset on December 3 1, 2013?
~---

Deferred tax Habilitv• -12/31/2013 .(30o/c0 X 3,400,0GO)

1,020,000
a. 240,000 Question 3 Answer c
b. 360,000
c. '780,000 Increase in deferred tax liab 'l't 1,020,000
Inc . I J y
d. 0 rease m deferred tax asset
( 36~000)
2. What is the deferred tax liability on December 31, 2013? Deferred tax ~xpense ___§~
a. .·1 ,020,000
Question 4 Answer a
b. 780,000
c. 240,fl00 :raxable income
8,000,000
d. 0 Excess tax depreciation
800,000
• Estimated product claim liabil't 1
3. What is the deferred tax expense for 2013? b1S taI'.ment sales income not included
• Y in taxable . ( 1,20C,OOO)
. . • · mcome 2 600 :')Of\
--1_._._:~.'--!.
a. 1,380,000 Accountmg income subject to tax
. b. 1,020,000 10,200 OvO
=====-~
c. 660,000 Total tax expense (30% x 10,200,000) 3,060,000
d. 360,000 ===--=--=
4. What is the totai tax expense for 2013? Anot:her approach

a. Current tax expense (30% x 8,000.000) ..

3,060,000 " 2,~r~C,v~O
Deferred tax expense - .
b. 2,400,000 ..........(\ ... ,

- ~'
't \

~~
c. 2,580,000 Total tax c: ...mse
3,060,00:1
d. 2,220,000 ===----=.:~-

282 283
Prob ltm 19-5 (IFR S) Solution 19-5
have the
On December 31, 2013 , the accounts of Simple Company fJu estio n 1 Answ er b
t following:
same basis for accounting ~nd tax purposes, e~cep the
l:rctax accounting income
Tax base Difference 13.000,000
Carrying amou nt l•uture taxable amou nt ( 7,000,000)
4,000,000 0 4,000,000 f uture dedu ctible amou nt 2,000,000
Computer software cost
15,000,000 12,000,~ 3,000,000
Equipment · ·• raxablc income 8,000.0CO
2,000,000 0 2,000,000
Accrued liability:health care
In January 2013, the entity incurred cost ofP6,000 ,000 in relation Curr ent tax cxp cns~ (30% x 8.000,0·,0) 2,400,0QO
softw are prod uct. The software
to the development of a computer 3 years for
cost was appropriately,capitalized and amortized over amount Question 2 Answer c
accounting purposes using straight line. H,owever, the total acquireQ.
was expensed in 2013 for tax purposes. The equipment was with no Comp uter software cost
t?quip mcnt
4,000,000
on January 1, 2013 for P20,000,000. The useful life is 4 years 3,000,000
ht line for
residual value,. The equipment is depreciated using the straigpurposes. rota! taxable temp orary ·difference
accounting purposes and sum ofyears ~ digits meth od for
In January?.O 13, the entity entered into an agreement with the
tax
employees Defer red tax liability - 12131120 13 (30o/c0 •x 7' 00 LI •000)
'
--
7,0~0,000

--·
2, 100 000
for 2013 was
to provide healt h care benefits. The cost of such plan
P2,000,000. This amount was accrued as expense
in 2013 for [~ the carrying amount of an asset is hi h7~r~ . +h ---..: :..._
accounting purnoses. However, health care benefits are dedug income
ctible for diff~rez::~e is a future taxable amount and the~e ..., :~ereta:xIS ab.das~, the
ei.em;ci
untin tax habi1 1ty.
tax purposes only when actually paid. The pretax acco
no deferred
for 2013 is P 13,000,000. The tax rate is 30% and there are
taxes on January 1, 2013. De ferred tax asset - 12/311201 3 (30% x 2,000,000) 600,0C'O
1. What is the curr ent tax expense fer 2013? h. h · - · --:
ffthecarryi.ngamountofa liability;'8 llg e~tt,a..T J. ditler.::nce
is a future ded c 1 ·
and there tore,
tax
there
base,
is a
the
defer red tax
a. 3,900,000 asset. uc IIJ e amount
b. 2,400,000
c. 3,300,000 Increase in def~r red t~x liabil ity L,lOO,OOO
d. 1,500,000 Increase in defer red tax asset ,
2. What is the defe rred tax expe nse for 20 13? Defe rred tax expensE>
--
( _j00 ,000 )

a. 2,100,000
b. 2,70C,OOO Question 3 Annl !er a
c. 1,500,000 Total tax expense (30% X 13,000,000)
d. 600,000 3,900,000

.3. Wha t is the total ~a~ expe nse for 2013? Ano~her approach

a. 3,900 ,000 CutTent tax expense 7,400,000

b. 4,500,QOO De ferred tnx expen se 1,500,000
c. 5,100,000 Total tax expen se 3,900,000
d. 1,500,000 =-=====
284 285
 Solution 19-6
Probl em 19-6 (PAS 12)
Quesrion I Answer c
On January l, 2010, Easy Company acquired an equipment·for
P8,000,000. The equipment is depreciated using straight line method Cost Replace ment cost Appreciation
based on a useful life of8 yeat-s with no residual value. On January 1, Equipment 8,000,000 12,000,000 4,000,000
t 2013, after 3 years, the equipment was revalued at
a replacement cost Accumulated depreciation
ofP121000,000 with no change ip the useful life. The pretax accounting ( 8,000,000 X 3/8) 3,000,000
income before depreCiation for 2013 is P lO,OOO, 000. The income tax (12,000,000 X 3/8) 4,500,000 1,500,000
there are
rate is·300/o and no other temporary differences at the beginning CA/SVIRS 5,000,000
ofthey~~ ~ ~QQ 2,500,000
Equipment 4,000,000
1. What is the deferr ed tax lia!>ility on Janua ry 1, 2013 arising Accumulated depreciation
R 1 · 1,500,000
from the revaluation?' eva uatwn surplus 2,500,000
a~ 1,200,000
b: 450,000 The revalu~tion surplus is a taxabl e temporary difference and
\;. 750,000 therefore wtll result to a deferred tax liability:
d. 0 Revaluation surpl~s . . 750 000
Llefen·ed tax habiltt y (30% x 2,500,000) ' 750,000
2. What is the cur're~t tax expense for 2013?
Question 2 Answe r a (30% x 9,000,000) :?,,700,000
a. 2,700,000
b. 3,000,000 • Pretax ~nc.ome before deprec iation
-
-10,000 ,000
·
c. Z,450,000 Deprec1at10n on cost (5,000 ,000/5 ) ( 1,000,000)
d. 3,300,000 Taxable income 9.000,000
3. 'What is the deferr ed tax Uability on Decem ber ~l, ~013 arisirr~ Question 3 Answe r c
from revaluation?
Equipm ent at replac ement cost 12,000,000
a. 750,000 Accumulated depreciation:
b. 450,000 Januar y 1, 2013 (500,0 00
c. 600,000 Depreciation on revalu ed amoun t
d. 0 for2013 (7,500 ,000/5) 1,500,000 6,000,000
4. What is the tota1 ~ax expellse for 201:3? Carrying amount - Decem ber 31, 2013 6,000,000
a. 2,550,000 ' Equipm ent at cost 8,000,000
b. 3,000,000 Accumulated depreciation:
c. 2,700,000 Januar y 1, 2013 3,000,000
d. 3,750,000 Depreciation on cost for 2013 1,000,000 4,000,000
Tax base- Decem ber 31, 2013
5. What is the revalu ation surolu s on December 31, 2013? 4,000,900

a. 2,500,000 Carrying amou~t- Decem oer 31, 2013 6,000,000

b. 1,750,000 Tax base - Decem ber 31, 2013 4,000,000
c. 1,400, 000 Taxable temporary differe nce 2,000,000
d. 2,000,000
287
286
Deferred tax liability- De.cembt;r 31, 2013 Problem 19-7 (AICPAAdapted)
(36% X 2,000,000) 600,000
Deferred taX: liab'ility- January 1,' ~0 13 750,000 Venus Company had no prior deferred tax balances. The worksheet
fo r calculating current and deferred taxes for 20 l3 is as fo llows:
Decrease in defe.rred tax liability ( 150,000)
2013 2014 2015
Jour~al entry
Pretax financial income 1,400
Deferred tax liability . . 150,000 Temporary differences:
Income tax expense ! 50,000 Depreciation ( 800) (1,200) 2,000
Warranty costs 400 ( 100) (. -:lo)O)
Question 4 Ans~er a · Taxable income 1,000
Current tax -expense . . 2,700,000
Decrease in.deferred tax liability ( ·. 150,000) Income tax rate 30% 30% 25%
Total tax expense 2,550,000
Deferred tax asset 105
Deferred tax,liability i40
Proof
.1 0,000,000 l. What is the current tax expense?
Pretax income before dep.reciation
Depreciation on revalued amount ( 1,500,000) a. 420
. 8,500,000 b. 350
Accounting income subject to tax c. 300
d. 0
,Total tax expense (8,500,000 X 30%) ·2,550,000
2. What is the deferred tax expense?
Question 5 Answer c a. 350
2,500,000 b. 300
Revaluation surplus-January 1, 2,0 13 c. 120
Deferred tax liability ( 750,000)
d. 35
Adjusted balance - January 1, 2013 1,750,000
Realization in 2013 (1,750,000/5) ( 3501000) Solution 19-7
Revaluation surplus - December 31, 2013 1,400.,000 .J QuestiC?_n 1 Answer c
C urr ent tax expense (30% x 1,000) 300
Jo.u rnal entry
Question 2 Answer d
Revaluation surpl us 350,00G
Retained earnings 350,000 Deferred tax liability 140
Deferred lax asso..:t 105
Deferred tax ex.pen~•~ 35

288 289
,. '20 Problem 20-2 (PHILCPAAdapted)
Glenn Company provided the folio wing ~foimation on December 31,
SHAREHOLDERS' EQUITY ·
)
2013.

Preference share capital, P 100 par 2,300,000

Problem20-l (ACP) Share premium- preference share . 805;000
Ordinary share capital, P 10 par · 5,250,000
Mara Cotnpa.pyprovided the following data at year-end: Share premium- ordmary share · 2,750,000
Authorjzed sh~re capital 5,000,000 Subscribed ordinC~.iy share canital 50,000
Unissued share capital 2,000,000 Retained earnings 1,900,000
Subscribc::d share capital 1,000,000 Note payable 4,000,000
Subscription receivable 400,000 400,000
Share premium · 500,000 Subscription receivable- ordinary share
Retained earning unappropriated 600,000
Retained earnings appropriated 300,000 What is the amount oflegal c~pital?
Revaluation surplus 200,000
Treasury shines, at cost 100,000 a. 7,550,000
What total amo~t should be reported as shareh~lders · ~uity? · b. 7,600,000
c. 13,055,000
a. 5,100,000 d. 11,150,000
b. 5,500,000
c. 4,900,000
d. .4,800,000 Solution 20-2 Answer b
Solution 20-1 Answer a !'reference share C(!.pital 2,300,000
Ord!nary share capital ,5,250,000
Authorized share capital 5,000,000'
Unissued share capital (2,000,000) : Subscribed ordinary share·eapit~l 50,000

Issued share capl.tal 3,000,000 Total legal capital 7,600,000

Subscribed share capital 1,000,000
Subscription receivable· ( 400,000) 600,000 In case of par value share capital, legal capital is th'e aggregate par
Share premium 500,000 value of all shares issued and.subscribed.
ltetained earnings:
UnapproP.riated 600,000 In the case ofno-par value shar~ capital, legal capital'is the aggregate
Appropriated 3'00,000· 900,000 stated value of shares issued and sul;>seribed plus any excess over stated
Rev~~tion surplus 200,000
value.
.Total 5,200,000
Treasury shares \:._1OO,QOO) 11lls is in accordance with th~ provision of Corporation Code ofthe
Shareholders' equity 5,100,000 Republic ofthe Philippines.
..
The subscription receivable is a deduction from the related
s.ubscribed share capital. However, subscription receivable·:.
collectible within one year is shown as current asset.
291
Problem 20-3 (AICPAAdap ted) Problem 20-5 (AICPAAdap ted)

MUIU1 Company reported the following eguity acco~ts: 1\t the beginning of the current year, Ria Company issued 10,000
ordin~ry shares ofP20 par value and 20,000 convertib le preferenc~
Preference share capital, par value Pl5 2,550,000 shares of P20 par value for a total of P800,000. At this date, th e:;
Share premium, preference share 150,000 ordin"ary share was selling for P36, and the convertible preference
Ordinary share capital, no par, P50 stated value 3,000,000 share was selling for P27. What amount of the proceeds should be
allocated to the convertible preference shares?
What is the number ofissued and outstanding shares for each class?
a. 600,000
Ordinary Preference b. 5402000
c. 480,000
a. 60,000 170,000 d. 440,000
b. 60,000 180,000
c. 63,0QO SoLution 20-5. Answer c
'170,000
d. 63,oeo 180,000 Allocated
Market value Fraction p r oceeds
Ordinary shares (10,000 x 36) 360,000 36/90 .•3:60,000
Solution- 20-3 Answer a
Preference sh<;res (20,000 x 27) 540,000 54/90 480,000
Ordinary shares . .(3,000,000/50) 60,000 900,000 800,000
Preference shares (2,550,000/15) 170,000
Problem 20-6 (AICPAAdapteo)
Problem 20-4 (AICP.AAdapteoJ
At the beginning of the cunent year, Cove Company, a closely-held
East Company issued 1~000 shares with P5 par to Howe as entity, issued 6% bonds with a maturity value ofP6,000,000, together
compensation for 1,000 hours oflegal services performed. Howe with 10,000 ordinary shares ofP50 par value, for a combined cash
usually bills P160 per hour for legal services. On the date of . amotmt ofP 11,000,000. If the bonds were issued separately; they
issuance, the share was trading on apubli~· exchange at Pl40. By would have sold for P4,000,000 on an 8% yield to maturity basis.
what amount should the ~hare premium account increase as a result What amq~nt should be reported for share premiunt un the issuance
of the transaction? · of the ord~nary shares?
a. 135,000 ·
b. 140,000 a. 7,500,000
c. 155,000 b. 6,500,000
d. . 160,000 c, 5,500,000
d. 4,500,000
Solution 20-4 Answer a Solution 20-6 Answer b
Share premium (P140,QOO fair value - P5,o60 par) 135,000 Cash received 11,000,000
Less: Market value of bonds payable 42000,000
When shares are issued for services, the measure should be the fair
Residual amoun t allocated to ordinary shares 7,000,000
value of such services. However, in this case, the fair value ofthe
Less: Par value of ordinary shares (1 0.000 x 50) 500,000
services is not avail,able. The normal billing rate is not necessarily
the fair value of the servi'ces because this amount is likely to be Share premium 6,500,000
negotiable.
292 293
Problem 20-7 (AICPAAdapted) Problem 20-9 (AICPAAdapted)
During the cmrent year, Line Company received a donation of2,000 During the current ye~r, Alto Company declared a 1 for 5 reverse
shares with P50 par value from a shareholder. On that date, the share split, when the market value of share was PlOD. Prior to the
share market value was P350. The shares were origina1ly issued for split, the entity had 100,000 shares ofP1 0 par value issued and
· P250 per share. What is the decrease in shareholders' equity as a outstanding. After .the split, what is the par value of the share?
result ofthe donation? · a. 10
·a. 700,000 b. 20
b. 500,000 c. 5'0
c. 200,000 d. 2
d. 0
Solution 20-9 Answer c
Solution 20-7 Answer d New par value (10 lC 5)
Donated shares not retired are recorded by means of a
memorandum only and therefore do not affect the total shareholders' The reverse share split or share spl;t cown decreases the number
equity. Donated shares not retired are actually treatmry shares of shares to 20,000 but increases the par to P50.
without-acquisition cost. However, the reissuance of donated
shares is credited to share premium. Prcbiem 20-10 r AICPAAd~pted)
As he Company was organized on January 1, 2013 with authorized
Problem 20-8 (AICPAAdapted) capital of 100,000 shares of P200 par value.
Effective December 31,2013, the shareholders ofDorr Company January l0 Issued 25,000 shares at P220 a share
approved a two-for-one split of the entity's share capital, and an Ma. ~h 25 Issued 1,000 shares for legal services when the fair
increase in authorized shares from 100,000 shares with.P20 par vab1e was P240 a share
value to 200,000 shares with PI 0 par value. The shareholders' equity September 30 Issued 5,000 shares for a tract ofland when the fair
a.ccounts immediately before the split shares were share capital value was P260 a share
Pl,OOO,OOO, share .p remium P150,000 and retained earnings What amc~n! should be reported for share premium?
P1,350,000. What should be the balances in the share premium
and retained earnings, respectively, after the share split is effected? a. 840,000
b 300,000
a. 0 ~ 500,000 c. 540,000
b. 150,000 an4 350,000 q. 500,000
c. 150,000 and 1,350,000
d. 1,150,000 and 350,000
So~ution 20-j 0 Answer a
Solution 20-8 Answer c January 10 (25,00G ~ 20) 500,000
March 25 ( 1,000 x 40) 40,000
Share split d~ not affect the elements of shareholdern? equity. Only
St!ptember 30 ( 5,000 x 60) 300,000
'
the number of spares and par value are affected.
I

To~al share premium 840,000

194 29 5
Problem 20- 11 (A~CPAAdapted) Problem 20-13 (AICPAAdapted)
Day,Company held io,ooo shares of P 10 par value as ·treasury Seco Companywas incorporated on January 1, 2013.
reacquired in 2012 for P120,000. On December 31, 2013, the Jan. 2 Number of shares authorized 80,000
entity reissued all 10,000 shares for P190,000. l!nder t_he cost Feb. 1 Number of shares issued 60,000
method of accounting for treasury shares, what 1s credtted for July 1 Number of shares reacquired but not canceled 5,000
Dec. 1 Two-for-one share split
the excess of the r ~issue price over the cost of treas.ury shares?
On December 31, 2013, what is the number of shares outstanding? . .
a. Share capital ofP 100,000
a. 150,000
b.. Retained earnings ofP70,000 b. 120,000
c. Gain on sale of investment ofP70;000 c. us;ooo
d. Share premium ofP70,000 d. 110,000
Solution 20-13 Answer d
Solution 20-1.1 Answer d
Issued shares after split (60,000 x 2) 120,000
Cash . 190,000 Treasury shares after split (5.000 x 2) . ( 10,000)
· Treasury shares 120,000
Outs.tanding shares
Share premium 70,000 110,000
The treasury sha~es are included in the share split.
Probiem 20-12 (AICPAAdapted)
Prob!em 20-14 (AICPAAdapted)
Beck Company issued 200,000 ordinary shares when i~ began
operations in 201.2 and issued an addit~onallOO,O?O sh_ares ~ 20 3. On January 1, 2013, Vey Company had 125,000 shares issued
which included 25,000 shares hel? as treasury.
The entity also issued preference shares converttble mto 10~,( 00
ordinary shares. In 2013, the entity purchased 75,000 ordmary January 1 through October 31 - 13,000 treasury shares were
shares to be held in treasury. On December J 1, 2013, ~ow many distributed to officers as part of?- share compensation plan.
November 1- A3-for-1 share split took effect.
~rdinary shar% were outstanding? December 1 -The entity purchased·S,OOO of tts uwn snares tu
a. 400,000 discourage an unfriendly takeover. These shares were not retired.
b. 325,000 On December 31, 2013, how many shares were l:)'>Uf'ci and
c. 300,000 outstanding, respectively?
d. 225,000 l. 3 75,000 and 33-t,OOO
IJ.375,000 and 324,000
Solution 20-12 Answer d c. 334,000 and . 334,000
d. 324,000 and 324,000
Total ordinary shares issued (200,000 + 100,000) 300,000
Treasury shares ( 75,000) Solution 20-14 Answer a
Ord;nary shares outstanding 225,0QO Issued shares after sol it (125.000 X 3) 375,000
b!d treasury shares · ( 12,000x 3) ( 36 000)
New treasury '.a~;es
{. "',GOO)
0 u tstanding s harr.s 334,00·;
I
' ' 297
Problem 20-15 (AI CPAAdapted)
Problem 20-16 (AICPAAdapted)
Nest Company issued 100,000 ordinar; shares. Ofth~se, 5,00"0 [n 2012, Rona Company issued 50,000 shares ofP l 0 par value for
shares were heid as treasury on January 1, 2013. Dunng 20b, P 100 per share. In 2013, the entity reacquired 2,000 shares at
transactions were as follows: P150 per share and immediately canceled these 2,000 shares. In
coP.nection 'vvith the retirement of shares, 'Nhat amount s·hould be
May 1 000 shares oftreasurywere sold.
1 'debited to share premium and retained earnings, respectively?
Aug. 1 10,000 unissued shares were sold. a. 20,000 and 280,000
Nov. 15 A 2-for-1 share split took effect. b. 100,000 and 180,000
c. 180,000 . and 100,000
On December 31, 2013, how many shares were issued and d. 280,000 and 0
outstanding? Solution 20-16 Answer c
Issued Outstanding Share capital (2,000 x 10) 20,000
Share premium (2,000 x 90) 180,000
a. 220,000 212,000 Retained earnings {balancing) 100,000
b. 220,000 216,000 Cash
222,000 214,000 300,000
c.
d. 222,000 218,000 if ar. enti!';'s share capital is retired, the share capital is reduced by
the par value. If the retirement results in a loss (cost exceeds par
Solutior. 20-l5 Answer c va!ue), such loss is debited to sbarepremium from original (.;sua;ce
' ' first, share premium from treasury shC~res second and retained
eamin~s last.
O:iginal shares issl'ed 100,000
New sl1are!; issued lO,OOQ
Prablem 20-17 (PHILCPAAdapted)
'Total ·shares issued bdorc spiit 110,000
l)omter Company issued all ofth.,. out.standing shares for P.390 per
(11 0,000 X 2) 220,000 :-:hare in 2013. On January 1, 2014, the entity f{';acquired 200,000
Shures issued ::tfter split
. ~·t
( 4,000 X. 2) ( 8,000) shares at P360 per share and retired them. The entity reported the
Trcasmy shaNs after sp •.i.
' following sharehoiders' equity on December 31, 2013·
Outstanding ordinary shares 212,000
Retained earnings .
75,000,000
Share premium
162,000,000
)hare capital, P300 par value, 2,000,000 shares
anthorized, i,800,000 shares issued and outstandi:.1g 540,000,000
What is tb.e balance of the share premium immediately after the
retirement of the s.hares?
a. 156,000,000
b. 150,00C,OOO
c. 144,000,000
d. 168,000,000
298
299
Solution 20-17 Answer b Ptoblem2~19 (AICPMd.apted) .
Share capital (200,000 x 300) 60,000,000 Vicar9ompanyw asorganizedonJa nuary 1, 2013 with 100,000
Share premium- issuance (200,000 x 90) 18,000,000 authonzed shares ofP 100 par value. On Januafy 5, the entity issued
Cash (200,000 x 360) 72,000,000 75,000 shares at P 140 per share and on :Oecember 31, the entity
Share premium- retirement (balancing) purchased 5,000 shares at PliO per: share. The entity used the par
. 6,900,000 yalue method to record ~e purchase of the treasury ~hares. What
The net effect on share premium is debit ofP12,000,000. Thus, the IS the balance of the share premium from treasury shares on
December~ 1, 2013? · ·
adjusted share premium is Pl50,000,000, P162,000,000 minus
P12,000,000. a. 200,000
b. 150,000
c. 50,000
ProkJlem 20- 18 (AICPAAdapted ) d. 0
On DeceMber 31, 2013, Pack Company canceled 5,000 shares of Solution 20-19 Answer b
P25 par value held in treasury at an average cost ofP130 per share.
Before recording the cancelation of the treasury shares, the entity Under the par value method the treasury shares account is debited
at par and-any share ~remium from original issuance is canceled.·
bad the following balances:
Treasury shares (5,000 x·lOO) 500 000
ShaLe capital issued originally at P30 per share 625,000 Share premium- issuance (5,000 x 40) 200:000
Share premiwn 750,000 Cash (5,000 x 110) , 550,000
Retained earnings 900,000 Share premium - treasury shares (balancing) 150,000
Treasury shares, at cost 650,000 Problem 20-20 (IFRS)
On December 31, 2013, what is the share capital outstanding? Polar Company issued 20,000 new P 100 par ordinary shares at a fair
valu.e ofP180 each. The ~tity incurred professional fee ofP400,000
a. 0 and J?temal managei_neJJt rune of~300,.000 in m~ging the process in
b. 250,000 rela~on to the share tssue..What ts the mcrease m equity as a result of
c. 500,000 the1ssuance of shares? ·
d. 625,000 a 3,200,000
b. 3,320,000
Solution 20-18 Answer c c. 2,900,000
d. 2,970,000
Sl:'.are capital 625,000
Par value of treasury shares retired (5,000 x 25) (125,000) Solution 20-20 Answer Q
Share capital outstanding 500,000 Issue price (20,000 x 180) 3,600,000
Professional fee, net of tax benefit (400,000 x 70%) ( 280,000)
Journal entry Increase in equity . 3,320,000

Share capital 125,000 PAS 32,.paragraph 37, provides that transaction costs of an equity
Shr~re premium (5,000 x 5) 25,000 transactiOn are accounted for as a deduction from equity net of tax
Rn.ta :11ed earnings (balancing) 500,000 benefit: Transaction costs include only incremental costs that
would
Treasur. s ares 650,000 otherwiSe have been avoided. Thus, the internal management time in
managing the process i& not considered a transaction cost.
303
.. 301
Problem 20-21 (PlllLCPAAdapted).
. . Solution 20-22 Answer a
Dayron Company had 80,000 ordinary ~ares outstanding in January
Original shares '300,000 .
2013. The entity<lis.tributed a 15% stoek div~dend in Marchand a Stock dividend (1 0% x 300,000) 30,000
10% stock dividend in June. After acquiring 10,000 shares of treasury
Total shares issued before split 330,000
in July; the entity"spli.t the share 4 for 1 in December. How many
Remaining treasury shares ( 50,000)
ordinary shares are outstanding on Df(cemper 31, 20 13?
Outstanding shares before split 280,000
a. 364,800 _
b. 488,000 Shares issued after split (330,000 x 2) 660,000
c. 49'8 ,000 Treasury, shares a~ter split {50,000 x ~) (100,000)
d. 451,500 Outstanding shares after split 560,000

Solution 20-21 Answer a . • Problem 20-23 (AICPAAdapted)

Origin'al shares . . 80,000 Cox Company was organized on January 1, 2013 at which date it
Stock dividend in March (15% x 80,000) 12..00Q . issued 100,000 ordinary shares ofP10 par value atP15 per share.
Duri.n g the period J ariuary 1, 2013 through December~ 1, 2014,
Total 92,000 thf;. entity reported net income ofP450,000 and paid cash dividend
Stock dividend in June (1 0% x 92,000) . 9,200 ofP230,000. On January 10, 2014, the entity purchased 6,000
Total issued spares before spiit 101,200 treasury sb.ares at P12 per share. On December 31,2014, the entity
sold 4,000 treasury shares at P8 per share and retired the remaining
. treasury share~. What is the total shareholders' equity on December
Total issued .shares after split (101,200 x 4) 404,800 31,2014? ' .
Treasury shares after split (10,000 x 4) ( 40,000)
a. 1,720,000
Outstanding shares 364;soo b. 1,704,000
c. 1,688,000
Problem 20-22 (AICPAAdapted) d. 1,680,000
Rudd Company had 700,000 ordinary shares authori~ed and
Solution 20-23 Answer d
300,000 shares outstanding on January 1, 2013.
Issuance of ordinary shares (100,000 x 15) 1,500,000
January 31 Declared 10% stock dividends Net income . .450,000
June 30 Purchased 100,000 shares Cash dividend pai<;l ( 230,000)
August 1 Reissued 50,000 shares Purchase of treasury shares (6,000 x 12) ( 72,000)
November 30 Declar~d 2-for-1 stock split Sale of treasury shares (4,000 x 8) 32,000
Retirement of treasury shares
On December 3l, 2013, how many or<4uary share: are outstanding?
Total shareholders' equity . 1,680,000
a. 560,000
b. 600,000 The retirement of treasury shares affects the eJements of
c. 630,000 shareholders' equity but'no longer affects the total amount of
d. 660,000 Nl1archolders '·equity.
302
Problem 20-.24 (IAA) Problem 20-25 (IAA)
Hatma Company reported the following sbareholde~' equity on January Penn Company began operations on January 1, 2013 by issuing at
1, 2013: . P15 per share one-half of the 950,000 ordinary shares ofJ>l par
value that had been authorized for issue. In addition, the entity
Share capital, P 10 par, outstartding 225,000 shares 2,250,000
Share premium had 500,000 authorized preference shares ofP5 p~value. During
900,000
Retained earnings 2013, the ·entity had P1,025,000 of net income and declared
2,190,900
P230,000 of dividend. During 2014, the en~ty had the following
, During the current year, the entity had the following share transactions: transactions:

* Acquired 6,000 treasury shares for P270,000. * !~sued 100,000 ordinary shares for Pl7 per share.
* Issued 150,000 preference shares for P8 per share.
* Sold 3,600 treasury shares at P50 a share. * Authorized the purchase ofa custom-made mac4ine to be delivered
inJanuary2015. TheentityrestrictedP300,000ofretainedeamings
* Sold the remaining treasury shares at P41 per share. for the purchase ofthe machine.
* Issued additional50,000 preference shares for P9 per share.
What is theJotal amount of share premium on December 31, 20 13? * Reported P l ,2 1'5,000 of net income an9 declared on December
a. 891,600 31,2014 a dividend ofP635,000 to shareholders ofrecord on
b. ~70,000 January 15,2015 to be paid on February 1, 2015.
c. 908,400 What is the total shareholders' equity on December 31, 20 14'! ·
d. 927,600
a. 11 ,850,000
. ' b. 11,550,000
Solution 20-24 Answer c
c. 12,485,000
Treasury shares (P45 per share) 270,000 d. 7,920,000
Cash 270,000
Solution 20-25 Answer a
Cash (3,600 x 50) 180,000
Treasury shares (3,600 x 45) 162,000 Issuance of ordinary shares on January 1, 2013
Share premium·- treasury 18,000 (950,000 X 1/2 X 15) 7,125,000
Net income for 2013 1,025,000
Cas~ (2,400 x 41) 98,400 Dividend declared in 2013 ( 2301000)
Share·premium-- treasu,ry 9,600
Shareholders' equity - Decel)lber 31, 2013 7,920,000
Treasury shares (2,400 x 45) 108,000
Issuance of ord~ary shares · (100,000 J{ 17) 1,700,000
Share premium- issuance January 1 900,000 Issuance of preference shares (150,000 x .8) 1,200,000
Share premium- treasury' 18,000- 9 ,600) 8,400 Issuance of pref~rence. shares ( 50,000 x 9) 450,000
Net income for 2014 1,215,000
Total share premium 908,400 Dividend declared in 2014 ( 6351000)
Shareholders' equity- December 31, 2014 11,850,000

304 305
 Problem 20-27 (IAA)
Problem 20-26 (IAA) . .
Negros Company was incorporated on January 1, 2013 with the Marinduque C01;npaoy reported the following postclosjng trial
balance on_ December 31, 20·13:
following authorized capitalization:
Accounts payable 3,000,000
Ordinary share capital, 200,000 shares, no par, A ~counts receivable 6,000,000
P 100 stated value 20,000,000 Accumulated depreciatiop· 2,500,000
Preference share capital, 200,000 shares, 10% fixed Allo,·rance for doubtful accounts 800,000
rate, P50 par value 10,000,000 Bonds payable ·5,000,ooo
Property, plant and equipment 11,000,000
During 2013, the entity issued 150,000 ordinary shares for a total Cash 2,500,000
ofP18,000 ,000 ;:~nd 50,000 preference shares at P60 per share. In Ordinary share capital (P5'0 par value) 6,00o,OOO
addition, on December 15, 2013, subscriptio ns for 20,000 Dividends payable · · 200,000
Inventory · 8,000,000
preference shares were taken at a purchase price of P 100. These Available for .sale, securities , 3,500,000
subscribed shares were paid for on Januarv 15,2014. Net income Investment in equity securities at cost 2,000,000
for 2013 was P5,000,000. What amount. should be reported as Unrealized loss on derivative contract 500,0QO
tota] contribute d capital on December 31, 2013? . Share premium-: ordinary
In excess of par 5,000,000
a. 28,000,000 From sale of treasury 1,000,000
b. 21,QOO,OOO Preference share capital (P25 par value) 5,000,000
c. 23,000,000 Retained earnings 6,500,000
Treasury ordinary shares- 20,000
d. 26,000,000 at cost 12500,000
Solution 20-26 Answer c 35,000,000 35,000,000
Ordinary share capital- ~50,000 shares "18,000,000 The dividend on cumulativ e preference share is 10%. The
Preference share "t:apital- 50,000 shares x 60 3,000,000 preference share has a ~_)reference in liquidation ofP50. What is
Subscribed preference share capital- 20,000 x 100 2,000,000 the total shareholde rs' equity on D~cember 31, 20 I-3?
Total contribute d capital 23,000,000 a. 22,000,000
b. 21,500,000
Observe that the subscribed preference share capital is already c. 21 '700,000
included in contributed capital ~ecause the subscription receivable d. 23,5J0,000
is collected within one year.
Solution 20.:27 Answer b
Otherwise , the subscripti on receivable is deducted from Ordinary share capital 6,000,000
subscribed sha?e capital Preference share capital 5,000,000
Share premium 6,000,000
Contribut ed capital includes the aggregate par value and any Retained earnings 6,500,000
Treas~·ry shares
share premium but does not include retained earnings. ( 1,500,000)
Unrealized loss on derivative contract (. 500,000)
The cost of treasury sba·res is not deducted in computing Total_shareholder s' equity 21,500,000
contributed capital or paid in capital.

306 307
Problem 20-28 (AICPAAdapted)
In 2013, Oflando Company issued for P105 per shar~, 8,000
convertible preference shares ofP 100 par value. One preference share
can be converted into three ordinary shares ofP25 par value at the
option of the preference shareholder. In August 2013,. all of the
preference shares were converted into ordinary shares. The market
value of the o~dinary share a:t 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 I
Problem 20-30 (IAA)
In 2012, Hyatt Comp~y issued for P 110 per share, 15,000 convertible
preference shares of P 100 par value. One preference share may be
converted'into three ordinary shares ofP25 par value at the option of
the preference shareholder. On December 31 , 2013, all ofthe preference
shares were converted into ordinary shares. The market va]ue of the
ordinary share at the conversion date was P40. What amount should
be credited to ordinary share capital on December 31 , 2013? ·

b. 120,000 a. 1,125,000
'0. 200,000 b. 1,500,000
d. 240,000 c. 1,650,000
Sofution 2,0-28 Answer d d. 1,800,000
Issue price of preference shares (8,000 x P105) 840,000
Par value of ordinary shares issuetl Solution 20-30 Answer a
(8,000 x 3 = 24,000 ordinary shares x P25) 600,000
Share premium 240,000 . To record the issuance ofpreference shares:
Cash (15,000 x 110) 1,650,000
Problem 20-29'(AICPAAdapted) Preference share capital 1,500,000
During 2013, Brad Company issued 5,000 convertible preference Share premium- PS 150,000
shares ofP l 00 par value for P 110 per share. One preference share
'
can be convert~d into three ordinary shru;es ofP25 par value at the To record the conversio_n of preference shares into ordinary sh~es:·
option ofthe preference shareholder. .On December 31, 2013, when
the market value ofthe ordinary share was P40, all of the preference Preference share capital 1,500,000
shares were converted. What amount should be credited to ordinary Share premium - PS . 150,000
share capital and share premium as a result of the conversion, Ordinary share capital (45,000 x 25) 1,125,000
respectively? · ·
Share premium - Ordinary 525,000
a. 375,000 and 175,000
b. 375,000 and 225,000 (15,000 preference shares x 3 = 45,000 ordinary sha~es)
c. 500,000 and 50,000
d. 600,000 and 0
Solution 20-29 Answer a
Issue price of preference shares (5 ,000 x 11 0) 550,000
Ordinary shares at par (5,000 x 3 = 15,000 shares x 25) 375,000
Share premium 175,000

308 309
Problem 20-31 (ACP) l•roblem 20-32 (IAA)

Juan Company was organized on January 1, 2013 with 100,000 Kalinga Company reported the following shareholde rs' equity en
authorized shares ofP 100 par value. The following transactions occurred January 1, 2013:
during the year:
Preference share capital, 100,000 shares, P 10 par 1,000,000
January 15 Sold 30,000 shares at Pl50 per share Ordinary share capital, 500,000 shares, P 10 par 5,000,000
February 14 Issued 2,000 shares for legal services with a fair value Share premium- Preference
ofP300,000. The shares on this date are quoted at P160 50,000
Share premium- Ordinary 200,000
per share .
March 27 Purchased 5,000 treasury shares at a cost of P12 per Retained earnings 100,000
share I >unng the current year, the following transactions we:r;e completed:
October 31 Issued P4,000,000 convertible bonds at 110. The bonds
are quoted at 97 without the conversion feature. Retirement of 5,000 preference shares at P 11 per share.
November 5 Declared a 2-for-1 share split when the market value of
the share was Pl60. Purchase of 5,000 ordinary shares of treasury at P 12 per share.
December 17 Sold 10,000 shares at P75 per share. Share split, ordinary share 2 for 1. '
Reissue of2,000 shares of treasury at P8 per share.
What total amount should be rer..ognized as share premium on December Net inyome for the ye~, P300,000. ·
31, 2013?
What is the total shareholde rs' equity on December 31, 2013?
a. 1,830,000
b. 1,850,000 a. 6,251,000
c. 2,390,000 h. 6,350,000
d. 2,370,000 c. 6,551,000
d. 6,556,000
Solution 20-31 Answer d
Jan. 15 (30,000 X 50 )
Solution 20-32 Answer c
1,500,000
Feb. 14 (300,000- 200,000 ) 100,000 Shareholde rs' equity - January 1
Mar. 27 6,350,000
Retirement of preference shares (5,000 x 11) ( 55,{)00)
Oct. 31 (4,400,000- 3,880,000) 520,000 Purchase of treasury shares (5,000 x 12)
Nov. 5 ( 60,000)
Share split - no effect
Dec. 17 ( 10,000 X 25 . ) 250,000 Reissue of treasury shares (2,000 x 8) 16,000
Total share premium 2,370,000 Net income · 300,000
rssuance of convertible bonds (4,000,000 x 11 0) 4,400,000 Shareholde rs' equity - December 31 6,551,000
' '
Market value of convertible bonds without conversion
feature (4,000,000 x 97) 3,880,000
Sharu premium- conversion feature '~0,000

On November 5, the par value was reduced from PI 00 to P50 because

ofthe 2 for 1 share split. Thus, the issuance on December 17 resulted
in a share premium ofP25 per share.

310 311
 Solution 21-2 Answer d
21 Rc tamed earnings
Note payable
1,000,000
. 1,000,000
Inter.e st expense (1, 000,000 x 10% x 9/ 12) 75,000
RETAINED EARNINGS Accmed in terest payable 75,000

Problem 21-3 (AICPAAdapted)

Problem 21-1 (AICPAAdapted)
Cyar~ Co~pany issued 200,000 shares ofP 5 par ~alu e at p 10 per
Long Company had 10,000 shares issued and outstanding .on~anuary , ~ h are. On January 1, 20i3, the retained earnings amo1.1nted to
1, 2013. On March 15, iheentitydeclared a 2 for 1 shar~ spht when 1' 3,000,000. In March 2013, the entity reacquired 50,000 trcasl!ry
the fair value of share was P80. On December 15, the entity declared·
a P5 per share cash dividend. What amount should be reported as .. shares at P20 per share. In June 2013, the entity sold 10,000 of
dividends? · these shares to corporate offi cers for P25 per share. The entity
used the cost method to record treasury shares. Net income for the
a. 50,000 year ended December 31, 2013 was P600,000. On December 31 ,
b. 100,000
c. 850,000 201 ~' what ~mount should be reported as t.mappropriat~d retained
1.:.1111mgs?
d. 950,000

Solution 21-1 Answer b

n. .3.,600,000
h. 3,650,000
Shares issued on January 1 10:ooo ~. 3,750,000
on
Share split March 15 2-for-1 2
d. 2,800,000
Total shares issued and outstanding 20,000

Dividends (20,000 X 5) 100,000 Solution 2.!-3 Answer d

. .
Problem 21-2 (AICPAAdapted) Rctainect·earnings- January 1, 2013
·3,000,000
Net income of 2013
East Company had sufficient retained earnings in 20 13_as a basis for 600,0QO
1\ppropriated for treasuty shares ( 40,000 x P20) .
dividends but was temporarily short of cas~. The enttt); declared a ( 800,000)
dividend ofPl ,000,000 on April I, 2013, and tssu.ed pronnssorynott:S Un:!pptopriated reta~ned earnings - 12/3 i /2013
2,800,000
to the shareholders in lieu of cash. The notes, which were ~at~dApnl .
1 2013 had a maturity date of March 31, .201 ~ and a 10 Yo mterest
~te. Ho'w should the scrip dividend and related mterest be accounted J L'ga~!Y: the retained earnings must be appropriated to the exter;,t of the
rcmammg cost ofthe treasury shares.
for?
a. Debit retained earnings Pl,IOO,OOO on April I, 2013. 'lite entity reacquired 50,000 treasury shares and subsequently sold
b. Debi' retainedearningsP1,100,000onMarc_hl 131.; 2('0~4. ddeb't I 0,000 treasury shares. 11ms, there are 40,000 treasurv shares !f~mainina
c. Debit retained earnings Pl,OOO,OOOonApn , /. • _,an 1 w1th total cost ofP800,000. • o
interest expense PIOO,OOO on March 3.1, 20 ~4. .
d Debit retained earnings Pl ,OOO,OOO on Apn l I, 2013 and debtt
interest expense P75,000 on December 31, 2013.
312 313
Problem21 -4 (IAA) Problem 21-5 (IFRS)
Lauretta Company reported the following shareholders' equity on <..rlobal Company, a real estate developer, is owned by ti ve founding
January!, 2013: ' ·
sl_1a_r~bolders."On December 1, 2013, the entity declared a property
Share capital l,SOO,OOO dtvtaend of a one-bedroom flat" for each shareholder. The property
Share pt·emium 3t000,000 dividend is payable on January 31, 2014.
Retained earnings 2,000,000
On December 1, 2013, the carrying amount of a one-bedroom flat is ·
The entity bad 400,000 authorized shares ofPS par value, of which P1,000,000 and the fair value is PI ,500,000. However, the fair value
. 300,000sbsres were issued and outstanding. On March 1,2013, the ts P 1,800,000 on Deqember 31 , 2013 and P 1,900,000 on January
3 1, 2014.
entity acquired 50,000 shares for P lO per share to be held as treasury.
The shares~ originally issued at P8 per share. The eqtity ~d the I. What is the div-idend payable on December I, 2013?
cost method to ~unt for treasury shares.
a. 5,000,000
On December 31, 2013, the entity declared and distributed a
a
property ·qividend of inven~iy. The inventory baa P7SO,OOO
b. 7,500,000
c. 9,000,000
~arrying amount and a P 1,000,000 fair value. The net income for d. 0
· 2013 was P2,500,000. What amount should be reported as
unapprop riated retained earnings. on 'Qecember 31, 2013? 2. What is the dividend payable on Det:ember 31, 2013?
a. 3,500,000 a. 5,000,000
b. 3,250,0Q0 b. 7,500,000
c. 3,350,000 c. 9,000,000
d. 3,000,000 d. 0

Solution 21-4 Answer d 3. What amount ofgain is included in profit or loss as a result of the
settlement ofthe property dividend on January 31, 201 4?
Retained earnings - January 1, 2~13 2,000,000
Net income 2.soo.ooo a. 2;500,000
Property dividend of inventory at fair value ( 1,000,000) b. 4,000,000
Appropriated for treasury shares (SO,OOO x PlO) ( 500,000) c. 2,000,000
Unappropriated retained earnings- December 31, 2013 3,000,000 d. 4,500,000

Under International Financial Reporting Interpretations Committee

(IFRIC) 17, paragraph 11, an entity shall measure a liability to
distribute noncash asset as divide.nd to the owners at the.fair value
of the asset to be distributed.
~ other words, a property dividend is recognized as liability at the
fair value of the property. ·

314 315
Solution 21-5
'Problem 21-6J IFRS)
Question 1 Answer b
Fair value ofproperty (S x 1,'500,000) 7,500,000 On November 1, 2013, Grande Company decl ared a property
. . ' .
~dividend of equipment paY.able on March 1, 2Q14. Tl}e carrying
To recognize the.dividend pa~ble on December 1, 2013: amount of the equipment is P3 ,000,000 and. the fair value is
Retained earnings 7,500,000 P2,5 00,000 on November 1, 2013. .
Dividend payable 7,500,000
However, the fa!r value less cost to distribute the equipment is
Question 2 Answer q P2,200,000 on December 31, 2013 and P2,000,000 on March 1,
1.(}1 4. .
Fair value- December 31 , 2013 (5 x 1,800,000) 9,000,000
Fair value - Decemb~r 1, 20 13 (7 ,500,000) ·,L _What is the dividend payable on December 31, 2013?
Increase in dividend p·a yable 1,500,000
a. 2,500,000
Retained e~mings · . . ,1,500,000 b. 2,200,000
Divi~end payable 1,500,000 c. 3,000,000
d. 0
IFRIC 17, paragraph 13, provides that at the end of ea~h reporting
period and at the date of settlement,'lbe entity'shall adjust the carrying 2. ¥[bat is the measurement ofthe equipment on December 3.1, 2013?
amount ofthe dividend payable with any change recognized in equity.
a. 2,.500,000
Question 3 Answer d b. 2,200,000
Fair value- January 31,2014 (5 Jt P1,900,090) 9,500,000 c. 3,000,000
Fair value- December 31;2013 · (9,000,000) d. 2,000,000
Increase in dividend payable 500,000
3. What anwunt of loss on distribution of property dividend is
Retained earnings 50(),000 recognized on March 1, 2014?
Dividend payable 500,000 a. 300,000
Dividend payable -January 31, 2014 9,500,000·
b._ 200,000
Carrying amount of property
Gain on distribution of property dividend
. .
5,000,000
4,500,000
c. 500,000
d. 0

Dividend payable 9,500,000 Solution 21-6

Inventory 5,000,000
Gain on distribution of property'dividcnd 4,500,000 Question 1 Answer b
\
IFRIC 17, para_graph 14, provides that when ·an entity settles the To recognize the dividend payable on November 1,1013: I

)
dividend payable, the difference-bet_ween the carrying amount of the
R..etain.:d earnings 2,500,000
dividend payable and the carrying amountofthe property is recognized
in profit or loss. Dividend payable 2,500.000

316
/
317
To recognize the decrease in dividend payable on December31, 2013: Problem21-7 (IFRS)
D .vidend payable ~OO,OOO .,
Retained eamings 300 000 On January l , 201 3, Easy Company had ordinary and preference shares
Fair value - December 31,2013 2,200,000
outstanding. The incorporators or original shareholdct., own tet:l ordinary
Fair value- November 1, 2"013 (2,500,000) shares but n~ preference shares. On December. 31, 2013, the entity-
declared dividends on the ordinary shares. The entity decided to give
r crease in dividend payable ( 300,0.QQ)
the ordinary shareholders a chojce between receiving a cash dividend
Question 2 Answer b ofP500,000 per share or a proPerty diyjqend in the form of a nonC8$h .
asset. The noncash asset is a standard model from the entity's car fleet.
Carrying amount 3,000,000
Fair value less cost to distribute 2,200,000 Each car has a fair value ofP600,000. The entity estimated that 80% .
of the ordinary shareholders will take the option of the cash dividend
Impairment loss 800,000 and 20% wiU elect for the non~h asset. What is the dividend payable
Impairment loss 800,000
tliat should be recognized on December 31, 20 I 3?
Equipment . 800,000
f\.5,500,000
PFRS 5, paragraph 5A, provides that the classification, presentation b. 5,200,000
and measurement requirements in this PFRS apply also to "a noncurrent c. 4,000,000
asset or disposal group that is classi fled for .distribution to owners". d. 6,000,000
PFRS 5, paragraph lSA, further provid~s that an e_nti~ s~lt measure a
Solution 21-7 Answer b
noncurrent asset or disposal group classtfied for dtstnbutton to owners
at the lower of carrying amount ~nd fair value less cost to
distribute. IFRIC 17, paragraph 12, requires that ifan entity gives the shareholders
uchoice ofreceiving either cash or noncash asset, the entity shall estimate
Question 3 Answer b tho dividend payable by considering both the fair value ofeach alternative
and the associated probabilities of shareholders selecting each alternative.
Fair value- March 1, 2014 2,000,000
Fair value - December 31, 2013 (2,200,000) Cash alternative · (500,000 x 10 x 80%) 4,000,000
Decrease in dividend payable ( 200,000) Noncash alternative (600,000 x 10 x 20%) 1,200,000
Dividend payable 200,000 Ojvidend payable S).OO,ctXJ
Retained earnings 200,000
Dividend payable- ~arch 1, 2014 . 2,000,000 The entry to recognize the declaration on December J.t.:;-2613:
Carrying amount of equipment- December 31, 2013 (2,200,000)
Retained earnings 5).00,000
Loss on distribution of propercy dividend ( 200,000) Dividends payable 5,200,000
Dividend payable 2,000,000
Loss on distribution of property dividend 200,000
Equipment · 2,200,000

~18
 . .
Problem.21-8 (AICPAAdapted) Problem 21-9 (AICPAAdapted)
At the beginning of the current year, Sol Company declared a 10% At the current year-end, Grey Company issued 4,000 ordinary
stock dividend. The market price of the entity's 30,000 outs~nding shares ofP ~ 00 par value in connection with a stock dividend. The
shares ofP20 par value was P90 per share on that date.·The stock market value per share on the date of declaration wasP 150. The
dividend was distribQted on July l, when the market price was PlOO E:hareholders' equity ac~ounts immediately before issuance of the·
per share. What amount should be credited to share premium for stock dividend shares were as follows: . . ·
the stock dividend?
Ordinary share capital P 100 par, 50,000 shares
a. 210,000 authorized, 20,000 shares outstanding 2,000,000
I 'b. 240,000 • Share premium 3,000,000
c. 270,000 Retained earnings 1,500,000
d. 300,000 What amount shaulq be reported as retained earnings immediately after
the stock dividend? ·
Solution 21-8 Answer a
a. 1,100,000
Market value on date of declaration
b. 1,500,000
( 10% X 30,000 = 31000 share X 90) 270,000 c. . 2;100,000
Par value of shares issued as stock dividend
(3,000x 20)
d: 900,000
60,000
· Share premium 210,000 Solution 21-9 Answer a
4,000 shares/20,000 = 20% stock dividend
To tecord the declaration ofthe stock dividex:'clJanuary l:
Retained earning Retained earnings before stock dividend 1,500,000
· 270,000
Stoc.~ dividend (4,000 x 100) ( 400,000)
Stock dividend payable 60,000
Share premium 210,000 Retained earnings ~fter stock dividend 1,100,000
To recorq the issuance of the stock dividend on July 1: ·
Ifthe stock dividend is 20% or more, the par or stated value is debited
Stock diviqend payable 60,000 to retained earnings.
Share capital 60,000
To record the declaration of the stock dividend:
If the stock dividend. is less than 20%, the market value of the
share on the date ofdeclaration is debited to retained earnings. Retained earnings 40.0,000
Stock dividend payable 400,000
However, if market value is !ower than par or stated value, the par
To record the issuance.of the stock dividend:
or stated value is chru::ged to retained earnings.
Stock diyidend payable 400,000
Ordinary share ~apital - 400,000

31.0 321
Problem 21-10 (AlCPAAdapted)
Ray Company declared a 5% stock dividend on 100,000 issued
and outstanding shares of P20 par ~lue, whieh had a fair value of
P50 per share before the stock dividend was declared. "Tb.is stock
dividend was distributed 60 days after the declaration date. what is
the increase in current ~iabilities as a ·result 9fthe stock dividend
declaration?
Problem 21-12 (IAA)
On Janu'ary 1, 2013, Coleen Company had 220,000 PS par value
shares outstanding. On June 1, the entity·acquired 20,000 shares to be
held in the treasury. On December .1, when the market price of the ·
share was P20', the entity declared a.I 0% share dividend to be issu~d
to shareholders ofrecord on December l6, 2013. What was the impact
of the share dividend on retained earnings?

a. 250,000 a. 100,000 decrease

b. 400,000 decrease
b. 100,000
c. 440,000 decrease
c. 150,000
d. Noeffect
d 0
Question 21-12 Answer b
Solution 21-10 Answer d
Outstanding shares (220,000- 20,000) 250,000
Retained earnings (5,000 x 50) 250,000 Share dividend (10% x 200,000 x 20) 400,000
Stock dividend payable (5,000 x 20) 100,000
Share premium 150,000 Problem 21-13 (IAA)
The stock dividend payable is not a current liability but shown as an ·
addition to share capital under shareholders •equity. At the beginning of the current year, Flash Company had retained
earnings ofP4,000,000. During the year, the entity reported net mcome
ofP2,000,000, sold treasury shares at a "gain" ofP720,000, declared
Problem 21-11 (AICPAAdapted)
a cash 9ividend ofPl ,~00 ,000, and deciared and issued a small share
Solace Company declared and distributed 10% stock dividend with dividendof60,000 shares withPlOpru:value when the fair value of the
f1ir -...atue of P 1,500,000 and par value of P 1,000,000, a~d 25% share was P20. What is the amount of retained earnings available for
stock dividend with fair value of P4,000,000 and par value of dividends at the end of the current year?
P3,~00,000. What aggregate amount should be debited to retained
earnings for the stock dividends? a. 3,600,000
a. 4,500,000 b. 4,200;000
b. 3,500,000 c. 4,320,000
c. 5,000,000 d. 4,920,000
d. 5,500,000
Question 21-13 Answer a
Solution 21-/1 Answer c Retained earnings -January 1 4,000,000
Net income 2,000,000
10% stock dividend at fair value 1,500,000 Cash dividend (1 ,200,000)
25% stock dividend at par value 3,500,000 Share di·li.dend (60,000 x 20) ( 1,200,COO)
Total amount debited to retalned earnings s,ooo,ooo Retained earnings - December 31 3,600,000

3ll 323
 Problem 21-14 (CGAC ) Solution 2 I -15 Answer a

The directors of Ontario Compan y whose P50 par value share capital Retained earnings - January I, 2013 8,000,000
Stock dividend declared on Aprill, 2013
is currentl y selling at P60 per share have decided to issue a stock
( 10% x 100,000 shares x P70) ( 700,000)
dividend.. The selling price is not exp ected to be affected by the Net loss .. (l,ZOO,OOO)
stock dividend. The entity, which has an authorization for 1,0.00,000
shares, had issued 500,000 shares, of which l 00,000 shares are Re~aine~ earnings -Decem ber 31, 2013 6,100,000
now held as treasury. In order to capitaliz e P2,400,000 of retained
earning s, what percenta ge should be declared as a stock dividen d Problem 21-16 (IAA)
by the director s? Kiara Company proyided the following data:
a. 10% 12/3112(H3 12/31/20 14"
b. 8% Share c~pital (P 100 par value) 5,000,000 5,10Q,HOO
c. 6% Share premium 2,500,QOO 2,900,000
d. 4% Retained earnings 5,000,000 ?

Solution 21-14 Answer a During 2014, the entity declared and paid cash dividend ofP7 50,000
and also declared and issued a stock dividend. There were·no other
Shares to be issued as stock dividend (P2,40G,OOO I P60) 40,000 changes in shares issued and outstand ing during 2014. The. net
Outstan ding shares (500,000 -100,00 0) 400,000 income for 2014 wasP 1,500,000. What is the balance of retained
Percenta ge of stock dividend (40,000 I 400,000) 10%. earnings on December 31, 20 14?
Problem 21-15 {IAh) a. 5,250,000
b. 5,750,000
Katrina Compan y orovide d tlte toilow il•g mforrnation on Ja.~1Uary 1, c. 5,650,000
2013: d. 6,500,000
Share capital, 250,000 shares authorized;
1OO,OOO.shares issued and outstanding 3,000,000
Solution 21-16 Answer a
Share premium 4,000,000 Retained earning s- December 31, 2013
Retaine d earnings 5,000,000
8,000,000· Net income for 2014 1,500,000
Cash dividend ( 750,000)
The entity declared a 10% dividen d on April 1, 2.0 13 when the Stock dividend
market value of the share v,;as P70. The stock dividen d was issued ( 500~0QQ)
on July 1, 2013 when the market value of the share wasP 100. The Retained earnings -Decem ber 3 1; 2014 5,250,0QO.
share has a par value of P30. The entity sustaine d a net loss of
P l ,200,00 0 for 2013. \Vhat arr...)unt should be reported ·as retained Increase in share capital 100,000
earning s on Decemb er 31, 2013? Increase in share premium 400,~_00
a. 6, l 00,000 Stock dividend 500,000
b. 6,500,000 ----
- ---
c. 6,800,000
d. 5,050,000

324 325
Probleni 21-'17 (ACP) Proi.Jiem 21-18 {ACP)

Zee~mpanyreportedtbefoDoWtnglhareboktera• equitfatdlecurrent On December 31,2013, Multiple Company reported the following

year-end: . ·. balances:
Share capi•aJ, par ns. autb.Driad l~O,Ooo shares, Share capital authorized, P l 00 p;u- 5,000,000
. ss.ooo shares issued of wbkh S~OOO !ihares Share capital unissued 2,000,000
arc in ·treasury . • 1,37S~OOO Subscribed share capital 1,000,000
.Retained ·earn.inas 2,000,JOO .;I'reasury shares, 5,000 at cost 600,000
Treasury shares. at cast ·tso,ooo Share premium 500,000
. . Retained earnings 1,500,000
A 100% stock divi~end was declared and all ofthe ~ury shares
were i 5Sued as stock dividend and the balance from the unissued On Uecember 31, 2013, the board of directors declared and iss~d ·
-shares. The shale has ~et value ofP40. What amount ofretained. a dividend frpm the treasury shares of one share for each ten shares.
eatnings should be capitalized? held. The wuirketvalue of the share on same date is PI 50. What is
a. I ,250,000 the decre~se in retained earnings as a result of the stoc_k dividend?
b. 1,800~000 a. 480,000
c. l,l75,000 b. 525,000
d. 1,125,000 c. 350,000
d. 420,000
SolutitJn 21·.17 A~werc
Shares issued ss,ooo Solution 2 1-18 Answer d
_Treasury shares ( S,OOO) Authorized shares 50,000
Outstandi.ng .50,000 Unissued shares ( 20,000)
Issued shares 30,000
StockcUvidend ahares (100% x SO,OOO) Subscribed shares 10,000
Treasury shares as stQCk dividend To cal 40,000
(5,_000 shares at ~st) Treasury shares ( 5,000)
150,000
Unisslfied shlres as stock dividend at par Outstanding shares 35,000
(4S,OOO X P2S) 1,125,000
Retained earnings-to ~ capitalized Stock dividend shares (10% X 35,000)
1.27S,OOO

That treasury shares may beTeisSl!ed as dividends, in which case Cost of treasury shares reissued as stock dividend
the cost ofthe shares should be charged to retained earnings. (3,500 I 5,000 X 600,000) 420,000

Retained earnings 420,000

To~easury shl;lres . 420,000

326 327 .
 P~blem' 21·19 (PHILC PAAd.apted)
Problem 21-20 (PHILC PA A~apted)
, Beau Company provided the following infonnatio~: C crritos Company began operations on 1anuary I, 20 I 0. During
the fi rst three years of operations, the entity reported net income
Number of shares Amount .md declared dividends as follows: ·
Preference share capital, P500 par value 2,200 1,100,000
Treasur y preferen ce shares, at cost 100
Net io(ome Dividen di declared
110.000
. Ordinary share capital without par value 2010 800,000 0
(at issue price) 3,000 600,000 2011 2,500,000 1,000,000
Retained earnings 2,500,000 2012 ' 3,000,000 1,000,000
D~e to the substantial amount of retained earnings, the Board of The entity provided the following infonnation for 2013:
Dtrectors resolved to pay a 1000/o stock dividend on all shares Income before lnc:ome tax 4,800,000
outstanding, capitalizing amounts of retained earnings equal to the l'rior period error - understa tement
par value and the issue price of the preference and ordinary shares . of 2011 deprecia tion before tax 400,000
outstandihg, respectively, and thereafter to pay a cash dividend of Cumula tive decr~ase in· income from change
.10% on preference share and a cash dividel)d of PI 0 per ordinary in inventor y method before tax 700,000
share. What amount should be reported as retained earnings after Dividen d declared (of this amount, PSOO,OOO
effecting the'dividend transactions? will be paid o~ January 15, 2014) . 2,000,00 0
Income tax rate 30%
a. 2,2_30,000
b. 530,000 What amount should be·reported as retained earnings ort December
c. 580,000 31,2013?
d. 850,000 a. 4~890,000
b. 4,300,000
Solution 2J... J9 Answer c c. 6,090,000
d. 5,390,000
Retained earnings per book
2,500,000
Stock dividends:
Prefere<ncc (2,200 - l 00 = 2,100 x PSOO)
Solution 21-20 A nswer CJ
( 1,050,000)
Ordinar y (3,000 shares at issue price) ( 600,000 ) Net income - 2010, 2011 and 20 12 6,300,000
Ca$h dividends: · Dividends declared - 2011 and 201 2 . (2,000,000) .
Preferen ce (2,100,0 00 x 10%) ( 210,000 ) Retained earnings - January l , 2013 4,300,000
Ordinary (3 ,000 + 3,000 x Pl O) ( 60,000) Net income for 2013 ( 4,800,00 0 x 700~) 3,360,000
Adjuste d retained earnings Prior period error ( 400,000 x 70%) ( 280,000 )
580,000
Cumula tive decrease in income from change in
Preferen ce share capital outstand ing inventory method (700,000 x 70%) ( 490,000 )
(2,l00 + 2.100 x P500) 2,100,000 Dividend declared in 2013 (2,000,000)
Retained earnings - Detemb er 31, 2013 4~890,000
/
318 329
Problem 11-ll(IA A) Problem·21-22 (PHILCPAAdapted)

N&m Company reported the full owing shareholders' equity on January Albay Comp~ny h~ri thP follou.:!ng ch ... ~,..J.,"Jrl,..,..c::, Pf1llitv on January
1, 2013: 1, 2013:
Preference share capital, P l 00 par, 10% cumulative 2,000,000
Preference share capital (PlSd par value, 20,000 shares) 3,000,000
Ordinary .share capital, no par, P5 stated value 5,150,000
Ordinary share capital (PSO par value, 100,000 shares) 5,000,000 '
Share premium . 3,500,000
Share premium 6,000,000
Retained earnings 4,000,000
Retained earnings 4,500,~
Treasury ordinary shares 400,000
On January l, 20 13, the entity sold 20,000 additional ordinary shares
for P90 per share. Late in 2013, it was· teamed that because of * On January 15, 2013, the entity formally retired all the 30,000
mathematical e.rror, an overstatement of depreciation expense by treasury shares. The treasury shares were acquired in January
PSOO,OOO had occurred in 2012. The entity reported net income of 2012. The shares were originally issued at P 10 per sha:-e.
P4,ooo;ooo for 2013. The entity de.clared cash dividend of * The emity owned 10,000 shares ofDigos Company purchased
P 1,000,000 on prt~ference 'shares and P2,000,000 on ordinary
in 2012 for P.800,.000. The Digos shares were included in
shares during 2013. The income tax rate is 30%. What is the balance
noncurrent equity securities. On December 31, 2013, the entity
of r~tained earnings on December. 31 , 20 13?
declared a dividend in kind of one share ofDigos for every
a. 5,850,000 hundred ordinary shares held by a shareholder. The fair value of
b. 6,000,00'0 the Digos share is P90 on December 31, 2013. The dividend in
c. 5,150,000 kind was distributed on March 15, 2011 when the fair value of
d. 5,000,000 D1gos share is P 100.

Solution 21-21. Answer a * On Decem her 31, 2013, rhe entity declared the yenrly cash
dividend on preference share, prJ.yable on January 15,2014. .
Retained earnings - January 1, 2013 4,500,000
Prior period error - overdepr eciation * On January 15, 2014, before the accounting records were
(500,000 X 70%) 350,000 closed for 2013, the entity became aware that rent income for
Net income for 2013 4,000,900 the year ended Decembe r 31. 2012 was overstate d by
Cash dividend - preference ( 1,000,000) P 1,000,000: The after-tax ~ffect on 2012 net income was
Cash dividend - ordinary (2,000,000 ) P700,000. After ..:orr~ctmg ihe rent income, net income for 2013
Retained earnings - December 31, 2013 5,850,000. was P3,000,000.
What amount :;;!<ould be repoi·lf.:J 2s retained earnings on. December
31,20 13?
a. 5,000,000
b. 5,200,000
C~ .5, 1 'JQ,QQ()
d. 4 .8 00,000

:n : 331
Solution 21-22 Answ er c
Retained earni ngs- January 1, 2013
c •••••• _r •••• .. r hw<~~l.&l)' 111uau:;11 uvt;r l:nii.&G
(400, 000- 300,000)
Pwperty dividend ofDig os shares (10,000 x 90)
pd\N
4,000,000
( 100,000)
.22
( 900,000)
Preference dividend (10% x 2,000,000) . ( 200,000)
Overstatement of 2012 rent incom e- net of tax ( 700,000)
Net income for 2013 ' . 3,000,000 APPROPRIATION AND QUASI-REORGANIZATION
Retained earnings - December 31, 2013
S1 100,000
Probl em ll-23 (AICPAAdapted) Problem22-1 (AICPAAdap ed)
On-Ja nuary 1, 2014 ,.Blak e Minin g Comp any decla red a cash On January 1, 2013, Eagle Company reported F1,750,000 of
divid end ofP80 0,000 to shareholders of recor d on Janua ry 15, appropriated, retained earnings for the construction of a new office
'2014 and payab le o~ Febru ary 15, l014. The entity .repor ted the building, which was completed in 2013 at a total cost ofP1,500,000.
following information on December 31,2013: L< 2013, the entity appropriatedP1,200,000 of retained earnings
for
the r.onstruction of a new plant. Also, Pi,OOO,OOO ofcash was restricted
Accumulated depletion 200,000 tor the retirement of bonds d'.le in 2014. In the December 3,1,
Share capital 2013
1,000,000 statement of financial position, what amount should be reported as
Share pr~mium 300,000
Retained ·earn~ngs approrriated retained earnings?
600,000
How much is the liquidating dividend? a. 1,200,.000
b. !,450,000
a. 600,000 c. 2,950,000
b. 300,000 d. 3,200,000
c. 200,000
d. 50,000 "
Soludon 22-1 Answ era
Solution 21-23 Answ er c Onlytne retained earnings appropriated for the con.Striletion of new
plant should be reported.
Dividend declared 800,000
Retained earnings balance The retained earnings appropriated for the construction office
600,000
building should be reverted to unappropriated retained earnings
Liquidating dividend 200,000 r:-ceuse the building is already completed.
Any amou nt paid in exces s of the retained earnin gs balance is The. cash restriction for the retirement of bonds payable does not
a
liquid ating divid end or return of capital. • necessarily require an appropriation of retained earnings.

This liquidating dividend is legal under the wasti ng asset doctr ine 333
embodied in the Philippine Corporation Code.

332
Problem 22·2 (AlCPAAdapted) Pr obJem 22-4 (IAA)
On January 1, 2013, Rama Company bad 20,000 treasury shares of Clvis Company was organized Oll January 1, 2011. After 2 years of
P100 par value that had been acquired in 2012 at P120 per share. In profitable Ofier:ations, the entity reported the following sharehc ldcrs'
December 2013, the entity reissued 1S,OOO of these treas\11)' sharea tt equity:
P 150 per share. The cost method is used to record treasurytransac~ Contributed capital:
On DecE-mber 31, 2013, what amount should be reported as a resmctiOn Share capital, P5 par, 600,000 shares authorized,
ofretained earnings as a result of the treasury share tranuctioru.? 200,000 shares issued and outstanding 1,000,000
Share premium 6,000,000
a. 2,400,000 Retained earnings . 2,800,000
b. 1,800,000
Total shareholders' equity 9,,800,000
c. 600,000
d. 500,000 During 2013, the following chronological transactions affected
shareholders' equity:
Solution _22-2 Answer c
"' Reacquired 10,000 shares at'P30 per share to be held as t:ea~ury.
Remainirig cost of treasury shares (5,000 x 120) 600,000 • Declared and issued a 30% stock dividend.
141 Declared and paid cash dividend ofP 10 per share
Legally, retained eam~rigs must be appropriated equal to the cost of "' Nctincomefor2013 amounted to P3,000,000.
treasury shares.
What amount should be reported as unappropriated retamed ea... ings
Problem 22-3 (AICPAAdapted) on.Dccember 31, 2013?
Mega Company provided the following information: a. 2,745,000
b. 3,045,000
• Dividends on 10,000 cumulative preference shares of 10%, p 100 c. 2,700,000
par value have not been declared or paid for 3 years. d. 2,600,000
..
• Treasury shares were a~ at a costofP1,500,000. The treaswy Solution 22-4 Answer a
shares had not been reissued at year-end. ·
Retained earnings - January 1, 20 13 2,3oo,ono
What amount ofretained earnings should be appropriated? Stock dividend (57 ,000 x 5) ( 235,000)
a. 1,500,000 Cash dividend (247 ,000 x 10) (2/70,000)
b. 1,800,000 Net income 3,000,000
c. 300,000 Appropriated for treasury sbarl!s (10,000 x 30) ( 300.{)00)
d. 0 Unappropriated balance - December 31 , 2013
-2,:'4~.ooc
-- -
Solution 22-3 Answer a Shares issued- January 1, 2013 200,000
Treasury shares (~000)
The pr~fe.rence di'?dends in arrears do not necessarily require
appropnation ofretamed earnings\ Outstanding shares 190,000
Stock dividend (30% x 190,000) __?2,_000
Legally, retained earnings must be appropriated to the extent ofthe
.cost of treasury shares. · Total outstanding shares . 247,000

334 335
 Proble m 22-5 (PHIL CPAA dapted )
Problem 22-6 (AICP .\Adap ted)
Kaiser Company provided the following infbnn ation for the year
ended D.ecember 31, 2013: Brown Compa ny provid ed the following sharell okers· equity on
Decem ber 31, 2013:
Retaine d earning s - uttappropriatedy JaiWal )' 1 200,000
Overde preciat ion of 20 12 due to prior period error · Share capital, P30 par, 100,0'00 shares
100,000 authorized and outstan ding
Net income for 2013 1,300~000
3,000,000
Share premium 1,500,000
Retaine d earning s approp riated for treasury shares
Retained earnings (defic1t) (2,] 00,000)
(origin al balance is P500,0 00. It is reduce d by
~ P200,000 by reason of reissua nce of the
On January 1, 2014, the entity put into effect a quasi-reorganlZation
treasllrY shares)
Retaine d earning s approp riated for conting encies by reducin g the par value of the share to P5 and elL.>ninatingthe
(beginn ing balance , P700,0 00. It is increas ed deficit against share premiu m. Immediately after the quasi-
by current approp riation ofPlOO,OOO) reorgan ization, what amoun t should be reJ::orted. as share Drenilum?
'800,000
Cash dividen ds paid to shareho lders 500,000
Change in a~ounting polity from FIFO to. weight ed
a. 1,500;000
average method - credit adjustm ent
b. 1,900,000
150,ooo' c. 4,000,000
What amoun t should be reported as unapp ropria ted retaine d d. 600,000
earnings on Decem ber 31~ 20 l3? ·
a. l,l50t0 00 Solution 22-·6 Answe r b
b. 1,350,000 ·To reduce the par value of the share:
c. 1,950,000
Share capital (100,000 x 25: 2,500,000
d 1,750,000 Share premium 2,.5{)0,000
Solution 22-5 Answe r b To eliminate the deficit:

Retaine d earni~gs- January l, 2013 Share premium 2,100.000

200,000 Retaine d earning s
Prior pc:riod error- overdepreciatiOI\ 2, !00,000
100,000
Net income 1,300,000 Considering the adju5tments, the sharepremnr-r. accountshouklhave a
Revers al of appFop riation for treasury shares 200,000 balance ofP1,900,000.
Increas e in approp riation for conting encies ( 100,000 )
Cash dividen ds ( 500,000 )
Change in accoun ting.po licy- credit adjustm ent 150,000
Rdaine d earning s unappr opriate d- Decemb er 31~ 20 l3 1,350,000

336
337
 Problem 22-7 (AICPAAdapted) Problem 22-8 (IAA)
Gaston Company had sustained heavy losses over a peiiod-oftime Christelle Company had incurred heavy losses since incepti~m. At
and conditions warrant that the entity should undergo a quasi- the recommendation o.fchief executive officer, the board of directors
reorganization on December 31,2013. - voted to implement a quasi-reorganization, subject to approval of
• Inventory with cost ofP6,500,000 was recorded on December shareholders. Immediately prior to the restatement on December
31, 2013 at the market value ofP6,000,000. 31, 2013, tlie entity reported the following shareholders' equity:
· • Property, plant and equipment were recorded on December 31,
2013 at P 12,000,000, net of accumulated depreciation. The Share capital, PlOO par, 500,000 shares 50,000,000
sound value was P8,000,000. Share premium 5,000,000
• On December 31, 2013, the share capital is P7,000,000 Rctamed earnings (deficit) ( 8,000,000)
consisting of700,000 shares with par value of PI 0, the share
premium is Pl,600,000, and the deficit in retained eamings is·
P900,000. The shareholders approved the quasi-reorganization on January 1,
• The par value of the share is to be reduced from P l 0 to PS. 2014 to be accomplished by a reduction in inventory ofP2,000,000,
a reductipn in.property, plant and equipment ofP4,000,000, writeoff
Immediately after the quasi-reorganization, what is the total of goodwill ofP 1,000,000 and appropriate adjustment to the capital
shareholders' equity?
structure against share premiunifirst and any remaining deficit against
a. 3,300,000 the share capital account. To implement the quasi-reorganization,
b. 3,500,000 what_ is the reduction in the share capital account?
c. 3,700,000
d. 4,200,000 a. 10,000,000
b. 15 000,000
Solution 22-7 Answer c c. 20,000,000
To reduce tb~ property, plant and equipment to sound value: d. 3,000?000
Retained earnings 4,000,000
Accumulated depreciation Solution 22-8 Answer a
4,000,000
To reduce ~be par value of the share: Deficit 8,000,000
Reduction in inventory 2,000,000
Share capital (700,000 x 5) 3,500,000
Share premium 3,500,000
Red~ctio~ in PPE 4,000,000
Writcoff of goodwill 1,000,000
To eliminate the deficit:
Total deficit 15,000,000
Share premium 4,900,000
Retained earnings 4,900,000
Charged against share premium 5,000,000
The inve~tory is not adjusted anymore because it is already recorded Reduction of'share capital 10,000,000
at market value. After adjustment, the resulting balances are:
Share capital 3,500,000
Share premium 200,000
Total ~hareholders' equity 3,700,000

338 339
 ,\'olution 22-9 Ans wer a
Proble~ 22-9 (IAA)
Reta ined earnings 500,000
Adverse financiai and operating circumsta
n~ wa fnventory
Company should undergo a quasi-reorganizatio rra nt that Solid. 500,000
n on Dec em ber 31, Retained earnings
2013. The following information may be 1,500,000
relevant in accounting Accumulated depreciation
for the quasi-organization. 1,500,000
Cash 4,000,000
• . Inventory with a fair value ofP2,000,000 Share premium
is currently recorded in 4,000,000
the accounts at cost ofP2,500,000.
Share capital (100 ,000 x P20) 2,000,000
• Plant assets with a fair value ofP7,000,000 Share premium 2,000,000
are ~urr
at P8,SOO,OOO net ofaccwnulated depreciation. ently recorded Share premium
· 5,000,000
* Individual shareholders contribute P4,000,000
to create additional
Retained earnings 5;000,000
capital to facilitate the reo~zation. No new Share premium per book 1,750,000
shares are issued.·
Reduction of,par
• The par value of the share is reduced from P25 to P5. Cash contribution from shareholders
2,000,000
4,000,000
The ~bareholders' equity before the quasi-reorg Ulirni.'lation of deficit (5,000,0 00)
anization comprised ·
the folloWing: Adjusted share premium 2,750,000
Share capital, P25 par value, 100,000 shar
es
authorized and outstanding
Share premium 2,500,000
Retained earnings (deficit) 1,750,000
(3,000,000)
. 1._.250,000
After the ~uasi-organization, what is the
balance of the share
premiwn?
a. 2,750,000
b. 3,250,000
c. 3,750,000
d. 1,750,000

341
340
Problem 12-10 (AICPAAdapted) 1. Wl!.at is the increac;e in c;hare premium arising from the issuan~e of
400,000 shares on February 15?
Jade Company reported the following shareholders· <;qui ty on J~uary
1, 2013. ~ a. 4,000,000
b. 5,000,000
Share capital, 1,500,000 shares l,SOOtOOO c. 4,600,000
Share premiiun 15,000,000 d. 400,000
Retained earnings 8,100,000
Treasury. shares, 100~000 at cost ( 900,000) 2. Vlhat is the decrease in share p~erruum arising :fi·om the retirement
of 100.000 shares on September 15?
All ofthe outstanding and treasury shares were originally issued in 20 11 ·
.for P 11 per share. The treasury shares are reacquired on March 31, a. 1,300,000
b. 0
1,200,000
2012. During 2013, the following events or transactions occurred c. 1,000,000
relating to shareholders' equity: d. 100,000
"' February 1S- Issued 400,000 shares for P 12.50 per share. 3. What amount of loss contingencies should be appropriated by a
charge to unappropriated retained earnings?
• Jun~ 15 -Declared a cash dividend of P0.20 per share to
shareholders ofrecord on April 1 and payable on April 1S. This a. 1,000,000
· was the first dividend ever declared. b. 600;000
c. ~00,000
• September 15-The presid"'nt Ietired. The entity p\U·chased from d. 500,000
the retiring president 100,000 shares for p 13.00 per share which
was equal to market value on this date. These shares were canceled. 4. What amount of cash di.viden9 should be charged against
unappropriated retained earillngs in 20 l3?
* December 15- Declared a cash dividend ofP0.20 per share to a. ·,oo,ooo
shareholders ofrecord on January2, 2014, and payable on January b. 680,000
15, 2014. c. 360,000
d. 340,000
* On December31, 2013, the entity is being sued by two separate
parties for patent infringement. The management and outside legal 5 'Nhat amount should be re;orted in the notes to financial statements
counsel share the following opinion regarding these suits: as restriction on retah-'led earnings because ofacquisition oftreasury
shares?
Likelihood Estimated
Suit of losing the suit loss a. 200,000
#1 Reasonably possible b. 900,000
600,000
c. 1,200,000
#2 Probable 400,000
Q. l ,300,000

342 • 343
Solution 22-10
Question 1 Answer c 23
Cash 5,000,000 .
Share capital (400,000 x 1.0) SIIARE-.SASED COlVIPENSATION
Share premium ' (400,000 x 11 .50)
Share options
Question 2 Answer c
Problem 23-1 (IFRS)
Share capital (lOO,OOOx 1) . ~OO,OO(f
S~premium (100,000 X 10) 1,000,000 lnsh Company granted l 0,000 share options to each of its five directors
Retained earnings 200,000 <.m Januar; 1, 4,013. The options vest on January 1, 2017. The fair
Cash (100,000 x 13) 1,300,000 valucofeachoption on January l, 2013 is P50 and it is antictpatcd that
'
nil of the share options will vest on January 1, 2017. What amount
Question 3 Answer b should be repor~cd as increase in expense and equity for the year enc!ed
December31, 2013?
Suit No. l is·a possible loss and therefore req~ires only disclosure
which may be done by appropriation ofrentained earnings. a. 750,000
b. 500.000
Suit No. 2 is aprobable loss and therefore requires accrual to expense. t:. 625,000
d, 125,000
Question 4 Answer a
Solution 23-1 Answer c
June 15 1,800,000 shares x .20 360,000
December 15 1,700,000 shares x .20 . 340,000 fair value ofsbare Options (10,000 X5 X 50) 2,500,000
"T~tal cash dividend 700,000
Compensation expense for 2013 (2,500,000 /4) 625,000
Questio~ 5 Answer b
1he entry to recognize the compensat·on for 2013 is:
Legally, retained earnings must be appropriated eq~al to the cost of
Salari~s 625,000
treasury shares ofP900,000. ·
Share options outstanding 625,()00
T:1e share options outstanding ac~ount is part of equity as share
prem1um.
PFRS 2, patagraph 10, mandates that th.e fair value method shall be
used in measuring the compensation ansing from sr -~~·e options. This
means that tr.~ compensation is equal to the fair' value of the share
options on the dale of grant. The compensation IS recognized as
expens~ over the vesting or senk~ period of4 years.

344
Problem 23· 2 (AICPAAdapted) Problem 23-4 (IAA)
In connection with a share option.plan for the benefitofkeyemp]oyees,
Ward Company intends to distribute treasury shares when the options On June 30, 2013, Newman Company granted compensatory shan~
urc exercised. These shares were bought in 2012 at P42 per share. On options for 30,000 P20 par value ordinary shares to certaia key
.January 1. 2013, the cntitygrantcdshareoptions oflOO,OOO shares at employees. The market price of the share on that date was P3 6 ar.~~ t!:~
an option price ofP38 per share as additional compensation for services option price was P30. The Black-Scboles option pricing mcdel
to be rendered over the next three years. The options are exercisable . measured the total compensation expense to be P5,400,000. The
during a 2-year-period beginning January 1, 2016, by grantee still
options are exercisable beginning January i, 2016, provided the key
employed by the entity. Market price of share was P47 at the grant
date. The fair value of the share option is P 12 on grc:Ult date. No share emp_loy~ are still in entit)ls employ at the time the option.<> are exerc(sed
opti<ms we~ tenninated during 20 13. What amount should be reported The options expire on June 30,2017. On January iS, 2016, whe1' 1.he
a} cc-rnpensation expense for 20 13? market price of the share was P42, all30,000 options were exercc,-.;d.
a. 6~J0,0\>0 What is the compensation expense for 201S'J
b. 400,000
c. 300,000 a. 2,16Q,OOO
d. 450,000 b. 2,700,000
Soft.lion 23-2 Answer b c. 5,400,000
d. e
Fair value of shure options (I 00,000 x 12)
Solution 23-4 Answer a (5,400,000 I 2.5 ycrr5' L-,16( ~~~.)0
~"'ompcnsation fvr 2013 (1,200,000 /3) 400,000 --·-··--
--- --
-·- -
Problem 23-5 (fAA)
P~·oblem 23-3 (AICPAAdaptcd)

On January 1,2013, Oak Company granted share options to certain On January 1, 2013, Greece Company granted an '..;P ;p:o;'ee ar: :'" io· :
key employees a~ additional compensation. The options were for to buy 20,000 shares tor r~o pP-r share, ·the optio:' ;·. :;r-::i.sabii_ for
100,000 ordinary shares ofP 10 par value at an option price ofP 15
·per share. Market price of this share on January 1, 20 13 was P20. The three years from January 1, 2015. Using a fairvalu.(· ,,pt:or• :'1 ' t.~ing
fair value of .'ach 1,hare option on January I, 2013 is P8. The options model, total compensation expense is dete1mi.ncd to ue P24G,OOU. The
were exercisabJt; beginning January 1, 2013 and expire on December employee exercised the option on September 1, 201 5, J'1d s •..'lG tl.J.e
31,2014. OnAprill, 2013, all share options were exercised. What 20,GGO shares on December t, 20 15 '~·he ,~~, • !O~ pc.rr.... d if f'·:H t',v'o
an:ount of compensation expense should be reported in 20 13? years beginning January l, 20 13" What ~~mou ni. should be reccgnized
a. 800,000 as ~01npensation expense for 2013?
b. 500,000
c. 200,000 a. 240,000
d. 125,000
b. 120,000
Solution 23-3 Answer a (;. t 60,000
Fair value cf share options ( 100,(JOO x 8) d. 80,000
800,000
Ifthf oprions vest immediately, the total fair value of the share options Solution 23-5 Answer b (240,00C I 2)
til be recognized immediately in full as experue.
346 347
/
Problem 23-6 (AICPA Adnptcd )
On January I, 201 3, K.Jine Company granted Morgan, the president, Problem 23-7 (lfRS)
compensatory share options to buy I0,000 ordinary shares of P 10 On January 1, 20 i3, Kamago ng Compan y granted 100 share options
par value. The options call for a pnce c..1f P20 per share and are each to 500 employees, conditional upon the employee's remaining in
exercisable in 3 years followin g the grant date. Morgan exercised the entity's employ dming the vesti.ng petiod. The share optic as vest at
the options on Decemb er 31, 2013. The market price ofthe share the end of a three-year period. On gram date, each 1:harc option has a
was P60 on January 1, 2013. and P70 on Decemb er 3 I, 2013. fair value ofP30. The par value per share is Pl 00 and ihc option price
The fair value of the share optiOn is P30 on the date of grant. What is P 120. On December 31~ 2014, 30 employees have left and it is
is the net increase m shareho lders' equity us a result ofthe·1:,rrant and expected that on the basis of a weighted., verage prob.ability, a further
exercise of tile optiOns'? 30 employees will leave before t!1e end of the three-year period. On
a. 200,000 December 31, 2015, only 20 employees actually left and all of the
b. 300,000 share options are exercised on such date. What is the compensation
c. 500,000 expense for 2015?
d. 700.000 a. 500,000
b. 880,000
Solution 23-6 Answer a . c. 380,QOO
To record the compensation for 2013: d. 470,000
Salaries ( 10,000 x 30) 300,000 Solution 23-7 Answer d
Share options outstanding 300,000 20 13
Observe that the options vest lmmedi ateJv and therefore·the total .fair Fair value of share options (500 x 100 x 30) 1,500.000
value of the share options is recognized as ~xpenre in full in 2013. The
effect ofthe enny on shareholders' equity is offsetting. Compen sation expense for 201 3 ( 1,500,000/3) 500,000
To record the exercise of the options on December 31, 2013: .l014
Cash ( 10,000 x 20) 200,000 ~umber of employees 500
Share options outstanding 300,000 Employees who left in 2014 ( 30)
Ordinar y share capital (1 0,000 x 10) 100,000 Employees expected- to leave (_30'
;
Share premium 400,000 Employees entitled to share options 440
The effect of the entry on shareholders' equity is a net increase of Fair value of share options (440 x 100 x 30) 1,320.000
P200,000, equal to the cash received .
Cumulative compensation for 2013 and 2014
( 1,320,000/3 Xi) . 880,000
Compensation expense recognized in 2013 ( 500,000)
Compensati on e:-.pense in 2014 380.000

,.
~
.. ~ .

349
 2015 '] {l 11.1

Number of employees Ftur v31ue ofshar~ opti0ns (30,000 x 30)

500
Employees who left in 2014 ( 30} Cumulative comjJensatio n for 2013 and 20 l4
Employees who left in 20\5 ( 20) (900,000/3 X 2) 600,000
Compensati on expense recognized in 2013 (30~,000)
Employees entitled to share options 450
Compensati on expense in 2014 300,000
Fair value of share options (450 x l 00 x 30)
- -
1,350,000
Cumulative compensation for 2013 and 2014 ( 880,000) The fair value of the share option is· still P30 because the sales
increased by -12% in 2013 or an average of 11.5% for two yc£!rS
Compensation expense in 2015 470,000
2015
Problem 23-tl (;FRS) Fair value of share options (30,000 x 25) 750,000
Cumulative compensatio n for 2013 and 2014 (600,0_00)
On January 1, 2013, Paranoid Company granted to a senior cxccufive
30,000 share options, conditional upon the executive's remaining in the Compensati on expense in 2015 JSC,OOO
entity's employ until.December 31,2015. The par value per share is
The fair value of share option is only P25 because the sales increased
PSO. The exercise price is P 100. However, the exercise price drops to by 4% in 2015 or an average of 9% only for 3 years (ll % plus
P80 ifthe entity's earnings mcrease by at least an average or 10% per 12% plus 4% divided 3 equals 9%).
year over the three-year period. On grant date, the entity estimated
that the fair value of the share option is P30 ifthe exercise price is P80. Problem 23-9 (IFRS)
~fthe exercise price is PlOO, the fair value of the share option is P25. On January 1, 2013, Nova Company granted share options to each
·During 2013 and 2014, the earnings increased by 11% and 12% of the 300 employees working in the sales dcpartmen" Th~ stare
respectively. However, during 2015, the earnings increased only by options vest at tile end of a three-year period pr.ov\~ed. th:lt tht;
4%. What amount should be recognized as compensation ~xpense in employees remain in the entity's employ and prov1ded the volume
2015? of sales will increase by mor~ than 10% per year. The fair value of
each share option on grant date is P30. If the sales incre.:>.se by
a. 300,000 more than 10%, each employee will receive 200 s( :ce options. If
b. 600,000 the sales increase by more than 15%, each eMployee will receive
c. 150,000 300 share options. On December 31,2013, the sales increas~d by
d. 750,000 mere than 10% but not more than 15%, and no employees h:A\<e left the
Solution 23-8 Answer c entity. On December 31, 2014, sales increased by more th~·l5% and
no employees have left. On December 31 ,2015, the sales·mcrcascd
2013 by more than 15% 'and 50 employees left the entity. Wh::tt amount
Fair value of share options (30,000 x 30) 900,000 should b,e recognized as compensation expense for 2015?
Compensation expense for 2013 (900,000/3) 300,000 a. 1,200,000
b. 2,250,000
The fair value of share option is P30 because the sales increased by c. 900,QLlO
11% in 2013. d. 450,000

350 351
Solution 23-9 Answer d Problem :!340 (IAA)
2013 Vicar Company initiated a performance-based employee share opti on
Fair value of share options (.300 x 200 x P30) 1,800,000 pbn ~n ;anuaFY 1, 2013. The performance base for the plan is nei.
sales m the year 2015. The plan provides for share options to be
Compensation expense for 2013 ( 1,'800,000/3) 600,000 awarded to the employees as a group on the following basis:
..
The sales· increased by more than l 0% but not more than 15% in Lcve 1 . Net s~ les· range Options gran ted
2013 and therefore, each employee is entitled to 200 share options. l Less than 2, 500,0GO~ 10,000
2 P2,500,000- 4,999,999 20,000
1014 3 P5,000,000- I 0,000,000 30,000
4 More than 10,000,000 40,000
'~eir value of share options (300 x 300 x 30) 2,700,000

·Cumulative compensation for 2013 and 2014 The options become exercisable on January 1, 2016, T.Je op~ion
(2,700,000/3 X 2) 1,800,000 cxcercise pnce is P200 per share. On January 1, 2013, ~ach option
Compensation expense recognized in 2013 ·( 600,000) had a fair value ofP9Q. The share market prices on selected dates
in2013-2015 were as follows:
Compensation expense in 2014 1,200,000
January 1, 2013 250
December 31 , 2013 300
Each employee is entitled to 300 share options because the sales
December 31,2014 350
increased by more than 15% in 2014. December 31', 2015 320
2015
Sales each yearwer~ as follows:
Number of employees 300
Employees who left in 2015 (JQ) 2013 4,500,000
Employees ertitJed to share options . 250 2014 5,500,000
2015 7,000,000
Fair value of share options (250 x 300 x P30) 2,250,000
Cumulati~e compensation for 20 13 and 2014 (1,800,000) What amount should be recognized as compensation ex.per..se .fc)r 2015?
/

Compensation expense in 2015 450,000 a. 1,200,000

b. 1,800,000
Each employee is entitled to 300 share options because the sales c. 600,000
increased by more than 15% in 2015. , d. 900,000

Solution 23.,.10 Answer d

2013
Fair value of share options (20,000 x 90) 1,800,000

Compensation expense for 2013 (1,800,000/3) 600,000

- --
352 353
The sales revenue of P4,500,000 in 2013 is within the Level2 range P!·ot...lem 13-12 (lFRS) .•

and lhereforc, the employees are entitled to 20,000 share options.

On ranuary 1, 2013, Cuba Company grru:ted to a ~en~or execu.ti\:e
2014 10,000 share options p ·ovide9 the executtve rernams m ~he.enttty s
employ until December 31, 2015. However, the share opt10ns cannot
Fair' .luc of share options (30,000 x 90) 2,700,000 be exercised unless the share price has increased from P50 on
Cumulative compensation for 2013 and 2014 January 1, 20.13 to above P65 on December31, 2015 . Ift~c share
(2, 700,000/3 X 2) 1,800,000 price is above P65 on December 31, 2015, the share opt10ns ~an
Compensation expense recognized in 20 I 3 ( 600,000) be exercised at any time during the next 5 years. The entlty apphed
a b~omi~l option pricing model and estimated that the fair v~lue of
Compensation expense in 2.014 12200~000 the share options with this market condition on grant date IS P24
7
per option. What is the compensation expense for 2013? .
The sales revenue ofP5,500,000 in 2014 is within the Level3 range
and therefore, the employees are entitled to 30,000 share options. a. 240,000
2015 b. 802000
c. 48,000
Fair value of share options.(30,000 x. 90) 2,700,000 d. 0
Cumulative compensation for 2013 and 1014 (1 ,800,000)
Compensation expense in 2015 900,000 Solution 23~12 Answer b
Fair value ofshare_opt'ions (10,000 x 24) 2.10,000
The sales revenue ofP7,000,000 in 2015 is within the Level3 range
and therefore, upon vesting the employees are entitled to 3(},000 Compensation expense for 2013 (240,000/3)
share options.
· Problem 23-13 (IFRS)
Problem 23-11 (IFRS)
Rose Company has granted share options to its employees with a
Esmeralda Company issued fully paid shares to 200 employees on
December 31, 2013. Normally, shares issued to employees vest fair value of P6,000,000. The options vest in three years. The
over a two-year period but these shares have been given as a bonus Monte-Carlo model was used to value the options. On January 1,
to the employees because of their exceptional performance during 2013, which is the date of grant, the estimate of employees leaving
the year. The shares have a market value ofP500,000 on December the entity during the vesting period is 5%. On December 31, 2014,
31, 2013 and an average fair value ofP600.000 for the year. What the estimate of employees leaving before vesting date is revised to
amount should be expensed for this share-based payment 6%. On December 31,2015, only 5% of the employees actually
transaction?
left the entity. What is the compensation expense for 20 15?
a. 600,000
b. 500,000 a. 2,000,000
c. 300,000 b. 1,900,000.
d. 250,000 c. 1,880,000
Solution 23-11 Answer b d. 1,940,000
Fair value of share options - December 31, 2013 500,000

354 355
 ,fr..·t.CI! 23 , 'f
Solution 23-13 Answer d
Ow:Hion 1 Answer c
Cum.ulativc compensation - Decembe r 31, 2013
(6,009,00 0x 95% 13) : otal .::ompcnsatiou 8.000.000
1,900,000
l ~•mrcn:;ation ·in 2013 l2,000,000)
· Cumulati ve compens ation- Decembe r 31., 2014 Compensa tion tn 2014 (2 , 100,000)
(6,000,00 0 X 94% /3 X 2) 3,760,000 Compensa tion in 2015 3,900,000
Cumulati ve compens ation- Decembe r 31, 2013 (I ,900,000)
Compens ation expense in 2014 Pr:·Rs ~·paragraph 28, provides that ifthere is an acceleration ofvesting,
1,860,000
' 1 ~ entity shall recognize im.r.1.ediatcly the compensation e~pense that

Cu_mulative compens ation- Decembe r 31, 2015 ot 1'~r.vise would have been recognized for the remainder of the vesting
(6,000,00 0 X 95%) 5,700.000 pcnod.
Cumulati ve compens ation- Decembe r 31, 2014 (3,76(),000)
Compens ation ~xpense in 2015 Quesrion 2 Answer c
1,940,000 ..
Cash payment 7,500,000
Problem 13-14 (IFRS) Compensation for 20 1.) (2,000,000 )
C'or:-tpensa tion for 2014 (2, 100,000)
Roxanne Company has granted share options to the employees. The
tatal compensation expense to the vesting date ofDecember 31, 20 16 Compeosation for 2015 3,400,000
has been calculated at P8,000,0.00. The entity has.decided to settle
the award early on December 31, 2015. The compensation expense ?cr:tgraph 28 further provides that any payment made w employl.!es
charged since the date of gr~nt on January l, 2013 was P2,000,000 on the cancelation or settlemem ofthe grant of share options shall oc
for 2013 and P2, 100,000 for 2014. The compensation expense that accounted f()r as repurchase of eqt:ity interest. Iftbe payq1ent c.A:ct>eds
would have been charged in 2015 was P2,200,000. the fc.ir value of share options,. the excess is recognized as au. exp~nse.
1. What is the compensation expense for 20.15?
.Journal entry to record the payment
a. 2,200,000
b. 8,000,00 0 Sl:n.:: options outstanding 4,1 )0,000
c. ),900,.00 0 Sr.laiies 3,400,000
d. 2,ooo,oqo Cash 7,500,000

2. What is the compensation expense for 2015 if the share options

are not exercised but instead the entity paid P7 ,500,000 to the
employees?
a. 2,200,000
b. 3,900,000
c. 3.400,000
d. 7,500,000
357
356 /
Problem 23-15 (IFRS) 'lolution 23~ 16 Answer b
Ivy Company, an unlisted entity, decided to issue 1,000 share options The intrinsic value me~hod i<; f9llowed ifthe fair value of the share
to"" employee in lieu of many years' servjce. However, the fair options cannot be measured reliably.
value of the share options cannot be reliably measured as the
entity operates in a highly specialized market where there are no The intrinsic value is equal to the excess ofthe market price of
comparable entities. The exercise price is P 100 per share and tpe the share over the option price.
options were granted on January 1, 2013 when the value of the
shares was also estimated at P100 per sharer On December 31, 2013
2013, the value of the shares was estimated at PI 50 per share and Market rrice - Decemb(;:r 31, 2013 62
the options vested on that date. What value should be placed on Option price 60
the share options issued for the year ended December 31, 2013?
Intrinsic value per share option 2.
a. 100,000
b. 150,000 mumsie value of share optior.s (GO,OOO x 2)
c. 50,000
d. 25,.000 Compensation expense for :Z013 (120,000/3) 40,000

Solution 23-15 Answer c .(l,OOOx 50) 50,000 l;he intrinsic value of share options is recognized as expense over
' the vesting period. not ever the life of share options.
Market value of share - December 31, 2013 150
Option price r 100 2014
Intrinsic value of share option Intrinsic value of share options (66 - 60 = 6 x 60,000) 360,000

Problem 23-16 (IFRS) Cumulative compensation for 20 13 and 2014

(350,000/3 X 2)· 240,000
On January 1, 2013, Alterra Company granted 60,000 share options Comp~ . sation expense in 2013 ( 40,0CO)
to employees. The share options will vest at the end of three years
provided the employees remain in service until then . The option Compensation expense in 2014 200,000
price is P60 and the par value per share is P50. At the date of grant,
the entity concluded that the fair value of the share options 2015
cannot be measured reliably. The share options have a life of 4 In.rinsic vatr.i e cf~harc ortwns (75- 60 = 15:. 60,000) 900,000
years which means that the share options can be exercised within Curr:ulativ" ccrnpensatio11 ~c..r 2013 and 2014 (240,0Cl0)
one year after vesting. The share prices are P62 on December 31,
Comper.sation exneose in 21)~,5 660,000
2013, P66 on December 31,2014, P75 on December 31, 2015
and P85 on December 31, 2016. All share options were exercised
2016
on December 31, 20 16. What is the compensation expense for ·
2016? Market price - December 31, 2016 85
Market p.tice- December 31, 2015 .12
a. 900,000
b. 600,000 '. Increase in intrinsic vaiue - ~Q
c. 660,000
c~1!ipcnsa:ion expense ill 2016 (oO.OCOx 10) ~.MQQ
d. 0

358 359
The increase in market pricP. after the vesting pe~iod is recognized
as expense in full until the share options are exercised.
PFR.S 2, paragraph 24, provides that i.fthe fair value of the share
options cannot be estimated reliably, thF entity shalt measure the
share options at their intrinsic value initially and subsequently at each
reporting date and at the date of final settlement with any change
in intrinsic value reeognized in profit or loss.
Problem 23-17 (AICPA Adapted )
Problem 23- 18 ({FRS)
On J<!nuary l, 2013, Easy Company granted 30,000 snare options
to employees. The share Jp twns vest at the end of three years
prO\ iJed the c;nplcvees remain in service until the1:.
The option price is P60 and the share price is also P60 at the date
of grant. The par value of the shnre is P50.
At the date of grant, the entity concluded that blc fair vaiue OI m e
shar e options cannot be estimate d reliably.

The employee stock purchase pl;m ofTripo li Company specifies The share options .have a life ct 6 years . This !T!er.ns that the options
can b~ exercised within three years after vesti:, g.
that for every P 100 withheld from employee 's wages for the purchase
ofTripoli 's ordinary shares, Tripoli Company contributes P200. The All s ha re options vesu:u a t the end of t hree years ar.o no
stock is pure based from Tripoli ~s treasury shares at market price on e;:nployees left during the three-year per:od.
the date ofpurchase. The following information pertains to the plan's The share prires and the nua~ber of share options exercised are set
2013 transactio ns: oat below.
Employee withholding for the year 3.50,000 Share pnce Shar~ ~rti on s excrd~ed at y<:!ur-cnc:
Market value of 150,000 shares issued 1.050,000 2013 63
Carrying amount of treasury shares issued 900,001 2014 66
::015 75
What amount shou ld be reC0!:,'11tzed as expense in 20 13 in relati Jn 2016 88 10,000
to the stock purchase plan? 2017 100 . 5/jOQ
2018 90 5,000
a. 1,050,00 0
R·~o uired :
b. 90G,O(,Li
c. 700,0GO Determine the compensation expense for each year from 2013 to
d. 550,000 2018 u~ing the h.trinsi: v~lt'e meth od.
Solution 23- i 8
Soltttion 23-17 Answer c
2013 Salaries (90,000 I 3 y:.-~_rs) 30.000
Market value of shares issued · 1,050,000 Share options om:;tanding 30,000
..::ontribution by employees ( 350,000) Share options 30,00()
Multiply bv intrinsic,. a1dt.~ 6.'·-60)
Compensation expense for 2013 700,000
(
--- ~.
Tot~l mrrmsic vail:.., 90,009
Wher accountin g for stock compens ation pla.n, tbe com~ensation
expense is compute d as the exce.ss of the fair value ofthe shares
issued over the amount contribute'd by.emplo yces.

360
2014 Salaries 90,000 20 l7 Sajari.e-s 240,000
Share options outstanding 90,000 Share ~ptions o\itstanding 240,0:](,
Share options 30,000 Share options (30,000- 10,000) 20,000
Multiply jntrinsic value (66-60) 6 Multiply by increase in -intrinsic value
(100-88) _i 2
Total intrinsic value 180,000
A:dditi'onal compensation · 240,000
Cumulative compensation- December 31·, 2014 120,000 Cash (1"5,000 x 60) 900,000
(180,000/3 x 2 years) ·. Share options outstanding .()5,000 x 40) 600,000
Compensation recognized in 2013 ( 30,000) Share capital ( 15,000 *50) 750,000
Share premium' 750,000
Compensation expense for 2014 90,000
Intrinsic value per option (1 00- 60) 40
2015 Salaries 330,000
'ZO 18 Share options outstanding 50,000
Share options outstanding 330,000 Gain on reversal of share optious 50,()00
Share options ·30,000 Share options (20,000- 1-5,000) 5~000
Multiply by intrinsic value· (75-60) 15 Multiply by decrease in intrinsic value
Cumulative compensation- December 31, 20 15 (100 -- 90) . 10
450,000
Cumulative compensation- December 31, 20 1'4 (120,000) Decrease in intrinsic value
Compensation expense for 2015 330,000 Cash (5,000 x 60) 300,000
S:tare options outstanding (5,000 x 30). 150,000
Share capital (5,000 x 50) 250,000
2 0 16 Salaries 390,000 Share.ptemium 200,~)00
Sh;1re options outstanding 390,000 Intrinsic value per option (9C·:_ 60) 30
S!lare options 30,000
Multiply by increase in intrirsic value
(88-75) 13
Additional compensation 390,000
Cash ( 10,000 x 60) 600,000
Share options outstanding 280,000
Share capital ~ 10,000 x 50) 500,000
Share premium 380,000
lntnnsic value per option. css-co) 28
Intrinsic value of share options exercised
( 10,000 X 28) 280,000

362
363
24 ProiJlem 24-2 (fFRS)
1· Iizabeth Company granted l 00 share appreciation rights to each of
the l ,000 employees in January 2013. The entity est1mated that 90%
SIIARE-BASED COMPENSATION of the awards will vest on December 3 i, 2015. The fair ·;alue of each
share appreciation right on December 31,2013 is PlO. What is the
Shaie appreciation rights accrued liability on December 31 , 2013?
a. 300,000
b. 900,000
c. 100,000
Pr('blem 24-1 (AJCPAAdapted) d. 90,000
Vr' January I, 2013, Morey Company granted Dean, the president,
20,0\10 1:.hare appreciation rights for past services. These rights are Solution 24-2 Answer a
cx~rc_isa~le lll_lm~iately and expire on January 1, 2015. On Total compensation (100 x 1,000 x 10 x 90%)
exercise, Dean IS entitled to receive cash for the excess of the share
market price on the.cxcrcise date o.ver the market price on the Accrued compensation- December 31, 201:1 (900,000 I 3) 300,000
gra.nt date. Dean did not exercise ¥.1Y of the rights during 2013. The
market price of Morey's share was P30 on January 1, 2013 and The compensation is recognized as expense over the vesting period
~45 on December 3 1, 2013.As a result ofthe share appreciation from Janu.ary 1, 2013 to December '31, 2015 or Llree years.
nghts, what am')Unt should be recogn i:r.ed as compensation expense
for2013? · . Problem 24-3'(AICPAAdapted) ·
& 0 Wolf Company granted 30,000 share appreciation rights whic!1
b. 100,000 entitled key employees to receive cash'eq_ual t() the difference
c. 300,000 between P20 and the market p;:-ice of the share on the date each
d. 600,000 right is exercised. TI?-e service period is 20 13 through 2015; and the
· rights are exercisable in 2016. Ti1~ market price oftha sh.are was
Solution 24 .J Answer c
P25 and P28 on December 31: 2013 a...'1d2014, respectively. \Vhat
amount should be reported as liability under the share appreciation
Market price - Decembt::r 31, 20 13 45 rights on December 31, 2 0 14?
Predetermined price on January 1, 2013 30 a. 0
Fair value of share apprcc1ation nght b. 130,000
15 c. 160,000
Compensation for 2013 (20,000 x 15) d 240,000
300,000
Solution 24-3 Answer c
The total compensation is recognized as expense entirely in 2013
because the share appreciation ri~?ts are exercisable immediately. Fair value of share appreciation ri ght (28- 20) 3

Ade-rued compensation - December 31, 2014

(30,000 x 8 = 240,000 /3 x 2 years) 160,000

364
.. 365
Problem 24-4 (IAA) Problem 24-5 (IA.-\)
On January I, 2013, ABC Company offered the chief executive On January 1, 20 13, Alpha Company offered the top management
officer shMe appreciation rights with the following terms: share appreciation rights with the following terins:
Predetenni ncd price P 100 per share Predetermined price P 100 per share
Number of shares 10,000 shares Number of shares 50,000 shares
Service period- 3 years 2013, 2014and 2015 Service period 3 years
Exetcise date December 3 1, 2015 E~ercise date January 1,, 2016

The~ appreciation rights are exercised on December 31, 2015. The The share appreciation rights are exercised on January 1, 2016.
(tUQted price ofthe ABC share is P 118 on December 31, 2013, P 112 on Thequotedpricespershareare 100,124,15 1 and 151 ouJanuary
December3 1,2014,and P124onDe cember31, 2015. What amount 1, 2013, December 31,2013, December 31,2014 and December
should be recognized as compensat ion expense for 2015? 31,2015, respectively. What is the compensation ~xpcnse for 2015
a. 160,000 as a result of the share appreciation rights?
b. 60,000 a. 2,550,000
c. 80,000 b. 1,300,000
d. 20,000 c. 850,000
d. 0
Solution 24·4 Answer a
Accrued compensati on -Decembe r 31, 2013 Solution 24-5 Answer c
(lO,OOOx 18= 180,000/3 ) 60,000 Accrued compensation - December 31, 2013
(50,000 X 24 = 1,200,000 I 3) 400,000
Accrued compensat ion- December 31, 2014
(lO,OOO.Y 12 = 120,000/3 x2) 80,000 Accrued compensation - December 31, 2014
Accrued compensati on - December 31, 2013 ( 60,000) (50,000 X 51 = 2,550,000/3 X 2) 1,700,000
Compensat ion expense for 2014 Accrued compensatio n - December 31, 2013 ( 400,000)
20,000
Compensation expense for 2014 1,300,000
Accrued compensati on -12/311201 5 (10,000 x 24) 240,000
Accrued compensati on - 12/3 1/20 14 ( 80,000) Accrued compensation -12/31/201 5 (50,000 x 51) 2,550,000
Compensat ion expense for %0JS Aecrued compensati on-12/31/2 014 (-1,700,C~O)
160,000
Compensation expense for 2015 850,000

366 367
Problem 24-6 (AICPA Adapted ) Prohlt>m 24-7 (IFRS)
On Jan\!ary 1, 2013, Omega Compan y granted the chief.~xecutive 01orway Company granted 200 share appreciation rights :o eacb o1
officer (CEO) 50,000 share appreci ation rights for past services . 1he 500 employees on January 1, 2010. The rights are due to vest
The rights are exercis able immedi ately and expire on Decemb er u n December 31, 2013 with payment being made on Decemb er
31 , 2014. On exercise , the CEO is entitled to receive cash for the 3 l, 2014. Only 80% of the awards vest. Share prices are:
excess of the share market pri~e on exercise date over the market January 150
1,2010 (Predetermined price)
price on grant date. The CEO did not exercise any of the rights in 180
Decemb er 3 1,2010
20 13. The market price of the share was P 100 on January 1, 2013 Decembe r 31, 2013 210
and P 11 S on Decemb er 31 , 20 13. The CEO exercise d the rights Decemb er 31,2014 190
on Decemb er 3 1, 20 14 when the market price was P 11 0 . What
amount should be recogni zed as gain on reversa l of share How should the settlement of the share appreciation rights ~c
apprecia tion ttghts in 2014? acconnted for on December 3 1, 20 14?
a. 750,000 a. Payment ofP3,20 0,000 and no gain is recorded.
b. 500,000 b. Pavment of P4,800,000 a,•d no gain recorded.
c. 2~0,000 c. Payment of P 1,600,000 and gain ofP3,20 0,000 recorde~.
d. 0 d. Payment ofP3,20 0,000 and gain ofP1,60 0,000 recordeo.

Solutiort 24-6 Answer c Solution 24-7 Answer d

1013 "tv1:arket price - Decemb er 31, 2013 210
Accrued compen sation- 12/31/20 13 (50,000 x. 15} Pr~dctermined pr~ce 150
750,000
Increase in fair value in 2013
The compe nsation is recogni zed as expense entir ely in 2013
because the rights are exercisable immediately. Market price- Decemb er 31,2014 19}
Predeter mined price . 150
Salaries 750,000
Increase in fai r value in 2014 · 40
Accrue~ salaries payable. 750,000
2014 Accrued compens ation - Decemb er 31, 20 t3
(500 X 200 X 60 X 80%) . 4,800,000
Accrued compcnoation - 12/31 /2014 (50,000 x 10} 500,000 Accrued compen~ation -Decem ber 31, 2014
Accrued co mpenr ation - 12/31/20 1 3 (150,000} (3,200,0 00\
. (500 X 200 X 40 X 80%)
Decreas e in accrued compen sation (250,000) Gain on reversal of share apprecia tion r ights 1,600,0QO
Accrued salar ies payable 750,000
Cash 500,000
Gain on reversal of apprecia tion rights 250,000

368 369
 Problem 24 -8 (IAA)
S'tJlution 24-8

On Januar; 1, 2013, Kristen Company established a share appreciation question .I Answer a ~

rights'plan for the executives. The plan entitled them to receive cash at t•air value - December 31 , 201 3 (28- 20) 8
any time during the next four years for the difference betw~en the
market price ofthe ordinary share and a pre-established price ofP20 Compensation expens~ for 2013 (60,000 x 8) 480,000
on 60,000 share appreciation rj.ghts or SARs. On December 31, 2015,
;2.0,{)00 SA..'R..$ are exercised by executives. Cu:rent market prices bf NOte that the SARs a.r:e e:xercisable.immediately.
the share are as follows: -.
Questi<;n 2 Answer b
January 1, 2013 25 per share
December 31, 2013 Fair value- December 31,. 20 1.4 (35- 20) 15 .
28.per share
December 3'1, 2014 35 per share
Dece;nbe• 31,2015 Acc,:ued compensation -12/31/2014 (60,000 x 15) 900,0fJO
30persha.r;e Compensation expense in 2013 (480,000)
I. What ~mol.!Ilt of compensation exp~nse should be recognized for Corn~ensation expense for 2014 420,000
2013?
Questian 3 Answer c
a. ~xo,ooo-
b. 120,000 Fair value -December 31.2015 .(30'- 20)' 10
c. 3\lO;<JOO
d. 180,000 Accn d compensation -12/Jl /2015 (60,000 x10) 600,000
Accrued compensation- Dec:!mber 31, 2014 900,000
2. What amount ofcompe;,1sation cxpenie sho'l1ld. be1ecognized for Gr.ir;. on reversal of SARs (3CO,OOO)
. 2014?
Accrued compensation- December 31, 20i5 600,000
a. 90q,ooo Payment for exercise of SARs (20,000 x 10) GQ!},QOO)
b. 420,000
Adju:sted accmed iiability- December 31, 2C15 4W,GOO
c.. 105,0QO
d. 225.000
Adj!.lsting entries
3. What amount should be recognized as accmed.liabi1ity for share Accrued salaries payable 300,000
appreci'ation rights on December 31 , 20 15? · Gait;t o'n reversal of SA.Rs 300,000
a. 600,000 A.Gcrued s~larie.s payable 200,000
b. 300,000 Cash 200,000
c. 400,000
d. ~0,000

370 371
 Pro ble m 24-9 (IF RS ) 1014
On Jan uar y 1, 2013 Mo dul e Co Dec . 31 . Sala ries 350,000
mp any gra nte d 100 sha re
appreciation rights to eac h of the 500 Acc rue d sala ries pay able 350,000
employees on con diti on that
the em plo yee s rem ain in its employ.
for the nex t thre e years. No Sha re app ieci ktio n righ ts 50,000
employees left the entity during the thre Multiply by fair value
e-year ves ting period. The 18
employees exercised their share appreci
ation ri~ts as follows: Tot al fair value · 900,000
Dec emb er 31, 2015 100 employees
Dec emb er 31, 201 6 · 250 employees Accrued liab ility - 1213112014 (900,000 600,000
/3 x2)
Dec emb er 31, 2017 1SO employees Acc rue d liab ility - 12/3 L/20 13 (25 0,00 0)
The fair value and intrinsic value of the Com pen sati on exp ens e for 101 4 350 ,000
share appreciation right are
as follows:
2015
Fai r valu e lntr lnsl c valu e
Dec emb er 31, 201 3 Dec : 31 Sai ane s 200,000
15 Acc rued sala ries pay able 200,000
Dec emb er 31, 201 4
18
Dec emb er 31, 2015 Sha re app reciatio n...righ ts not yet
20 15
Dec emb er ~ 1, 201 6 exe rcis ed (50 0- 100 x 100) 40,000
21 20
December 31, 201 7 Mu ltip ly by fuir value 20
25
Acc rued liability -12 /31 /20 15 800,000
The intr insi c val ue of the sha re app rec Acc rued liab ilit y- 12/3 1/20 14
iati on righ t on the,dat e of (60 0,00 0)
exe rcis e is the am oun t pai d out to
the em plo yee s. Compensation exp ens e for 101 5 200,000
Determine the com pen sati on exp ens
e for eac h year from 2013 to Sala ries
2017 as a result of the share appreciatio 150,000
n rights. Cas h 150,000
Solution 24~9 Sha re appreciation rights exe rcis ed
(100 x 100) 10,000
Mu ltip ly by intr insi c value 15
201 3
Tot al pay tpcn t 150,000
Dec . 31 Sala ries
250,000
Acc rued sala ries pay able Com pen sati on rela ted to righ ts not
250,000
Sha re app reci atio n righ ts yet exe rcis ed . 200,000
(50 0 emp loy ees x 100 ) Com pen sati on pai d for. righ ts alre
50,000 ady
Mu ltip ly by fair value exe rcis ed · 150,000
15
Total fair value Total com pen sati on exp ens e for 201 350,000
750.000 5

Acc rued liab ility - 12/3 1/20 13 (75 0,00

. '.
0/3) 250,000

. 372 373
201Ji Problem 24~10 Share and cash alternative (IFRS)
Dec. 31 Accrued salaries payable 485,000 On January 1, 2013, Ingenuous Company granted to an employee
Salaries 485,000 the right to choose either:
Share appreciation rights ~ot yet a. 12,000 shares (share or equity alternative)
exercised (400 - 250 x 100) 15,000
b. Cash payment equal to market value of 10,000 shares (cash
Multiply by fair value 21
alternative)
Accrued liability- 12i31120 16 315,000
Accrued liability- 12/31/20 15 (800,000) The grant is conditional upon the completiOn of three years of service.
Decrease in accrued liabllity (485,000) If the employee chooses the share alternative, the shares must be
held for: three years after vesting date.
Salarjes 500,000
Cash 500,0UO Th~ par value of the share is P25 and at grant date on January 1,
2013, the share price is PSl. Th~ share prices for the three-year
Share appreciation rights exercised vesting period are P54 on Dec~mber 31, 2013, P60 on December
(250 X 100) 25,000 · 31,2014 and P65 on December 31,2015.
Multiply by intrinsic value 20
After taking into account the effects of post-vesting restrictions, the
Total payment 500,000 entity has estimated that the fair value of the share or equity
alternative is P48 per share.
Reversal of accrued liability related to
rights not yet exercised (485,0(0) Required:
Compensation paid for rights already Determine the compensation expense from 2013 to 2015 as a
exercised 500,000 result of the share alternative and cash alternative.
Net compensation expense !~r 2016 15,000
Solution 24-10
2017
PFRS 2, paragraph 35, requires that this compound financial
Dec. 31 Salaries 60,000 instrument shall be accounted for separately as liabiJity and
Accrued salaries payable 315,000 equity.
Cash 375,000
Fair value of share alternative ( 12,000 shares x P48) 576,000
Share appreciation rights exercised Fair value of liability on grant date, January 1, 2013
. (150 employees x 100) 15,000 (10,000 sh..:res x 51) 510,000
Multiply by intrinsic value 25
Equity component 66,000
Total payment iA 20 17 375,000
Accrued liability -12/31/2016 (315,000) 2013
N~t comp~_nsation expense f:-,r 2017 60,000 Dec. 31 Salaries (66,000/J) 22,000
Share options outstanding 22,000
Allocation of the equity component equalJy over the
three-year vesting period.

374 375
Dec. 31 Salarie~ 180 IV'';
Accrued salaries payable 180,000 Final accounting
Share basis of cash alternative 10,000
Multiply by fair value 54 The method ofsettlement chosen by the employee will detennine the
final accounting.
Total liability 540,000
Ifthe employee has chosen the cash alternative, the j.ournal entry on
Accrued liability-12/3112013 (540,9()0/3) 180,000 December'31,2015 is as follows:
Total compensation expcns.e for 2013
(22;000 + 180,000) Accrued salaries payable 650,000
202,000
Share options outstanding 66,000
20J4 Cash .
650.000 .
D~c . 31 Salaries 22,000 Share premium
Share options outstanding
66,000
22,000
31 Salaries . 220,000 Ifthe employee has chosen the equity alternative, the journal entry
Accrued salaries payable 220,000 on December 31, 2015 is as follows: ·
Share basis of cash alternative 10,000 Accrued salaries payable
Multiply by fair value 60 650,000
.Share options outstanding 66,000
Totallittbility 60~ Share capital (12,000 x 25) 300,000
Accrued liability- D¢cember 31, 2014 . Share premium 4t6;ooo
(600,000/3 x 2 yeurs) 400,000
Accrued liability- December 31,2013 (180,000) Observe that the entity issued 12,000 shares and not 10,000 shares ·
c;ompcnsation for 2014 220,000 which serve as the basis· Only in computing the liability for the
Total compensation expense for 2014 cash alternative. · · ·
(22,000 + 220,000) 242,000
2015
Dec. 31 Salaries 22,000
Share options out~tanding 22,000
31 Salaries 250,000
Accrue<}. salaries payable 250,000
Share basis of cash alternative 10,000
Multiply by fair value 65
Total liability- De~embcr 31 , 2015 650,000
Accrued laibility- December 31, 2014 (400,000)
Compensation for 2015 250,000

Tot'al compensation expense for 2015

(22,000 + 250,000) 272,000

376
377
Problem 24-11 (IFRS) Soluzion14-ll
On January 1, 2013, Planet Company purchased an equipment for Question I Answer c
the cash price ofP5,000,000. The supplier can choose how the
purchase is to be settled. Fair value of equipment equal to th,e cash price 5,000,000
Fair v~lue ofliabitity (40,000-shares x 11 0) (4.400,000)
The choices are 50,000 shares with par value ofP50 in one year 's -
Equity component
time, or a cash payment equal to the market value of 40,000 shares 600,00:)
on December 31,2013.
Jom nal entry to record the acqu~sition oftht: equipment
At grant.dace on January 1, 2013, the market price of each share is Equipment ),QUL\000
PliO and on the date of settlement on December 31,2013, the Accounts payable 4,4·00,000
market price of each share is-P 13 0. Share options outstanding 600,000
1. What is the equity component arising from the purchase of
Ques.tion 2 Answerc
equipment with share and cash alternative?
Fair value ofliabi1ity- December 31, 2013
a. 500,000 (40,000 shares x 130) 5,200,000
b. 400,000 Fair value ofliablity- January 1, 2013 (4,tOO,OOq)
c. 600,000
d. (; Implied interest 800,000

2. What is the interest expense to be recognized on December 31, Journal entry to reco:-d tbe payment of accounts p~yablc ·
2013 if the supplier has chosen the cash alternative?
Accounts payable 4,400,000
a. 600,000 Interest expense 800,000
a. 40o,ooo Share options outsldnding 600,000
c. 800,000 Cash 5,200,000
d. 0 Share premium 600,000

3. What is the share premium on December 31, 2013 if the supplier Question 3 AnswJ;- b
has chosen the share alternative?
Journal entry to record the issuance of 3h~1r~s
a. 5,000,000
b. 2,500,000 Acco:.~ntspayable 4,400,000
c. 4,400,000 Share options outstanding 600,000
d. 4,000,000 Share capital (50,000 !(50) 2.300,000
Share premium 2,500.000

378
379
 Problem·25-2 (AICP.J:\. -\.dapted)
25 Hoyt Company reported the following shareholders· equity <il
year-end::
5% cumulative preference share capital, par value
PlOO per share; 25,000 shares issued and outstandmg 2,500,COO
BOOK VALUE AND PREFERENCE DIVIDENDS Ordinary share capital, par value P35 ~cr shan:;
100 000 shares issued and oul:>tandtng 3,500,000
' . 1,250,000
Share premium
Problem 25-1 (IAA) Retained ean1ings 3,000,000
Tarr Company reported the following shareho~ders' equity on
Dece-nber 31,2013: Dividend<; in arrears on the prefe, ~nee share amounted to P2 50,000. _If
Preference share capital - 12%, PSO par, 20,000 shares I ,000,000 the entity ~ere to be liquidated, the preference sha~eholders would
. Ordinary fuare capital, P25 par, 100,000 shares 2,500,000 receive par value plus a premium ofP500,000. Wbat1s t.be bcok....-alue
Share premium 200,000 per ordinary share?
Retained earnings 400,000
Retained earnings appropriated I 00,000 a. 77.50
Revaluation surplus 300,000 b. 75.00
Dividends on prefer~nce share ha\"e not been paid since 2011. The c. 72.50
preference share has a liquidating value ofP55 and a call price ofPS8. d. 70.00
What is the book value per preference share?
a. 61 SCltl.,tiqfJ 25-2 Answer d
b. 56 Total shat=eholders' equity 10,250,000
c. 55
d. 58' Preference shareholders' equity:
Prefercnct! share capital 2,500,000
Sulution 25-1 Answer a Preferen~e dividends in arrears 250,000
Liquidation premitm1 500,000 .3.250,000
Preference share capital 1,000,000
Liquidation !Jremium- excess ofliquidating value Ordinarv shareholders' equity 7,000,000
over par (20,000 x 5) 100,000
by
Divide ordinary shares outstanding 100,000
Pref~rence dividend for current year (1,000,000 x 12%) 120,000 B,ook value per ordmary share 70
Total preference shareholders' equity 1,220,000
If the preference share is cumulative, a11 dividends in arrears should
Book value per prcferen.;e share (1 ,220,000 I 20,000) 61 be satisfied.

In the abserice of any contrary statement, the preference share is

noncumulative and nonparticipating. Thus, it is entitled to current
year dividend only. The liquidating value ofthe preference share is
used instead of the call price because book value computation is on the
pr~"onise that the entity will dissolve and liquidate.

380
Problem 2S.3 (AICPAA dapted) Problem 25-4 (AICPAA dapted)
Dix Company reported the, following shareholders' equity on Boe Company reported the following shareholders' equity on December
December 31, 2013: 31,2013:
8% cumulative preferenu share capital, P50 par; 6% noncumu lative preferenc e share capital, P 100 par,
liquidating value P55 per ehare; liquidatio n value of P 105 per share 1,000,000
authorized, issued and outstanding 20,000 &hares 1,000,000 Ordinary share capital, PLOO par 3,000,000
Ordinary share capital, P25 par; 200,000 shares autOOrized;. Retained earnings 950,000
100,000 shares issued and outstanding 2,500,000 Preference dividends have been paid :~p to Decembe r 31,2013. On
Retained earnings 400,000 December 31,2013, what is the book value per ordinary share?
Dividends on preference shares have been paid through 2011 but have a. 131.70
not been declared for 2012 and 2013. On December 31, 2013, what b. 130.00
is the book value per ordinary share? c. 129.70
d. 128.00
a. 25.00
b. 27.20 Solution.25-4 Answer b
~. 26.40
d. 29.00 Total sharehold ers' equity 4,950,000
Preferenc e sharehold ers' equity:
Solution 25-3 Answer c Preferenc e share capital 1,000,000
Liquidatio n premium (10,000 x 5) 50,000 J.,QSO.OQQ
Total equity . 3,900,000 Ordinary sharehold ers' equity 3,900,000
Preferenc e sharehold ers' equity:
Divide by ordinary shares 30,000
Prefere~ce share capital 1,000,000
Liquidatin g premium (20,000 x 5). 100,000 Book value p·er ordinary share J.lO
Preferenc"' dividend in arrears
(1,000,000 X 8% X 2) . 160,000 1,260,000 Problem 2S.5 (IAA)
Ordinary sharehold ers' equity 2,640,000 Nike Company paid cash dividends of P600,000 and reported net
Divide by ordinary shares 100,000 income ofP l ,550,000. The ordinary shareholders' equity at year-eud
Book value per ordinary share was P5,000,000 and the entity bad 200,000 ordinary shares outstanding.
26.40 What is the book value per ordinary share?
a. 25.00
b. 22.00
c. 3.00
d. 7.75

Solution 25-5 Answer a

·Book value per ordinary share (5,000,000 /200,000 shares) ~

382 383
Problem 25-6 CPHILCPAAdapt ed) Problem 25.. $ (AICPAAd~pted) .
Baker Company had 5,000 ordinacy shares of P500 par value
outstanding and 500 preference shares of P.l )000 par value Nova Company provided the following shareholders' equity on
outstanding. The curren: market price of tb.e ordinary share is December 31,2013: ·
Pl,200 and total equity amounts to P3,600,000 The preference •
Cumulative preference sbare capital, PlOO par, 8% 500,000
shareholders have a liquidation prefercue:e.of P 1,4 00 per share
and no dividends are in ~rrrears. What.is the book value per Ordinary share capital, P 100 par 1,100,000
ordinary share? Share premium 200,000
Retained earnings 260,000
a. 510 Treasury ordinary shares - 1,000 at cost ( 150,000)
b. 520
c. 580
d. 818
Dividends on preference shares are in anears for 2012 and 2013.
What is the book value of an ordinary share on December 31, 2013?
Solution 2 5-6 Answer c
a. 125
Tctal equity 3,600,000 b. ' lQl
Preference shareholders' equity:
c. 133 '
Preference share capital (500 x :Pl,GOO; 500.,0CO
Liquidatio41 premium (500 x P400) 200,000 700,000
d. · 141
Ordinary shn-c!:1')11c::s' eq>lit:' 2,9CO,OOO. Solution 25~8 Answer c
Book value p•.::r ordinarv share (2,900,000 I 5,0001 Total shareholders' equity per book ·1,910,000
580 Preference shareholders' equity:
Preference share capital 500,000
Pr~blem '1.5-7 (IAA)
Preference dividends for 2012 and 2013
Law in Company provided th~ foliowin3 i'l.}ormation for 2012 and (500,000 X 8% X 2) 80,000 580,000
2013: Ordinary shareholders' equity 1,330,000_·
Ord.ina1y shareholders' equity, December 31, 2012 4,400,000
Ordinary shareholders' equity, De~ember 31,2013 Ordinary shines issued ( 1,100,000 /1 00) 11,000
5,000,000 Treasury ordinary shares
Outstanding ordinary shz.rcs, December 3 i, 2013 160,000. ( 1,000)
Preference dividend~ poid fer 201.3 100,000 Ordinary shares outstanding 10,000 .
What is the book value per ordinary' share for2013? Book ~aluc per ordinary share (1 ,330,000 I 10,000) ill
a. 27.50
b. 31.25
c. 30.62
d. 26.88

Book value per ordinary share (5,000,COO .' 160,000) 31.25

384 385
 Problem 25-9 (CGAC) Pr oblem 25-lC (IAA)
Trojan Company was organized on January L 2013 with the
following capital structure: Karen Company provided fo llowing data at year-end:
•
10% cumulative preference share capital, par value PI 0, .liquidation 2G13 2')12
value P 12, authorized, issued and outstanding 100,000 shares, 10% cumulat~ve preferenc e shares, P50 par 2,000.000 2,000,000
Pl ,000,000. Ordinary shares, P 10 par 2,500,000 2,000,000
Share premium 1,500,000 1,300,000
Ordinary share capital, par value P 100, authorized 40,000 shares, Retained earnings 4,800,000. 4,200,000
issued and outstanding 30,000 shares, P3,000,000. Net income for t,e year 11800,000
The net income for 2013 was P6,000,000 and no dividends were
declared in 2013. What is the book value per odinary share? On July 1, 2013, 50,000 ordinary shares were issuea. 'fhP. preference
dividends were paid in 2012 but not declared during 2013. Thernarket
a. 290 orice ofthe ordinary share was P50.on December 31. 2013. W'uat is
b. 293 ~he book value per ordinary share for 2013?
c. 300
d .. 333 a. 34.40
b. 35.20
Solution 25-9 Answer a c. 38.22
d: 39.U
Preference share capital 1,000,000
Ordinary share capital 3,000,000 Solution 25-10 Answer a
Retained earnings- 2013 net income 6,000,000
Preference shares 2,000;000
Total shareholders' equity 10,000,000 Preference cividend for 2013 (10% X 2,000,000) 200,00C
Preference shareholders' equity: Preference shareholders' equity 2,200,000
Preference share capital 1,000,000
Preference dividend (1 ,000 ,000 x 10%) 100,000 Preference shares 2,000,000
Liquidation premium ( 100,000 x 2) 200,000 1,300,000 Ordinary shares 2,500,000
Share premium 1,500,000
-Ordinary shareholders' equity 8,700,000 Retained earnings ~800,000
Divide by ordinary shares 30,000
Total shareholders' equity 10,800,000
Book value per ordinary share 290 Preference shareholders' equity ( 2,200,000)
Ordinary shareholders' equitv 8,600,000
....
Divide by ordinary shares outstanding.
{2,500,000 / 10 par value) ?50,000
Book value per ordi!1ary share 34.40

386 387
Problem 15-11 (ACP)
P~etro Company provided the following data on
p,·obi em 25··12 (ACP )
December 31, 2013:
Simplex Come4.nyprovided the follo\\-ing data on December 31, ?.0
12% Preference share capital, 20,000 shares. PlOO par value 13:
2,000,000
14% Preference share capital, 10,000 shares, P300 par value Preference share capital, 10% cumu lative and
3,000,000
Ordin ary share capital, 50,00 0 shares, P100 par value nonparticipating, P!OO par, 20.000 share s 2,000,000
S,OOO,OOO Ordinary share capital, P 100 par, 40,00 0 share s
Retai ned earnings 4,000,000
2,240,000 Subsc ribed ordinary share capital, 20,00 0 share s
Share premi um 2.000,000
1,500,000 Subscriptio n receivable
The 12% preference share is cumulative and participating. The 500,000
14% Share premi um
preference share is noncumulative and participating. Dividends 1,000,000
are Rctatned earnings
in arrears for 3 years. What is the book value per ordinary share 1.400,000
? Treasury ordin ary shares, 10,000 at cost
600,000
a. 132 Divid ends are in arrea rs for 3 year$. What is the book
V3.1ue per
b. 126 ordin ary share~
c. 100
a. 172
d. 112 b. 200
c. 160
Solution 25-11 Answ er a d. 150'
Exce ss
-r
12%P S 14o/ePS Ordin ary Solution 25-12 Answer c (S,OOO,OOO i 50.000) l60
Balan ces 3,740,000 2,000,000 3,000,000 5,000,000 Prefe rence share capita l
12.% X 2,000,0()() X 3 ( 720,0 00J 720,000 2,000,COO
14% X 3,000 ,000 X 1 ( 420,0 00) Ordin ary share capit~l . . 4,000,000
420,000 Subsc ribed ordinary sharecap1tal 'Z,GOO,OOO
12% X 5,000,000 X 1 ( 600,0 00) Share prem ium
600,000 LOOO.OUO
Balan ce - p~orata Retai ned earnings i.4C0,G00
2,000,000 4002000 600,000 1,000,000 Treasury sha;e s ,.... ( - 80() .000)
Total 3,120,000 4,020 ,000 6,600,000 Total share holde rs' equity 10/iOC,OOO
Divid e by share s outst andin g Prefe rence share holde rs' equity:
20.000 . 10!000 50z000 Prefe rence share capital· 2,000,000
Book value per share Preference dividend for 2011, 2012, 2013
j1Q 402 132 (2,000,000 x 10% x 3) 600,0CO 2,600 ,000
Before participation, the current year dividend should be given Ordinary share holde rs' equity 8,000 ,000
to
ordinary share using the lowe r preference rate
For book value purposes, the subscnption receivable is JW! ded~,;
Share capit al Fract ion cted
Allocation from subsc ribed share capital.
12% Prefe rence share 2,000,000 2/10 400,0 00 Ordin ary share s issued 40,00 0
14% Prefe rence share 3,000,000 3/10 600,000 Ordin ary share s subscribed 20,000
Ordin ary share 5,000,000 5/10 1,000,000
Total Go.c•oo
10,000,000 2,000,000 Treas ury share s . @&_00)
Ordin ary share s outsta nding :50,000
388
389
 Problem 25-13 (AICPAAdapted) Prot;em 25-15 (AICPA.At!apted)
On December 31, 20.13 and 2014, Carr Company had outstanding On December 31,2013, Arp Company had outstanding 30,COO 5%
40,000 6% cumulat1~e pr~ference shares·· ofPlOO par value and cumulative and rJIIy participating preference shares, Pl OO par, and
40~0 ordinary shares ofP 10 par value. On December 31 2013 200,000 ordinary shares~ P 10 par. No dividends were in an·ears on
preference dividends in arrears amounted toP 120,000. Cash di~idend~ December 31,2012. On December 31,2013, the entity declared
dec1.at:ed in 2014 tot~led P440, 000. What amount should be reported dividend ofPl,OOO,OOO. 1.Vhat is the dividend payr.ble to the ordinary
. 8:5 dividend payable to preference and ordinary shares, respectively in sharehoiders?
2014? a. 100,000
a. 44Q,OOO and . 0 b. 340,000
b. 360,000 and 80,000 c. 400,00:)
c. 320,000 and 120,000 d. 475,000
d. 240,000 and 200,000
Sclutior; 25-15 Answer c
Preference sh'l:tre capital (30,000 X 100) 3.000,000
Solution 25-13 Answer b
. Ordi~.ary share capital (200,000 X 10) 2,000,000
Total dividend declared 440,000 ~OO,OO_Q
Total
Preference dividends: ----
In arrears on December 31, io 13 120,000 ?referenc~ cii vidends (3/5 X 1,000,000)
, 2014 d,ividend (6% x 4,000,000) 240,000 360,000 Ordinary dividends (2/5 X 1,000,000)

~alance to ordinary share Total dividends declared on December 31, 20 l3

80,000
S mce there were no dividends in ar!'ears on Decet"'ber 31, 2012
Problem 25-14 (IAA)
. and the p:-eference share is fury partidpatH:g, the dividend of
~arie Company "" had outstanding 50,000 8% preference shares with Pl,OOO,OOO is simply alloc~ted on a p·rorata basis.
PI 00 par value and 125,000 P30 par va~ue ordinary shares. Dividends Problem ~5-16 (IAA)
have been paio every year except last year and the cufrent year. The
pre~ence sna:.:~.· &e cumu,lative and nonparticipating. The entity Wendy Company had outstanding 300,000 ordinary sharts cfP:LO par
distnbuted i-2,500,000 as dividend in the current year. What is the and 60,000 preference shares no-pa1 8% with a stated value ofP5.0.
dividend payable to the ordinary shareholders? The prefe~ence shares are cumulative and nonrarticipating. DiVIdends
have been paid in eve'"'' year except the past t,vo years and the current
a. 2,1 00,000 yea:.-. The e:::ltity paid d1vidend QIP500,000 in the current year. Wr.:.at is
b. 1,700,000 the dividend payable to the preference sharehold<;rs m the cllf!ent year?
c. 2,500,000
a 500,000
d. 0 b 480,000
c. 240,000
Solution 25-14 Answer b d. 72.0,000
Tota. divid~nd distributed in the current tear 2,500,000
Preference' dividend (8% x 5,000~000 x 2)
Salution 25-16 Answer a
( 800,000)
Dividend payable to ordinary shareholders The dividend ofPSOO,OOO is paid to preference only tecause t4e
1,700,000
total preference dividends a.rnoUDt to 8% xP3,000,090 x 3 or P720,000.

390 391
 Problem 2S-18 (PHILCJ>AAdapted)
Probfem 25-17 (IAA)
Culture Company provided the following on December 31, 2C i 3:
YOdel Company had 50,000 ordinary shares ofPlOO par value and Ordinary share capital, P20 par value, 200,000 shares 4,000,000
25,000 preference shares o.fPlOO par value, 6% cumulad ve 11nd Preference share capital, 6% P 100 par value, cumulative
partldpa dng. Dividends on the preference shares are two years {n and fully .partie ipating, 10,000 shares outstanding 1,000,000
arrears including the current year. The entity distributed Pl,3SO,OOO as
Preference dividends have been in arrears for 2011 and 2012. On
. dividends in the current year. What is the dividend payable to tb;e
ordinary shareholders.? December 31,20 1;3, a cash dividend ofP900,000 was declared. What
· · is the dividend payable on the preference and ordinary shares,
a. 1,050,000 respectively?
b. 1,200,000 a. 324,000 and 576,000
c. 800,000 b. 220,000 and 672,000
d. 550,000 c. 276,000 and 624,000
d. 180,000 and 720,000
Solution 1'5-17 Answer c
Solution 25-18 Answer c
Dividend Preference Ordinary
Dividend Preferenc e Orctin.try
Amoun~ '1,350,000
6% X 2,500,000 X 2 ( 300,000) 300,000 Amount 900,000
6% X 5,000,000 ( 300,000' 6% X 1,000,000 X 3 (180,000) 180,000
300,000. 6% X 4,000,000 (240,000) 240,000
Balance prorata 750,000 ' 250,000 . 500,000
Balance prorata 480,000
Total dividend 550,000 800,000
1/5 X 480,000 96,000
Total par 4/5 X 480,000 384!000
Fraction Participation
Preference (25,000x ~00) 2,500,000 2sns Total dividends 276,000
Ord.iJlarY (SO,OOOx 100) :iso,ooo 624,000
5,000,000 sons soo,ooo Problem25-19(AICPAAdapted)
7,500,000 750,000
'
On December 31, 2012 and i013, Apex Company had 30,000
The preference share is participating. P 100 par value 5% cumulative preference shares outstanding. No
dividends were in arrears on December 31, 2011.1'he entity did
Before participation, the ordinary share is paid an amount equal to the not declare a dividend during 2012. During20 13, the entity paid a
current ye~r dividend using the preferen ce rate. on
cash dividend.,pfP 100,0'00 the preference shares. How is the
preference dividend in arrears reported in 2013?
a. ·Accrued liabilityofP150,000
b. Disclosure ofP 150,000
c. Accrued 1iabilityofP200,000
d. Disclosure ofP200,000

393
Solution 25-19 Answer d Problem 25-21 (Pl:IILCPAAdapted)
Preference share capital (30,000 x. 100) 3,000,000 Tunn Company reported the following balance~ on December 3 1,
2013.
Prefl!rcnce dividend in 2012 (3,000,000 x S%) 150,000
Prefc1ence dividend in 2013 150,000 12% nonparticj_patiog, noncumu1 ativ~ preference share
capitaf, par value ofPIOO, I0,000 sbares I,0<10,000
Total preference dividend 300,000
100,000 I0% fully participating, cumu latiYe preference share
Less: Preference dividend paid m 2013
capital, par value ofP l 00, 25,000 sbares 2,500,000
Preference dividend in arrears - December 31, 2013 200,000 Ordinary share capital, par '.ralueofPIOO, 75,000 shares 7,500,000

A dividend is not a liab~lityuntil it is legally declared. Accordingly, the The entity plans to declare cash d ividends. It ha.s not paid a
pufcrence dividend in arrears ofP200,000 on December 3 L, 2013 · cash or a stock dividend before. There has been no change in
shali he di~closed only. the capital ba]ances since the entity started opera-Dons five years
ago. The entity reported th e following net income and loss for
Problem 25-20 (IAA) the five years of operations:
The director! of Lora Company wish to declare a dividend whereby 2009 1,500,000 loss
ordinary shareholders are to receive a total per share dividend of 2010 1,000,000 loss
P4. The equity on December 31,2013 appears as follows: 2011 . 500,000 loss
2012 1,750,000 income
Preference share capital, PlOOpar, 7% participating up
2013 6,250,000 income
to 10%, noncumulative, 100,000 shares autbori~~•.
25,000 shares issued 2,500,000 Ifthe maximum amount available for dividend' on .December 31,2013
Ordinary share capital, P25 par, 250,00Q shares is <Jeclared and paid, wJ1at amount should be distn'b~1ted to the ordinary
authorized and issued 6,250,000 shareholders?
Share premium 1,250,000
Retained earnings 5,000,000 a. 3, 750,000
b. 2,910,000
What is the total amount of the di vitlend that must be declared to meet
c. 500,000
the per share goal of the board ofdirectors?
d. 750,000
a. l,l75,000
b. 1,700,000 Solution 25-21 Answer b
c. \ ,000,000
d. 1,250,000 Total income 20 12 and 20 l 3 8,000.000
Total loss 2009,20 10 ar.d 20l l (3 ,OOO.OCO)
Solution 25-20 Answer d Retai ned earnings- maxjmum di vidend
( 250 000 X 4) 1,000,000
- -
----
Ordinary divideR<i
Prd'crencc dividend (2,500,1)00 X. l 0%) 250,000

Totu~ dividend 1,25(),000

J94
 Retained 12% 10%
earnings Preference Preference Ordin~ry
':>olution 25-22 Answer a
Dividend 5,000,000 Ordinary dividend (200,000 x 10) 2,000,000
12% X 1,000,000 ( 120,000) 120,000 Preference dividend:
10% X 2,500,000 X 5 (1,250,000) 1,250,000 2012 (12% X 8,000,000) 960,000
10% X 7,500,000 ( 750,000) 750,000. 2013 (20% X 8,000,000) 1,600,000 2,560,000
·Balance for Total dividends to be declared 4,560,000
participation 2,880,000 720,000 2,160,000

Total dividenri 120,000 1,970,000 2,910,000 The percentage of ordinary dividenu is P2,000,000 divided by
PlO,OOO,OOO ordinary share capital or 20%. Since the ordinary
Before participation, one year dividend is paid to ordinary share capital sharehqlders· receive 20% in the current year, the preference
using the participating preference rate. The balance for participation shareholders shall receive also in the current year 2013 20% of
is distributed on a prorata basis as follows: · preference share capital outstanding because the preference shares are
fully participating. ·
Amount Fraction Allocation

10% Preference share 2,500,000 25/lOO 720,000 Proof

Ordinary share 7,500,000 75/100 2,160,000 Preference Ordinary
10,000,000 2,880,000 2012 dividend 960,000
2013 dividend:
Problem 25-22 (IAA) 12% X 8,000,000 960,000
12% xlO,OOO,OOO 1,200,000
Bonat~za Company provided the following shareholders' equity on
Balance for participation 640,000 800,000
December 31, 2013:
Total dividend 2,560,000 2,000;000
Pre1erence share capital, PlOO par, 80,000 shares issued,
12% cumulative and fully participating 8,000,000
Total dividend 4,560,000
Ordinary share capital, P50 par, 200,000 shares issued 10,000,000
5,00().,000 Preference dividend:
Share premium
7,000,000 2012 ( 960,000)
Retained earnings
2013 ( 960,000)
Dividends on the preference shares are in arrears for two years including Ordinary dividend (1,200,000)
the current year. On December 31,2013, the entity intends to pay cash
Balance for participation . 1,440.000
dividend of P10 per share to the ordinary shareholders. What is the
total ?mount of dividends to be declared for the preference and ordinary
Outstanding Fraction Allocation
shareholders?
Preference 8,000,000 8/18 640,000
. a. 4,560,000 Ordinary · 10,000,000 10118 800,000
b. 3,920,000
c. 3,600,000 18.000,000 . 1,440,000
d. 5,5~0,000

396
~97
 Problem 26..:2 (AICPA Adapted )
26 Madden Compan y had 500,000 ordinar y shares issued and
outstand ing on Decemb er 31, 2012. During 2013, no addition al
ordinary shares were issued. On January 1, 2013, the entity issued ·
BASI C EAR NING S PER SHA RE 400,000 noncum ulative and noncon vertible preferen ce shares:
During 2013, the entity declared and paid P200,00 0 cash dividend
on the ordinary share and P l 10,000 annual dividen d on the
Problem 26-1 (AICPA Adapted ) preferen ce share. Net income for 2013 was P750,00 0. What
amount should be reported as basic eaming s per share?
On_Dec ember 31, 2013 and 2012, Gow Compan y had 100,000
a. 1.88
ordmary shares and I 0,000 cumulative preference shares of 5% p 100
par_value. No ~ividends were declared on either the prefer~~ce or
b. 1.60
c. 1.28
ordmary share m 2013 or 2012. Net income for the current year was d. 1.50
P900,000. WPat amount should be reported as b~ic eanlings per share?
a. 8.50 Solution 26-2 Answer c
b. 9.50 Net income 750,000
c. 9.00 Preference dividend (110,000)
d. 5.00 Net income to ordinary shares 640,000

Solution 26-1 Answer a Basic earnings per share (640,000 /500,00 0) 1.28

Preference share capital (10,000 x PIOO) 1,000,000 Problem 26-3 (PHILC PAAdap ted)
Net income 900,000 Royal Compan y reported the following capital structure on January 1, ·
Preference dividend (1,000,000 x 5%) ( 50,000) 2013:
Net incom~ to ordinary shares 850,000 Shares issued and outstand ing
Ordinary share capital 200,000
Basic earnings per share Prefere~ce share ~apital 50,000
(850,000 I I 00,000 ordinary shares) 8.50
On Octobc:r 1, 2013, the entity issued a 10% stock dividen d on
ordinary shares, and paid the annual cash dividend ofP200, 000 on
~ether_cumul~tive or noncum ulative, only one year preference preferen ce shares. The preferen ce shares are noncum ulative,
dtvidend Is deducted from net income. nonparticipating and nonconvertible. Net income for the year ended
If cumul.ative, the preferen ce dividend is depucte d regardle ss of Decemb er 31, 2013 was P1,920, 000. What amount should be
declarat ion. reported as basic earning s per share?

If noncumulative, the preference dividend is deducted only when

a. 8.20
declared . b. 8.72
C. 9.36
d. 7.82
398 399
 Solution 26-3 Answer d . Pr~blem 26-5 (IFRS)
Ordinary shares- January 1, 2013 200,000 Canyon Company reported in the fmancial statements for the year ended
Stock dividend on October 1, 2013 (10% x 200,000) 20,000 December31, 2013 basiceamings per share ofP85. On July 1, 2014,
Total ordinary shares outstanding 220,000 the entity made a 3 for 1 bonus issue. What 2013 eamings per share
should be reported as comparative inf01mation in the financia1 statements
. Net income 1,920,000
for2014?
Preference dividend ( 200,000) a. 21.25
Net income to ordinary shares 1,720,000 b. 37.50
c. 34.00
Basic EPS (1, 720,000 I 220,000) ?.82 d. 28 .30

Problem 26-4 (AICPAAdapted) Solution 26-5 Ans'rt'er a

Ute Company bad the following capital structure during 20 12 and Basic earnings per shzre- 2013 (8514) 21.25
2013:
Preference share capital, P 10 par, 4% cumulative ,
The bonus issue is the equivalent of a stock dividend.
25,000 shares issued and outstanding 250,000 Problem 26-6 (IFRS)
Ordinary share capital, P5 par, 200,000 shares
issued and outstanding 1,000,000 Smart Company reported profit before tax ofP5,800,000 and income
The entity reported net income of P500,000 for the year ended tax expense ofP 1,500,000 for the current year. In add1tion, the entity
December 31, 2013. The entity paid no preference dividends during paid during ilie year an ordmary dividend ofP400,000 and a preference
dividend ofPSOO,OOO on the redeemable preferences shares. The
2012 and paid P 16,000 in preference dividends during 2013. What entity had Pl,OOD,OOO ofPS par value ordinary shares in issue. What
amount sboul-:1 be reported as basic earnings per share? amount shouid be reported as basic eamings per share for the year?
a. 2.42 a. 21.50
b. 2.45 b. 19.00
c. 2.48 c. 8.60
d. 2.50 d. 7.60

Solution 26-4 Answer b Solution 26-6 Answer a

Het income 500,000 Ordinary shares outstanding ( 1,000,00015) 200.000
Prefe re nce dividend for one year (250 ,000 x 4%) ( 10. 000)
Basic earnings pe r share (4,3 00,000/200 ,000) 2] .50
N et income to ordinary shares ~QQQ
The preference divid end is ignored because rhe prefer.ence shares.
Bask ea rnings per share (490,000 I 200,000) 2.45 are redeemabl e and tht'rcfo rc the preference dividend ofP500.000
is aiready deduct ed fro m the ne t income as a finan re <'Ost.

400 401
Problem 26-7 (PHILCPAAdapted) Problem 26-9 (PHILCP.-\Adapled)
During 2013, Globe Company had the following two classes of
share capital issued and outstandi-ng for the entire year: Umted Compauy rep01ted the following on December 31, 2013:

Ordinary share capital, 200,000 shares, P 10 par 2,000,000 8% cumulative preference share capital, PS.O par value 4,500,000
Preference share capital, 2,000 shares, P 100 par, Ordinary share capital, P 1 par, i 0,000.000 shares 10,000,000
12% convertible share for share into ordinary share 200,000 Share premium 10.500,000
Retained earnings, January 1, 2013 132,000.000
The net income for 2013 wasP 1,800,000 and the income tax rate was
Net income for 2013 35,000.000
30%. In the computation ofbasic earnings per share, what is the amount
to be used as earnings?
The net income included an expropriation loss ofP8,000,000. Vlhat
a. 1,824,000 amount should be reported as basic earnings per share?
b. 1,776,000
c. 1,224,000 a., 3.46
d. 1,800,000 b. 4.04
Solution 26-7 Answer d c. 4.63
In the absence of any contrary statement, the preference share is d. 4.67
noncumulative.
Solution 26-9 Answer a
Accordingly, the annual preference dividend is not deducted from
net income because there is no declaration. Net income 35,000,000
Problem 26-8 (IAA) Preference dividend for 2013 (4,500,000 x 8%) ( 360,000)

During 2013, Innova Company had outstanding 200,000 ordinary Net income to ordinary shares 34,640,000
shares and 20,000 cumulative preference shares with a Pl-0 per share
dividend. Each preference share is convertible into five ordinary shares. Basic EPS (34,640,000 I 10,000,000) 3.46
The entity had a P3,000,000 net loss for 2013. No dividends were
paid.or declared. What amount should be reported as basic loss per Problem 2610 (IAA)
share?
On 1anuary 1, 2013, Pink Company had 200,000 ordinary shares and
a. 15.00 · 100,000 4% P 100 par value cumulative preference shares outstanding.
b. 16.00
No dividends were declared on either the preference or ordinary shares
c. 10.00
10.67 in 2012 or 2013. On February 10, 2014, prior to tbe issuance of the
d.
financial statements for the year ended December 31,2013, the entity
declared a 100% share split on ordinary shares. Net income for 2013
Solution 26-8 Answer b
was P7 ,500,000. What amount should be reported as basic camings
Net loss 3,000,000 per share? ·
Preference dividend (20,000 x 10) 200,000
a. 35.50
Total loss to ordinary shares 3,200,000
b. 37.50
c. 17.75
Basic loss per share (3,200,000 I 200,000)
d. 18.75
402 403
 Pt·oblem 26-12 (IFRS)
Solution 26-10 Ans:w,.er c On January 1, 20i3, Sabina Company bad ordinary share capit::~l
Net income 7,500,000 outstanding ofP 100 par value, 200,000 shares or a total par value
Preference dividend (4% x 10,000,600)" ( 400,000) ofP20,000,000. On July 1, 2013, a bonus issue: was made in the
Net income to ordinary shares 7,100,000 ratio of one additional ordinary share for encb origi11a 1 share. The
Divide by ordinary shares (200,000 + 200,000) 400,000 net income for 2013 wasP 12,000,000. What amount should be
Basic. EPS reported as basic earnings per share?
17.75
a. 30
Problem26-11 (IAA) b. 4G
T~e income statement of Laguna Company for the year ended c. 20
December 31, 2013 showed net income ofP 15,000,000. The net d. 60
income for reflects an income tax rate of 30%. The net income
included a casualty loss ofP5,000,000 before income tax. The Solution 26-12 Answer a
entity reported the following shareholders' equity on December January .I Ordinary shares 200,000
31, 2013:" Ju]y 1 Bonus issue 200,000
Preference share capital' 10% cumulative, P50 Total, ordinary shares 400,000
'p ar value, 100,000 shares 5,000,000
Ordinary share capital, P 100 par value 30,000,000 Basic earnings per share ( 12,000,000/400,000). 30
Share premium 10,000,000
Retained earnings 18,000,000 The ''bonus issue" is the equivalent of a stock dividend.
Treasury ordinary shares, 50,000, at cost 4,000,000
What amount should be reported as basic earnings per share? Problem 26-13 (Applicatio11 Guidance PAS 33)
a. 58.00 On January 1, 2013, Gina Company had 300,000 ordinary shares
b. 60.00 outstanding, P 100 par or a total par value ofP30,000;000. During
c. 73.60 20 13 , the entity issued rights to acquire one ordinary share at P l 00
d, 48.33
in the ratio of one share for everf 5 shares held. The rights are
Solution 26-11 Answer a exercised on March 31, 2013. The marke1 value of each ordinary
share immediately prior to March 31 , 20t3 was P160. The net
Ordinary shares issued (30,000,000 I PI 00) 300,000 income for 2G 13 was P6,000,000. What amount should be reported
Treasury shares ( 50,000) as basic eamings per share?
Ordinary shares outstanding 250,000 a. 17.14
Net income 15,000,000 b. 16.67
Preference dividend (10% x 5,000,000) ( 500,000) C. l !>.75
Net income to ordinary shares d. ,17 .39
14,500,000
Bask earnings p-er share (14,500,000 I 250,000) 58
405
404
Solution 26-13 Answer a· Pr~blem 26-14 (Application Guidance PAS 33)
The theoretical value of a right is computed as follows: E~cel Company had 600,000 ordinary shares outstanding oi:.
January 1, 2013. During 2013, the entity issued rights to ac,q uire
Market value of share right-on one ordinary share at P 10 in the ratio of one new share. for
minus subscription price every 4 shares outstanding. The market value of the ordinary
= Value of one right share immediately prior to the rights issue is P35. The rights were
Number of rights to purchase exercised on October 1, 2013. The net income for the year is
one share plus 1 P8,550,000. What amount should be reported as basic earnings
per share?
Applying the forinula, the theoretical value of one right is: a. 11.40 ·
b. 12.00
160- 100 60 c. 14.25
= = P1 0 per right d. 13.41 ·
5 +I 6
Solution 26-14 Answer b
Market value of share right-on 160 35-10
Theoretical value of right 10 Theoretical value ofright = -------
4+1
Market value of share ex-right 150
5
Adjustment factor . 160/150
Market value of share right-on 35
.5
The number of ordinary shares outstanding prior to the exercise .Theoretical value of right
of the rights is multiplied by the adjustment factor "whose Market value of share ex-right 30
numerator is the market value of the share right-on and whose
Adjustment factor 35/30
denominator is the market value ofthe share ex-right".
Ordinary shares on January 1 300,000 Ordinary shares on January 1 600,000
Ordinary shares issued through exercise Ordinary shares issued through exercise of
of rights on March 31 (300,000/5) 60,000 rights on October 1 (600,000/4) 150,000
Total ordinary shares on March 31 360,000 Total ordinary shares - October 1 750,000

January 1 300,000 x 160/150 x 3/12 January 1 600,000 x 35/30 x 9/12 525,000

80,000
October 1 750,000x 3/ 12 187,500
March 31 360,000x9/12 270,000
Average number of ordinary shares 712,500
Average number of shares 350,000
Basic earnings per share ( 8,.550 ,000/712,500) J.bQ.Q
Basic earnings per share (6,000 ,000/?50J)(l0)

40 6 4 07
 27 Problem 27-3 (IFRS)
Prc¥ise Company had a profit after tax ofP 1 ~,000,~00 _for 20 13.
BASIC EARNINGS PER SHARE 'l11e following appropriations have not been considered m this amount:
Average shares Arrears ot cumulative preference dividend for 2 years 4,000,000
Ordinary dividends . . 5,000,000
Preference share premium payable on redemptton 1,000,000
Prob~em 27-1 (IFRS) Exceptional profit, net of tax 4,000,000
Monopoly Company had 100,000 equity shares in issue on January
1,2013, On Ju]y 1, 2013, the entity issued 20,000 new shares by The entity had J,OOO,OOO ordinary shares ofP l p_ar value outstand!ng
way of a 1 for 5 bonus, On October. !, 2013, the entity issued on January 1. 2013. The following share transactions occurred dunng
28,000 new shares for cash at full market price. When calculating t 1c current year:
basic earnings per share, what is the average number of shares?
Jan. I" Issued at P5 per share, Pl paid to date and
a. 100,000
entitled to participate in dividends to th~
b. 117,000 extent paid ttp
c. 148,000 250;000
April 1 fu1l market price P3 per share issue 600,000
d. 127,000 July 1 Purchase of ()Wn shares at P3.50 per share . 400,000
Solution 27-1 Answer d What amount should be reported as basic earnings per share?
January 1 (100,000 + 20,000)
Octpf,>er 1 ( 28,000 x 3/12 ) 120,0 10 a. 4.85
_lf.JO b. 4.57
Average shares c. 3 64
127,000
d. 3.94
Problem 27-2 (IAA)
Solution 27-3 Answc1 a
On De~emr:1 31. 2013, ~eacock CompanY: had 500,000 ordinary
shares 1ssued and outstandmg, 400,000 of which had been issued and Net income per book 15,000,000
outstanding throughout the year and 100,000 ofwhich were issued on Exceptional profit 4,000,000
. October I, 2013. Net income for the year was P5,100,000. What Adjusted net income ,
amount should be reported as basic eammgs per share? 19,000,000
Preference dividend for current year (4,000,000/2) ( 2,000.000)
a. 10.10 Preference share premium payable upon redemption ( 1,000,000)
b. 12.75
c. 12.00 Net income to ordinary shares 16,000,000
d. 11.35
January 1 (3,000,000 x 12112 ) 3,000.000
Solution 27-2 Answer c (5,100,000 I 425,000) January 1 (250,000 x 115 x 12/12) 50,000
April 1 (600.000 X 9/12 )
January 1
October l
(400,000x 12!12)
(lOO,OOOx 3/ 12) 400,000
25,000
Tuly .1 (400,000x6'12 ) ( ___ '"00

Average shares Average shares 3,300,000

425.000
Basic earnings per sh a·J·c ( 16,000',009/3,300,000) 4.85
408

409
 Problem 27-4 (PHILCPAAdapted) Solution ?7-5 Answer b
January 1 (20,000 X 12/ 12) ~0,000
Yasmine Company showed the following infom1ation for 2013? May 1 (10,500 X • 8/12)
0

7,000
Income from continuing operations 3,765,000 Average number of shares
Loss from discontinued operations 27,000
( 540,000)
Net income 3,225,000 Net income 967~000.
Retained earnings- January 1 1,000,000 Preference dividend ( l 0,000 x P40) (400,000)
Dividends paid on 12% preference shares ( 120,000) Net income to ordinary shares
Dividends paid on ordinary shares ( 700,000) 567,000

Retained earnings - December 31 3,405,000 Basic earnings per share (567,000 /27,000) 21.00

On December 31, 2013, the entity had outstanding 140,000 ordinary Problem 27-6 (AICPAAdapted)
shares, and lO,OOOpreference shares withP100parvalue. OnApril1,
Strauch Company ~~done class of ord~nary share capital outstanding
2013, the entity issued 20,000 ordinary shares. What amount should and no othe~ secunttes that are potentially convertible into ordinary
be reported as basic earnings per share?
share~. ~uni_J.g 2013, I~q,ooo sha_res were outstanding. In 2014,
a. 27.00 two dtstubut10ns of addttlonal ordmary shares occurred: On April
b. 23.00 1, 2'Q,OOO shares of treasury were sold, and on July I a 2-for-1
c. 26.89 share split_was issued. Net income was P410,000 in' 2014 and
d. 23.03 P35~,000 m 2013. What amount should be.r6ported as basic
earmngs per share in the comparative income statement?
Solution 27-4 Answer b
. January 1 (120,000 x12/12) 120,000 2014 2013
April 1 ( 20,000 x 9/12) 15,000 a. 1.78 3.50
Average shares 135.000 b. 1.78 1.75
c. 2.34 1.75
Net :ncorne 3,225,000 d. 2.34 3.50
Dividends on preference shares ( 120,000)
Net income to ordinary 3,105,000 Solution 27-6 Answer b
23.00 2014 basic EPS (410,000 / 230,000) 1.78
Basic earnings per. share (3,105,000 / 135,000)
January 1, 2014 (200,000 12/12 ) 200,000
..
,
Problem 27-5 (AICPAAdapted)
April 1, 2014 ( 20,000
X
X 2 X 9 /12) 30,000
Rand Company had 20,000 ordinary shares outstanding on January
1, 2013. On May 1, 2013, the entity issued 10,500 ordmary shares. Average number of shares 230,000
Outstanding all year were 10,000 nonconvertible and noncumulative
preference shares on which the annual dividend ofr40 per share 2013 basic EPS (350,000 I 200,000) 1.75
was paid in December 2013. Net income was P967,000. What
amount should be reported as basic earnings per share? December 31,2013 balance 100,000
July 1,2014 2-for-1 share split 100,000
a. 18.60
b. 21.00 Total ordinary shares -December 31, 2013 200,000
c. 28.40
d. 35.80
l •
410 411
t
!.
Problem27-7 (IAA)
Problem 27-9 (AICPAAdapted)
Aubrey Company had 600,000 ordinary shares outstanding on January
1, issueti 120,000 shares on May 1, purchased 60,000 treasury shares Jet Company provided the following information for the current year:
on September 1, and issued 90,000 shares on November 1. What is January 1 Shares outstanding 200,000
the weighted average number of shares outstanding for the year? April 1 2-for- 1 share split 200,000
July 1 Shares issued 100,000
a. 675,000
What is the average number of shares?
b. 750,000
c. 660,000 a. 400,000
d. 810,000 b. 450,000
c. 500,000
Soiution 27-7 Answer a d. 540,000
January 1 ( 600,000 X 12/12) 600,000
May 1 ( 120,000 X 8/12) 80,000 Solution 27-9 Answer b
September 1 ( 60,000 X 4/12) ( 20,000) January 1 (200,000 x 2 x 12/12) 400,000
November 1 ( 90,000 X 2/12) 15,000 July . '1 ( 100,000 x -6/12 ) 50,000
Average shares 675,000 450,000

Problem 27-8 (IAA) The share split is reco~nized retroactively, meaning, it is treated
Sharon Company provided the following information in relation to share as a change from the date the original shares are issued.
capital: ·
1,250,000.
Thus, the balance of200,000 shares on January 1 would become
January 1~ 2013 Shares outstandiag 400,000 as a result of a 2-for-1 sha.re split. ·
April 1, 2013 Shares issued· 200,000
October 1, 2013 Treasury shares purchased 100,000
December 1, 2013 Issued a 100% share dividend Problem '},7-1 0 (AICPAAdapted)
Timp Company had the foll~wing transactions during the year:
\\That is the number of weighted average shares?
1/l Ordinary shares outstanding 300,000
a. 2,700,000 2/1 Issued a 10% stock dividend 30,000
b. 2,775,000 311 Issued ordinary shares in a "purchase" combination 9o,opo
c. 2,750,000 7/1 Issued ordinary shares for cash · 80,000
d. 1,350,000
12/31 Ordinary shares outstanding 500,000
Solution 27-8 Answer c
January 1 (1,250,000 x 200% ) 2,500,000 Vlhat is the weighted average number of shares outstanding?
April · 1 ( 200,000 X 200% X 9,' 12) 300,000 a. 400,000
·october 1 ( 100,000 x 200%" 3/12) ( 50,000)
b. 442.500
Average shares 2,750,000 c. -~45,00(;
d. ·160,0.00
412
413
 Solution 27-10 Answer c
January 1 300,'000 x 1.10 x 12112
¥arch 1 90,000 x 10112
July • 1 .80,000 x 6/12
Ave~;age number of shares
. The stock .dividend is treated as a change from the date the . . 1
shares are Issued.
Problem 27-12 (IAA)
S.h.ane Company had 100,000 ordinary shares issued and outstanding
330,000 OB January 1, 2013. During the current year, the entity had the
following ordinary share transactions:
75,000
40,0QO April 1 Issued 30,000 previously unissued shares
May 1 Split the share 2 for 1
445,000
June 30 Purchased 10,000 shares for the. treasury
July 30 Distri'Quted a.20 percent stock dividend
. ongma December 31 Split the share 3 for 1

What is the weighted average number of shares that should be used

Thus, the balance of300,000 on January l would,become 330 000 in calculating earnings per share?
shares. '
a. 288,000
Problem 27-11 (IAA) b. 864,000
c. 8.82,000
OnJanuaryl,2013,NissanCompanyhad 100 OOOord· h d. 972,000
outstan_ding. During the current year th; foll t.nary s ares
occurred: ' owmg events Sol~tion 27~12 Answer b
January 1 (100,000 X 2 X 1.20 X 3 X 12112) 720,000
March 2-for-1 share split . 162,000
April 1 ( 30,000 X 2 X 1.20 X 3 X 9/12 )
June Issued 30,000 additional shares 30 ( 10,000 X 1.20 X 3 X. 612 ) ( 18,000)
June
September 20% stock dividend · 864,000
What is the weighted average number of ~hares outstandi~g forth Problem 27-13 (IAA)
~~ . e
Helen Company provided the following share transactions for the current
a. 276,000 year:
b. 261,000 January 1 Shares outstanding 44,000
c. 230,000 February 1 Issued for cash 56,000
d. 256,000 May 1 Acquired treasury shares 25,000
August 1 25% stock dividend
September 1 Resold treasury shares 10,000
Solution 27-11 Answer b Issued 3 for 1 share split
November 1
. January 1 (100,000 x 2 x 1.20 x 12112) 240,000
June 1 (30,000 x 1.20 x 7I 12 ) .What is the weighted average number of shares for EPS
21,000 computation? ·
Average number of shares . 261,000 a. 305,000
b. 307,500
c. 103,750
d. 311,250

4l4 415
 Solution 27-13 Answer a
January 1 ( 44,000 x 1.25 x 3 x 12/ 12) Solution 27-14
February I (56,000 x 1.25 x 3 x 11/12) 165,000
May 1 (25,000 x 1.25 x 3 x 8/12) 192,500 Question 1 Answer a
September 1 (10,000 x 3 x 4/ 12 ·) ( 62,500)
10,000 2013

305,000 January (250,000 X 1.20 X 3 X 12/12)

Problem 27-14 (IAA) March
900,000
1 ( 24,000 X 1.20 X 3 X 10/12) 72,000
October 1' ( 16,000 X 3 X 3/12 )
Wisconsin Company had 250,000 ordinary shares outstanding on December I ( 15,000 X 3 X 1/ 12
12,000
) ( 3,750)
January 1, 2013. During 2013 and 2014, the following transactions
took place.
980,250
2013 March 1 Sold 24,000 shares
July January I, 2013
1 Issued a 20 percent stock dividend 250,000
.October March 1, 2013
1 Sold 16,000 shares . 24,000
December 1 Purchased 15,000 shares to be held in treasury July 1', 2013 (20% x 274,000)
54,800
October 1, 2013
16,000
2014 June December 1, 2013
1 3 for 1 share split ( 15,000)
September 1 Sold 60,000 shares Outstanding shares - December 31, 20!3 329,800

1. What is the weighted average number of shares" for 20 i3 to be Solution 2 Answer a

used in the earrungs per share computation for comparative financial 2014
statements at the end of2014?
January 1 (329,800 x 3 x 12/12)
a. 980,250 989,400
September 1 ( 60,000 x 4/12 )
b. 329,800 2o,ooo ·
c. 984,000 1,009,400
d. 969,000

2. V\'hat is the weight~d number of shares for 2014 to be used in the

earnings per share computation for comparative financial statements
attheendof2014? · ·
a. 1,009,400
b. ·1,049,400
c. 1,169,400
d. 989,400

416
411
28 Problem 28-2 (AICPAAdapted)
Dunn Company had 200,000 ordinary shares ofP20 par value and
20,000 shares ofP 100 par, 6% cumulative, convertible preference
DILUTED EARNINGS PER SHA RE share capital outstanding for the entire year ended December 31, 20 13.
Each preference share is convertible into 5 ordinary shares. The net
income for 2013 was P840,000. What amount should be reported as
Problem 28-1 (AICPAAdapted) diluted earnings per share?
Cox' Company bad 1,200,000 ordinary shares outstanding on a. 2.40
January 1 and Decem ber 31 , 2013. ln conn~cti_on wi~h the b. 2.80
acquisition of a subsidiary in June 2012, the enuty IS requued to c. 3.60
issue 50 000 additional ordinary shares on July 1, 2014 to the fom1er d. 4.20
owners ~fthe subsidiary. The entity paid P200,000 annual preference Solution 28-2 Answer b
dividend in 2013 and reported net income ofP3,40 0,000 for the
year The prefere nce share capital is noncum ulative and Ordinary shar~s outstanding 200,000
non~onvertible. What amount should be reported as diluted Potentia.! ordinary shares to be issued for conversion
earning s per share? of preference shares (20,000 x 5) loo,ooo
Total ordinary shares 300,000
a. 2.83
b. 2.72 Diluted EPS (840,000 I 300,000)
c. 2.67 2.80
d. 2.56 Under diluted EPS, the annual dividend on the convertible preference
share is no longer deducte d from net income bec&use it ~s assumed ·
Solution 28-1 Answer d . that the preference share is already converted into ordinary share.
'
Ordinary shares 01,1tstanding 1,200,000
Potential ordinary shares to be issued in the Problem 28-3 (IAA)
acquisition of subsidiary 50,000 Vios Company had 100,000 ordinary shares outstanding on January 1,
2013. In addition, on January 1, 2013, the entity bad issued 10,000
Total ordinary shares 1,250,000
convertible cumulative 5% preference shares with P 100 par. These
preference shares were converted on September 1, 2013. Each
Net income 3,400,000
preference share was converted into six ordinary shares. The preference
Preference dividend ( 200,000)
dividends for the entire year were paid in full before the conversion.
Net income to ordinary shares 3,200,000 The entity has no other potentially dilutive securities. Net income for.
2013 was P2,000,000. What amount should be reported as diluted
Diluted earning s per share (3,200,000 I 1,250,000) 2.56 earnings per share?
Note that the preference share is non convertible a~d _therefor~ n?t a. 12.50
a potential ordinary share. Thus, the preference d1v1dend pa1d ts b. 12.19
deducted from net income. c. 16.25
d. 19.50
418
<flO
 Problem 28-5.(AICPAAdaptcd)
Solution 28-3 Answer a
Bacoor Company had 2,500,000 ordmary shares outstanding on
January 1 Outstanding 100,000 .·
January 1, 2013. An additional 500 ( 1QQ ordinary shares were issued
September 1 Conversion (100,000 x 6) 60,000
on April I, 2013, and 250,000 more on July 1, 2013. On October 1,
Total ol'dinary shares 160,000 2013, the entity issued 5,000, Pl,OOO face \alue, 7% convertible bonds.
Each bond is convertible into 40 ordinary shares. ~o bonds were
Diluted EPS . (2,000,000 I 160,000) 12.50 converted into ordinary shares m 2013. \Vhat is the number of shares
to be used in computing basic camings per share and diluted eamings
The issuance of ordinary shares on September 1 is not "averaged" per share, respectively?
anymore because the convertible preference shares are outstanding
on January 1. a. 2,875,000 and 2,925.000
b. 2,875,000 and 3,075,000
Under diluted EPS, the annual dividend on convertible preference c. 3,000,000 and 3,050,000
share ts no.longer deducted from net income. d. 3,000,000 and 3,200,000

Problem 28-4 (AlCPAAdapted) Solution 28-5 Annver c

On January 1, 2013 , Lex Company h ad 600,000 ordinary shares January (2,500,000 12 J2)
X 1
. 2,500,000
outstanding. OnApril1 ~ 2013, an additional180,000 ordinary shares April ( 500,000 X 9/12) 375,000
were issued for cash. The entity also had P~,OOO,OOO of 8% July ( 250,000 X 6'12) 125,000
convertible bonds outstanding during 2013, which are convertible
Average shares- Basic EPS 3,000,000
into 150,000 ordinary shares. The bonds ar~ dilutive iri the 2013
earnings per share computation. No bonds were issued or converted January 1 2,500,000
· into ordinary shares during 2013. What is ~e number of shares that April 1 375,000
should be used in computing diluted earnings per share? July 1 125,000
a. 735,000 October 1 (5,000x40x3/ 12) 50,000
b. 780,000 Average shares - Diluted EPS 3,050.000
c. 885,000
d. 930,000

Solution 28-4 Ans11.•er c

Ordinary sha res outstanding on January 1 600,000 '
Ordinary shares issued on April 1 ( 180,000 x 9/12) 135,000
Potential ordinary shares to be issued fOt bond conversion i 50,000
Total ordinary shues 885.000
----

421
'420
Problem 28-6 (IAA) Problem28-7 (AlCPAAdapted)
Fortuner Company bad200,000 ordinaiyshares outstanding op Japuary On June 30, 2012, Lomond ~Gmpa.ny Issued.20, PIO,OOO, 7%
I, 2013. On January 1, 2013, the entity had issued 4,000 co~vertible bonds at face value. Eacb. bond was converti]?le into 200 ordinary
10% bonds with P 1,000 face value. The bonds were converted on 'shares . On January 1, 2013, 10,0()0 ordinl;lry shares were
outstanding. The bondholders converted all the bonds on July 1, 2013.
October 1, 2013 and 40 ordinary shares were issued in exchange for The net income for 2013 was P35,000. The tax rate is 30%. What
each bond. Net. income was P5,000,000. The income tax rate is 30%. amount should be reported as diluted earnings per share?
1. What is the amount ofbasic earnings per share? a. 2.50
b. 2.85
a':" 25.00 c. 2.92
b. 13.80 d. 3.00
c. 20.83
d. 15.62 Solution 28-7 Answer b
2. What is the amount of diluted earnings per share? Ordinary shares outstanding 10,000
Bond conversion on July 1 (20 x 200) 4,000
a. 14.47
b. 21.65 Total ordinary shares .14,000
c. 14.72 Net income' 35,000
d. 14.61 Interest on bonds· from January 1 to July 1. 2013
(200,000 X 7% X 6/12) 4,900
Solution ·28-6 Question i Answer c Question 2 Answe1 a
Adjusted income 39,900
January · 1 Outstanding 200,JOO
October 1 Con·version (4,000 x 40 x 3/12) 40,000 Diluted earnings per share (39,900 I 14,000) 2.85
Average number of shares 240,000
Problem 28-8 (IAA)
Basic EPS (5,000,000 I 240,000) 20.83
On January 1, 2013, Kate Company had 500,000 ordinary shares
January 1 Outstanding 200,000 outstanding. On October 1, 2013, an additional I00,000 ordinary shares
October 1 Conversion (4,000 x LlO) 160,000 were issued. In addition, the entity had P20,000,000 of 6% convertible .
Total ordin&ry shares 360,000 bonds outstanding on January 1, 2013 which are convertible into
225,000 ordinary shares. No bonds were converted in 2013: The net
The issuance of ordinary shares on October 1 is not "averaged" income for 2013 was P6,000,000. The income ta·x rate was 30%.
because the convertible bonds are outstanding on January 1. What amount should be rep~r:ted as diluted earnings per share?
Net income 5,000,000
Interest on bonds net of tax from January 1 to October 1 a. 10.00
(-t,OOO,OOOxl0%x9112x70°1..' . 210,000 b. 9.60
Adjusted income 5,210,000 c. 9.1 2
d. 8.00
Diluted EPS (5,21 0,000 I 360,000) 14.47

422 423
Solution 28-8 Answer c Solution 28-9 Question I Answer d Question 2 Answer c
Ordinary shares outstanding on January l , 500,000 Netincome ·
8,000,000
Ordiuary shares issued on October 1 ( 100,000 x 3/12) 25,000 Preference dividend (20,000 x 40)
( 800,000)
Potep.tial ordinarY. shares for bond conversion 225,000 Net income to ordinary shares
7,200,000
Average ordinary shares 750,000
Basic EPS (7,200,000 1200,000)
·Net income 6,000,000 Ordinary s~ares outstanding.
Interest on bonds (6% x 20,000,000 x 70%) 840,000 200,000
Potential ordinary shares - preference
40,000 ..
Adjusted net' income 6,840,000 :Potential ordinary shares- bonds (5,000 x 50) 250,000.
Tota_l ordinary shares
Diluted EPS (6,840,000 / 750,000) 490,000
9.12
Net income
8,000,000
Problem 28-9 (IAA) Interest on bonds (10% x 5,000,000 x 70%)
350,000
Adjusted net income
Hanzel Company had 200,000 ordinary shares, 20,000 convertible ~QRQQ
preference shares, and P5,000,000 of· I 0% convet{:ib1e bonds Diluted EPS (8,350,000 I 490,000)
outstanding during the current year. The preference shares are convertible 17.04
into 40,000 ordinary shares. During the current year, the entity paid Problem 28-10 (IAA)
dividends ofP20 per share on the ordinary shares and P40 per share
on the preference shares. Each Pl,OOO bond is convertible into 50 Atl~tic Company had the following capital on January 1, 2013.
ordinary shares. The net income for'the cun·ent year was P8,000)000 Ordinary share capital, PlO par value, 800,000 shares 8,000,000
and the income tax rate is 30%. 12% conveiiib1e bonds, each Pl,OOO bond
is convertible into 80 ordinary shares .5,000,000
1. Vlhat amount should be reported as·basic earnings per share!
May 1 Issued 60,000 ordinary shares for P30 p~r share.
a. 40.00 ~ July 1 Purchased 100,000 shares of treasury at P35 per share.
b. 37.50 Oct. 1 Converted P2,000,000 face vali1e of bonds.
c. 33.50 Dec. 3 I Net income for2013 was P9,500,000. The tax rate is 30%.
d. 36.00 1. ·what is the amount ofbasic earnings per share?
a. 11.45
2. What amount should be reported as diluted earnings per share? b.. 11.88
c. 10.33
a. 13.98 d. 10.80
b. 15.61
c. 17.04 2. What is the amount of diluted earnings per share?
'd. 16.32 a. 8.30
b. 8.44
c. 8.33
d. 8.48
424 42S
Solution 28-10 Problem 28:-11 (IFR.S)
Question 1 Answer a On January 1,2013, Bergen Companyissued4, 000,000 convertible
January 1 Outstanding 800,000 bonds at tace value ofPIO or a total ofP40,000,000. The bonds
May 1 (60,000 X 8/12) 40,000 mature in 3 years and can be ~onverted into two ordinary shares for
July .1 (100,000 X 6/12) ( 50,000) each bond. The entity can settle the principal amount of the bonds in
October 1 (2,000 X 80 X 3/ 12) 40,000 ordinary shares or in cash but the entity is likely to settle the contract by
issuing shares. ··
Average number of shares· 830,000 -
When the bonds are issued, the interest rate for a similar debt without
Basic. earnings per share (9,500,000 /830,000) 11.45 conversion rights is 10% and the market value of an ordinary share is
P4. The profit attributable to ordinary shareholders for 2013 is
Question 2 Answer a P33,000,000 and there are 10,000,000 ordinary shares outstanding
January 1 Outstanding ·800,000 during the current year. The income tax rate is 30%. The proceeds
January 1 (5,000 bonds x 80) 400,000 from the issuance of the bonds are allocated·as follows:
May 1 (60,000 X 8/12) 40,000
(1 00,000 X 6/12) ( 50,000) Liability component 30,000,000
July 1
Equity component 10,000,000
Average number of shares 1,190,000
Total proceeds 40,000,000
All of the 5,000 bonds are assumed to be converted on January 1,
What amount should be reported as diluted earning~
2013 because the cOnvertible bonds are outstanding on January 1, 2013. . . per sbare?
Net income 9,500,000 a. 2.00
Interest on bands actually converted on b. 1.95
October 1 C,000,000 x 12% x 9/12) 180,000 c. 3.30
Interest on bonds not converted d. 3.51
(3,000,000 X 12%) 360,000
Total interest 540,0QO Solution 28-11 Answer b
Tax effect (30% x 540,000) (162,000) 378,000 Net income 33,000,000
Adjusted income 9,878,000. Interest on bonds (1 0% x 30,000,000 x 70%) 2,100,000
Adjusted net income 35,100,000
Diluted earnings per share (9,878,000 I 1,190,000) 8.30
Ordinary shines outstanding 10,000,000
Potential ordinary shares from bond conversion
(4,000,000 X 2)
Total ordinary shares it.OOO,OOO

D_iluted ea,,.ings per share (35,100,000 / 18,000,00v) _L95

426 427
Problem 28-12 (IFRS)
Accentu re Compan y had made a net profit attributa ble to ordinary Problem 28-13 (AICPA Adapted )
shareho lders ofP2,00 0,000 for the year ended Decemb er 31, 2013. Mann Compa ny had 300,00 0 ordinar y shares issued a!'ld
There·are 100,000 ordinary shares outstanding during the entire year. outstan ding on January 1, 2013. On July 1, 2013, an addition al
Since January 1, ~013, there has been R800 ,000 of5% converti ble 50,000 ordinar y shares were issued for cash. The entity also
loan in issue. The terms of conversion are for every P 10,000 nominal bad unexerc ised share options to purchas e 40,000 ordinary shares
amount as follows: at P 15 per share outstand ing at the beginni ng and end of 2013. No
valu~ was assigned to the share options. The av~rage market price
June 30, 2013 120 ordinary shares of ordinary share was P20 during 2013. \Vhat is the number of
June 30, 2~14 150 ordinary shares shares that should be used in compt.c ing diluted earning s per
June30, 2015 140 ordinary shares share?
a. 325,000
No conversion has taken place during the current year. The interest on
b. 335,000
the convertible loan is allowable for a tax relief of30%. What amount
c .. 360,000
should be reported as diluted earning s per share for the year ended
d. 365,000
Decemb er 31, 2013?
Solution 28-13 Answer b
a. 18.11
b. 17.86 Ordinary shares outstand ing on January 1 300,000
c. 18.21 Ordinary shares issued on July 1 (50,000 x 6/12) 25,000
Share options outstanding · 40,000
d. 18.24
Assumed treasury shares (600,000/20) ( 30,000)
Solution 28-12 Answer a Average number ·of shares 335,000

N~t income 2,000,000 The proceed s of P600,00 0 (40,000 x 15) from the exercise of the
Interest on bonds (800,000 x 5% x 70%) - 28,0~Q share options are assumed to acquire treasury shares at the average
Adjusted net income market price.
2,028,00(.,

Ordinary shares outstanding 100,000 Problem 28-14 (PAS 33)

Potential ordinary shares through conversion of bonds On January 1, 2013, Citadel Compan y bad 500,000 ordinary shares
on most favorab le terms (800,000/10,000 x 150) 12,000 outstand ing with P 100 par value. On same date, the entity had also
Total ordinary shares, 112,000 unexercised share options to purchase 50,000 shares at P 180 per she!:e.
The fair value of the share option on grant date is P20. The average
Diluted earning s per share (2,028,000/1 12,000) 18.11 market price of ordinary share is P250. What amount should be reported
a~ diluted earning s per share?

a. 30.00
b. 29.18
.. . c . 29.41
428 d. 28.57

.:f?Q
Solution 28-14 Answer·c Problem 28-16 (IAA)
Adjusted exercise price ( 180 + 20) . 200 Altis Company had 100,000 ordinary shares outstanding on January
Proceeds from exercise of o}rtions (50,000 x 200) 10,000,000 I, 2013. On January 1, 2013, the entity had issued share options
that allowed employees to purchase 40,000 ordinary shares. The
Ordinary shares outstanding 500,000 option price is P 10 per share. The options were exercised on April
Option shares 50,000 1, 2013. The average share price was P20. The share price on .
Assumed treasury shares ( 10,000,000/250) ( 40,000) April I, 2013 wasP 16. Net income was P2,000,000.
Total ordinary shares 510,000 1. What is the amount of basic earnings per share?
I Diluted earnings per share (15,000,000/510,000) 29.41 a. 20.00
b. 15.38
c. 14.28
PAS 33, paragraph 4 7A, provides that for employee share options,
d. 16.67
the exercise price shall include the fair value of share options.
2. What is the. amount of diluted earnings per share?
Problem 28-~5 (IAA) a. 14.95
b. 13.70
Glenda Company bad 200,000 ordinary shares issued and outstanding
c. 14.28
on January 1, 2013. On July 1, 2013, the entity issued a 10% stock d. 12.90 .
dividend Unexercised stock options to purchase 40,000 ordinary shares
adjusted for the 2013 stock dividend at P20 per share were outstanding Solution 28-16 Question 1 Answer b Question 2 Answ~r p
at the beginning and end of20 13. The market price of ordinary share
Ordinary shares outstanding 1.00,000
which was not affected by the stock dividend was P25 during 2013.
Exercise of share options on April 1 (40,000 x 9112)" · 30,000
Net inco_me for 2013 was P 1,1 00,000. \Vhat amount should be reported
as ~iluted earnings per share? Average number of shares 130,000
a. 4 .23 Basic earnings per share (2,000,000/130,000) 15.38
b. 4.82
c. 5.00 Share options 40,000
d. 5.05 Assumed treasury shares (40,000 x 10 = 400,000116) ( 25,000)
Potential ordinary shares 15,000
Solution 28-15 Answer b
January 1 200,000 x 1.10 x 12112 220,000 Note that the share price of P16 on exercise date on Aprill,
1 Option shares 40,000 2013 is used in computing the assumed treasury shares.
1 Assumed treasury shares (800,000/25) ( 32,000) 100,000
Outstanding shares on January 1
Average number shares 228,000 Exercise of share options on April 1 30,000
Potentiai shares from January 1 to Aprill (15,000 x 3/12) 3,750
Diluted earnings per share (1,100,000/228,000) 4.82
Average number of shares 133,750

Diluted earnings per share (2,000,000/133,750) 14.95

430 431 .
 Problem 28-17 (IAA) Question 2 Answe r a
Croatia Company provided the following data on December 31,
The amount of diluted EPS is the same as the basic EPS because the
. 2013 . share options are antidilutive.
Opera ting revenue 5,600,000
To be dilutive, the option price'lnust be lower than the average.market
Opera ting expenses 3,000,000
30%
price. In.this case, the option prioe ofP25 is higher than the average
·Incom e tax rate
· Ordina ry shares outsta nding during the entire year 200,000 price ofP20. Accordingly, the share options are ignored in computing
diluted EPS.
On January 1, 2013, there were options outstanding to purch~se The bonds are also ignored because they are nonconvertible.
40 000 ordinary shares at P25 per share. The average market pnce Nonconvertible securities never become potential ordinary shares.
w~s P20 per share. Th~ entity report ed P2,00 0,000 of 10%
nonco nverti ble bonds on December 31,20 13 . In.terest expense Problem 28-18 (IAA)
is included in operating expenses.
Corolla Company had 100,000 ordinary shares outstanding
1. What is the amount ofbasic earnings per share? throughout the year. On Ja,nuary 1, 2013, the entity had issued share
a. 13.00 options that allo~ed employees to purchase 40,000 ordinary shares.
b. 10.83 The option exercise price is P 10 per share. The entity has no other
c. 7.42 potentially dilutive securities. Net income for 2013 was P2,000,000.
d. 9.10 The average share prjce for the year wasP 16. What amount should
be reported as dilute d earnin gs per share?
2. \Vbat is the amount of diluted ~gs per share?
a. 17.39
a. 9.10
b. 20.00
b. 8.89
c. 9.58 c. 14.29
d. 7.58 d. 16.00

Soluti on 28-17 Soluti on 28-18 Answe r a

Questi on 1 Answe r d Ordina ry shares outstanding 100,000
Share options 40,000
Opera ting revenue 5,600,000 Assumed treasury shares (40,000 x 10 = 400,000116)
Opera ting expenses (3,000,000) ( 25,000)
Total ordinary shares
Incom e before tax 2,600,000 ..!12R_QQ
Income tax (30% x 2,600,000) ( 780,000)
Dilute d earnin gs per share (2,000 ,000 I 115,000) 17.39
Net incom e 1,820,000

Basic earnin gs per share ( 1,820,000/200,000) 9.10

432
433
Problem 28-19 (AICPAAdapted) Pt·oblem 28-20 (!FRS)
Riselie Company is calculating earnings per share for inclusion ·itt tb,e · Mount Banahaw Company had outstanding 20,000 written put
annual report to shareholders. The entity obtained the.following· options on the ordinary sha.res with an exercise price ofP350. The
information from the controller's office: · average market price of ordinary shares for the period is P280. In
Net income from January 1 to December 31 125,000 calculating diluted earnin gs per share, how many potential
Number of outstaqding shares: ordinary shares shou.ld b.e included as a result of the wr~tten put
January 1 to March 31 15,000 options? ·
April 1 to May 31 12,000
June. 1 to December 31 18,000 a. 20,000
b. 25,000
1n addition, the entity issued 10,000 incentive share options with an c. 5,000
exercise price ofP30 to employees and a year-end market price of d. 0
P25 per share. What amount should be reported as diluted earnings
per share? · Solution 28-20 Answer c
~- 4.6-3 Written put options are co·ntracts that require the ·entity to repurchase
b. 4.85 its own shares. ·
c. 6.94 Ifthe exercise price is higher than the average market price, U1e potential
d. 7.69 ordinary shares shall be included in computing diluted earnings per share.
Solution 28-19 Answer d Exercise price (20,000 x P350) 7,000,000
January 1 to March 31 (15,000x3112) · 3,750
April1 to May 31 (12,000 X 2/12) . 2,000 It is assumed that sufficient number of ordinary shares shall be
June 1 to December 31 (18,000 X 7/12) 10,500 issued at the average market price to cover the amount of
Weighted average shares outstanding 16,250 P7,000,000.

Diluted EPS (125,000 /16,250) Ordina1y shares assumed to be issued

(7 ,000,000 I P280) 25,000
Since the exercise price is higher than the market price, the options Ordinary shares to be repurchased under the
written put options 20,000
are antidilutive and therefore ignored in computing diluted EPS.
Potential ordinary shares . 5,000

434 435
 Probl em 28'-22 (AICP AAda pted)
Probl em 28-21 {IAA) Pagsanjan Comp any reported the following capital stmcture at year-e
nd?
.Betty Comp any purch ased anoth er entity and agree d 2012 2013
to give
shareh olders oftbea cquire e--10, 000 additi onal shares in 2015 Ordinary sh.ares 500,000 500,000
ifthe Conve rtible prefer ence shares
acqui ree'sn etinco me in 2014 isP5,000,000. The acquiree's net 100,000 100,000
income 10% conve rtible bonds pay~ble
was P5,20 0,000 in 2013. Betty Comp any report ed net incom P3,000,000 P3,000,000
e for
2013 at P4,00 0,000 and had an avera ge numb er of ordina ry Durin g 2013, the entity paid the annua l divide nd ofP5 per share
shares on
outsta nding of 100,0 00 shares . What amou nt shoul d be report the prefe rence share . The prefe rence share s are conve rtible
ed as into
200,0 00 ordin ary share s and the 10% bonds are conve rtible
dilute d earni ngs per share for 2013? into
100,0 00 ordin ary share s. Net incom e for 2013 was P5,00 0,000
.
The tax rate is 30%. What amou nt shoul d be repor ted.as dilute
a. 44.44 d
earnings per &hare?
b. 40.00
a. 6.51
c. 36.36 b. 7.85
d. 47.27 c. 6.25
d. 9.00
Solution 28-21 Answer c
Solution 28-22 Answ er a
Number of average ordinary sbares outstanding Effect on net income:
100,000
Contingent ordinary shares Prefer ence divide nd (1 00,000 x P5) 500,000
10,000 · Intere st on bonds (3,000,000 x I 0% x 70%)
Total ordinary shares 110,000
110,000 Incremental EPS:
Diluted EPS Prefer ence share (500,000/200,000) 2.50
(4,000,0001110,000) 36.36 Bonds payab le (21 0,000/l 00,000) 2.10
PAS 33, paragraph 53, provides that ifa specified amou nt ofnet income The multiple potential ordinary shares shall be ranked starting with
is a condi tion for the issuance of contingent shares and that amou the
nt of lowes t incremental EPS.
net incom e is alrea dy attain ed at the end oft he curre nt year,
the Net income 5,000,000
contin gent shares are included in the comp utatio n of diluted earnin Preference divide nd
gs ( 5001000)
per share.
Net income to ordina ry share - basic EPS 4,500,000
It is assum ed that the net income at the end of the curren t year is the net
Net incom e Share s · EPS
incom e at the end of the contingency period .
Basic EPS 4,500,000 500,000 9.00
Convertible bonds payab k 210,000 100,000
However, restat emen t is not permi tted ifthe condition is not satisfi
ed Diluted EPS
when the contingency expires. 4,710,000 600,000 7.85
Convertible PS . 500,000 200,000
Diluted EPS 5.210,000 ~~ 6.51

436
 Problem 28-23 (AICPAAdapted) Net income 650,000
Camiguin Company reported the following capital structure on Preference dividend (100,000)
December 31,2013: Net income to ordinary share- basic EPS 550,000
. Ordinary share capital 110,000 shares
.,_ .'";ooVt> ' ,ible noncumulative preference share capital 20,000 shares Net income Shares EPS
,; !V~¥'"vertible bonds payable P2,000,000 Basic EPS 550,000 110,000 5.00
Share options 5,000
Shar{'9ptions to purchase 20,000 shares at PlS were outstanding.
Market price ofCamiguin share was P22 at December 31,2013 and DilutedEPS 550,000 I 15,000 4.78
averaged P20 during the year. No value was assigned to the share Convertible PS 100,000 40,000
options. The entity paid the annual dividend ofPS on the preference Diluted EPS 650,000 155,000 -4.19
share. The preference shares are convertible into 40,000 ordinary shares. Convertible bonds 140,000 30,000
·The 10% bonds are convertible into 30,000 ordinary shares. The net
income for 2013 is P650,000. The income tax rate is 30%. What amount Diluted EPS 790,000 185,000 4.27
should be reported as diluted earnings per share? .
The diluted EPS that should be reported is P4.19. The convertible
a. 5.00 bonds are ignored because the effect is antidilutive.
b. 4.78
c. 4.19 Note that the diluted EPS increased from P4.19 to P4.27 after
d. 4.27 _considering the bonds payable.
Solution 28-23 Ans·wer c
Effe.ct 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 shares second,
and the bonds payable third.
Share options 20,000
Assumed treasury shares (20,000 x Pl5:::: 300,000/P20) 15,000
Potential ordinary shares 5,000

438 439
29 Problem 29-~ (PHILCPAAdapted)
..
On December 31, 2013, Melissa Company showed shareholders'
equity ofPS,OOO,OOO: The share capital of P3,000,000 remained
unchanged during the year.
SINGLE ENTRY Transactions during the y~ar which affected the equity were:
"' An adjustment of retained earnings for 2012
ovcrdepreciation 100,000
Problem 29-1 (ACP) • Gain on sale of treasury shares 300,000
Consol e Company reported capital at P 1,700,000 on January 1, "' Dividend declared, of which P400,000 was paid 600,000
2013 and P2,400,000 on December 31, 2013. During the current "' Net income for 2013 800,000
year, the owner withdrew merchandise with carrying amount qf What is the balance of retained earuings on January l, 2013?
P100,000 and sale value ofP180,000, and paid a Pl,OOO,OOO note.
payable of the husiness with interest of 12% for six months with a :\. 1,400,000
cheek drav.n on a personal checking account. What is the net income b. 1'700,000
or loss for 20 13 ? c. 1·,200 000 .
a. 260,000 income
d. 1,600,000
b. 260,000 loss
c. 180,000 mcome Solution 29-2 Answer a
d. 180,000 loss Retained earnings- January 1 (SQlJEEZE} 1,400,000
Add: Net income 800..!00
Solution 29-1 Ans,ver b Prior period error of 2012
ovcrdeprectnti on lQJ,OOO __290,00Q
Capital - December 31 2,400,000
Add: Withdrawals- merchandise at carrying amo unt 100,000 Total 2,300,000
Less: Dividend declared ·_ 600,000
Total 2,500,000
Less: Capital - January 1 1,700,000 Retained earnings - December 31 1,700,000
Additional imestment 1,060,000 2,760,000
The begmning balance of retained camings is "squeezed'' by working
Net loss ( 260,000)
back from the ending balance.
The additional investment is detem1ined as follows: Total shareholders' equity- December 31 5,000,000
Less: Share capital 3,000,000
Payment of note payable out of personal checking account 1,000,000
Share premium from treasury shares 3oo,~;oo
lntc~est
(1 ,000,000 x 12% x 6/12) 60,000 .
Retained cam ings - Dcccmher 31 l :oo,ooo
- --- --
t
Total 1,060,000
----

440 441
Problem 29:-3 (I.AA) S~lution 29-4 Answer a
Aubrey Company provided the following data: Effect on equity
12/31/2012 12/31/2013 Increase in assets 520,000
Decrease in liabilities 820,000
Share capitai (PIOO par value) 5,000,000 5,500,00Q
Net increase in equity 1,340,000
Share premium 1,500,000 2,500,000
S,hareholders' equity - beginning 2,080,000
.Ret_ained earnings 3,000,000 ~4,500,000
Sharehold~rs' equity - ending· 3,420,000 '
During 2013, the entity declared and paid cas~ .dividend of
p 1 000 000 and also declared and issued a stock dlvtdend. There Increase in asset wi11 increase equity and decrease in asset wih .
w;re n~ other changes in equity during 2013. What i~ the net income decrease equity. ·
for 20i3?
Increase in liability will decrease equity and decrease in liability
a. 3/)00,000 will increase equity. ·
b. 2,500,000
c. J ,000,000 Problem 29-5 (IAA)
d. 4,000,000
Trend Company provided the following infonnation for the current
year:
Solution 29-3 Answer d
Net less 100,000
increase in share capital (5,500,000- 5,000,000) 500,000 Total assets on December 31 3,000,000
Increase in shan;; premium (2,500,00Q-1,500,000) 1,000,000 Share capital on December 31 1,000,000
Stock dividend l,SOQ,OOO Share premium 500,000
Dividends dccla'red 700,000 .
Retai:led earnings- December 31, 2013 4,500,000 .The debt-to-equity ratio (liabilities divided by equity) is 50% ·on
Stock dividend 1,500,000 December 31. What amount of retained earnings was reported on
Cash dividend 1,000,000 January I?
Tc)tal 7,000,0CG a. 1,100,000
Retained earnings- December 31,2012 (3,000,00(' b. l ,300,000
4,000,000 c. 500,000
Net income
d. ' 600,000
Problem 29-4 (PHILCPA~dapted) Solution 29-5 Answer b
Sunshine Company han total assets ofP4,000;000 an9 s~areholders' Sharel:olders' equjty {3,000,u00 I i50%) 2,000,000 '
equity ofP2,080,000 at the beginning of the year. Dunng tl).e year, Less. Contributed capital ( 1,000,000 + 500,000) 1,500,000
assets increased by P520,000 tlnd liabilities decreased by P820,000. Retained earnings- December 31
Wb.1t is the shareholders' equity at the enu of the year? 500,000

a. 3,420,000 Retained earnings- January 1 (SQUEEZE) 1,300,000

Net loss ( 100',000)
b. 3, 700,000 Dividends declared
c. 3,380,000 ( 700,000)
d. l,YO,OOO Retained earnings - December 31 500,000

442· 443
• /
Problem 29-6 (AlCPAAd apted) Problem 29-7 (IAA)
Vela Company reported that the following cl1anges in account balances Isabel Company disclosed the following changes in account balances
during the cuuent year: for the current year: ·
Increase Cash 480;000 decrease
8,900,000 Accounts receivable 300,000 increase
As sets Merchandise inventory 3,100,000 increase
· Liabilities 2,700,000
Accounts payable 420,000 increase
Share capital 6,000,000
600,000 During the year, the owner borrowed P4,000,000 in notes from the
Share premium
bank and paid off notes ofP3,000,000 and interest ofP240,000.
Exc.ept for a p 1,300,000 dividend payment and the year's e.arnings, Interest of P 100,000 is accrued on December 3l . There was no
tuPre. .were no changes in retained e~gs for the year. What 1s the net interest payable at the beginning of the year. In the current year, the
income·for the current year? owner transferred certain trading securities to the business and these
were sold forP1,500,000 to finance purchase of merchandise. The
a. 400,000 owner made weekly withdrawals of PI 0,000. What is the net income
b. . 900,000 for the current year? ·
c. 1,300,000 a. l ~520,000
d. 1,700,000 b. 1,920,000
c. 1,400,000
Solution 29-6 Answer b d. 420,000
Effe.~t on equity
Solution 29-7 Answer d
1ncrease in asset 3 8,900,000
(2, 700,000) Effect on equity
Increase in liabilities
Increase Decrease
Net inl;rease in equity 6,200,000
.2.2_00,000 Decrease in cash 480,000
Add: Dividend Increase in accounts receivable 300,000
7,500,000 Increase in inventory 3,100,'100
Total
6,000,000 Increase in accounts payable 420,000
Less: Increase in share capital
600,000 6.600.000 lncrcase in notes payable (4,000 ,000 - 3,000,000) 1,000,000
lncrt:.(.se in share premium ---- Increase in accrued interest payable 100,000
900,000
Net income 3,400,000 2,000,000

Net increase in equity 1,400,000

Add: Withdrawals (10,000 x 52 weeks) 520,000
Total 1,920,000
Less: Additional invcslmcnt (sale of securitie s) 1.500,000
Net income
~-QQQ
Problem 29-8 (IAA) Solution 29-9 Answer c
Easy Company reported beginning and ending total liabilities at Total assets - December 31 880,000
P840,000 and Pl,OOO,OOO, respectively. At year-end, owners' Total liabilities - December 31 390.000
equity was P2,600,000 and total assets were P200,000 larger than Shareholders' equity - December 31 490,000
at the beginning of the year. If new share capital issued exceeded Shareholders' equity - J anuarv 1 380,000
.dividends ·paid by P240,000, what is the net income or loss for Net income 110,000
the year?
a. 280,000 mcome Since there are no dividends declared :.nd issuance of share capital
b. 280,000 loss during the year, the net increase in shareholders' equity is already
the net income for the year.
c 200,000 Joss
d. · 40,000 m~me·
Problem 29-10 (IAA)
Solution 29-8 Answer c On January 1, 2013, Race! Comp~ny showed tota!'assets of
200,000 P5,000,000, total liabilities ofP2,000,000 and contributed capital of
Increase in assets
Increase in liabilities ( 1,000,000 - 840,000) (160,000) P2,000,000. During the current year, the corporation issued share capital
of P500,000 par value at a premiwn of P300,0QO. Dividend of
~'1crease in owners' equity 40,000 P250,000 was paid on December 31,2013. On December 31,2013,
Excess of share capital issued over dividends paicl (240,000)
total assets amounted to P7,500,000 and total liabilities amounted to
Net loss (200,000) 'P3,200,000. What is the net income for the current year?
a. 1,750,000
Problem 29-9 (PHlLCPAAdapted) b. 1,000,000
Marbel Company provided the following information for the year: c. 750,000
d. 500,000
Cash balance, January 1 130,000
Accounts receivable, January 1 190,000 Solution 29-10 Answer c
Collections from customers 2,100,000
Shareholders' equity, January 1 .' 380,000 January 1 December 31
Total assets, January 1 750,000 Total assets 5,000,000 7,500,000
Total assets, December 31 880,000 Total liabilities 2,000,000 3,200,000
Cash balance, December 31 160,000
Equity 3,000,000 4,300,000
Accounts receivable, December ~ 1 360,000
Total!i:Ibilities, December 31 390,000 Increase in equity (4,300,000- 3,000,000) 1,300,000
What is the net income for the current year? Add: Dividend paid 250,000
. Total 1,550,000
a. 490,000
I..;ess: Issue of share capital at a premium
b. ] 50,000 (500,000 + 300,000) 800,000
c. 110,000
Net income 750,000
d. 70,000
446 447
 Problem29-ll (PIULCPAAdapted) Problem 19-12 (IAA)
Camadillo Corrit>any reported the following changes in all the Java Company reported tho following increases (decreases) m the
acc~unt balances for the current year, except for retained accounts for the current year: ·
eammgs:
Cash 1,500,000
In cruse Accounts receivable (net) 3,500,000
.· (Decrease) Inventory 3,900,000
Cash Investments (1 ,000,000)
790,000
Accounts receivaple, net Equipment 3,000,000
240,000
Inventory 1,270,000 Accounts payable ( 800,000)
Investments ( 470,000.) Bonds payable 2,00<r,OOO
Accounts pa:, able ( 380,000)
Bonds payable During the year, the entity sold I 00,000 shares with..P20 par value
820,000 for P30 per share and received cash in full. Dividend ofP 1,500,000
Share capital 1,250,000
Share premium was paid in cash during th ,~ year. Equipment with fair value of
130,000
P2,000,000 was donated by a shareholder during the year. What
!here \'1-ere no ~~tries in the re~ined earnings accow1t except for net is the net income for the current year?
mcome and a div1dcn<! declaration ofP190,000 which was paid in the
current year. What is the n~t income for the current year? a. 6,200,000
b. 9,700,000
a. 1,200,000 c. 8,200,000
b. 1,190,000 d. 7,700,000
c. 200,000
d. 10,000 Solution 29·12 Answer a
Solution 29-11 Answer c Effect on equity
Increase in cash . 1,500,000
Effect on equity Increase in accounts receivable 3,500,000
Increase in cash 790,000 Increase in inventory 3,900,000
Increase in accounts receivable 240,000 Decrease in investments ( 1,000,000)
Increase in·inventory 1,270,000 Increase in equipment 3,000,000
Decrease in investments ( 470,000) Decrease in accounts payable 800,000
Decrease in accounts payable 380,000 Increase in hoods payable (2,000,000)
Increase in bond.: payable ( 820,000) Net increase in equity · 9,700,000
Net increase in equity 1,390,000 Add: Dividend paid t,soo,ooq
Add: Dividend declared 190,000 Total 11,20Q,OOO
Total J.580,000 Less: Increase in share c'apital
Less: Increase in share capital 1,250,000
( 100,000 X 30) 3,000.000
Increase in donated l:apital 2,000,000 ~00,000
Increase in share premium . _l30,QOO 1,380,000
Net ir.come ·Net income 6.2UO,OOO
lQO.OOO

44R 449
Problem 29-13 (IAA) Solution 29-13
Crispin Santos sta11ed a retail merchan dise business on January 1, Question 1 Answer b
2013. During the year ended Decemb er 31, 2013, the entity paid
trade creditor s P2,000, 000 and suffered a net loss ofP350 ,000. Question 2 Answer b
The ledger account preclos ing balance s on Decemb er 31 , 2013 Accounts payable - December 31 750,000
included the following: Payments to trade creditors . 2,000,000
Accounts receivable 600,000 Total purchases 2,750,000
Accounts payable 750,000 Less: Unadjusted debit balance of merchandise account 700.000
C~pital (total investm ent in cash) 2,000,000 Sales 2,050,000
Expenses (paid in cash) 100,000
Merchandise (unadju sted debit balance) 700,000 Question 3 Answer a
There were no withdra wals. All sales and purchas es were on credit.
Cash - January 1 (Investment) 2,000,000
The mP.rcha ndise accoun t is debited for purctiases and credited for
Collectio ns of AR (2,050,0 00- 600,000) 1,450,000
sales.
1. What is the amount of purchases for the year? Total 3,450,000
Less: Payment of account payable 2,000,000
a. 2,000,0 00 Payment of expenses 100,000 2,100,000
b. 2,750,0 00
Cash - Decei:nber 31 1,350,000
c. 1,250,0 00
d. 2,050,0 00
Question 4 Answer b
2. What is the amount of sales for the year?
Sales 2,050,000
a. 2, 750,000 Cost of Sales:
b. 2,050,0 00 Purchases 2,750,00C
c. 2,650,0 00 . Merchandise inventory- 12/31 (squeeze)( 450,000) 2,300,000
d. 700,000
Gross loss ( 250,000)
3. What is the cash balance on Decemb er 31, 2013? Expenses ( 100,000)
a. 1,350,0 00 Net loss ( 350l000)
b. 2,000,0 00
c. I ,450,00 0 The ending merchandise inventory is "squeezed" by working back from
d. 3,450,0 00
the net loss ofP350, 000.
4. What is tb e merchan dise inventory on Decemb er 31, 2013?
a. 700,000
b. 450,000
c. 750,000
d. 0

450 451
Problem 29-14 (PHILCPAAdapt ed) Problem 29-15 (PHaCPAAcblpt ed) ,

Elysee Company was incorporated on January 1 ofthe current year oy Comp~ex Company kept very limited reeords·. On j~ 1, 201 3,
issuing share capital with par value ofPSO,OOO,OOO for P60,000,000. the enttty started business and issued share capital, 60,000 shares with
P100 par, for the following considerations:
The ott:ter transactions that affected the cash account during January
were: Cash 500,000
Building with useful life of 15 years 4,500,000
Land and building were purchased for P2S,OOO,OOO with a Land 1,500,000
downpayment ofP l 0,000,000. A one-year note was signed for the
remainder. 6,500,000

A check was written for P4,500,000 to pay for equipment. An analysis ofthe bank statements showed total deposits, including the
A check ofP 1,500,000 was written to acquire software. original cash investment, of P3,500,000. The balance in the bank
statement on December 31, 2_0 13 was P250,000 but there were checks
One piece ofcomputer equipment was sold at its original price and the amounting to P50,000 dated in December but not paid by the bank
cash collected was deposited in the entity's checking account. until Januaryofnextyear. Cashon bandon December 31, 2013 was
The balance ofthe checking account on January 31 was P45,000,000. P125,.000 including customers' deposit ofP75,000.
What was ~e sale price ofthe compute~ equipment? During the year, the entity borrowed PSOO 000 from the bank and
I '
repaid P 125,000 and P25,000 interest. The proceeds of the loan were
a. 3,000,000 credited to the bank account of the entity.
b. 1,500,000
c.' 1,000,000 Disbursements paid ln cash during the year were as follows:
d. . 2,000,000 Utilities 100,000
Salaries 100,000
Solution 29-14 Answer c Supplies 175,000
Taxes 25,000
Cash receipts: Dividends 150,000
Issue 'o f share capital . 60,000,000
550,000
Sale price of equipment (SQUEEZE) 1,000,000
Total cash receipts 61,000,000 An inventory of merchandise taken on December 31, 2013 showed
P755 00() of merchandise. Tickets for accounts receivable totaled
Cash disbursements: P900,000 but P50 000 of that amount may prove uncollectible. Unpaid
Land and building 10,000,000 suppliers invoices for merchandise amounted to P350,000.
Equipment 4,500,000 ·Equipment w ith a cash price· of P400,000 was purchased in early
Software 1,500,000 16,000,000 January on aonc-ycat'instaltm~m basis. Dunngthcyear, checks for
Cash balance- January 31 45,000,000 the downpayment nnd all maturing installments totaled 1'445,000.
The equipment ha~ a u~eful life of'S' years.

452 45
1. What is the total cash on December 31, 2( 3? 6. What is ·the amount of total liabilities on December 31, 2013?
a. 325,000 · a. 800,000
b. 200,000 b. 925,000
·C. 375,000 c. 725,000
d. 250,000 d. 850,000

2. What is the amount of sales for the y1 · ~ ·r? 7. \¥hat is the amount ofshareholders' equity on December 31, 2013?

a. 4,000,000 a. 7,150,000
b. 7,300,000
b. 3,400,000
c. 6,500,000
c. 3, 100;000
d. 6,650,0.00
d. 4,050,000

3. 'W.hat is the ~ount of purchases for the year? Solution 29-15

a. 3,055,000 Question 1 Answer a
b. 2,705,000 Cash in bank per book 250,000
c. 2,355,000 Outstanding checks ( 50,000)
d. 3,810,000
Adjusted cash in bank 200,000
4. What is the ne~ income for the year? Cash on hand 125,000
a. 800,000 Total cash - December 31, 2013 325,000
'b. 650,000
Question 2 Answer a
c. 870,000
d. 850,000 Initial cash investment 500,000
Proceeds of loan · 500,000
5. What:.~ ih"' ".mount of total assets on December 31, 20 13? Collections of accounts receivable (SQUEEZE) 2,500,000
a. 7,950,000 Total deposits 3,500,000
b. 7,800,000
c. 8,330,000 Customers' deposit 75,000
Collections of acco~nts receivable (SQUEEZE) 600,000
d. 8,380,000
Total 675,000
Disbursements in cash (550,000)
Cash on hand - December 31 , 2013 125,000

Accounts receivable- I.. ecember 31,2013 900,00::>

Collections deposited 2,500,000
Collections not deposited 600,000
Total sales . 4,000,000

4~4 455
. Question 3 Answer a Question 5 Answer a
Total deposits 3,500,000 Cash 325,000
Total disbursements in check (SQUEEZE) (3,300,000) Accounts receivable 900,000
Cash in bank- December 31, 2013 200,000 Allowance for doubtful accounts ( 50,000)
·Inventory 755,000
Payment-of loan 125,000 Land . 1,5(\{),000
Interest on loan .25,000 Building 4,500,000
Payment for equipment 400,000 Accumulc.ted depreciation- building ( 300,000)
Interest on equipment 45,000 Equipment 400,0W
Payment of accounts payable (SQUEEZE) 1705,000 Accumulated depreciation -equipment (__J!hOOO~
Total disbursements in check ~0,000 Total assets 7j950,000

Accounts payable - December 31, 2013 350,00!.) Liabilities 800,000

Payment of accounts payable 2,705,000 Shareholders' equity 7,150,000
Total purchases 3,055,000 Total liabilities and shareholders' equity 7,950,000

Question 4 Answer a Question 6 Answer a

Sales 4,000,000 Accounts payable 350,000
Cost of sales: Loan payable- bank (500,000- 125,000) 375,000
Purchases 3,055,000 Cutomers' deposit 75,000
Inventory- Deccmbtr 31, 2013 ( 755,000) 2,300,000 Total liabilities 800,000
Gross income 1,700,000
Expenses: Question 7 Answer a
Utilities 100,000 Share capital (60,000 x PIOO) 6,000,<'(,0
Salaries 100.000 Share premium (6,500,000- 6,000,000) 500,000
Supplies 175,000 Retained earnings 650,000
Taxes 25,000
Doubtful accounts 50,000 Total shareholders' equity 7,!50,000
Depreciation- building (4,500,000/15) 300,000
Depreciation- equipment (400,000 I 5) 80,000 Ne:t income 800,000
Interest expense (25,000 + 45,000) 70,000 900,000 Dividends paid (150,000)
Net income ~00,000 Retainea earnings 650,000
30 l't uiJicm Ju-2 \AlC.PAAdapted)
Zeta Company reported sales revenue ofP4,600,000 in the income
statement for the year ended December 31,2013.
CASH BASIS 12/3112012 1~/3112013
Accounts receivable 1,000,000 1,300,000
Problem30-1 (AICPAAdapted) Allowance for uncollectible accounts. 60,000 110,000

Spee Company provided the following infonnation for the current year: The entity wrote offuncollectible accounts totaling P20,000 during 2013.
C:;st sales Under the cash basis of accounting, what amount should be reported
Gross 2,000,000 as sales revenue for 2013? ·
i<. -~-turr s and allowances 100.000
Credit sales
a. 4,900,000
Gross 3,000,000 b. 4,350,000
Discounts 150,000 c. t,,300,000
Customers owed Pl ,000,000 on January 1 and P750,000 on d. 4,280,000
December 31. The eatity used direct writeoff method for bad debts.
No bad debts were recorded in the current year. Under the cash Solution 30-2 Answer d
'lasis of accounting, what amount of sales revepue should be Accounts receivable - December 31, 2012 1,000,000
reported for the current year? Add: Sales 2013 4,600,000
a. 5,000,000 Total 5.600,000
b. 4,750,000 Less: Accounts receivable- 12/3 1/2013 1,300,000
c. 4,250,000 Writeoff 20,0_QQ. 1,320,000
J. 1,900,000
Collections - cash basis sales revenue ~~
Solution]().. ' Answer a
Accounts receivable -January 1 1,000,000 Problem 30-3 (AICPAAdapted)
Add: Credit sales 3,000,000 During 2013, Kew Company had P200,000 in cash sales and ·
Total 4,000,000 P3,000,000 in credit sales. The entity reported accounts receivable of
Less: Accounts rereivable - December 31 750,000 1'400,000 and P485,000 on December 31, 2012 and 2013.
Sales discounts 150,000 900,000
JL'spectively. Under cash basis, what amount should be reported
Collections 3,100,000. 11~ sales for 2013?
Cash sales- net (2,000,000- 100,000) 1,900,000
Total sales - cash basis 5,000,000 tl , 3,285,000
h, 3,200,000
Under the cash basis , sales revenue includes cash sales and I , 3 l\5,00()
l' " 1 kctions from customers. d 2..1)15.00(;

4~8
4:;9
 Solution 30-3 Answer c
Problem 30-5 (IAA)
Accounts receivable - December 31, 2012 '400,000

I Credit .sales
Total
Less: Accounts receivable~ Dec n1ber 31, 2013
3,000,000
3,400,000
485,000
.I acquclinc Company began the cutTent year 'vith the following:
Accounts recei\·l:lblc
Allowance for doubtful accounts
1,000.000
80,000
i\ct accounts receivable 920.00(
Collections of accounts rcceivF.Jlc 2,915,000
Cash sales 200,000
I)uring the current year, the following events occurred:
Total sales - cllsh basis 3,115,000
Accounts written off 120,000
Problem 30-4 (ACP) ( ash sales 500.000
<.;nics on account . 3,000,000
Elame Company experienced the following changes in selert~d Had debt expense recognized 200,000
accounts for the current year:
A.ccrual sales 5,000,000 At the end of the current year, the en'.ity showed a balance in
Accounts !'eccivablc: accounts receivable ofP 1,680,000 before the allowance for doubtful
January 1 800,000 nccounts. Under the cash basis, what amount should be reported
December 31 500,000 11s sales for the current year?
Advances from customers·
January 1 300,000 a. 2,700,000
December 31 400,000 b. 2,200,000
What total amouni of cash was received from customers during the c. 3,500,000
year? . d. 3)20,000
a 5.400,000
b. 5,300,000 Solution 30-5 Answer a
c. 4,800,000 Accounts receivable- January 1 1,000,000
d. 4,600,000 Sales on account 3,000.00G
'J otal 4,000,000
Solution 30-4 Answer a
Accounts receivable - December 31 (1,680,000 I
Accrual sales 5,000,000 Accounts written off ( 120,0001
Accounts receivable- January 1 800,000 Collections of accounts receivable 2,200,000
Advances from customer - December 31 400,000 Cash sales 500,000
Total 6,200,000 Total sales - cash bllsis 2,700,000
Less: Accou!1ts receinble- December 31 500,000
Advances from customers - January 1 300,000 800,000
Cash rcrciYcd from customers 5,400,000
-
- ----
-
J (:

46 J
 Problem 30-6 (IAA)
Problem 30-7 (AICPAAdapted)
Royal Company provided the folJowing data for the current year: I !arlett Company reported that all insurance premiums paid are
Sales debited to prepaid insurance. The entity made monthly estimated
10,000,000 charges to insurance expense with credit to prepaid insurance
Cost of goods sold
5,300,000
Operating expenses Prepaid insurance -January 1, 2013 210,000
3,800,000
Charges to insurance expense during 21) 13 875,000
December 31 January 1 Prepajd insurance- December 31, 2013 245,000
p
~ repa1"d operating expenses 1,000,000 700,000 What is the insurance premium paid during 2013?
Accounts payab le 1,350,000 1,2GO,OOO
Inventory 2,500,000 a. 910,000
2,100,000
Accounts rel:~ivable 1,400,000 b. 875,000
1.,375,000
c. 840;000
Under c~sh basis, what amount should be reported as purchases for d. 665 ,000
the current year?
Solution 30:..7 Answer. a
a. 5,550,000
Insurance premium paid (875,000 + 245,000-21 0,000) 910,000
-b. ·5 ,700,000
c. 5,850,000
Problem 30-S (IAA)
d. 5,] 50,000
During the current year, Seawall Company reported total operating
expenses of P3,200,000, consisting of P1,000,000 depreciation,
Solutio.n 30-6 Answer a
Inventory- January 1 ~
• P700,000 insurance and P 1,500,000 salaries. The prepaid insurance
2,100,000 is P150,000 on January 1 andP200,000 on December31. The accrued
Purchases under accrual basis (SQUEEZE) 5,700.000 salaries payable totaled P120,000 on January 1 and PlOO,OOO on
Goods available for sale December 31. What total amount '.Vas paid for operating expenses?
7,800,000
Inventory- December 31 a. 3,270,000
(2,500,000)
' Cost of goods sold b. 2,270,000
5,300,000 c. ' 2,130,000
Accounts payable- January 1 d. 2,230,000
1,200,000
Purchases - accrual basis 5,700,000 Solution 3 0-8 Answer b
Total
6,900,000 Operating expenses per book 3,200,000
Accounts payable - December 31 (1,350,000) (1 ,000,000)
Depreciation
Cash 'paid for purchases - cash basis Prepaid insurance- December 31 200,000
5,550,000 ( 150,000)
Prepaid insurance .:.. January 1 ·
Accrued salaries payable - December 31 ( !00,000)
Accrued salaries payable- January 1 120,000
Cash paid for operating expenses , 2,270,000

462 463
 Problem 30-9 (PHILCPAAdapted) Prohlem30-10 (PIDLCPAAdapted)
Miramar Company used the accrual basis of accounting. The Under the accrual basis, Hamtil<an Company reported rental income
\ :!xpenses fc.r 2013 included depree-iation of P200,000 and for the current year at P600,000. The entity reponed the following
:\mortization ofP 100,000. additional information regarding rentaf income:
2013 . 2012 Unearned rental income, January 1 50,000
· Accounts receivable 4,500,000 5,000,000 Unearned rental income, December 31 75,000
Interest receivable 20,000 50,000 Accrued rental income, January 1 30,000
Inventories 8,000,000 9,000,000 Accrued r~ntal income, December 3 1 40,000
Prepaid insurance 100,000 50,000 What total amount of cash was received from rental in the cuJTent
Accounts payable 7,500,000 7,000,000 year?
.~ ,crued expenses 500,000 300,000
~et sales 25,000,000 a. 585,000
Interest revenue 150,000 b. 615,000
Cost of goods sold 15,000,000 c. 625,000
Insurance expense 1,000,000 d. 655,000
Other expenses 2,000,000
'vv ~1at total amount was paid for expenses during the current year? Solution 30-10 Answer b
a. 2,550,000 Rental income - accrual basis 600,000 .
b. 2,850,000 Unearned rental income- January 1 ( 50,000)
c. 2,700,000 Unearned rental incon1e -December 31 75,000
d. 3,150,000 Accrued rental income- January 1 30,000
Accrued rental income -December 31 ( 40,000)
Solution 30-9 Ans·wer a Rental received - cash basis 615,000
Insurance expense 1,000,000
Other expenses 2,000,000 Problem 30-11 (AlCPAAdapted)
Depreciation ( 200,000) Un February 1, Tory began_a servie-e proprietorship with an initial
Amortization ( 100,000) cash investment of P200,000. The proprietorship provided
Prepaid insurance- 2013 100,000 P500,000 of service in February and received full payment in
Prepaid insurance- 2012 ( 50,000) Ma rc.h . The proprietorship incurred expenses ofP300,000 in
Accn:ed expenses- 2013 ( . 500,000) February \Vhich were paid in April. Tory drew P 100,000 during
A.ccrued expenses- 2012 300,000 March For the two months ended March 31, prepared under the
Cash paid fo1 expenses 2.550,000 rash basis, what amount should be reported as capital?
100,000
"h.300,000
()()0.000
d. 700,000
464 4o:,
SolZ:tti.on 30-11 Answer c Problem 30-13 (IAA)
· Capjtal - Febru"ary 1 200,000 Katcelynne Company provided the follo,:ving data for the current
Cash basis ineome for February and March 500,000 year:
Total 700,000
Cash sales 2,500,000
Withdrawals during March (100,000)
Sales on account 850,000
Capital - Mar<::h 31 600,000 Cash purchases 1,700,000
Credit purchases 400,000
Under cash basis, no expenses were reported in February and March Expenses paid 750,000
because the ~xperises were inctirred in February and paid in April. Accounts receivable- January 1 250,000
Accounts receivable - December 31 300,000
Problem 30-12 (PIDLCPAAdapted) Accounts payable- January 1 150,000
Accounts payable - December 31 200,000
On Ja9uary 1, 2013, Reims purchased the net asset"s of Alador
Inventory- January 1 500,000
Laundry, a sole proprietorship, for P3,500,000, and commenced
Inventory - December 3. . 600,000
operations of Saint Etienne Laundry, a sole proprietorship. The assets
had a carrying amount of P3,750,000 and a market value of Accrued expenses - December 31 20,000
P3,600,000. In Saint Etienne's cash basis fmancial statements for Prepaid expenses - December 31 30,000
Equipment - December 31 1,000,000
the current year, Saint Etieruie reported revenue in excess of expenses
Interest received 40,000
of P.600,000. Reims' drawings during the current year totaled
P200,000. In Saint Etienne's fmancial statements, what amount Interest receivable- January 1 10,000
should be reported as Capital- Reims on December 31, 2013? Interest receivable - December 31 . 20,000

a. 4,000,000 On July 1 of the current year, an equipment was acquired for

b. 3,900,000
P200,000. The terms are P50,000 down and the balance to be
c. 4,150,000
paid after one year. The useful life of equipment is 10 years with no
d. 4,100,000
residual value. What is tbe net income under cash basis?
Solution 30-12 Answer b
a. 550,000
Capital- January 1 3,500,000 b. 570,000
Cash basis net income 600,000 c. 540,000
Total 4,100,000 d. 640,000
Drawings ( 200,000)
Capital - D~cember 31 3,900,000

4.66 467
Solution 3 0- I 3 Answer a
Sales on account 850,000
3_1
Accounts receivable- January 1 250,000 ..
Accounts receivable -· December 31 ( 300,000). ACCRUAL BASIS
Collections from customers 800,000
Cash sales 2,500,000
Problem 31-1 (PHILCPAAdapted)
Total sales - cash basis 3,300,000
Calapan Company provided the following data:
Credit purchases 400,000 12/31/2012 12131/2013
Accounts payable- January 1 150,000
Physical inventory, at cost 600,000 1,000,000
Accounts payable- December 31 ( 200,000)
Sales 4,000,000
Payments· of acco,Jnts payable. ·350,000 Cost of sales 2,400,000
Cash purchases 1.700,000 Accounts receivable - trade 1,200,000 1,350,000
Accounts payable - trade 1,500,000 1,850,000
Total purchases - cash basis ~,050,000

Depreciation on equipment on January 1 (800,000 I i 0) In 2013, accounts written off amounted toP 100,000. Sales returns
80,000
Depreciation on equipment acquired o~·July 1 with credit memo amounted toP 150,000 and purchase returns,
(200,000 I 10 x 6/ 12) P50,000. Cash receipts from customers after P200,000 discounts
10,000
totaled P6,000,000 while cash payments to trade creditors
Total depreciation 90,000 amounted to P4,000,000 after discounts ufP300,000 Cash paid
to customers for goods retumed was PSO,OOO. On this transaction,
Sales 3,300,000 accounts receivable was debited .
Cost of sales:
Inventory- January 1 500,000 1. Under accrual basis, what amount should be reported as gross
Purchases 2,050,000 sales for the CutTent year?

Goods available for sale 2,550,000 a. 6,600,000

Inventory- December 31 ( 600,000) I ,950,000 b. 6,550,000
c. 6,650,000
Gross income 1,350,000
Expenses paid d. 6,:,50,000
( 750,000)
Depreciation ( 9{),000) 2. Under accrual basis, what amount should be reported as gross
Interest Teceivcd 40,000 purchases for the current year?
Net income - cash basis 550,000 a. 4, 700,000
b. ~.350,000
c. 4,300,000
d. 4,000,000

4 ll 1\
Solution 31-~ Solution 31-2 Answer b
Question 1- Answer b Accounts receivable - December 31, 2013 300,000
' Add: Sales in 2013·under caslfbasis 1,750,000
Accounts receivable- December 31, 2013 1,350,000
Accounts \Vritten off 100,000 Total 2,050,000
Sales returns 150,000 Less: Accounts receivable- December 31, 2012 500,000
.Cash.receipts .from customers 6,000,000 Sales - accrual basis 1,550,000
Sales discounts 200,000

Total 7,800,000 l,roblem31-3 (AICPAAdapted)

Accounts receivable - December 31, 2012 (1 ,200,00:0)
( 50,000) Mall Company reported the following balances on De~ember 31:
Erroneous debit to accounts receivable
6,550,000 12/31/2013 U/31/2012
Gross sales
Inventory 2,600,000 2,900,000
Question 2 - Answer a Accounts payable 750,000 500,000
Accounts payable- December 31, 2013 \,850,000
Purchase retutns 50,000 ·The entity paid suppliers P4,900,000 during the year ended
Payments to trade crcdi tors 4,000,000 December 31, 2013. Under accrual basis, what amount should be
Purchase discounts 300,000 reported for cost of goods sold in 201 '3?

Total 6,200,000 a. 5,450,000

Accounts payable- December 31, 2012 (1 ,500,000) b. 4,950,000
Gross purchases 4,700,000 c. 4,850,000
d. 4,350,000
Problem 31-2 (AICPAAdapted)
Solution 31 -3 Answer a
Reid Company, which began operations on January 1, 2012, has
elected to use cash basis accounting for tax purposes and accrual Accounts payable - December 31, 2013 750,000
basis accounting for the financial statements. The entity reported Payment to suppliers 4,900,000
sales ofPl ,750,000 and P800,000 in the tax returns for the years Total 5,650,000
ended December 31, 2013 and 2012, respectively. The entity Accounts payable- December 31,2012 ( 500,000)
reported accounts receivable of P300,000 and P500,000 on
Purchases - accrual basis 5,150,000
Decem9er 31,2013 and 2012, respectively. What amount should
be reported as sales in the income statement for 2013? Inventory - December 31,2012 2,900,000
a. l ,450,000 Purchases 5,150,000
b. 1,550,000 <loods available for sale 8,050,000
c. 1,950,000 Inventory- December 31,2013 (2,600,000)
d 2,050,000 l\)st of goods sold 5,450,000

470 4/l
Problem 31-4 (AiCPAAdapted) l'roblem31-5 (IAA)
Class Comppny maintained the accounting records on the cash basi5 I~mmyrelle Company provided the following selected account<; cash
but restated the financial statements to the accrual method of n:ccipts and disbursements for2013: . '
accounting. The entity had P6,000,000 in cash basis pretax income
for 2013. The entity provided the following infonnation on December ' December 31 January 1
31.2013 and 2012. Accounts receivable 250,000 300,000
Notes receivable 150,000
2013 2012 100,000
Accounts pay"able 120,000 160,000
Accounts receivable 4,000,000 2,000,000 Notes payable 200,000 150,000
Accounts payable · 1,500,000 3,000,000 Prepaid insurance 30,000 10,000

Under the accrual basis, what amount of income before tax should Cash receipts for 2013
be reported in·the 2013 income statem~nt? Cash sales
500,000
Collections of accounts, net of discounts ofP40 000 1,800,000
a. 2,500,000 Collections of notes receivable '
b. 5,500,000 80,000
Oank loan - one year, dated December 31, 2013 100,000
c. 6,500,000 Purchase returns and allowances .60,000
d. 9,500,000
Cash disbursements for 2013
Solution .31-4 An ~'·ve,- d Cash purchases . 130 000
Jl~ymcnts of accounts payabll!, net of discounts ofP20 000 1 500,000
Cash basis income _6,000,000 (> aymen ts o f notes paya bl e ' '400,000
'
Add: Accounts receivab lc - 2013 4,000,000 l11surance 220,000
Accounts payable - 2012 3,000,000 7,000,000 Other expenses 650 000
13,000,000 Sales returns and ailowances 50:000
Total
Less: Ace0~mts receivable- 2012 2,000,000
Accounts payable -. 2013 1,500,000 3,500,000 I. U~der accrual basis, what amount shoul~ be reported af. gros::-
sa,es? · .
Accrual basis income 9,500,000
a. 2,420,000
b. 2,470,000
c. 2,370,000
d. 2,380,000
" Under accrual basis, what amount should be reported as gross
purchases?
a. 1,960,000
b. 2,060,000
c. 2, 140,000
d. 1,830,000

473
'Solution 31-5 J•robJem 3i-6 (AICPAAdapted)

Questzon I Answer u 1\krill Company.has not prepared fmancial statements for three years
250,000 •.1ncc December 31,2010. During the three-year period, the cash
Accounts recejvable - December 31
150,000 1 ccc1pts and cash disbursements were maintained and sales on
Notes receivable -December 31
Collcctwns of accounts receivable 1,800,000 ncco•tmt were entered directly into an accounts receivable ledger.
Sales discounts · 40,000
I lowcver, no general ledger postings have been made since the
Collections of notes receivable 80,000
December 31, 20 10 closing.
Total 2,320,000
Accounts receivable - January 1 ( 300,000) 'I he examination of the records 4isclosed balances at the beginning
Notes receivable - January 1 ( 100,000) and end of the thrye-year period as follows:
Sales OP account 1,920,000 12/31/2010 12/3112013
Cash sales 500,000 Less than 1· year old 77,000 141,000
Gross sales 2,420,000 I to 2 years o]d 6,000 9,000
2 to 3 years old 4,000
Question 2 Answer a Over 3 years old IJ ,OOO
Accounts payable - December 31 120,000 Total accounts receivable 83,000 i65,000
Notes payable- trade:
Notes payable - December 3_1 200,000 Inventory 58,000 94,000
Bank loan on December 31 (100,000) 100,000 Accounts payable 25,000 55,000
Payments of accounts payable 1,500,000
Purchase discounts 20,000 No _account ba_Iances have been written off during the three-year
Payments of notes payable 400,000
pcnod. The rat1o of gross profit to sales remains const.ant from year
Total 2,1 40,000 to year. ·
Accounts payable- January 1 ( 160,000)
( 150,000) Other data available are as follows:
Note payable- January!
1,830,000 2011 20:2 2013
Purchases on account
·130,000 Cash received applied to
Cash purchases
Current year 744,000 809,000 1,044,000
Gross purchases 1,960,000 Accounts of prior year 67,000 75,000 84,000
Accounts of two years prior 3,000 2,000 10,000
Total collections 814,000 886,000 1,138,000
..
Cash sales 85,000 130,000 . 1:>6,000
Payment of accounts payable 625,000 706,000 lSb9,000

474 4 15
1. What is the amount of total sales for 2011, 2012 and 2013? Question 2 Answer c
a,. 1,341;000 Accounts payabl~- December 31, 2013 55,000
b. 3,291 ,000 Payment of accounts payable:
C. 2;920,000
2011 625,000 '
d. 1,032,000 2012 706,000
2013 . 869,000
2. · ·what is the amount of total purchases for 2011, 2012 and 2013?
Total 2,255,000
a: 2,170,000 Accounts payable - December 31, .2010 ( 2.5,000)
b. 2,200,000 Purchases- 2011, 2012 and 2013 2,230,000
c. 2,210,000
d. 2,255,000 Question 3 Answer d
3. What is the amount of cost of sales for2011, 20liand~013? Inventory- December 31, 2010 58,000
a. 2,266,000 Purchases- 20~ 1, 2012 and 2013 2,230,000
b. 2,230,000 Goods.available for sale 2,288,000
c. 2,288,000 Inventory - December 3 1, 2013 ( 94,000)
q. 2,194,000 Cost of sales- 2011, 2012 an& 2013 2,194,000
Solution 31-6 Sales- 2011, 2012 and 2013 . 3,291,000
Question 1 Answq b Cost of saJes - 2011 , 20 l2 and 20 13 · 2,.194,000
2011 2012 2013 Gross profit ' C097,000
. .
AR- December 31,2013 4,000 9,0')0 ' 141,000 Average ·gr~ss profit rate (1 ,097,000 I 3,29..i ,000) · 33 113%
Cash received applied to:
Current year 744,000 809,000 1,044,000
Acco.unts of prior year 75,000 84,000
Accounts of two years prior 10,000

Sales on account 833,000 902,000 1,185,000

Cash sales 85,000 130,000 156,000

Total sales 918,000 1,032,000 1,341,000

Total amount (9 18,000 + 1,032,000+ 1,341,000) 3,291,000

476 477
Problem 31-7 (AICPAAdapted) Problem 31-9 (AICPAAdapted)
During the year ended December 31, 20 I 3, Clay Company paid <)tJS Co~pany acquired rights to a patent under a licensing agreement
interest totaling P 100,000. The prepaid interest expense is P23 ,500 II utt requrred an advance royalty payment when the agreement was
and Pl8,000, respectively, on December 31, 2012 and 2013. The t. igncd. The entity remitted royalties earned and due under the
interest payable is P45,000 and P53 ,500, respectively on December ugrcem.ent o~ O~tober 31 each year. Additionally, o,n the same date,
31, 2012 and 20 l 3. What amount of interest expense shoul.d be !he cnti.ty pa~d, m adva~ce, estit:nated royalties for the next year.
reported for 2013? I he ent1ty adJusted prepa1d royalties at year end. The entity provided
1l1c following information for the year ended December 31, 2013:
a. 86,000
b. 97,000 1/1 Prepaidroyalties . 650,000
c. 103,000 101'31 Royalty payment (charged to royalty expense) I, I 00,000
d. 114,000 12/31 Year-end credit adjustnient to e~pense 250,000
On December 31, 20 I 3, what amount should be reported as prepaid
Solution 31-7 Answer d royalties?
Interest paiq 100,000 H. 250,000
Prepaid interest - 2012 23,500
b. 400,000
Interest payable- 2013 53,500
Prepaid interest - 2013 . ( 18,000) c. 850,000
lnt~rest payable - 2012 ( 45,000) c.l. 900,000
Interest expense 114,000 Solution 31-9 Answer d
Prepaid royalties - January 1 650,000
Problem31-8 (AICPAAdapted) Add: Adjustment on December 31 ., 250,000
During 2013, Cooke Company acquired patent right and remitted Prepaid royalties - December 31
royalties ofP3,000,000. The entity reported prepaid royalties of 900,000
P550,000 and P450,000, royalties payable of P800,000 and Problem 31-10 (AICPAAdapted)
P750,000, respectively, on December 3.1, 2012 and 2013. What
amount should be reported as royalty expense for 2013? Based on 2013 sales of compact discs :recorded by an artist under
a contract with Laser Company, tbe artist earned PI ,000,000 after
a. 2,950,000
b. 3,os·o,ooo an adjustment ofP80,000 for anticipated returns. The entity paid
c. 3,100,000 the ~rtist P750,000 in 2013 as a reasonable estimate of the amount
d .. 3,300,000 iecoverable from future royalties to be earned by the artist. What
amount should be reported as royalty expense for 20 13?
Solution 31-8 Answer b a. 1,000,000
Royalties paid 3.000,000 b. 1,080,000
Prepaid royalties - 2012 sso,ooo· c. 1,750,000
Royalties payable- 2013 150r000 d. 1,830,000
Prepaid royalties- 2013 ( 450,000)
Royalties payabl c - 20 12 ( 800,000) Solution 31-10 Answer a
Royalty expense for 2013 3,050,000 Royalty expense (earned by artist in 2013) 1,000,000

' 478 479

 Problem 31·11 (AICPAAdapted) l'1 uhlcm 31-13 (PHJLCPAAdapted)

On July l, .20.13, Roxy Company obtained fire insurance at an annual t\ l1lttn Company, a publishing house, obtained the copyright to an
premium of P72,000 payable o.n July l of each year. The first ·"'book owned by Sayville Company on June l , 20 ll. The book
premium payment was made July 1, 2013. On October l, 2013,
the en,tity paid P24,000 for real estate taxes to cover the period 1s nne of the best sellers in the bookstores abroad. The royalty
ending· September 30, 2014. On December 31, 2013, what amount llfll'l'mcnt \Vith Sayville provides for payment of royalties at 20%
.· ·should be reported as prepaid expenses? · ol future sales of the book, payable semiannually on February 28
a. 60,000 lu1 ~a l es in June to November of the preceding year, and on August
b. 54,000 j I for sales in December of the preceding year to May of the cutTent
c. 48,000 . \\ ar. Milan made royalty payments ofP 1,500,000 and P 1, 700,000
d. 36,000 on February 28, 2012 and August 31, 2012, respectively and
PI ,200,000 and Pl ,.600,000 on February 28, 2013 and August
Solution 31'7 1 I Answer b ' I , 20 13, respectively. For the last half of fiscal year ending
Prepaid insurance (72,000 x 6/12) 36,000 November 30, 2013, the Sayville book registered sales of
.Prepaid taxes (24;ooo x'9/12) 18,00Q P0,000,000. Milan Company's year-end is November 30. What
Total prepaid ex~enses - December 31,2013 54,000, amount should be reported as royalty expense for the year ended
November 30, 2013?
Problem 31-12 (AICPAAdapted) a. 3,200,000
. . I
Thrift Company reported that the unadjusted prepaid expense on h. 2,800,000
~ ' December 31, 2013. comprised the following: , ·. · l. 3,000,000

• An opening balance ofP 15.0,000 for an insurance)>olicy. The d. 3,400,00Q

·entity had paid an anrtual premium ofP300,000 on July 1, 20 12·.
• A P320,{)00 annual insuran~e premium paynien~ July l, 2013. Solution 31-13 Answerd
• A P200,000 advance ren.:.a,l payment for a warehouse leased Royalty expense from December 20 i ~ to May 2013,
for on~ year beginning January 1, 2014. . . . · paid on August 31, 2013 1,600,000
On December 31,.2013, what amount sho1:1ld be reported as prepaid . Royalty expense from June 2013 to November 2013,
expenses? to be paid on February 28 , 20 14.(20% x 9 000,000) 1,800,000
a. 520,000 Total royalty expense 3,400,000
b. 360,000 .
c. 200,000
d. '160,000
Solutiou31-12 Answerb
Prepaid insurance (320,000 .x 6/12) . '160,000
Pr.e paid rent 200,000
Total prepaid expenses·- December 31,2013 360,000

480 481
 \ulutton 31-15Answerd
Problem 31-14 (AICPAAdapted)
P• cp<tid insurance - January 1 600,000 .
Rara Company paid P72,000 to rene'"' the only insurance poJicy ln•.urnnce payment debited to prepaid insurance 800,000
for three years on March 1, 2013, the effective date of the policy.
On March 31,2013, the unadjusted trial balance showed a balance lt,IHI 1,400,000
I'• cpaid insurance- December 31 ( 500,000)
ofP3,000 for prepaid insurance and P72,000 for insurance expense.
Wbat amount should be reported for prepaid insurance and insurance Insurance expense 900,000
expense, respectively, for the three months ended March 31, 20 13?
l'rrpaid insurance 800,000
a. 70,000 and 3,000 Cash 800,000
b. 70,000 and 5;000
c. 72,000 and 3,000 Insurance expense 900.000
d. 73,000 and 2,000 Prepaid insurance 900,000

Solution 31-14 Answer b Problem31-16 (IAA)

Prepaid insurance - March 31, 2013 (72,000 x 35/36)
Insurance expense per book
Prepaid insurance before adjustment
Total
Less: Prepaid insurance - March 3 1, 2013
70,000 An entity paid P 1,000,000 for supplies during 2013. The full
umount ofPl,OOO,OOO was debited to supplies inventory. The
72,000 January 1, 2013 balance·ofsupplies inventorywasP360,000.A
3,000 physical count of the supplies on hand on December 31, 2013
75,000 revealed an amount ofP600,000. What is the December 31, 2013
70,000 adjusting entty for supplies expense?

Insurance expense 5,000 n. Debit supplies expens.e and credit supplies inventory P760,000.
b. Debit supplies expense and credit supplies inventory P600,000.
Problem 31-15 (IAA) c. Debit supplies inventory and credit supplies expense P600,000.
d. Debit supplies inventory and credit supplies expense P240,000.
On December 31, 2013, the. prepaid insurance account showed a
debit balance ofP500,000. The balance of the prepaid insurance
Solution 31-16 Answer a
on January 1, 2013 was P600,000. During the year, the entity paid
insurance premium of P800,000. If insurance premium payment is Supplies mventory- January 1 360,000
initially entered in the prepaid insurance account, what is the adjusting Payment for supplies debited to supplies inventory 1.000,000
entry on December 31, 2013? Total 1,360,000
a. Debit prepaid insurance P900,000. Supplies inventory- December 31 ( 600,000)
b. Credit prepaid insurance P 1,000,000. Supplies expense 760,000
c. Debit insurance expense P700,000.
d. Debit insurance expense P900,000.

. 482 483
 Pro~lem.31 -17 (IAA) \t,furion 31-18 Answer c

On January 1, 2013, an entity reported supplies inventory of /\11 '11rd salaries paya~eeembe(31, io I 2 400,000
1\ dd Salaries expense 4,200,000 .
P 1,200,000. During the ~urrent year, supplies purchased amounted
to P3,400,000 and the purchases were charged tp supplie~ expense. lnltl 4,600,000
The Decemper 31, 2013 statement of financial position showed I 'liS Salaries paid 3,900,000
supplies inventory ofP900,000. If no reversing entry was made on 1\l l rued salaries payable- Dec~mber 31, 2013 700,000
' January 1, 2013, what was the amount needed for the year-end
adjusting entry for supplies expense? l't'uhlem 31-19 {IAA)
a. 2,5bO,OOO incre&e I" arcn Company reported in the income statement for 2013
b. 2,500,000 decrease I' I , 100,000 of wages expense. The previous year's statement of
c. ...300,000 .increase 1111ancial position repmted Pl 00,000 of wages payable. An analysis
d. '300,000 decrease ol the payroll rec?rds showed wage payments during the year of
l'lJ SO,OOO. If the- previous year's adjusting entry for unpaid wages
Solution 3I -17 Answer c wns reversed on January 1, 2013, \Vhat is the amount of the adjusting
l'ntry for accrued wages payable on December 31, 2013?
Supplies inventory-January 1 1,200,000
' Supplies inventory- December 31 900,000 n 250,000
ll, 400,000
Decrease in supplies inventory 300,000
150,000
d. 850,00.0
ProbJem 31-18 (AICPAAdapted)
Rice Company's salai"ied employees are paid biweekly. Advances Solution 31-19 Answer a
made to employees are paid back by payrol1 deductio,ns.
Wages payable - J.a nuary 1 100,000
12/31/2012 12/31/2013 W1ges expense 1,100,000
Employee advances 240,000 . 360,000 'l'otnl 1,200,000
Accrued salaries payable 400,000 ? Wage payments during the year ( 950,000)
Salaries expense during the year 4,200,000 •
Wages payable- December 31 250,000
Salaries p.aid during the year (gross) . 3,900,000
Adjusting eritry on December 31
On December 31,2013, wbat ammmt should ~e reported as accrued
salaries payable? Wages expense 250,000
a. 940,000 Accrued wages payable 250,000
b. 820,000
c. 700,000
d. 300,0()0

484 485
Problem 31-20 (AICPAAdapted) Solution 31-21 Answer b
Doren Company had a balance of P490,000 in the compensation Balance per book 990,000
expense account on Deceml;>er 31, 2013 before year-end adjustment Radio advertising accrued on December 31, 2013 50,000
for the following: Total 1,040,000
No salary accrual was made for the week of December 25-31, Prepaid 11ewspaper advertising- December 31, ·20 13 ( 60,000)
2013. Salaries for this period totaled Pl8,000 and were paid
Advertising expense , 980,000
on January 5, 2014.
• Bonus for2013 was paid on January 31,2014 in the total amount
ofP175,000. Problem 31-22 (AICPAAdapted)

What is the adjusted balance of compensation expense for 2013? Pak Corppany had a bala;1ce of P820,000 in the professional fees
expense account on December 31, 2013, before considering year-end
a. 683,000 aqjustments relating to the following:
b. 665,000
c. sos,ooo Consultants were hired for a special project at a total fee not to
d. 490,000 exceed P650,0~0. The entity had recorded P550,000 of this fee
based on billings for work performed in 2013.
Solution 31-20 Answer a • The attorney's letter requested by the auditors dated January 31,
Compensation expense per book 490,000 2014, indicated that legal fees ofP60,000 were billed on January
Accrued salaries -December 31, 2013 18,000 15,2014 for work performed in November 2013, and unbil1ed
Accrued bonus ; -December 31, 2013 1"75,000 fees for December 2013 were P70,000.
Total compensation expense. 683,000 What amount should be reported for professional fees expense for the
' year ended December 31, ~013?
Problem 31-21 (AICPAAdapted)
a. . 1,050,000
On December31, 2013,Ashe Company had aP990,000 balance in b. 950,000
the advertising expense account before any year-end adjustments. c. 880,000
Radio and television adve1tising spots broadcast during December d. 820,000
2013 were billed toAsheon.Tanuary4,2014. The invoice cost of
P50,000 was paid on January 15,2014. Solution 31-22 Answer b
Included in the P990,000 is P60,000 for newspaper advertismg Bala~ce per book 820,000
for a January2014 sales promotional carnpaign. Accrued legal fees:
What amount should be reported as advertising expense for 201 3? November 60,000
December 70,000 130,000
a. 930,UOO Total professional fees expense
b 980,000 950,000
c. 1,000,000
d. 1,040,000

486 487
 Problem 31-23 (AICPAAdapted) l'rohicm 31-24 (IAA)
Fay Company pays the outside salespersons fixed monthly salaries lit a nc.::t Company maintained the accounting records using the cash
and commissions on net sales. Sales commissions are c01i-iputed I•.Hds of accounting. During 2013, the entity collected P5,000,000
. and pai·d on a monthly basis (in the month following the month of from clients. On December 31, 2012, accounts receivab.Je
111 fl'l!S
sale), and the fixed salaries are treated as advances . agaiJ?-St 'd I'HOO,OOO and unearned fees ofPSOO,OOO had been recorded.
commissions. However, if the fixed salaries for salespersons exceed 011 December 31, 2013, accounts receivable increased to
. their sales commissions earned for a month, such excess is not 1'1, 500,000 while unearned fees increa::;ed to P900,000. Under
charged back to them. Pertinent data for the month of March fqr. utrrual basis, what is the service revenue for 2013?
the three salespersons are as follows:
n. 5,000,000
Fixed
It, 4,700,000
Salesperson salary Net sales Commission
l • 6, 100,000
A 10,000 200,000 4% d . ~.300,000
B 14,000 . 400,000 6%
c 18,000 600,000 6% ,\olutton 31-24 Answer d
·Total 42,00Q 1,200,000 ('ollcctions from clients 5,000,000
What amount should be accmed for sales commissions on March Ac.:l'ounts receivable- Decemb.e r 31, 2013 1,500,000
31? llncarned fees- December 31, 2012 500,000
a. 70,000 It~ Ia I 1,000,000
b. 68,000 \ ll'Ounts receivable- December 31, 2012 ( 800,000)
C. 28,000 I lul'arncd fees- December 31, 2013 ( 900,000)
d. 26,000 ~·t:l vice revenue - accrual basis 5,300,000
Solution 31-23 Answer c
l't ol>lcm 31-25 (AICPAAdapted)
Salary C -.~mmission Acerued commissio n
I >uring 2013, Tara Company received P8,000,000 frorr tenants. The
A 10,000 8,000 htatcment of financial position contained the following data:
B 14,000 24,000 10,000
c 18,000 36,000 18,000 2012 2013
28,000 Rc.:1ttals receivable 960,000 1,240,000
Unearned rentals 3,200,000 2,400,000

WI Ult amount ofrental revenue should be rep01ied for 2013?

... 9,080,000
b. 8,520,0G.
7,480,000
d 6,920,000

483 -189
 Problem31 -23 (AICPAAdapted) I' • ohicm 31-24 (IAA)
Fay Company pays .the outside salespersons fixed monthly salaries 111111H: :1 Company maintained the accounting records using the cash
and c01:nmissions on net sales. Sales c:ommissions are c01i1puted ltilsis of' accounting. During 2013, the entity collected P5,000,000
. and paid on a monthly basis (in the month following the month of 111 kl!s from clients. On December 31 , 20 12, accounts recei,•ab)e
sale), and the fixed sal~ries are treated as advances . against 1 d P ~OO, O OO and unearned fees ofP500,000 had been rec orded~
commissions. However, if the fixed salaries for salespersons exceed Cl n December 31 , 2013 , accounts receivable increased to
. their sales commissions earned for a month, such excess is not I' I , 500,000 while unearned fees .increased to P900,000. Under
charged back to them. Pertinent data for the month of March f~r. I H ' (T U al basis, what is the service revenue for 2013 ?
the three salespersons are as follows:
n. 5,000,000
Fixed
It, 4,700,000
S alesp erson salary Net sales Commission
1', 6, 100,000
A 10,000 200,000 4% d. S,300,000
B 14,000 . 400,000 6%
c 18,000 600,000 6% ,\ olution 31-24 Answer d
Total 42,000 1,200,000 . 'n lh:ctions from clients 5,000,000
What amount should be accrued for sales commissions on March Accounts receivable - December 31, 2013 1,500,000
31? llncarned fees - December 31, 2012 500,000
a. 70,000 ' l tlt,d 1,000,000
b. 68,000 \ l counts receivable -December 31, 2012 ( 800,000)
c. 28,000 I lnl'arncd fees- December 31, 2013 ( 900,000)
d. 26,000 SL'I vice revenue - accru al basis 5,300 ,000
Solution 31-23 Answer c
l'a oblcm 31-25 (AICPAAdapted)
Salary C -.~ mmis s i o n Acerued commission
I luring 20 13, Tara Company received P8,000,000 frorr tenants. The
A 10,000 8,000 1.tatcment of financial position contained the following data:
B 14,000 24,000 10,000
c 18,000 36,000 18,000
-- 201 2 2013
28,000 11 l'n lals receivable 960,000 1,240,000
I J nca med rentals 3,200,000 2,400,000

Wh.nt amount ofrental revenue should be repmi ed for 20t3?

" 9,080,000
b 8,520,00.
7,480,000
d 6,920,000

488 489
Solution 31-25 Answer a l'roblem 31-27·(AICPAAdapted)
Cash received from tenants 8,000,000 Rill Company owned a 20% royalty interest in an oil well. The
Rentals receivable- 2013 1,240,000 entity received royalty pa}rrnents on January 31 for the oil sold
Unearned rentals - 2012 3,200,000 twtween the previous June J and November 30, and on July 31
Total 12,440,000 for oil between December 1 and May 31. Production reports
Less: Rentals receivable - 2012 960,000 ' cvcaled the following sales:
Uneamed rentals - 2013 2,400,000 3,360,000
lune l, 2012- November 30,2012 3,000,000
Rental revenue for 2013 9,080,000 010cem.her 1, 2012 - December 3l, 2012 500,000
!Jcccrnber 1, 2012- May 31,2013 4,000,000
Problem 31-26 (AICPAAdapted) June 1, 2013- November 30,2013 3,250,000
IJccember 1, 20 13 - December 3 I, 20 13 700,000
Marr Company reported rental revenue ofP2,21 O,GOO in the cash
basis income tax return for the year ended November 30, 2013. What amount should be reported as royalty revenue for -2013?
Rent receivable- November 30, 2013 1,060,000 n. 1,400,000
Rt':nt receiva~le- November 30, 2012 800,000 h. 1,440,000
Uncollectible rent written off during the fiscal year 30,000 c. l ,490,000
Under accrual basis, what amount should be reported as· rent d. l ,590,000
revenue?
f)o/ution 31-27 Answer c
a. 1,920,000
b. 1,980,000 J>cccmber 1, 2012- May 31,2013 4,000,000
r:. 2,440,000
December 1, 2012- December 31, 2012 ( 500,000)
d. !,500,090 ~n ics January 1 to May 31,2013 3,500,000
luuc 1, 2013- November 30,2013 3,250,000
Solution 31-26 Answer d l)cccmber 1, 2013 - December 31, 2013 700,000
Rent r~cei·vcd - cash basis 2,210,000 Iotal sales in 2013 7,450,000
Rent receivable- November 30, 2013 1,060,000
Rent written off 30,000 Royalty revenue for 2013 (20% x 7,450,000) 1,490,000
Total 3,300,000
Rent receivab le- November 30, 2012 UQO,OOO)
Accrual basis rent revenue 2,500,000

490 491
 Prob lem 31-28 (AIC PAA dapte d)
'Nbat amou nt should be reported for divid end revenue?
Lake Com pany repor ted the follo wing infut matio n on J,anu
2013: ary 1,
. II. 160,000
'Investments in share s b. 24,000
Kar Comp any (1 ,000 share s). ~·. l 0,000
10(J,000 d. 1,500
Aub Comp any (5,00 0 share s)
1,000,000
Real estate: \Vhat amQtmt should be reported for royalty revenue?
Parki ng lot (lease d to Day Comp any) '
3,0\JO,OOO
Other: a. 1,400,000
Trade mark b. 1,300,000
250,000
c. 1,100,000
Total investments
4,350,000 d. 900,000
The Day lease, which commenced on January 1 013, is for What amount should be reportedfor rental revenue?
10
years at an annual rental ofP480,000. In additi01 , on Janua
ry 1, n. 430,000
20!3 Day paid a nonrefundable deposit ofP500,000, as well b. 480,000
as a
security deposit ofP80,000 to be refunded upon expiration oflea c. 530,000
se.
The trademark was licensed to Barr Company for royalties of d. 538,000
10%
of sales ofthe trademarked items. Royalties are payable semiannual
ly Solution 31-28
on March 1 for sal~s in July through December of prior year,
and
on September 1 for sales in January through June of the same
year. {)uestion 1 Answer c
Uike owned 1o/r of,Kar and 30% of Aub. During the year ende
d
December 31,2013, Lake received cashdividendofPlO,OOO ash divid end from Kar
from
Kar, and Pl50,000 from Aub, whose 2013 net income figures
were
P750,000 .:.nd P1,500,000 respectively. (Jue.stion 2 Answer d
Lake also received P480,000 rent from Day in 2013, and
the l'uyal ty reven ue from January to June 2013
fo1lowi.ng royalties from Barr:
paid on Septe mber 1, 20 13 700,000
Marc h 1 Royalty from July to Dece mber 2013 (10% x 2,000 ,000) 200,000
Septe mber 1
2012 300,000 l'olal royal ty reven ue 900,000
500,000
2013 400,000 700,000
Darr reported tbat saJes ofthe trader:.1arked items totaied P2.00 (}ues tion 3 Answ er c
0,000
for the last half of20 13.
Rent for 2013 480,000
Amortization ofnonrefundab1e depos it (500,000 I 10) 50,000
Total renta l revenue 530,000

491
493
Problem 31-29 (AICPAAdapted) t•ruhlcm 31-30 (CGAC)
On January 1, 2013, Denver Company entered into a 4-year I 111s Company kept the records on a cash basis. At the end of20 13,
licensing agreement with Akins Company allowing Akins to use t hl accountant prepared the following cash basis income statement.
Denver's cartoon characters on all the lunchboxes that Akins
l{t•vcnue 1,910,000
manufactures. Akins is reqqired to pay Denver royalties equal to I XJK'llSCS
10% of annual sales. 809,000
Net tncome 1,10!,000
Akins guaranteed Denver a P1,200,000 minimum royalty over the
life of the agreement and paid Denver the minimum amouiit.on
I he following amounts of accrue<l, prepaid and unearned items
January 1, 2013. For the year ended December 31, 2013, Akins' wt•t c ignored at the erid of20 12 and 2013:
sales totaled P5,000,000. What amount of royalty income should
Denver report in 2013? 2012 1013
a. 300,000 :\ rc rued r.evenue 91,000 73,000
b. . 500,000 ll11carned revenue 66,000 108,000
c. 800,000 \n;rued expenses 49,000 65,000
d. ' 1,200,000 l'tt•paid expenses 46,000 56,000
What is the net income under accrual basis for 2013?
Solution 31-29 Answer b
II, I ,035,000
Royalty revenue for 2013 (1 0% x 5,000,000) 500,000 11, 1,051,000
l '. 1,20~,000
Since the guara~teed minimum annual royalty is P300,000 d. I, 135,000
(1 ,200,000 I 4 years), the royalty revenue for 2013 is P500,000. ·
•\'olution 31-30 Answer 'a·
N~·t income - cash basis 1,101,000.
Atnued revenue
2012 ( 91 ,000)
2013 73,0CQ
Uuc:arned revenue
2012 . 66,000
2013 ( 108.000)
Atcrued expenses
2012 49,000
2013 ( 65,000)
l'1cpaid expenses
2012' ( 46,000)
2013 56,000
Net income - accrual basis 1,035,000

494 495
Probiem 31-31 (AICPAAdapted) /\c lclitional information

Baron Company, a proprietorship, which maintained t~e acco~ting I, Amounts due from customers totaled P360,000 on December 31.
records on the cash basis provided the following information dun~"lg the .'013.
veal" ended December 31, 20 13:
~
i.. An analysis of the accounts receivable re,·ealed that an allowance
for doubtful accounts ofP40,000 should be provided.
Cash 260,000
Accounts receivable- January 1, 2013 160,000 Unpaid invoices for purchases totaled P305,000 and Pl70,000
Inventory-January 1,2013 · 620,000 on December 31,2013 and December 31,2012, respectively.
Fumiture and fixtures 1,180,000 11 The invento1ytotaled P750,000 based on a physic"al count of the
Leasehold improvement 600,000 goods on December 31, 2013. The inventory was priced at cost,
Accumulated depreciation- January 1, 2013 330,000 which approximates market value.
Accounts payable- January 1, 2013 170,0~0
·
Baron, Capital - January 1, 2013 1,400,000 'i On May 1, 2013, Baron paid P90,000 to renew the insurance
Sales 6,520,000 policy for one year. The premium on the previous policy wh~ch
Putcbases 3,070,000 expired onAp.ril30, 2013 was P75,000 .
Salaries 1,740,000
)10,000 (, On January 1, 2013, Baron entered into atwenty-five-year operating
Payroll taxes
90,000 lease for the vacant lot adjacent to Baron's retail store for use as a
Insurance
340,000 parking lot. As agreed in the lease, Baron paved and fenced the lot
Rent
120,000 at a cost ofP600,000. The improvement was completed on April
Utilities
130,000 I, 2013, and had an estimated useful life of fifteen years. No
pving expenses
provision for depreciation bad been recorded. Depreciation on
8,420,000 8,420,000 furniture and fixtures was Pl20,000 for 2013 ..
.., Accrued expenses on December 31, 2012 and December 31, 2013
were as follows:
2012. 2013
Utilities 10,000 15,000
Payroll taxes 11,000 16,000
B. Baron is being sued for P4,000,000. The coverage under the
comprehensive insurance policy is limited to P2,500,000. The
attorney believed that an unfavorable outcome is probable and that
a reasonable estimate ofthe settlement is P3,000,000. The liability
is expected to be settled in2014.
'J. The salaries included P40,000 per montli paid to the proprietor.
The proprietor also received P2,500 penveek for living expenses.

496 497
 I. What amount of sales should be reported under ·accrual basis? ,\'olutw n 31-31
a. 6,520,000 J 11c •stion 1 Answer c
b. 6,320,000
Srt lt scash basis 6,520,000
c. 6,720,000
At counts receivable- December 31, 2013 360,000
d. 6,880,000 Acr ounts receivable- January 1, 2013 ( 160,000) "
2. What amount of cost of sales should be reported under accrual ~ des accrual basis 6,720,000
basis?
(!tl('stion 2 Answer a
a. 3,075,000
b. 3,245,000 Purchases - cash basis 3,070,000
c. 3,205,000 Au:ounts payable - December 31, 2013 305,000"
d. 2,940,000 1\1 t'ounts payable- January 1, 2013 ( 170,000)
r•11rchases - accrual basis 3,205,000
3. What tota1 amount of expenses should be reported under accrual
luvl'ntory -January 1, 2013 "620,000
basis?
luvl'rtlory-December 31,2013 { 750,000)
a. 2,575,000 <'ost of sales -accrual basis 3,075,000
b. 2,590,000
c. 2,595,000 (Jtwstion 3 Answer d
d. 2,615,000
S rlarics 1-,260,000
4. What is the net income under accrual basis? l'.1yroll taxes ( 110,000+ 16,000-11,000) 115,000
ln•.mance 85,000
a. 1,100,000 llc•nt 340,000
lllrhhcs (1~0,000+ 15,000-10,000) 125,000
b. 1,030,000 llnubtful accounts 40,000
c. 700,000 llc prcciation ( 30,000 + 120,000) 150,000
d. 900,000 I n~.s from lawsuit ( 3,000,000- 2,500,000) 500,000
l'olui expenses 2,615,000
5. What is the capital on December 31, 2013?
:'nl.rries per book 1,740,000
a. 1,824,000 I I'IS. Drawings (40,000 x 12) ( .480,000)
b. 1,820,000
t\d1ustcd salaries 1,260,000
c. 2,434,000
d. 1,404,000 I prrcd amount on previous policy (75,000 X 4/12) 25,000
I ·pi red amount on new policy (90,000 X 8/12) 60,000
111.,\lrancc 85,000
I ><'I" cciation on leasehold improvement
(600,000/15 =40,000 X 9/J2)

499
 Question 4 Answer b
Sales 6,720,000
Cost of sales QR_75,000)
· Gross income 3,645,000
Expenses · (2,6 15,000) I• RROR CORRECTION
Net income - accrual basis 1,030,000
Question 5 Answer a
Paohkm 32-1 (AICPAAd apted)
Capital-Janmi.ry 1, 2013 1,400,000
Unrecorqed prepaid insurance- Deceml:-er 31, 2012 . 25,000 I >111111g the course ofan audit ofthe financial statementsofJulie Company
Unrecorded accrued expenses - December 31, 2012 ( 21,000) ltH the year ended December 31, 2013, the foll owing data are ·
Adjusted capital- January 1, 201 .3 1,404,000 til .covt.:rcd:
Net income 1,030,000
Drawings · • Invcntory on January 1, 2013 had been overstated by P300,000.
( 610,000)
Capital -December 31, 2013 1,824,000 Inventory on December3l, 2013 was understated byPSOO,OOO.
of
Salary proprietor 480,000 A11 insurance policy covering three years had been purchased on
Living expenses (2,500 x.-52.weeks) 130,000 .lanuary 1, 2012, for Pl50,000. Theentireamountwas charged as
Drawings . 610,000 HII expense in 201 2 .

11111 in!-' 2013, the entity received a PIOO,OOO cash advance from a
t:ll•,tomcr for merchandise to be manufactLlred and shipped during 2014.
ll1 111nount had been credited to sales revenue. The gross profit on
t1 •• 1s 50%. Net income for 2013 per book was P2~00Q,OOO. Vvhat
I tl1c proper net income for2013?
2,650,000
2,150,000
1,650,000
d 2,05 0,000

,\nlution 32-1 A nsvver a

"1•1 inco111e per book 2,000,000
l tn unry I inventory overs tated 300,000
I J l'lllbcr 31 inventory understated 500,000
I ln1 ccurdcd ins·.1rance exoensc
( 50,000)
"clvo~•1ct's from cus lome:
.L!.QO,COQ)
tt•l'l'! net Jncomc for 20J 3 2,050,0(.)()

5 00
Problem 32-2 (PHILCPAAdapted) I'• uhlt•m32-3 (IAA)
Malampaya .Company showed income before income tax of II Company had detennined the 2012 and 2013 t .
II ollll
P6,500,000 on December 31,2013. The year-end verification of the I 'h P~ .ooo~ooo
and PS,OOO,OOO, respectively. In a firs~~~~~~~~
transactions revealed the fo11owing errors: ttl Ill\ f1nanc1al
. statements,
. the following errors are d'ISCOVered·.
* P 1,000,000 worth of merchandise was purchased in 2013 and • M cr chandise inventoty was incorrectly determined- P50 000
included in the ending inventory. However, the purchase was overstatement for 2012 andP150,000 overstatement for 2013.
recorded only in 2014. ·
* A merchandise shipment valued at P1 :.500,000 was properly l{l'Vcnue received in advance in 2012 ofP300,000 was credited
ftJll revenue account when received. Of the total P50 000
recorded as purchase at year-end. Since the merchandise was
still at the port area, it was inadvertently omitted from the awed in 2012, P200,000 was eamedin2013 and'th ' . :as
wi II be earned in 2014. e remam er
inventory balance on December 31, 2013.
* Advertising for December 2013 amounting to PSOO,OOO was l'ilO?,OOp gairi on sale of plant asset in 2013 was erroneously
recorded when payment was made inJanuary2014. ( 1cd 1ted to retained earnings.
* Rental ofP300,000 applicable for s1x months was received ori
November 1, 2013 ..Tbe entire amountwasrcportedas income in Wit 11111 the correctednetincornefor 20!3?
2013. ~.soo,ooo
* Insurance premium covering the period from July 1, 2013 to July 150,000
,1

1, 2014 amounting to P200,000 was paid and recorded as expr nse S,400,000
on July 31,2013. The entity did not make any adjustment a· the tl ,550,000
end of the year.
What is the corrected income before tax for 2013? J/utum 32-3 Answer a

a. 6,900,000 2012 2013

b. 6,400,000 I 111~ome per book 4,000,000 5,000,00Q
c. 6,500,000 I h rslatcment of inventory
d. 6,300,000 1012
( 50,000) 50,000
I() 13
( 150,000)
Solution 32-2 Answer b v 'JJUC received in advance ( 250,000) 200,000
6,500,000 • 1111 on sale of plant asset
Net income per book 400,000
Unrecorded purchase of 2013 (1 ,000,000)
1111 cctcd net income 3,700,000
Merchandise shipment not included in December 31, 5,500,000
1,5.00,000
2013 inventory
Unrecorded advertising for December 2013 ( 500,000)
c 200,000)
Unearned rent income .(300,000 x 4/6)
100,000
Prepaid Insurance (200,000 x 6/12)
6,400,000
Corrected income before tax

502 503
 Pr uhlt~m 32-5 (PHi l.CPA Adap ted)
"'
Prob lem 32-4 (IA..J\)
.
Iillllrt Company failed to recognize accmals and .
Blcnde Company provided the following comparative statem
ents of
tlll'l'ption of business three years ago. The inco~~~e~=fo~;~:s. smce tu~
income and retained eamings: und prepayments at the end of the CUITent year are: x, accmal
2013 2012
II 1~ome befor e tax 1,400,000
Sales 4,600,000 4,350,000 I repaid insurance 20,000
2,346,000 2,305,000 Al crucd wage s
Cost of good s sold 25,000
2,254,000 2,045,000 l(cnt revenue collected in advance 30,000
Gross profit ltJtcrest receivable
1,598.000 1,533,000 50,000
Expe nses
656,000 512,000 What IS the corrected income before tax?
Net incom e
I, I,385,000
1,441,000 1,077,000
Begin ning retain ed earni ngs h. 1,415,000
656,00.0 512,000
Net incom e ~. I ,400,000
( 157,000) ( 148,0 00)
·Dividends "· I ,375,000
i,940,000 1,441 ,000
Endin g retain ed earni ngs - --
\'o!tUion 32-5 Answ er b
In 2014 , Blonde Company discovered that ending invent01y
for 2012
was ' l11ndjusted income 1,400.000
was understated by Pl 00,00 0 and the ending inventory for 2013
fltl~paid insur ance 20,000
retained
overstated by P300_,000. What is the corrected balance o~ Al·cru cd wages ( 25,00 0)
eamings on Dece mber 31, 2013 ? Rent collec ted in. advan ce ( 30,00 0)
IJ1Icrcs1 receivable " 50,000
a. 2,240 ,000
b. 1,6~0,000 ot rccted income 1,415,000
C. 2,340 ,000
d. 1,540,000

Solut ion 32-4 .IJ11S>Ver b.

1,940,000
Retai ned earni ngs- Dece mber 31, 2013
( 300,000)
Overs tatem ent of 2013 endin g inven tory
1,640,000
Corre cted balan ce- Dece mber 3 L 2013

o··e
The inventory en-or in 2017 is cotmterba lanced in 2013 and theref
20 I~.
bas no effect on ret?incd earnings on December 31

505
5(14
 l't uhlcm 32-7 (AJC PAA dapt ed)
Prob lem 32-6 (IAA)
Canal Company reported the following net income: 111 Dece mber 31, 2013 , Asto r Com pany
sold merc hand ise for
I' /')0,0 00 to Day Com pany. The term s of the sale
6,000,000 wet:,e net 30,
2012 II Ill sh ippin g poin t. The merc hand ise was shipp
6,500,~00 ed on Dece mber
2013 \ I , ~0 13, and arriv ed at Day on Janu ary 5, 2014 . Due
. . to a cleri cal
.
In the deter mina tion of the net mco the follo wmg ltem s are 11ur, the sale was not reco rded until
me, Janu ary 2014 and the
ignored: 111 fl'llandise sold at a 25% mark up on cost
was inclu ded in Asto r's
2012 2013 111Vcntory c..• Dece mber 31,2 013. Wha t was the
effect of the errors
lilt ost of good s sold for 2013 ?
Prepaid insurance 100,000 150,000
50,000 200,000 1 Unde rstate d by P750 ,000
Accrued saia-ries
Unearned rental income 250,000 450,000 h Understated by P600 ,000
300,000 400,000 ll Unde rstate d by P 150,0 00
Accr ued interest receivable
d <'otTcctly state d
Wba t is the corre cted net incom e for 2013?
~'olutton 32-7 Answ er b
a. 6,100 ,000
b. 6,300 ,000 I he- Dece mbe r 31, 2013 inve ntory was over state
d. Ther
c. 6,400 ,000 , ,,.,, uf good s sold for 2013 was unde rstat ed by P600efore ,
,0 00
d. 6,50 0,00 0 I /10,0 00 / 125% )

Solution 32-6 Answer b 111uhlcm 32-8 (~CPAAdapted)

2012 2013 I l 1 'II ( 'ompany's beginning inventory on January 1was
understated by
I' 1110,000 and the ending inventory was overstated by
Net income per book 6,000,000 6,500,000 P520,000. What
\ I'll he effec t of the error s on the cost of good
Ot.1ission of prepaid insurance s sold for the current
\ u'/
100,000 ( 100,000)
2012
2013
150,00(, ' 2W,OOO understated
Omission .of accrued salaries I• .1 h0,000 overstated
2012 ( 50,00 0) 50,000 \..: /HO,OOO understated
2013 ( 200,000) d /KO,OOO overstated
Omission ofu,t earne d rental inc.ome
2012 ( 250,000) 250,000 \'ol11twn 32-8 Answ er c
( 450,000)
201 ?- . lniJu.uy 1 inventory unde rstat ed
Omission of accrued intcreSl rc\:civablc 260,000
11, ~,;r mbcr 31 inventory over state d
300,000 ( 300,000) 520,000
2012
400, 000. ( 'f• 1 nf goods sold understated
2013 780,000
Corr ected net incom e 6,100,000 6,300,000
II hcginnn1g inven tory is unde rstate d, cost
of good s sqld is also
11111 kl!-ilf lted. If endin g inven tory is overs tated
, cost of good s sold is
llllll w~t~ted.

506 507
Proble m 32-9 (AICP AAdap tcd) \olulio n 32-10 Answe r c
Conn Compa ny reported a retained eami.ngs balance ofP4,0 00,000 2012 . 2013
on Januar y 1, 2013. In 2013, the entity detem1ined that insuran ce lO 12 inventory understated 60,000 ( 60,000)
premiu ms of P900,0 00 for the three-y ear period beginn ing 013 inventory overstated
The ( 75",000)
Jam..tar~' L 2012 had been paid and fully expens ed in 2012.
incom e tax rate is 30%. What amoun t should be report(>d as Net correction to income 60,000 {135,00Q)
correct ed retaine d earning s on Janua ry 1, 2013? -·-
N I correct ion to 2012 net income 60,000
a. 3,400,0 00 N t correct ion to 2013 net income (135,000)
b. 4,420,0 00 Net correction to retaine d earn.ln gs "( 75,000)
c. 4,600,0 00
d. 3,580,0 00 l'a'Oblcm 32-11 (AICP AAdap ted)

Solution 32-9 Answe r b V•ctoria Com~anyreveal~d the following:

4,000,000 Ending Inventory Deprec iation
Retaine d earning s- January 1, 2013
Unders tatemen t of prepaid insuran cr. 2012 200,000 underst ated 50,000 underst ated
on 12/31/2 012 (900,00 0 x 2/3) "600,000 ),0)3 300,000overstated... 90,000 overstated
Tax effect (30% x 600,000 ) (180,000) 420,000
At what amount should retained earnings be retroactively adjusted ·
Correc ted retaine d earning s -Janua ry 1, 2013 4,420,000 111 Jnnua ry 1, 2014?

r• 260,000 increase
Proble m 32-10 (AICP AAd.ap ted) b 260,000 decrease .
During 2014, Paul Compa ny discovered tbaftbe endi~g inventories t • 4 J0,000 decrease

reporte d on the financial statements were incorre ct by the following ,2 10,000 decrease
amounts:
60,000 understated Solution 32-11 Answe r b
2012
2013 75,000 oversta ted 2012 2013
fhe entity used the periodi c invento ry system to ascerta in year-end 012 invento ry understated 200,000 (200,000)
~0 12 depreciation understated ( 50,000)
quantit ies that are conver ted to peso amoun ts using FIFO. Prior to 0 11mvcn tory oversta ted (300,000)
any adjustments for these errors and ignoring income tax, what was 2011 depreci ation oversta ted 90,000;
the effect on retaine d eaming s on Janua ry 1, 2014?
Ncr correct ion to income (410,00 0)
a. Correct
b. 15,000 overstated Ncr currcct ion to 2012 net income 150,000
c. 75,000 overstafed Ncr correction to 2013 net income (4t0,00 0}
d 13 5,000 overstated N~o:~ co1 rcction to retaine d ~arnlnos
b (260,000)

:)08 509
Problem 32-12 (lAA) \ol11110n 32-12
Bexley Company is in the process of adjusting the books at the end of ('"'',\ lion 1 Answer a
2013. TI1e accounting records revealed the·following infom1ation:
2011 2012 2013
* The entity failed to accrue sales commissions at the end of20 11 l Jnu.· conled commissions:
and 2012 as follows: .2011 (220,000) 220,000
220,000 2012 (140,000)
2011 140,000
140,000 hultng inventory:
2012
2011 under 400,0C ~ (400,000)
In each case, the sales commissions
. were paid and expensed in 20 12 over (540,000) 540,01)0
January ofthe following year. 2013 under
150,000
* Errors in ending inventory for the last three years were discovered Net correction to income 180,000 (860,000) ~O_QQ
to be as follows:
Net income per book for 2013
2011 400,000 understated 3,000,000
Net correction to income of2013
2012 540,000 overstated 830,000
2013 150,000 understated Adjusted net income of2013
3,830,000
The unadjusted retained earnings balance on January 1, 2013 is
Question 2 Answer a
P12,600,000 and the unadjusted net income for 2013 was
P3,000,000. Dividends ofP1,750,000 were declared during 2013. Net correction to income of 2011
180,000
Net correction to income of2012
I . What is the adjusted net income for 2013? (860,000)
Net correction to income of prior years (680,000).
a. 3,830,000
b. 3,150,000 Retained earnings - January 1, 20 13 12,600,000
c. 3,680,000 Prior period ·e rrors- 2011 and 2012
( "680,000)
d. 3,530,000
Corrected beginning balance
I 1,920,000
2. What is the adjusted balance of retained earnings on December Net income for 2013
3,830,000
31,2013? Dividends declared ·in 2013
( I ,750,000)
a. 14,000,000 Retained earnings - December 31, 2013 14,000,000
b. 13,320,000
c. 13,850,000
d. 11,000,000

510 511
Problem 31-13 (AICPAAdapted) I toh ll'tn 32-14 (AICPAAdapted)
Shannon Company began operations on January 1, 2011. Financial lmy Company reported that the yea~end fmancial state1nents
statements for the years ended December 31, 2012 and 20 l3 nt unod the following errors:
contained the following errors:' 2012 2013
2012 2013 I ulutJ inventory 200,000 under 300,000 over
Ending inventory 160,000 understated 150,000 overstated I J pt cu'ltion 50,000 under ·
Depreciation expense 60,000 understated n lllfiu'rance premium ofP150,000 was prepaiq in 2012 to cover
Insurance expense 100,000 overstated lOO,OOO.underst~ted
()I , 20 13 and 20 14. The entire amount was ~harged to expense in
Prepaid insurance 100,000 unde.r stated
0 I On December 31, 2013, fully depreciated machinery was sold
ln addition, on December 31, 2013, fully-depreciated machin~ry f 1 1'250,000 cash but the sale was not recorded until2014. There
was sold for P108,000 cash, but the sale was not recorded until v 1 no other errors during 20 1,2 and 20 ~ 3 and no corrections have
2014. There were no other errors during 2012 or 2013 and 1.10 I n made for any of the errDrs. Tgnoring inC9me tax, what is net effect
corrections have been made for any of the errors. Ignoring income 11f th errors on retained earnings on December 31, 2013?
tax, what is the total effect of the errors on the amount of working
capital on December 31, 2013?
h
300,000
250,000
overstated
understated
a. 42,000 overstated 50,000 overstated
b. 58,000 understated 50,000 understated
c. 60,000 understated
d. 98,000 understated \ 1/UIInn 32-14 Answer c

Solution 32-13 Answer a

2012 2013
o1. ending inventory under 200,000 (200,000)
Working U~ \ending inventory over (300,000)
capital l I 2 <\~predation under ( SOtOOO)
2012 2013 121311-2013 111 u• nee premium 100,000 ( 50',000)
2012 inventory understated i60,000 (160,000) ( lntn on sate of machinery 250,000
2013 inventory overstated (150,000) (150,000) N 1 c 1rrcction to income 250,000 (300,000)
2012 depreciation understated ( 60,000)
N I orrcction to 2012 net income 250,000
Prepaid insurance understated 100,000 (100,000)
N 1 1.' orrection to 20 13 net income (3001000)
Gain on sale of machinery 108,000 108,000
N 1 ('orrootion to retained earnings ( 50,0.0 0)
Net correction 100,000 (30~,000) ( 42,000) .1

I he net mcome of2012 was understated by P250,000 and the net

Incidentally, the 2012 net income was understated by P200,000 111 (litH~ of2013 was oversta_ted by P300,000. Acoordingly, the net
and the 20 13 net income was oyerstated by P302,000 or a net II 'l' t i~ overstatement ofretain~ earnings ofPSO,OOO.
decrease ofP102,000 in retained earnings on January 1, 2014.

512 513
 Problem 31-15 (IAA) l'1 nhlt'm32-17 (IAA)

Crescendo Company reported the following errors: 1\ lrllltl! Company reported income before tax ofP3, 700,000 for
2012 2013 'II I J and P5,200,000 for 2013. An audit produced the following

Ending inventory 140,000 overstated 200,000 understated 11 ''' u 11111tio.n :

Rent expense 48,000 understated 66,000 overstated
I he ending inventory for 2012 included 5,000 units erroneously
· Ifnone of the errors were detected or corrected, by what amount-would pr1ccd at P59 per unit. The correct cost was P95 per unit.
2013 net income be overstated or understated?
ML'1chandise costing P175,000 was shipped to Mariot
a. 134)000 overstated
<'ompany) FOB shipping point, on December 26, 2012. The
b. 278)000 understated
c. 358,000 understated purchase was recorded ·in 2012, but the merchandise was
d. 406,000 understated t·xcluded from the ending inventory because it was not received
1111tll January 4, 2013.
Solution 32-15 Answer d
2012 2013
+ <>n December 28, 20 12) merchandise costing P30,000 was sold
Ending inventory:
2012 (140,000) 140,000 tn Deluxe Company. Deluxe had asked Mariot in writing to keep
2013 200,000 the merchandise until January 2, 2013. The merchandise was
Rent expense: lllcluded in the inventory count. The sale was correctly recorded
2012 ( 48,000) i11 December 2012.
2013 66!000
(188,000) 406,000 <.ray Company sold merchandise costing P 15,000 to Mariot
Net correction to income
<'ompany. The purchase was made on December 29, 2012 and
Problem 32-16 (lAA) merchandise was shipped on December 30. Terms were
till'
Saturn Companyrep.orted the following errors: 1·013 shipping point. Because the bookkeeper was on vacation,
2012 2013 IH'Jtber the purchase nor the receipt of goods was recorded on
the books until January 20 13?
Ending inventory 60,000 understated 90,000 overstated
Depreciation expense 120,000 overstated 75,000 overstated
W h o~t 1s the corrected income before tax for 2013?
N.one of the enors were detected or corrected, and that nu additional ·
errors were made in 2014. By what amount would current assets on jl ,H75,0 00
December 31,2014 be overstated or understated? 11 <~ , g15 ,ooo
a. 90,000 understated 11,890,000
b. 90,000 overstated d ~ . )25,000
c. 30,000 overstated
d. 0
Solution 32-16 Answerd
The current assets on December 31, 2014 are no longer affected
because the overstatement of 2013 ending inventory would affect
2014 cost of goods s.old. The depreciation error does not affect
current assets.
515
514
I •

l't 11hlt 111 32-19 (AlCPAAdapted) ·

Solution J 2- I 7 Answer a
( 11 • y () .Jmpany provided the follo\vir. g information:
1012 . 1013
51200,000 2014 2013
Income before tax 3.;700.000
Ending inventory of 2012 understated 1,350,000 1,000,000
(S,OOOx 36) 180,000 ( 1.80,000) 980,000 650,000
. Purchase in transit in 2012, FOB shipping 370,000 . 350,000
· point, excluded from inventory 175;000 ( 175,000) lut ltl IISSCIS 1,570,000 1,050,000
Merchandise sold in 2012 incorrectly lui tlllabilities 500,000 350,000
included in inventory ( 30,000) 30,000 I ulltl owners' equity 1,070,000 700,000
Unrecorded purchase in 2012 · ( 15,000) 15,000
Purchase on December 29, 2012 llw entity failed to record p 120,000 of accrued wages 'at the end
incorrectly exCluded from inventory 15,000 . ( 15,000) 411 ~ ( l
IJ The wages were recorded and paid in January 20 14. The
Corrected income 4,025,000 4!875,000 'l"' c~.;t accruals were made on December 31, 2014.
What is the corrected net income for 2013?
Problem 31-18 {IAA)
Holden Company reported the following errors: II 230,000
h. 350,000
~012 2013 c. 470,{)'00
Over(under)statcment of ending inventory (100,000) 40,000 d. 250,000
Depreciation unQerstaterncnt 40,000 60,000
Failure to accrue salaries at year-end 80,000 - 120,000 What is the co·rrected net income for 20 14?
As a result of the errors, wh~t was the effect on net income for 20 13? II 490,000
h. 370,000
a. 240,000 understated · c. 250,000
b. 240,000 overstated
d. 430,000
c. 220,000 overstated
d. 260,000 overstated What is the amount oftotal liabilities on December 31,20 13?
Solution 32-18 Answer b 47o;ooo
rl .

2012 2013 b. 230,000

e. 40Q,OOO
2012 ending inventory- under 100,000 (100,000)
d. .500,000
2013 ending inventory- over
Dcpreciati:011 - under ( 40,00~)
( 40,000)
. ( 60,000) ,, What is the amount of owners' equity onDccember31, 2014?
Accrued salaries unrecorded: a. 1,070,000
2012 ( 80,000) 80,000
(120.000) h. 1,190,000
2013
e. 1,010.000
Net cotTection to income ( 20,000) (240.000) d. 950.,'000
---
-~

516
Solution 32-19 J•mbJem 32-20 (PHIL CPAA dapte d)

Questi01~ 1 Answ er a ( >n July 1, 2012, Dave Company purchased for cash a machine with
lllt tnvoice price ofP3,600,000. The terms of payment were 2/ 10,
Net income for 2013 per book 350,000 11/ W. Irrevocable purchase taxes amounted
toP 150,000. On July 3,
Unrecorded accrued wages - Decem ber 31, 2013 (120,000) lltl' machine was delivered and freight charge ofP70
,000 was paid'.
.230.000
lll'.tallation cost amounted to P252,000. During the process of
CorreCted net income for 2013 111slallafion, carelessness by a workmancaused damage to an
adjacent
111 udune with resulting repair cost ofP32,000.
Question 2 Answ er a
c )n November 10, 2012, after four months of satisfa
ctory operations,
Net income for 2014 per book '370,000 I hr machine was thoroughly cleaned and oiled at a cost
· ofP42,000.
Accru ed wages on 12/3112013 recorded in 2014 120,000 I Itt• useful life ofthe machine is 10 years. The straight line depreciation
w.t~ used with no residual value and depreciation started
Corre cted net inco!D; for 2014 490,000 on the month
t 'lnl·quisition .

In December 31, 2013, the unaudited financial statements

Question 3 Answer a showed
tht' machine at a cost ofP3,528,000 with accumulated depreciation
of
Total liabil ities- December 31, 2013 350,000 I'~J<J,200. Net income for 2013 was P5,000,000
.
Unrec orded accrued wages - Decem ber 31 , 2013 120,000 Igr1nr ing income tax, what is the corrected net income for 2013?
Corre ct amoun t oftota lliabi lities - Decem ber 31, 2013 470,000 (I •1,952,800
h 5,000,000
Question 4 Answ er a ' 4,680,000
I 4,647,200
Total owne rs' equit y- Decem ber 31, 201.4 1,070,0JO
s.,l11t10n 32-20 Answ er a
The owners' equity on December 31, 2014 is uot affect ed because
the nonaccrul'll ofthe wages on December 31, ~0 13 is counterbalanced In vmrc price . 3,60.0,000
t.' 1 .h discou nt (2% x 360)0 00) ( 72,00 0)
in 2014.
Ncl ollllOU nt
3,528,000
Itt \ocnb le purch ase taxes 150,000
It rrht charg e
70,000
In tollation
252,000
• '"'cct cost 4,000,000
1 •111l·ct depreciation for 2013 (4,000 ,000/ 10) 400,000
1lr1 mdcd depreciation for 2013 (3,528 ,000 x 10)
352,800
U11clcr Jcprec iation for 20 ! 3
47,200
Net rncom c for 2013 5,000,000
IIJ11kt depreciation for 2013 ( 47,20 0)
' olttl'CI Cd net income for 2013 4,952,800

518 519
Problem 3~-21 (IAA)
nse installation
3
In January 2013, Campa Company charged to expe machinery of
the
cost ofP900,000 on new machinery. The cost of
ry was depreciated
('A SH FL OW - OP ER AT IN G
P3,000,000 was correctly n:corded and the mac hine
s and no residual value.
using the straight line with useful life of 10 year machinery had a
On January 1, 20 14, the entity determined that the
nse had not yet
remaining useful life of 15 years. Depreciation expe
y on December 1•1 ull~t·m 33-1 (AICPAAdap ted)
been recorded for 2014. What is the correcting entr
31,2014? ln I >c..:cember 31, 2013, Kale Company had
the following balances in
lite oll.'COUI}tS maintained at First State Banlc
a. Debit retained earnings P900,000
b. Credit retained earnings P900,000 ~lu:ck mg acco unt# 101 1,750,000
c. Debit retained earnings P81 0,000 ('ht·ckmg account #201 ( 100,000)
d. Credit retained earnings P81 0,000 l11nc. deposit 250,000
c llllllllcrcial papers 1,000,000
'JII day treasury bill, due February 28, 2014 500,000
Solution 32-21 Ans wer d
IHO day treasury bill, due March 15,2014 800,000
900,000
Machinery
Accwnulated depr~ciation(900,000 I 10)
90,000 nf!l maturities of three
I hl' entity classified investments with origi
810,000 er 31,2 013 , what
Retained earnings . 111 mths or less as cash equivalents. On Decemb
valents?
•n1ount should be reported as cash and cash equi
Problem 32-22 (IAA)
' . II. 3,400,000
In 2014, Cremas Company discovered that equi
pment purchased on II, 2,000,000
e. The equipment
Januaryl,2012forP600,000wasexpensedatthattim o. 2,400,000
residuaivatue. The
should have been depreciated over 5 years with no d. 3,200,000
tax rate is 30%. What is the journal entr)r in
2014 correct the error?
to
Solution 33-1 Ans wer a
a. Credit equipment P600,QOO 1,750,000 •
b. Debit retained earnings P600,000 Checking acco unt # 101
c 'hccking acco unt #20 1 ( 100,000)
c. Credit retained earnings P252,000 250,000
d. Credit retained earnings P360,000 Time depo sit
Com merc ial pape rs 1,000,000
• 500,000
'.>0-day treasury bil1
,Solution 32-22 Ans wer c
'I otal cash and cash equivalents 3,400,000
600,000
Equipment
240,000
Accu mula ted depr eciat ion (600,000/5 x 2) gory as mon ey mar ket
108,000 I he com mer cial pape rs are in the sam e cate
Income tax payable (360,000 x 30%) 252,000 placements.
Retained earnings
521
520
-
Problem 33-2 (IAA) l't uhlcm 33-4· (lAA)
Youth Company reported the following assets at year-end: :-;_..,waJ I Company provided the following data for the preparation of
lhl ~tatcment of cash flows for the current year:
Treasury bills acquired with less than 3 months
1,500,000
before maturity Dividends decl~red and paid 800,000
1,200,000
Money market placements . ( u~oh flow froii?- J.rlvesting activities (2,500,000)
Financ!al assets held for tradmg 1,000,000
nsh flow from financing activities ( 800,000) .
What total amount should be reported as cash equivalents at December 31 January 1
. year-end? Mlh 2,100,000 1,200,000
~. 1,500,000 I )t her assets 21,000,000 22,700,000
t. 4,700,000 t ,,ll)lli,ies 10,500,000 11,700,000
c. 2,700,000 ~,11.1rc capital 2,000,000 2,000,000
d. 2,500,000 fltlamed earnings 10,600,000 10,200,000

Solution 33-2 Answer c What is the net cash fJ(i)w from o~erating activities?
To+.al cash equivalents ( 1,500,000 + 1,200,000) 2,700,000
II, 4~200,000
h. ~400,000
Problem33-3 (IAA) c 4,500,000
Oakwood Company provided the following data for the year: d. 5,400,000
C~sh balance, beginning of year 1,300,000
Cash flow from fin·ancing activities ·1,000,000 Solution 33-4 Answer a
Cash flow from operating activities 400,000
Cash- January 1 1,200,000
Cash flow from investing activities (1,500,000)
Total shareholders' equity, beginning of year 2,000,000 ( 'iJ,sh flow from operating activities (SQUEEZE) 4,200,000
C~sh flow from investing activities {2,500,p00)
What is the cash balance a"tthe end o"f current year·? C..ash flow from financing activities ( 800,000)
a. 1,200,000 Cash - December 31 2,100,000
b. 1,600,000
c. 1,400,000 The cash flow from operating activities is "squeezed" by working
d. 1,700,000 hack from the December 3 1 cash balance.
Solution 33-3 AnS\t'er a
1,300,000
Cash balance -beginning
Cash -flow from financing activiti~s
1,000,000
400,000
Cash Dow· from operating activ~cies
Cash flow from investing activities ( 1,500,000)
L200,0_22
ush balance- enc'ing

523
 l'1uhh•m 33-6 (IAA)
Problem 33-5 (AICPAA dapted)
Lax Compan y provided the followin g informat ion during the .tilt l ·ompany provided the following data for the preparati on of
current year. ·
'C t 'lt'ttltt \t of cash flows for the current year using the direct method:
Dividend received 500;000
Dividend paid 1,000,000 1.. ''It J'a tuncc, beginning 1,500,000
Cash received from customers 9,000,000 11 h p:ud to purchase inventory 7,800,000
Proceeds from issuing share capital 1,500,000 ( fl!'h received from sale of trading securities 2,500,000
Interest received 200,000 450,000
~1u.lt pa tc.l for interest
Proceeds from .sale of long term investmen ts 2,000,000 1,000,000
011h paid to repay a loan
Cash paid to suppliers and employee s 6,000,000 10,000,000
400,000 L ,tNh t't,Jiected from customers
Interest paid on long term debt . ·1,200,000
300,000 Hllh rcc...cived from issuance of ordinary shares
Income taxes paid 780,000
1,809,000 ~ 11 1h paid for dividend
Cash balance, January 1 1,350,000
h paid for income taxes
11
What is the net cash provided by operating activities for the current 1
1tHh putd to purchase trading securities 1,000,000
year usinr; direct method?
a. 3,000,000 WIIat ts the net cash flow from operating activities?
b. 3,300,000
c. 2,700,000 (I I' 900,000
d. 2,000,000 h ),900,000
2,350,000
Solution 33.:5 Answer a d 400,000
Cash receipts:
Cash received from customers 9,000,000 ,.,,flftiqn 33-6 Answer a
Dividend received 500,000
Interest received 200,000 9,70C ··00 I 'llhhcollected from customers 1o,uvo,ooo
l 'nsh received from sale of trading securities 2,500,000
Cash payments:
Cash paid to suppliers and employee s 6,000,000 c'u~h p<tid to purchase trading securities ( 1,000,000) •
Interest paid 400,000 1 'osh paid to purchase inventory (7 ,800,000)
Income taxes paid 300,000 6,700,000 lntrrcst paid ( 450,000)
3,000,000 l11 comc taxes paid (1 ,350,000) .
Net cash provided by operating activities
I 'll!ih 0 ow from Operating activitieS 1,900,000
Dividend received and intefcst recei·,red usually are classified as
op~r~ting. Alternati vely, the nvo arc presented as investing. Interest I Ill' cash paid to repay the loan, the cash received from issuance of
patd 1s nom1ally op~rating . Alternati vely, interest paid is classified as
'11 d i t1ary shares alid the cash paid f01 dividend are all financin g
financing.
111 tivities.
The dividend paid is financing, the proceeds fi·om 1ssuing share capital
shall l)c classifie d as financin g and the proceeds from sale of
long .1em1 inYesm1~nts shall be classified as investing .
525
52./
Problem 33-7 (lAA) l'r(•hlem 33-8 {PHILCPAAdapted)
Fragile Conl..Pany used the direct method to prepare ttle H ogcr Company reported net income ofP3,520,000 for the ·current
statement of cash flow-s. The entity had the following cash flows yl·.u. l11e entity provided the following additional information:
during the current year:
Purchase of plant assets 2,800.!000
Cash receipts from issuance of ordinary shares 4,000,000 fh-prcciation of plant assets ! ,480,000
Cash receipts from customers 2,000,000 I >ivtdcnds declared 970,000
Cash receipts from dividends on long-tern1 investments 300,000 Nd decrease in noncash current assets 290,000
Cash receipts from 1 , payment of loan made to I oc;c; on sale of equipment 130,000
another entity 2,200,000
Cash payments for wages and other operating expenses 1,200,000
Whnt is the net cash provided by operating activities?
Cash payment~ rur insurance 100,000
Cash payments for dividends 200,000 fl 5,420,000
Cash payment£ for taxes 400,000 h 5,130,000
Cash payment to purchase land 800,000 ~ 7,250,000
cl 5,290,000
What is the net cash provided by operating activities?
a. 600,000 Solution 33-8 Answer a
b. 400,000 Net income . 3,520,000
c. 300,000 I >cpreciation 1,480,000
d. 200,000 Net decrease in noncash current assets 290,000
I oss on sale of equipment 130,000
Solution 33--7 Answer a Net cash provided by operatin~ activities 5,420,000
Cash receipts from customers 2,000,000
Cash receipts from dividends 300,000 'I he indirect method begins with accrual basis net income and
Cash paymePts for wages and other operating expenses (1 ,200,000) applies adjustments to convert the income to cash basis.
Cash payments for insurance ( 100,000)
Cash payments for tr.xes ( 400,000) All increases in noncash trade current assets are deducted from
Net cash provided by operating activities 600,090 net income.
2 All decreases in noncash trade current assets are added to net
The cash receipts from issuance of ordinary shares and the cash income.
j. All increases in trade current liabilities are added to net income.
payments for dividends are classified as fin~ncing.
I. All decreases in trade current liabilities are deducted from net
The cash receipts from repayment ofloan made to another entity income.
and the cash payment to purchase land are classified as investing. S Depreciation, amortization and other noncash expenses are
added back to net income.
(). Gain on disposal is deducted from the net income.
7 Loss on disposal is added back to net"income.

526 527
 l'1 ohh.·m 33-10 (IAA)
Problem 33-9 (AICPAAdapted)
'·' 111 ( 'ompany provided the following data for the preparatioq of the
Kersley Company provided the following account balances· f<w 1-llt'nlcnt of cash flO\vs for the cunentyear: ~ ·
the preparation of the statement of cash flows for the clirren:
1111 ll':IS<.: in accounts re.Wv-a ble 300,000
year:
11 1 rc.1sc in income tax p_(lyabl.c 170,000
January 1 December 31
I l ~,; pll'ciulior! 1,000,000
1,150,000 1,450,000 N1 I 11u:ome 250,000
Accounts receivable
Allowance for uncollectible accounts 40,000 50,000 ' ' 1111 on sale of equipment 440,000
620,000 . 410,000 I '' t'l 011 sale of building 210,000
Prepaid rent expense
970,000 1,120,000
Accounts payable
IJ .111g the indirecfmethod, what amount should be reported as net cash
The net income for the year is P7 ,500,000. What is the net cash provided lit •w l mm operating activities?
by operating activities? 7XO,OOO
I• 700,000
a. 7,270,000
HRO,OOO
b. 7,430,000
•I 'l~O,OOO
c. 7,550,000
d-. 7,570,000
\'J/IItion 33-JOAns.;,;er d
Solution 33-9 Answer d N 1 utcome· 250,000
7,500,000 '"' 11 usc in accounts receivable ( 300,000)
Net income II• IJI tnsc in income tax payable ( 170,000)
Increase in ~zet accounts receivable
(1,400,000-1,110,000)
( 290,000) I >•'JH cciation 1,000,000
210;000 r 111111 <m sale of equipment ( '440,000)
Decrease in pr ..;j)~id rent expense
150,000 I tHIN on sale of building 210,000
Increase in accounts payable
Net cash provided by operating activities 7,570,000 N1 I cnsh flow from operating activities · 550,000

Observe that the a1lowance account is "netted" against the accounts

receivable for purposes of determining the net change in accounts
receivable.

529
Problem 33-11 (lAA) I' I uhlt•1n '1-12 (IAA)
Brown Company reported the following inf~mation for the current M •""~'· "' Y<'ompany bad the following account balances for the currem
II .
year:-
2,800,000 December .31 January 1
Sales
Cost of goods sold 1,000,000 500,000 700,000
Distribution costs 400,000 300,000 450,000
Administrative expenses 3scr,ooo 800,000 750,000
Depreciation 250,000
Interest expense 80,000 A11 p11r chases of inventory were on account. The entity provided
Income tax expense 280,000 II" I«,llowi ng income statement information for the current year:
Alrsales were made for cash and all experues other than depreciation ·9,800,000
and bond premium amortization ofP20,000 were paid in cash. All (4,000,000)
(1,300,000)
current assets and omTent liabilities remained unchanged. What is the (1,000,000)
net cash provided by <;>perating activities for the .current year? ( 100,000)
a. 440,000 3,400,000
b. 690,000
c. 670,000 Wli If is the net cash flow from ope~ating activiti"es?
d. 710,000 I •1,500 ,000
It 1,4 00,000
Solution 33-11 Answer c \ •1,600,000
Sales 2,800,000 d ·I. 300 ,000
Cost of goods sold (1 ,000,000)
Distribution costs ( 400,000) ~ .J/ulron 33-12 Answer b
Adm.inistrati ve .~xpenses ( 350,000)
( 100,000) N t income 3,400,000
Interest paid J1, pr cciation
( 280 ,000) 1,000,000
Income tax expense
I "''~ on sale of equipment 100,000
Net cash provided by operating activities 670,000 11 1 rcase in accounts payable ( 200,000)
111 1 rcase in inventory 150,000
Interest expense 80,000 lw rl·asc in accounts receivable ( 50,000)
Premium amortization 20,000
N1 I cash flow from operating activities 4,400,000
Intere's t paid 100,000

~30 531
 l't ohll•m 33-14 (IAA)
Problem.33-13 (IAA) · . .- t
. "ded the following informatl.On for thec~n 11 V1l Company provided the following information for the current
Ch~paca CompanyproVl \ 1 11

.year: 750,000 N I lllC0111C 3,960,000

'-:ct income f~r the current year 4,500,000 I' I'H' ciation expense 1,020,000
<..: •.i~:s revenue ' . . . ) 2,750b000 A III~Htt.wtio n 200,000
t vst of goods sold .( except depreciatiOn 500,!)00 I i ., l l'llSC in accounts receivabl e 1,260,000
Depreciation expense . . 200,000 ln l: ll."oi St: in inventory 900,000
Amortization of intangible assets 300,000 111111 ~~~c in accounts payable 240,000
Interest expen·s e on short-:erm ~eht ·350,000 1'111 llll'llt of dividends 540,000
Dividends declared and patd dunng year 1'1111 hasc of financi al as set at amortized cost 220,000
January 1 De~emb~r 31 I 1 1 1 rase in income tax payable 160,000
220,000 150,000 !11 ~; 1< tl'H.: ir.. long-term no te payabl e 2,000,000
Accounts receivable 35 0,00Q :400,QOO
Inventory 475 ,ooo '520,000 W ltlllt!-i the net cash flow from operating activities?
Accounts payable · 1OO,OOO · 85,000
Interest payable . . \OHO,OOO
Under the indirect m~thod,_ ":'~at;,mount shol;lld be reported as net II I h20,000
cash flow from op_eratmg act1V1tles .· I \100,000
tl l,Ct20,000
a. 1,500,000
.b. 1,515,000 , •1111/0/1 33-14 Answer d
c. 1,450,000 J 1 lilt omc 3,960,000
d. 2;020,000 11 l'llt'tatJOn expense 1,020,000
"''" 11 .at ion 200,000
Solution 33-13 Answer a II in accounts receivable
11 ,, ><.' 1,260,000
750.000 II in inventory
Net income
1 llt>t' ( 900,000)
500,000 1'
h ' tsc in accounts payable 240,000
Depreciation 200,000' II t 1 1sc in income tax payable ( 160,000)
Amortization . 7_0,000,
Decrease in accuunts recetvable 50,000} ll' lSi! !low from operating activities 5,620,000
(
Increase in invento_ry 45,000
Increase in accounts payable I II I'•' Yitacnt of dividends and the il1crease in long-tenn note payable
( 15,000).
Decrease in interest payable u l l ,,_.,, ficd as fmancing. TI1e purchase of fmancial asset at an101t ized
1,500,000 11 11 •. classified as investing.
Net cash fl ow from oper ating activities

533
532
 ,., ohJc m 33~16 {IAA )
Pro blem 33-15 (IAA )
acco unt bala nce s for the nna..:on l: the curr ent
Bla ckto wn Com pan y had the foll owi ng Brook Com pan y prov ided the fo1Iowin· g info u 10r
Ye<rr :
cu:r ent year:
Dec emb er 31 Jan uary 1 llt·r rcas c in inventory 300,000
lntrc ase in wages payable 100,000
500,000 650,000
Acco11nts pay able I t 'llructuring char ge 2,300,000 .
3QO, OOO 250,000 lltpr ccia tion
· Inve ntor y OO 900,000 1,000,000
80Q,O Nt-t 111come
Acc oun ts rece ivab le 6001000 500,000
400, 000
Prep~id expe nses
plac e inc . .
* All purc hase s ofm ven tory wer e on acco unt. Norte of the relo cati on has yet take n re onne ctiO n With the
r f; lr ucturing. What amount shou ld be
* Dep reci atio n duri ng the year was P90 0,00 0.
' 'Pt.'mtmg activities? ported as net cas~ flow from
the yea r at a gain ofP 300 ,000 .
* Equ ipm ent was sold duri ng
s for the current year: 4,20 0,00 0
(1,
TI1e entity prov.ided the following cash flow b 1,900,00 0
9,500,000 3,600,00 0
Cas h coll ecte d from customers 00,000)
Cas h paid for inventory
\

\.. (4,1
(1,400,000)
u 4,000,00 0
~ ·
Cas h paid for othe r expenses
4,000,000 \'o/t(/ion 33- 16 Ans wer a
Cas h flow from operations
? N 1 inco me 500,000
.Wh at is the net inco me for the curr ent year I> Crease in inventory 300,000
a. 3,30 0,00 0 lucn·nse in wages payable 100,000
b. 3,40 0,00 0 I l r uc turing char ge · 2,300,000
I >c prcc1a tion 1,000,000
c. 3,00 0,00 0
d. 3,90 0,00 0 Nc r cash flow from operatin g activitie s 4,200,000
Solution 33-15 Ans wer 'a l"ruhlcm 33-1 7 (AI CPA Ada pted )
3,300,000
Net income (SQ UEE ZE) 000 l: th e year.
Dec rease in acco unts payable
( 150,000) M •lr(l Com pan y reported net inco me ofP7 ,500 , 10r
( 50,000)
Incr ease in inventor y 100,000 IIVI' 'lme nt in Videogo ld stoc k carr ied
Decrease in accounts receivable nr1 the equi ty basi s
200,000 .?50,000 incr ease
Dec reas e in prepaid expenses umu.latcd depreciation• caused b y. maJ. or
1
900,000
Depreci atio n rcparr to proJect equipment 210,000 decr ease
( 300,000) r rr11urn on bonds payable
Gain on sale of equipment 140,000 decr ease
4,000,000 I) lcrrcd tax habi!ity 180,000 mcr easc
Cas h flow from oper ati ons \J . ities?
back fro•Jl the cash flow Vh rtr~ the net cash provided by operating activ
The net inco me is "squeezed'·' by working
I 7,54 0,00 0
from oper atio ns.
I 7,27 0,00 0
6,990,000
6,78 0,00 0

534 535
 1'1 ultll'UI H- 19 (PHlLCP'A Ad apt ed)
Solution 33-17 Answer c
n.
. 7,500,000 llllltlolll <..o mp any pro vid ed
the fi' II .· . cun-et: £
Ne t inc om e o O"W mg.mf om lati on for the
d at equ ity , \I "
Inc rea se in inv est me nt carr~e ( 550 ,000)
om e of inv est ee
rep res ent ing sha re in net inc ( 140 ,QOO)
lit II
6,000.000
Am ort iza tio n of pre miu m on
bon ds pay abl e I !I I of goods ma
nuf act ure d and sold
180,000 2.80(.\000
ity
Inc rea se in def err ed tax lia bil (II (I,S jll ofi t
6,990,000 1 ll111:· !'L'rwra l and ad · . . 3,200,000
ing act ivi ties mm1stratJve cxp
Ne t cas h pro vid ed by ope rat ( lltl lttd ing dep rec iati on ofP 600 00 ens es
, 0) 2,000, 000
ted) I
Problem33-18 (PillLCPAAdap Ill' 'II II' hl· fore inc om e tax
lth nnt{' t.rx
1,2QO,OOO
cur ren t
inc om e ofP 3,0 00 ,00 0 for the 400 ,000
Bra in Co mp any reported net year:
r. Th e ent ity pro vid ed the fol lowing information dur ing the N1 I 111 om c
800,000
yea
30,000 dec rea se
De fer red tax liabilit y I ' llflngcs for tbe cur ren t yea r w e1.e as rtallows:
to majo r rep air ,
Ac cum ula ted dep rec iati or., due 40,000 dec rea se De bi t Cr edi t
to equ ipm ent 110,000 increase
Lo ng ter m investment at equ ity 20,000 dec rea se
200,000
Un ear ned interest income 500,000
rating
ed as ne t cas h pro vid ed by ope 100,000
Wh at am ou nt sho uld be rep ort · 20,000
h flows for the current year?
activities in the statement of cas 30,000
50,000
a. 2,8 80, 000 140,000
b. 2,8 00, 000 .
c. 2,9 00, 000 \\ It tt rr: the net cas b pro vid ed bYo per atm oac t· ·t· ?.
o lVl lCS
d. 2,8 40. 000 1,1 000 00
I lko.ooo
Solution 33-18 Answer d ~c,(J 000 .
3,000,000 wo,ooo
Ne t inc om e ( 30,000)
ity
De cre ase in def err ed tax lia bil ( 110,000) ' 111111111 33 -/9 Answer a
e- equ ity me tho d
Inv est me nt inc om ( 20,000)
ere st inc om e
De cre ase in une arn ed int 800,000
2,840,000 600,000
ing act i\'i ties
Ne t cas h pro vid ed by ope rat ( 500,000)
100.000
( 20, 000 )
30.000
( 50.000)
~ 140,000
1, 1Q(I.O[i()
=:::::::::..~

53 7
Problem 33-20 (lAA) I'• ullh•m 3 ~-21 (AICP:AAd apted)
I llt~L·< ompanyprovidedtheflll . .
Albay Company provided the foJJowing i.nfom1ation for the current • 11 ° owmg Information forth)... ~;;current

year:
I 1111 (!Ill~'
Accounts receivable, 'January l, net of allowance 6,000,000
1.200,000 Ill n h :ldjustments:
P100,000 I' jlll'ciation
AccOUlitS receivable, December 31, net of 900,000
1,600,000 "'' reasc i~ accounts receivabl
I 1 1t:asc ~n inventory
allowance ofP300,000 ( 500,000)
8,000,000 e
Sales of the year- all on credit 4,000,000
50,000- I), • I co~sc m accounts payable
Unc.ollectible accounts written off during the year (1,200,000)
250,000
Barl debts expense for the year I " h llow from operating activities
Ca£b expenses for the year
5,250,000 ~.200,000
2,500,000
Ne: inc~me for the year t lltrty reported revenue fr
Ill lit Underdirectmeth~r:~s~omers ofP7,soo;ooo for the
v··ar
What is the net cash provided by operating .activjties? IIIII It urstomers? a amount of cash was received
a. 2,100,000 (tlJO,OOO
b. 2,350,000 O(Hl,OOO
c. 2,900,000 r~ no ooo
d. 2,150,000 00,000

Solution 33-20 Answer a Iff 1111 13 21 Answer b

;

l~1direct method I
2,500,000 7,500,000
Net income rn accounts receivable
( 400,000) ( 50(),000)
Increase in accot•uts receivable (1·,600,000- 1,200,000)
2,100,000 It I civcd from customers
Net cash provided by operating activities 7;D{J(T,ODO
rlrll•tu3J-22 (IAA)
Direct rodhod
AR- January 1 (1,200,000+ 100,000)
1,300,000
,, ompany reported the follow.mg relevant mform..~tion:
.
8,000,000
SJles
9,300,000 2013 2012
Total (1,900,000) payable
!IX
AR- December 31 (1,600,000 + 300,000) 1,750,000 1,400,000
( 50,000) 11 d lax liability
Account!'l written off 210,000 140,000
7,350,000
Collections from customers ~~~~ ur.nctaxexpensefor2013wasP
Cash ex pcnse~
(5,250,000)
r lr p lid for income tax in 20 13? 2,000,000. Wnat is ~l ... qmount
2,100,0C•.
Net cash provided by opC>;rating activities I (J 000
1(1 1)1, •
l • ~te that the bad debts expense is completely ignored under both 0 000
Jircct and d irect method. (I ()()Q

53R
 1 'ohlt·m 33-24 (IAA)
Solution .53-22 Answer d
2,000,000 '' ( 'nlllJ1an)'.repo rted net mcome
· ·
ofP5 00 ..
1 otal income tax·expense for 2013 1,400,000 I hi l'lllltyprovtded the follow· 111 . fi '. 0,000 m the cunent year
mg onnatJOn forth ·
lncome tax payable- 2012 (1,750,000) ' ' 1111 at ionofpatcnt ecurrentyear:

,65~:~~~
1i1come tax payable- 2013 140,000 ltq \lt't tation on plant assets 4
:Jcfcrred tax liability- 2012 ( 210,000) I 1111 g IL'J m debt: 1
Deferred tax liability-2013 lltllld premium amortizat.
1,580,000 itllt'ITS!pajd - lOll 65,000
Cash paid for income tax in 2013 I lllll'ld ~;,cd loss on financial as ' 900,000
I hll!.: ti JZcd loss on financial a .set held. . or trading 100,000
lluough other comp. h• sse! at ~a1r value
Problem 33-23 (IAA) 'e ensn·e tncome 400,000
Ciaire Comrany reported interest expense in 20l3 and 2012 of
Pl,500,000 and Pl,200,000, reslJectively. The balance in accrued \\It'''" lllcnetcashprovidedb .
' .IJ !lows for the current year~ operatmg activities in the statement of
interes! payable at the end of2013, 2012, and2011 was P600,000,
P700,000, and P.500,000, resp~ctively. In addition, a note to the 2013 I Ct /(,(),000
financial statements i.t"1cluded the following,: h (l,(t10,000
I (, I \0,000
Interest costs related to construction in progress are c~pitalized as t1 1. 1 ~o.ooo
incurred. The entity capitalized P300,000 and P250,000 of interest
costs during 2013 and 2012, respectively. \nltl(tllll 33-24 Answer c
What amount of interest was paid in.2013 net of the amount J I tru lltnl!
5,000,000
~ ltHtlf t;ulton of patent
capitalized as construction in p_rogress? . 45,000
'''I'"' i.ttton 1,650,000
a. 1,600,000 !11 lltl11tllllll1ortization
·( 65,000)
b. 1,400,000 11ilt•.llr.Tdlosso fi . n manc1al. asset heJ·d fiortradmg
. 100,000
c. 1,300,000 t ' u.l' IH'OVJded by operating activities 6,730,000
d. 1,900,000
1'1 uhh•ru 33-25 {IAA)
Solution 33-23 Answer a
1,500,000 IIIHIIpt•r Company reported in
Interest expense in 2013 ( 600,000) '"' \ "' ycnr cash flow from optehet~tat~ment of cash Dows for the
Accrued interest payable- December 31, 2013 . ra Jons ofPl 840 000
700,000
Accrued interest payable- December 31,2012 lr I" 'r.ttron expense ' ' .
400,000
1,600,000 tllnt•, receivable increase 120,000
Jnterest paid in 2013 Ill ll[ury decrease
280,000
l lllll s payable decrease
The amount of P 1,600,000 is net of the amount capitalized of 80,000
!ttl l'l lltL'nctincomefor'the cur1ent
.. year?
P300,000 in 2013. Accmdingly, the total '.nterest patdJn 2013 is
I , 11,0,000
p 1,900,000. 1
I 0 000
I ! 1o.ooo
I ti iO,U(JO

540
541
Solution 33-25 Answer a I'• uhf em 33-27 (Pli iLC PAA dap ted)
1,360,000 l) ·•• wIn Com pan y repo rted cash bala nce ofP8,000,0_00 on Januruy
Net ineqme (SQ UEE ZE) • 400,000
Depreciation I' 20 13. Dur ing 2013, the entity disc i
( 120,000) ' 'tarn accounts: osed the foJlowmg changes in
Accounts receivable increase 280,000
Inventory decrease ( 80,000) Accounts receivable
Accounts payable decrease 2,000,000 increase
I11Vcnlory
1,840,000 1,500,000 decrease
Cas h flow from operations ACl.!ounts payable 3,000,000 decr ease
I I wer e .
; \11:1 sale s and cos t of goo
ds sold
Pro blem 33-26 (PH ILC PAA dap ted) I 20,0 00,0 00 resp ecti vely All 1 d P30 ,000 ,000 and

Che rry Com pan y had the following tra_nsacti

ons duri ng first y~ar of ' l l du Var ious exp ense s ~fP
5 s~O~s ~~0 purchas~s ~'ere mad e on
Wt'l l' uo othe r pert inen t tran
sadtion~ we~e paid m ~ash. The re
operations: · Wh at lS the cash bala nce on
) 7,500,000 I let ,.m ber 31, 20 13?
Sales (90 percent collected in the first year 6,000,000
Disbursements for costs and expenses II I 3,000,000
2,000,000 h. l (1,500,000
Purchase of equipment for cash 2,500,000
Proceeds from issuance of ordinary shares 250,000
C I 0,50 0,00 0
Payments on short-term borrowings <I 9,50 0,00 0
500,000
Proceeds from short-term borrowings 400,000
Depreciation on equipment 450,000 \'olution 33-2 7 Ans wer d
Disbursement for income tax .300,000
Bad debt writ eoff 8,000,000
( 2,000,000)
1,500,000
Wh at is the cash balance at year-end?
( 3,000,000)
a. 1,40 0,00 0 30,000,000
b. 1,05 0,00 0 (20,000,000)
c. 750 ,000 ( 5,000,000)
( II l1 balance - December 31 9,500,000
d. 850 ,000

Solution 33-2 6 Answer b

6,750,000
Collection (90% x 7,500,000) (6,000,000)
Disbursements for costs and expenses (2,000,000)
Purchase of equipment for cash 2,500,000
Proceeds from issuance of ordinary shares ( 250,000)
Payment on borrowings 500,000
Proceeds from borrowings ( 450,000)
Disbursement for income tax
1,050,000
Gash balance at year-end

542 54l
Problem 33-28 (~ffiLCPA~dapted)
Complex Company had the following financial data during 2013: '
Cash revenue 8,000,000
Cash expenses 4,000,000
Depreciation expense 2,000,000 ('ASH FLO\V -INVESTING Al\1) FINANCING
Income before income tax 2,000,000
Income tax expense 500,000
Net income . 1,500,000 l'1 ohlem 34-1 (AICPAAdapted)
At the beginning of20 14, the entity purchased additional assets ~t·a \I pha Company bad the following activitres during the.current
cost ofPS 000 000 on cash basis. Each year, these assets provrde ) ~·ar:
additional cash revenu~ ofPS,OOO ,OOO and incur cash expenses of
P2 000 000 . The assets have a 10-year life and the entityuses the Acquired 2,000 shares of Maybe! Company for P2,600,000.
str~ight line depreciation for all assets. The existing as~ets produce Sold an investment in Rate Motors for P3 ,500,000 when the canyino
the same cash revenue and incur the same expenses as m 2013. The value was P3,300,000. o
income tax is paid every A pril ·15 of each year. What is the net cash Acq~ired a P5,000,000, 4-year certificate of deposit from a banlc
provided by operating activities for 2014? Durmg the.~e.ar, interest ofP3 7 5, 000 was paid to Alpha.
Collected diVIdends ofP 120,000 on share investments.
a. 7,000,000
b. 6,500,000 In the state~~nt of~ash flows, what amount should be reported as net
c. 3,000,000 cash used m mvestmg activities?
d. 1,500,000
a. 3,725,000
Solution 33-28 Answer b b. 3,805;000
Revenue (8,000,000 + 5,000,000) . 13,0GO,OOO c. 3,980,000
Expenses (4,0oo·,ooo + 2,00_0,000) ( 6,000,000) d. 4,100,000
Income tax for 2013 paid onAp1,l 15, 2014 ( 500,000)

Net cash provided by opt'!ratin~ activities- 2014 . 6,500,000 Sohttioiz 34-1 Answer d
Purchas~ of investme~t (2,600,000)
Sale of investment 3,500,000 .
Acquisition of 4-year certificate of deposit (5,000,000)
Net cash used in investing activities (4,100,000)

As a- .s·imple guide, c:asb effects of transactions involvina

nonoperating as5ets are investing activities. ;:;.
The interest received of Pl75,.000 and tbe dividend received of
Pl~~·~OO shall be classified as cash inflows from· operating
acttvltJes. ·

545
~44
Problem 34-2 (IAA) l'a uhll'm34-3 (AlCPAAdapted)
Riverside Company provided the following information for the · I 1u r Company reported net income of P3,000,000 for the current'
)'l'lll . Changes occurred in oertain accounts as follows:
current year:
* Purchased a building for P 1,200,000. Paid P400,000 and signed I qurpmcnt
At t umulated depreciatjon
250,000 increase
400,000 increase
a mortgage with the seller for the remaining P800,000.
N11tr payable 300,000 increase
* Exe·cuted a debt-equity swap and replaced a P600,000 loan by ,,} • During the year, the entity sold equipment costing P250,000, with
. giving the lender ordinary shares worth P600,000 on th~ date accumulated depreciation ofP 120,000 for a gain ofP50,000.
the.swa.p was executed.
lnDecemberofthecmrentyear,theentitypurcbasedequipmentcosting
* Purchased land for Pl,OOO,OOO. Paid P350,000 and issued P500,000 with P200,000 cash and a 12% notepayableofP300,000.
ordinary shares worth P650,000. I. In the statement of cash flows, what amount should be reported as
* Borrowed P550,000 under a long-term loan· agreement. Used net cash used in investing activities?
the cash from the loan .p roceeds as follows: PJSO,OOO for a. 20,000
purchase of additional inventory, P300,000 to pay cash dividend, b. 120,000
and P 100,000 to increase the cash balance. c. 220,000
d. 350,000·
What amount should be reported as net cash used in investing
activities in the statement of cash flows? i . In the statement ofcash flows, what amount should be reported as
net cash provided by operating activities?
a. 1,200,000
b. 2,200,000 a. 3,400,000
b. 3,470,000
c. 400,000
c. 3,520,000
d. 750,000
d. 3,570,000
Solution 34-2 Answer d Solution 34-3
Cash paid for purchase of building (400,000) (Juestion 1 Answer a
Cash paid for purchase of land (350,000)',
~:.t i c
of equipment (carrying. amount ofP 130,000
Net cash used- investing (750,000) plus gain ofP50,000) 180,000
l'nyment of equipment (200,000)
The debt-equity swap is disclosed as a financing activity. The· Net cash used in investing activities ( 20,000)
borrowing ofP550,000 is a cash inflow from financing.
Q11estion 2 Answer b
The·purchase of inventory of P300,000 is operating and the
dividend payment ofPlOO,OOO is financing. Nt·t income 3,000,00C
<,,tin on sale of equipment ( 50,000)
lkprcciation (400,000 + 120,000) 520,000
tkt cash provided by operating ,a ctivities 3,470,000

546 547
 l'1 ohlt·m34-5 (AICPAAdaptcd)
Problem 34-4
d111 < nmpany's comparat'[ve statement of financial position on
Zoe Company reported net income ofP3 ,400,000 for the year ended IJ c'Jnbc.:r 31, 20 13 and 20 12 reported accumulated depreciation
December 31,2013. The net income included depreciation ofP840,000 I IIIII~.;L·s ofP800,000 and P600,000 respectively. Propelt)' with a cost
and a gain on sale of equipment ofP170,000. The equipment had an of 1'50,000 and a ca_rrying an1ount ofP40,000 was the only property
original cost of P4,000,000 and accumulated depreciation of 1ld in 2013. What IS the depreciation for 2013?
·P;2,400,000. All of the following accounts increased during 2~ 13: I 1)0,000
,, 200,000
Patent · 450,000
( 210~000
Prepaid rent 680,000
d 2"0,000
financial asset at fair value through other
comprehensive ip.comc 100,000
500,000 \ol11tion 34-5 Answer c
Bonds payable
A 1 1111\Uiated depreciation- December 3 1, 20 12 600,000
What amount sbould be reported as net cash fiow from Investing I •cp1cciation for 2013 (SQUEEZE) 210.000
activities? · 1111 d 810,000
AT> on property sold (50,000- 40,000) ( . 10,000)
a. 1,720,000 provided ' ---
b. 1,220,000 provided Atl'lllllUlated depreciation- December 31, 20 13 800,000
c. 540,000 provided
l't uhlcm 34-6 (IFRS)
d. 380,000 used
Mur Ihew Company provided the following information:
Solution 34-4 Answer b
l'llll hase of inventory 1,950,000
1,770,000 1'111 chase ofland, with vendor financing of
Proceeds from iale of equipment I I ,000,000 for 2 years
Increase in patent ( 450,000) 3,500,000
l'1urhase of plant for cash 2,500,000
Increase in finanCial asset at FVTOCI ( 100,000)
s de of plant:
Net cash provided by Investing· activities 1,220,000 Carrying amount 500,000
Cash proceeds 400,000
Original cost 4,000,000 lluyback of ord:nary shares 700,000
Accumulated depreciation 2.400,000
Carrying amount 1,600,000 Wll:tt amount should be reported as- investing net cash outflows?
Gain on sale of equipment 170,000
n 5,600,000
Proceeds from sale of equipment 1,770,000 ''· 4 600,000
I , (),550,000
J . 5, '300,00 0

549
548
Solution 34-6 Answer b Problem 34-8 (AICPAAdapted)
Purchase of land (3,500,000) Roe Company provided the following account balances:
Vrndor financing 1,000,000
12/3112 012 12/31/2013
Cash payment (2,500,000)
Purchase of plant for cash (2,500,000) Machinery 2,500,000 3,200,000
Cash proceeds from sale of plant 409,000 Accumulated depreciation 1,020,000 1.200,000
(4,600,000) Loss on sale of machinery 40,000
~et cash outflows- investing
During2013, the entity sold for P260,000 a machine thatcostP400,000,
Problem 34-7 (PHILCPAAdapted) and purchased several items ofmachinery.
Erwin Company provided the following information: 1. What is the depreciation ofmachinery for 2013?
January 1 December 3.1 a. 180,000
Machinery 3,600,000 3,750,000 b. 240,000
Accumulated depreciation 1,350,000 1,500,000 c. 280,000
Loss disposal of old machinery 50,000 d. 320,000
An old machinery with a costofP700,000 and accumulated depreciation 2 . . What is the amount of machinery purchased in 2013?
ofP450,000 was traded in during 2013 for a new machinery. What
a. 340,000
amount was paid for the ne'" rr ach.incry as a result of the trade-in?
b. 700,000
a. 850,000 c. 960,000
b. 600,000 d. 1,100,000
c. 550,000
d. 650,0.00 Solution 34-8

Solution 34-7 Answer d Question 1 Answer c

Machinery- January 1 3,600,000 Accumulated depreciation- December 31, 2012 1,020,000
New machinery acquired (SQUEEZE) 850,000 Depreciation for 2013 (SQUEEZE) 280,000
Total 4,450,000 Total 1,300,000
Cost of old machinery sold ( 700,000) Accumulated depreciation on machine sold:
Cost 400,000
Machinery - December 31 3,750,000
Carrying amount (260,000 + 40.000 Joss) 300,000 ( I 00.000)
Cost of old machinerv sold 700,000 Accumulated depreciation- December 31, 2013 ~.000
Accumulated deprec(ation ( 450,000)
Carrying amount 250,000 Question 2 AnsH·er d
Loss on disposal old machinery ( 50,000) Machinery- December 31, 2012 2,500,000
Trade in value of old machinery 200,000 . Machinery purchased in 2013 (SQUEEZE) 1,10(),000
Total 3,600.000
List price of new machinery 850,000 Cost of machin e sold
( 200,000) ( 400,000)
Trade. in value of old machinery
650.00Q Machinery- Deccmbcr.31, 2013 . 3.200.000
C tSn paid fur new machinery ,--~
- -
550 551
Proble m 34-9 (AICP AAdap ted) l't uhl{•m 34-10 (AI<?PAAdapted)
During the current year, Teb Company had the following activi tics I n\'!.!Company provided the followincr data fioJ· tile cun-ent year:
o
related to fina~cial operations: I lfllll on sale of equipm ent
l'r"l!('t~ds from sale of equipm ent 60,000
Paymer1t for the early retirement of long-term 100,000
bonds payable (carrying amount P7 ,400,000) 7,500,000 l'ur ~;h:~sc ~f bond investm ent (face value P2 000 000) 1,800.000
Arii<.H tl:tauon ofbondd iscount ' ' '
Distribution in the cun·ent year cash dividen d declare d '''vidcnd declare d 20,000
in prior year to preference shareho lders 620,000 450,000
I >1 \-Jdcnd paid
Carryin g amount of convert ible prefere nce shares l'r nu<'t'ds from sale of treasur y shares (cost, P650 000)
380,000
converted into ordinar y shares 1;200,0 00. 750,000
I \\'hat is the net cash provided by fin a . · '. . .
Proceed s from sale of treasury shares (carryin g amount ncmg activities?
at cost, P860.00 0) 950,000 II. 200,00 0
b. . 270,00 0
In the statement of cash flows for the cum~nt year, what amount should c. 300,000
be reported as net cash used in financ ing activities? d. 370,00 0

a. 7,170,000 What is the net cash used in investing activities?

b. 7,160,000 It,1,700,000
c. 5,970?000 h. I, 760,00 0
d. 5,350,000 c. 1,880,000
d. I ,940,00 0
Solutio n 34-9 Ans-..ver a
Paymen t of bonds payable (7,500,000) \ol111ion 34-10
Paymen t of cash dividen d ( 620,000)
(Ju '.Hion 1 Answe r d
Proceed s fror. :;n)" of treasur y shares _950,0 00
I )rvidcnd paid
Net cash used in financing activiti es (7,170,000) (380,00 0)
l'r oc~.:cds from sale of treasur y shares
750,000
N I cash provide d by financing act· ·n
The conversion ofpreference shares into ordinary shares is a noncash IYI es 370,000
financing activity and the~efore has no cash effect. I he divide nd declar ed is a nonca .
1111'11.! fore has no cash effect. · sh financ mg activit y and
A..s- a simple guide, cash effects of transactions involving nontrade
tiabilil ies and shareho-lders' equity arefin..pncing activities. (Jut•sti on 2 Answe r a
1'11" ccds from sale of equipm ent
1OU.t)OO
I'"' oh,sc of bond investm ent
(1,.)0~)
I cnsh used in inve!'ti ng activiti es
( 1'700,000)
·--
552
Pro ble m 34-11 (Al CP AA dap ted l'ro ble m 34-12 (IF RS )
) .
Kol lar Com pan y provi .ded the foll owi ng dat a for the current year. Nellie Co mp any pro vid ed the foll
owi ng info rma tion ext rac ted from
Pur cha se of rea l esta te for cas h lhl· acc oun ting rec ord s at the end
(ca sh was bor row ed from ban k) 5,500,000 of eac h yea r:
Sal e of inv estm ent sec urit ies for 5 000,000
cas h 6:000,000 2013 2012
Dividend pai d . llm row ing s
ls·u anc e of ord ina ry sh<\res for cas h 2,500,000 2,500,000
1~250,000 800,000
P~rchase of pat ent for cas h Sha re cap ital
3,500,000 2,000,000
Pay men t of ban k loan , 1,500',000 Rl'tained ear nin gs
. 950,000 750,000
Inc rea se in cns tom ers dep oslt 200,000
h 3,000,000
Issu anc e of bon ds pay abl e for cas Bo rro win gs of P30 0,0 00 we re
. . . <J rep aid dur ing 201 3 and new
Wh at is the net cas h pro vid ed by fin bor row ing s inc lud e P20 0,0 00 ven
l. anc ing acti vltles. dor fina nci ng aris ing o.q the
:u.:quisition of a pro per ty.
a. 5,0 00, 000 ·
b. 3,5 00, 000 · Tht.: mo vem ent in reta ine d ear nin gs
c. 4,5 00, 000 com pris es pro fit for 20 13 of
1'<>00,000, net of div ide nds pai d
d. 5,5 00, 000 ofP 700 ,00 0. The mq vem ent in
. . . <] shurc cap ital aro se fro m issu anc e
iTh at is the net cas h use d in inv esti of sha re cap ital for cas h dur ing
2. ng activities. t I11: 1ear. The re wer e no div ide
nds pay abl e rep orte d at t~.... beg inn
a. and end of the cur ren t year. ing
6,7 50, 000
b. 3,750,00{J
c. 1,7 50, 000 What am oun t sho uld be rep orte d as
fin anc ing net cas h infl ow s in
d. 500 ,00 0 tht: stat em ent of cas h flow s?
·

StJlution 34-11 Question 1 Answer Que3tion .2 Answer c 2,4 00, 000

II.
b h. 2,2 00, 000
CasL bor row ed from ban k 5,5 00, 000 .
(6,000,000~
c. ?,5 00, 000
Dividend paid d. 2,3 00, 000
ls<.:uance of ord ina ry sha res for cas 2,500,000
h (1,500,000)
Pay men t of ban k loa n
3,000,000 ~olution 34- 12 An swe r d
Issu anc e of bon ds payab~e
Net cas h pro vid ed - fina nci ng 3,500,000 Net incr eas e in bor row ing s
Vendor fina ncin g of pro per ty 1,700,000
(5,500,000) ( 200,000)
Purc~1 as~.; of rea l esta te . Net c<.sh inflO"-' from bor row ing s
Sal e of inv estm ent sec unt Jes 5,000,000 Issuance of sha re cap ital 1,500,000
Pur cha se of pat ent for cas h ( 1,250,000) 1,500,000
l)ividends paid
(1,750,000) ( 70U,OOO)
Net cas h u ~c:ed •:n inve'~ting acti viti es Nl'l cas h inf10ws from fina nci ng acti
Yit ies 2,300,000
. ,. '
The inc rea se m cus tom e. s d_ep osit is an add itio n to net inc om e in
dctetminirlg the net cas h t1ow:::. trm · acti \ ities.
n oper.ltmg

554 : h ...
 •

Problem 34-13 Problem 34-14 (AICPAAdapted)

Sarah Company reported bonds payable of P4, 700,000 on
Outlandish Company provided the follnwing infom1ation for 20 13? Dec~mber 31, 20 J 2 _an~ P5,000,000 on December 31, 2013
Dun ng 2013, th~ entity 1ssued P2,000,000 of bonds payable i~
Bor.ds payable, January 1 5,000.000 <.:)_(change for .eqmpment. There ~as no amortization of premium or
Bonds ~ayable, December 31 20,000,000 c!Jscount dunng the year. What 1s the payment for redemption of ·
bonds payable? · ·
During 2013 aP4,500,000 payment was made to retire bonds payable a. 300,000
with a face amount ofP5 ,000,000. Bonds payable with a face amount b. 1,700,000
c. 2,000,000
ofP2,000,000 had been issued in exchange for equipment. In the d. 2,300,000
<>taLement of cash flows for the year ended December 31, 2013, what
Solution 34-14 Answer b
ai710Unt should be reported as proceeds from issuance ofbonds payable?
Bonds payable - December 31, 2012 4,700,000
Bonds payable issued in 2013 2,000,000
a. 15,000,000 Bonds payable- December 31,2013 (5,000,000)
b. 17,500,000 Cash paid for bond redemption in 2013 1,700,000
c. 18,000,000
d. 22,000,000 ) Problem34-15 (IAA)
Ocean Company provided the following information:
Solution 34-13 Answer . .
2013 2012
5,000,000 Retained earnings 3,000,000· 2,5'00,000
Bonds payable, January 1 Dividends payable 1,200,000 1,800,000
Total issuance ofbonds payable (SQUEEZE) 20,000,000
Net income 2,900,000
Total 25,000,000
( 5,000,0UO) What amount was paid for dividends during the current year?
Face amount ot bonds pa;yable retired
a. 2,100,000 ·
Bonds payable -December 31 · 20,000,000
b. 1,500,000
c. 1,900,000
Total issuance of bonds payable 20,000,000 d. 2,600,000
I<>suance ofbonds payable for equipment ( 2,000,000)
Solution 34-15 Answer a
Cash proceeds from issuance of bonds payable 18,000,000
Retained earnings- 2012 2,500,000
Net income for 2013 2.000.000
Total 4,500,000
Rcta i~ed earnings- 2013 . (3,000,000)
Dividends declared in 2013 1,500,000
Dividends payable- 2012 1,800,000
Dividends payable- 2013 . (1,200,000)
('ash paid for dividends in 2013 2,100,000

556
5.57
 What is the amount of cash collections from customers in 20 13?
a. 5,560,000
b. 5,.850,000
c. 6,140,000
CASH FLOW- COMPREHENS IVE d. 6,400,000
1 What is the amount of cash payments to merchandise creditors in
2013?
rroblem 35-1 (AICPAAdapted)
a. 4,670,000
'Debbie Company provided the following data: b. 4,910,000
c. 5,000,000
2013 2012 d. ~, 150;000
Cash 350,000 150,000 What is the net cash provided by operating activities?.
Accounts receivable, net 840,000 580,000
Merchandise inventory 660,000 420,000 a. 400,000
Prepaid expenses 50,000 100,000 b. 100,000
Long term investment 80,000 c. 200,000
Property, plant and equipment 1, 130,000 600,000 d. 110,000
Accumulated depreciation 110,000 50,000 11. What is the net cash provided by financing activities?
Accounts payable 530,000 440,000
a. 140,000 ·,
Accrued expenses 140,000 130,000
b. 300,000
Dividend payable 70,000 c. 500,000
Note payable - long term debt 500,000 d. 700,000
Share capital 1,200,000 900,000
Retained earnings 560,000 330,000 5. What is the net cash used in investing activities?
Net credit sales 6,400,000 4,000,000 a. 80,000
Cost of goods sold 5,000,000 3,200,000 b. 530,000
Expenses 1,000,000 520,000 c. 610,000
Net income 400,000 280,000 d. 660,000
All accounts receivable and accounts payable relate to trade
merchandise. Accounts payable are recorded net and always paid Solution 35-1
to take all of the discounts allowed. The allowance for doubtful Question 1 Answer c
accounts at the end of20 13 was the same as at the end of2012.
Accounts receivable- 2012 580,000
No receivables were charged against the allowa'1ce during 2013. Credit sales- 2013 6,400,000
The proceeds from the note payable were used to finance a new Total 6,980,000
store building. Share capital was sold to provide additional working Accounts receivable - 2013 .< 840,000)
capital. Collections in i013 6,140,000

558 559
Question 2 Answer d l'1uhh·m JS-2 (IAA)
Inventory- 2012 420,000 t 'I'll< 'ompanyprovided the following for the current year:
Purchases (SQUEEZE) 5,240,000
Good~ available for sale '"' '' l 'it' mlong-term debt 5,000,000
5,660,000 l'w• of treasury shares
Inventory - 2013 ( 660,000)
lill'il.' 1,000,000
I It '" tl t.ttion and amortization 1,500,000
Cost of goods sold in 2013 5,000,000 { lllton.~alc of equipment 500,000
l'tlll c cds from issuance of share capital 4,000,000
Accc..unts payable- 2012 440,000 I'''" h.• sc of equipment for cash 7,000,000
Purchases in 2013 5,240,000 l'c•tt tl'cls from sale of equipment 2,000,000
Accounts payable - 2013 ( 530,000) l't tiiH'Il l of cash dividend 2,500,000
Payment of accounts payable iu 2013 5,150,000 N• I 1m orne 8,000,000
''" ,,.,,.,c (decrease) in working capital accountc;.:
Question 3 Answer d J\rl'ounts receivable · 2,000,000
IIIVl'nlory (3,500,000)
Net income 400,000
Increase in accounts receivable (260,000) l't.tdc accounts and notes payable 4,000,000
llll'omc tax payable (4,500,000)
Increase in inventory (240,000)
Decrease in prepaid expenses 50,000 t 1 It balance, January 1 6,000,000
Depreciation ( 110,000- 50,000) 60,000
Increase in accounts payable 90,000 What is the net cash provided by operating activities?
Increase in accrued expenses · 10,000
.t . I 0,000,000
Net cash provided by operating activities 110,000
h. 11 ,000,000
Question 4 Answer d (' , 7,500:000
d. 8,500,000
Proceeds from note payable 500,000
Proceeds from share capital (I ,200,000- 900,000) 300,000
Dividend paid in 2013 (see below) (100,000) What is the net cash used in investing activities?
Net cash provided by financing activities 700,000 .
a 7,000,000
Retained earnings 2012 plus net income b. 5,000,000
(330,000 + 400,000) 730,000 l' 9,000,000
Retained earnings - 2013 (560,000) d. 2,000,000
Dividend declared in 2013 170,000
Dividend payable- 2013 ( 70,000) ' · What is the net cash provided by financing activities?
Dividend paid in 2013 100,000
a. 9",000,000
Question·5 Answer c b. 8,000,000
Purchase of long term investment ( 80,000) c. 5,500,000
Purchase ofPPE (1,130,000- 600,000) (530,000) d. 2,500,000
Net cash used in investing activities (610,000)

560 561
Solution 35-2 l'e uhh•m 35-3 {AICP AAda pted)

Question I Answe r a Wl',l \'L'I, ( 'Ot'l)pany provided the following data:

Net incom e 8,000,000 December 31,2012

- ~ecember 31,201 3
tncrea se in accoun ts receiv able ( 2,000,000)
I t uiP uccounts receiva ble, net 840,000
Decrease in invent ory 3,500,000 780,000
ltiVl' lllmy 1,500,000
increa se in accoun ts and notes payable 4,000,000 1,400,000
( 4,500,000) 1\ I IIIIII( S payable 950,000 980,000
Decrease in incom e tax payable
Depreciation and a~1ortization 1,500,000 • J'otal sales were P 12,000,000 for 2013 and P 11,000,000 for
Gain on sale of eqUtpment ( 500,000) .'0 12. Cash sales were 20% of total sales each year. Cest of
Net cash provid ed - opera ting 10,000,000 goods sol~ was P8,40 0,000 for 2013.
• Variable genera l and admin istrativ e expens es for 2013 were
Question 2 Answe r b PI ,200,0 00. They have varied in propo rtion to sales, 50%
purcha se of equipm ent for cash ( 7,000,000) have ~een paid in the year incurr ed and 50% the follow ing
Proceeds from sale of equipm ent 2,000,000 year. Unpai d expen ses are not includ ed in accou nts payab le.
( 5,000,000)
• l·txed expens es, includ ing P350,000 deprec iation and P50,000
Net cash used - invest ing
bad debt expens e, totaled P 1,000,000 each year. Eighty percen t
Question 3 Answe r c of fixed expen ses involv ing cash were paid in the year incurre d
5,000,000 and 20% the follow ing year. Each year there was a P50,0 00
Increase in long-te rm debt
( 1,000,000) had debt estima te and a P50,000 writeo ff. Unpai d expen ses
Purcha se of treasur y shares
Procee ds from issuan ce of share capltal
0

4,000,000 nrc not includ ed in accoun ts payabl e.

Payme nt of cash divide nd ( 2,500,000) What is the cash collec ted from custom ers during 2013?
Net cash provid ed- financ ing 5,500,000
a. 12,010,000
h. 12,060,000
Cash balan ce- Januar y l 6,000,000
10,000,000
c. 11,960,000
Net cash provid ed- operat ing
( 5,000,000) d. 11,890,000
Net cash used- investi ng 0

Net cash provid ed- financ ing 5,500,000 What is the cash disbur sed for purchases during 2013?
Cash balanc e - Decem ber 31 16,500,000 a. 8,500,000
h. 8,270,000
c. 8,300,000
d. 8,200,000
I. What is the cash disbur sed for expenses during 2013?
a. 1,800,000
b. 1,200,000
c. 1,750,000
d. 1,450,000
562 563
Solution 35-3 l'rnhh.•m 35-4 (IFRS)

Q~estion I Answer a ~~~ Hll'Wall Company proviued the ~allowing comparative statement of
840,000 ftlllllttal positionatyear-end:
Accounts rey-eivable - 201 ;_
Sales- 2013 12,000,000
20 13 2012
Tota~
12,840,000 l' I h 550,000 400,QOO
Accounts recetvable - 2013 ( 780,000) /\1l'nunts receivable 1,400,000 920,000
Writeoff ( 50,000) luVl'stmcnts, at cost 200,000 350,000
12,010,000 1'111111 1,800,000
Cash collections in 2013 1,300,000
A 1 1 lllllU Ia ted depreciation ( 600,000) ( 450,000)
A lllltnts payable 950,000 750,000
Question 2 Answer b 1h11t c en pi tal 1,500,000 1,000,000
Inventory- 2012 1,500,000 I Inned earnings 900,000 770,000
Purchases (SQUEEZE) .
8,300,000
A11 tnvcstment was sold for P250,000 dwing the year. There was no
Goods available for sale 9,800,000
(1,400,000) dt llosal ofplant during the year. The profit for the year was P600~000;
Inventory - 2013 .
1f1u tncome tax expense ofPl05,000. A dividend ofP470,000 was
Cost of good sold 8,400,000
p ud 1m December 31, 2013.
Accounts payable - 2012 950,000 What amount should be reported as net cash provided by operating
Purchases 8,300,000 ndivities?
Total . 9,250,000 II. 475,000
Accounts payable - 2013 ( 980,000) h. 470,000
Payment of accounts paxable in 2013 8,270,000 ~. 370,000
d, 570,000
Question 3 Answer c What amount should be reported as net cash used in investing
Fixed expenses 1,000,000 ll'livities?
Depreciation ( 350,000)
50,000) 500,000
II .
Bad debt expense (
h 750,000
Fixed expenses paid in 2013 600,000 l' 250,000
d. 400,000
Variable expenses paid 20 13:
2013 (1 ,200,000 X 50%) 600,000 What amount should be reported as net cash provided by fmancing
550,000 n<.'tivities?
2012 (1 ,100,000 X 50%)
Total cash disbursement for expenses 1,750,000 " 500,000
h 470,000
1(1 c 970,000
Variable ratio ( 1,200,000 I ,12,000,000)
2012 variable expenses (1 0% x 11 ,000 ,000) 1,100,01' d. 30,000

- 564
Solutiqn 35-4 l'1 uhlcm 35-5 (AICPAAdapted)

Question 1 Answer c 111 v tileCompany provided the following statement of financial

f111Miion on December 31,2013 and 2012 and information relating
Net income 600,000
(100,000) 11120 I 3 activities:
Gain. on sale of investment ( 250,000- 150,000)
Depreciation ( 600,000- 450,000) 150,000 2013 2012
Increase in accounts receivable (1 ,400,000- 920,000) (480,000) 1\ro<idS
Increase in accounts payable ( 950,000- 750,000) 200,000 1 'ush 460,000 200,000
Net cash provided by operating activities 370,000 l11uling securities 600,000
J\1 l ounts receivable (net) 1,020,000 1,020,000
lu vr11tory 1,360,000 1,200,000
Question 2 Answer c I oug term investments 400,000 600,000
Sale of investment 250,000 l'tupcrty, plant and equipment 3,400,000 2,000,000
Purchase of plant (1 ,800,000- 1,300,000) (500,000) 1\1 lttmulated depreciation ( 900,000) ( 900,000)
I' dent 180,000 200,000
Net cash used in investing activities (250,000) '
I otul assets 6,520,000 4,320,000
Question 3 Answer d ..
I labilities and Shareholders' Equity
Issue of share capital ( 1,500,000- 1,000,000) 500,000
An:ounts payable and accrued liabilities 1,650,000 1,440,000
Dividend paid · (470,000)
!hmt term debt 650,000
Net cash provided by financing activities ~QQ :t,ruc capital, P20 par 1,600,000 1,400,000'
Sh,uc premium 740,000 500,000
ltt•t.t ined earnings 1,880,000 980,000
I r,Jnlliabilities and shareholders' equity 6,520,000 4,320,000

Net income for 2013 wasP 1,380,000.

Cash dividends ofP480,000 were declttred and paid in 2013.
Equipme;J.t costing P800,000 and having a carrying amount of
P300,000 was sold in 2013 for P300,000.
A long-ter1:1 investment was sold in 2013 for P270,000. There
were.no other transactions affecting long-term investments in 2013.
I 0,000 shares were issued in 2013 for P44 a share. ,
Th~ trading securities were .rurchased .cor cash on December
11,2013.

566 567
 Solution 35-5
l. What is the net cash provided by operating activities?
a. 1,380,000 ( hll'.~tion 1 Answer c
b. 1,830,000 Net income 1,380,000
c. 1,280,000 lurrcase in inventory ( 160,000)
d. 1,900,000 ( Ia 111 on sale oflong term investment (270,000- 200,000) ( 70,000)
I kp1cciation 500,000
i. What is the net cash used in investing activities? •\ 1110rtization of patent 20,000
a. 2,230,000 l11ncase t. l accounts payable and accrued liabilities 210,000
b. 1,790,,000 l'un.: hasc of trading securities ( 600,00(\)
c. 1,730,000 N~.: t cash provided by operating activities 1,280,000
d: 1,630,000
3. What is the net cash provided by financing activities? Nt• l ~.:hange in
accumulated depreciation 0
1\dd: Accumulated depreciation on equipment sold
a. 610,000
(800,000- 300,000) 500,00Q
·b. 880,000
c. 910,000 I dt:tl depreciation
~~
d. 1,090,000
Ju,·stion 2 Answer a
d· of long-term investments 27.0,000
lllll h.tsc of property, plant and equipment \.2.200,000)
II nl equipment 300,000
1 caslt used in investing activities ( l ,630,000)

l'tnp 1ly, plant and equipme11t- 20AJ2 2.000,000

!'1 1 hot.;~ of PPE (SQUEEZE) 2,200,000
I I tl 4,200,01.:'
ll•fl.!quipmcntsold (_ 800,00Q)
'• p 1 ty, plant and equipment-· 2013 3,400,000

lion 3 Allswer a
ds ,.,~om
short-term debt 650,000
tl or (10,000 X 44)
ll.lfCS 440,000
ll tl1 Vl<lcnd paid . (480,000)
1 .11 provided by financing activities 610.000

568
Problem 35-6 (AlCPAAdapted) WI :.11 i 1111ou ;1ts should be reported in the statement of cash flows for the
y, .u ,·mkd December 31, 2013 for the following:
Flax Company used the direct method to prepare the statement of cash
flows. The entity provided the following infom1ation: I 'ash collected from customers?
2013 2012 II. 5,418,000
h. 5,416,000
Cash 350,000 320,000 lj, 5,360,0'00
Accounts receivable 330,000 300,000 d . 5,358,000
lnventory 310,000 470,000
1,000,000 950,000 'ash paid for g_<1ods to be sold?
Property, plant and equipment
lJnzmortized bond discount 45,000 50,000 II.2,585,000
l ~s~ of goods sold 2,500,000 3,800,000 b 2,575,000
Distr: buti~n costs 1,415,000 1,720,000 G 2,425,000
Gene:-al and administrative expenses 1,370,000 1,513,000 d. 2,265,000
fntetest exp€nse 43,000 26,0.00 C:~sh paid for interest?
lncome tax expense 204,000 612,000
.1. 48,000
7,567,000 9,761,000 b 43,000
c 38,000
d 17,000
Allowance for cioubtful accounts 13,000 11,000
165,000 150,000 t1 Cash paid for income tax?
Accumulated depreciation
Trade accounts payable 250,000 175,000 a. 258,000
~ncome tax payable 210,000 271,000 h. 204,000
Deferred tax liability 53,000 46,000 c. 197,000
8% callable bon js payable 450,000 200,000 d. 150,000
Ordinary share capital 500,000 400,000
' ('ash paid for distribution costs?
Sh.are premium 91,000 75,000
Retained ~arnings 447,000 646,000 u. 1,420,000
5,388,000 7,7872000 h. 1,415,000
Sales
,;, I ,410,000
7,5672000 9,761,000 d. 1,400,000

The entity purchased P§.Q,OOO in equipment during 2013. The entity ,,ol11/10n 35-6
a1located one-third of depreciation expense to distribution costs an<i )lltwlion 1 Answer d
the remainder to general and administrative expenses. A1~.;ounts receivable - 2012 ~f'\0,000
'inks 2013 5,38G,00Q
lulnl 5,688,000
/\l counts rer :ivable - 2013 C~33o,oo<n
r 1 .h collected fr<?m customers 5,358,000

570 571
2uestion. 2 Answer d
470,000 l'ruhlcm 35-7 (AICPAAdapted)
Inventory- 2012
Purchases (SQUEEZE) 2,34;0,000
Ill .II Company reported the following differences in the statement of
Available for sale 2,810,00C llll.tncial position accounts on December 31,2013 and 2012:
·nventory - 2013 ( 310,000)
Increase
Cost of goods sold - 2013 2,500,000
(Decrease)
AsHts
Accounts payable - 2012 175,000
Purchases - 20 13 2,340,000 t 'u>l h and cash equivalents 120,000
2,515,000
Short term investments 300,000
Total At counts receivable, net
Accounts payable- 2013 ( 250,000)
'"''t·ntory 80,000
Cash paid for accounts payable 2,265,000 I 11111-' term investments ( 100,000)
11111pCrty, plant and equipment 700,000
Question. 3 A11swer c J\,tumulated depreciation
Interest expense - 2013 43,000
Amort ization of bond discount (50,000- 4 5,000) ( 5,000) 1,100,000

Cash paid for interest 38,00_2 I l.1hilities and Shareholders' Equity

\1' tHllJts payable and accrued liabilities ( 5,000)
Question 4 Answer a
llav1dcnd payable 16,0,000
!11COme tax expense - 2013 204,000. ~ luu t term bank debt 325,000
Tncomc tax payable - 20 12 2 71 ,000 I tcm1 debt
1111g 110,000
Deferred tax liability- 20 12 46,000 11 drnary share capital, P 10 par 100,000 .
521.000 " It u l' premium 120,000
L'otal
~ncome tax payable - 2013 (21 0,000) ltc t.11ncd earnings 290,000
Deferred tax liability- 2013_ ( 53,l ·~)
1,100,000
Cash paid for incom~ tax for 20 13
ll w lbllowing additional infom1ation relates to the current year:
Question 5 Answer c Nl't income for the current year was P790,000.
Di stnbution costs- _o 13 1,415.000 < nsh dividend ofP500,000 was declared.
OcprcciaLion (I 5,000 x 1/3) ( 5,000) l·quipment costing P600,000 and having a carrying amount of
Cash paid for dtstribution costs 1,41 0,000 I' ~SO,OOO was sold for P350,000
Fqu ipment cost:ng P 110,000 was ac.,quirea tnrough issuance of
Accumulated depreciation- 2013 165,000 long tcnn debt
A.ccttmulatcd depreciation - .20 12 150,000 ,\ l<,ng-term investment was sold for P 135,000. The•e were no
')cprc.::iation fo r 2013 15,000 1111 K'r transactions affecting tong-tem1 investments
I0 000 o;·dinary shares were issued for P22 a share.
..,.
-'
I
573
1. What is the net cash provided by operating activities? Solution 35-7
a. 1,160,000 (Juestion 1 Answer c
b. l ,040,000 Net income 790,000
c. 920,000 Increase in inventory ( 80,000)
d 705,000 (lain on sale of investments (135,000 -100,000) ( 35,000)
2. What is the net cash used in investing activities? lkpreciation · 250,000
J >ccrease in accounts payable and accrued liabilities ( ·5,000)
a. 1,005,000
N~t cash ·provided by operating activities 920,000
b. 1,190,000
c. 1,275,000 Accumulatcd,depreciation- net change
d. 1,600,000 Add ba<;k: Accumulated depreciation on building sold
3. What is the net cash provided by financing activities? (600,000- 350,000) 250,000

a. 20,000 'l'otal increase -Depreciation for current year 250,000

b. 45,000
C. 150,000 Question 2 Answer a
d. 205,000 Purchase of short-term investments ( 300,000)
Sale of long-term investments 135,000
l'urchase of property, plant and equipment (1,190,000)
Sa lc of equipment ·350,000
Nl·t cash used in investing activities (1,.005,000)

I ropcrty, plant and equipment - net increase 700,000

'\dd back: Cost of equipment sold 600,000
lola) 1,300,000
I css: Equipment acquired through issuance of
long-term debt 110,000
( '11sh paid for property, plant and equipment 1,190,000

(Juestion 3 Answer d
l 'nsh dividend paid (500,000- 160,000) (340,000)
I'1 occcds from short-term debt 325,000
I '1 occcds from issue of ordinary shares ( 10,000 x 22) 220,000
hid cash provided by financing activities 205,000

574 575
l>roblem 35-8 (AICPAAdap ted) 1. What is the net cash provided by operating activities?

'i1mplex Corr~pan_yprovided the following compruative statement of a. 2,800,000

financial position: b.. 2,900,000
c. 2,600,000
2013 2012 d. 2,850,000
Cash 2,300,000 1,500,000
Accounts receivable 1,150,000 1,200,000 2. What is the net cash used in investing activities?
{nventory 2,000,000 1,800,000
Property, plant and equipment 6,400,000 3,000,000 a .. 500,000
Accumulated depreciation (1,150,000) ( 1,000,000) b. 300,000
r1'·'e~tment in Belle Company 3,200,000 3,000,000 c. 600,000
l.van receivable 800,000 d. 490,000
Accounts payable 1,000,000 . 900,000
[ncome tax payable 50,000 250,000 3. What is the net cash used in fmancing activities?
[' . vidend payable 1,000,000 1,500,000
Fmance lease liability 3,800,000 a~ 2,100,000
Ordinary share capital 5,000,000 5,000,000 b. 1,600,000
Srn.re premium 500,000 500,000 c. 1,200,000
Retained earnings 3,350,000 1,350,000 d. 1,700,000
* Net income fo·r 2013 was P3,000,000.
* On December 31, 2012, Simplex acquired 25% of Belle
Company's ordinary shares for P3,000,000. Belle reported net
income of P 1,200,000 for 2013. Belle paid cash dividend of
P400,000 on ordinary shares during the current year.
* During 2013, Simplex loaned PI ,000,000 to Chase Company,
an unrelated entity. Chase made the first semiannual principal
repayment ofP200,000, plus tnterest of 10%, on October 1,
2013. No accrual of interest was made on December 31,2013.
* On January 1, 2013, Simplex sold equipment costing P600,000,
wi~h a carrying amount ofP350,000 for P400,000 cash.

* .On January I, 2013, Simplex entered into a finance lease for an

office building. The present value ofthe annual rental pa:Yments
is P4,000,000, which equals the fair value of the building.
Simplex made the first rental payment ofP600,000 when due
on December 31,2013. The payment includes an implicit interest
ofP400,000.
* Simplex declared casl1 divi dend in one year and p:1id the dividend
in the subsequent year.
576 577
, '\;olution 35-8 l'•uhl(•m35-9 (CGAC)

Question 1 Answer b ~ h•ea Company gathered the following i.nfom1ation about changes which

Net income 3,000,000

It"'' plnce during the current year:
Investment income (25% x 1,200,000) ( 300,000) ( ,.,It ( 150,000)
Cash dividend from Belle (25% x 400,000) 100,000 Att'ounts receivable, net 300,000
Gain on sale of equipment (400,000- 350,000) ( 50,000) ltiVf'n!ory 1,500,000
Decrease in accounts receivable 50,000 l't•JpCI ty, plant and equipment 500,000
Increase in inventory ( 200,000) Att'umulated depreciation ( 180,000)
Depreciation 400,000 111111ng1blc asset, net of amortization 275,000
(ncrease in accounts payable 100,000 Att' llll!d expenses ( 50,000)
Decrease in income tax payable ( 200,000) Acrollnts payable · ( 320,000)
Nttll• payable - short-term debt ( 700,000)
Net c.ash provided - opera tin g 2,900,000
IIt 111ds payable ( 250,000)
Net increase in accumulated depreciation 150,000 lit d 111ary share capital, P 10 par ( 125,000)
Add: Accumulated depreciation of equipment sold Shutt.: premium ( 200,000)
(600,000- 350,000) 250,000 R ·luincd earnings ( 600,000)
Depreciation 400,000 hptipment which had originally cost P200,000 and had a carrying
lltiOUnt ofzero was thrown away. Equipment with a cost ofP 150,000
Observe that the cash dividend received from an "equity investee" is 1111 I accumulated depreciation ofP 100,000 was sold for P50,000. Some
treated as a cash inflow from operating activities. This amount 11 w equipr:nentwas purchased during the year. An intangible asset was
represents the "cash portion" of the investment income during the year. 11 q111rcd during the year for 25,000 ordinary shares. Each share was
,c• IIi ng for P 13 at that time. The entity retired P2,500,000 ofl 0% bonds
Question 2 h.nswer d 11 par and issued P2,750,000 of 8% bonds at par. The income statement
Loan receivable ( l ,000,000)
11'purtcd revenue ofP7 ,000,000 and expenses ofP~,OOO,OOO.
Collection of loan .200,000 I What is the net cash provided by operating activities?
Sale of equipment 400,000
a. 1,000,000
Net cash used - investing ( 400,000) b. 1,800,000
c. 1,050,000
Net increase in PPii 3,400,000 d. 1,100,000
Add: Cost of equipment sold 600,000
' What is the net cash used in investing activities?
Totai acquisition 4,ooo;ooo a. 850,000
b. 800,000
The acquisition is represented by the building acquired by a finance c. 900,000
lease. This is a noncash investing acquisition: d. 950,000
Qu~tion 3 Answer d What is the net cash used in financing activities?
Principal lease payment (600,000 -400,000) ( 200,000) a. 250,000
Dividend declared in 2012 and paid 2013 (1,500,000) b. 450,000
• c. 950,000
Net cash used- financing (1 ,700,000) d. 125,000

578 579
 l'mblem35-10 (IAA)
Solution 35-9
f\ lotultain Company provided the following comparative statement:
Question 1 Answer d
Net income (7 ,000,000- 5,000,000) 2,000,000 2013 2012
Depreciation . 480,000 1 ,,.,11 and cash equivalents 5,600,000 7,400,000
Increase in accounts receivable ( 300,000) \ltounts receivable 3,000,000 3,500,000
Increase in inventory ( 1,500,000) IJJVt·ntory 8,000,000 6,500,000
Amortization (325,000- 275,000) 50,000 l'11 paid expenses
50,000 400,000 600,000
Increase in accrued expenses l'1op~.:rty, plant and equipment
Increase in accounts payable 320,000 55,000,000 42,000,000
A, l umulated depreciation (20,000,000) ( 16,000,000)
Net cash provided - operating 1,100,000 f\, ~..:o u nts payable 6,000,000 9,500,000
180,000 A, l 1 ucd expenses 1,500,000 500,000
Net increase in accumulated depr~ciation
Accumulated depreciation of equ.Ipment thrown away 200,000 Null payable- bank (current) 2,000,000 5,000,000
Accumulated depreciation of eqmpment sold 100,000 ' l11ll' payable- bank (noncurrent) 10,000,000
Total ciepreciation 480,000 n, d lila ry share capital 30,000,000 30,000,000
I lutncd earnings 2,500,000 ( 1,000,000)
Question 2 Answer b t•,h needed to purchase new equipment and to improve the
Sale of equipment 50,000 \VIII king capital position was raised by borrowing from bank with a
Purchase of equipment (850,000) I '''}' IL rm note. Equipment costing P2,000,000 and carrying amount
Net cash used - investing (800,000) of I' I ,500,000 was sold for P 1,800,000. The entity paid cash
thvult:nd ofP3,000,000 in the current'year. There were no entries
Net increase in property, plant and equipment 5.00,000 111 1111.: retained earnings account other than to record dividend and

Cost of equipment thrown away 200,000 It 1 tncome for the year.

Cost of equipment sold 150,000
Whnt is the net cash provided by o·p erating activities?
Total acquisition 850,000
I 7,400,000
Patent acquired by iss~ing share.s (25,000 shares x 13) 325,000 b. 6 ,900,000 •
Less: Increase in intangible asset 275,000 l 8,000,000
d. 7,700,000
Amortization 50,000
What is the net cash used in investing activities?
Question 3 Answer b I, 15.000,000
Retirement of bonds payable (2 ,500,000) h 13,~80,000
Issuance of bonds payable 2,750,000 . 14,800,000
Dividend paid (1 ,400,000) d 13,000,000
Proceeds from note payable - short term debt 700,000
What is the net cash tJroviued byfina1.cing activities?
Net cash used - fi nancing (_ 450 ,000)
I 7,000,000
N et income . 2,000,000 b (1,000,000
Lf'ss: Increase in retained eann ngs ___QQQ,_OOQ <!,.. ·I ,000,000
1.400.000 d ~.0 0(), 000
fJiv idend pa:J.
581
580
Solution 35-l 0 Ju, 'st;on 2 Answer b
l'uy rnl!nt for new equipment (15,000,000)
Question 1 Answer a
l'rPt:l'l!ds from salr of equipment 1,800,000
Net income (see below) 6,500,000
500,000 Ne t cash used in inHsting activities (13,200,000)
Decrease in accounts receivable
Increase in inventory (1,500,000)
200,000 PH,pcrty, plant and equipment- 2012 42,000,000
Decrease in prepaid expenses
( 300,000) P.tyr•tcnt for new equipment (SQUEEZE) 15,000,000
Gain on sale of equir .11ent
Depreciation 4,500,000 hJtal 57,000000
Decrease in accounts payable (3,500,000) 1 C•S I of equipment sold . 2,000,000)
Increase in accrued exp~:mscs 1,000,000
Pwpcrty, plant and equipment- 2013 55,000,000
Net cash provided by operating activities 7,400,000
J11estion 3 Answer c
Retained earnings - 20 13 2,500,000
(1,000,000) I tllcccds from borrowing on a long-term note payable 10,000,000
Retained eamings- 2012 (deficit)
Dtvidcnd paid ( 3,000,000)
Net increase in retained earnings 3,500,000 I' ryrncnt of current bank note payable
Add: Dividend paid 3,000,000 (5,000,000- 2,000,000) ( 3,000,000)
Net income 6,50.0,000 Net cash provided by financing activities 4,000,000

Accumulated depreciation-- 2012 16,000,000

Depreciation for 2013 (SQUEEZE) 4,500,000

Total 20,500,000
Accumulated depreciation on equipment sold
(2,000,000- 1,500,000} ( 500,000)
Accumulated depreciation- 20 13 20,000,000

582
Problem 35-11 {IAA)
l, What is the cost of equipment sold?
Hero Companyprov1ded the following statement offinancial position
on January 1, 2013 and statement of cash flows for 2013: fl . l, 100,000
h. 2,100,000
Assets Liabilities and Equity c. 1,600,000
Cash 3,200,000 Accounts .payable 1,500,000 d. 950,000
Accounts receivable 3,000,000 Share capital 9,200,000
Building and, equipment 12,000,000 Retained earnings 4,800,000
'. What is the carrying am9unt of the bt:;lding and equipment 011
Accumulated depreciation ( 4,000,000) December 31, 2013?
Patent 1,300,000
15,500,000 15,500,000
a. 10,100,000
b. I 0,400,000
lo..J'etincome 4,000,000
Increase in accounts receivable (1 ,300,p00) e. 14,200,000
• 600,000 d. I 1.700,000
lncr:ease in accounts payable
Depreciation 1.200,000
Gam 011 sale of equipment ( 450,000) ~. What is the balance of accounts payable on December 31, 2013?
Amortization of pa tent 150,000
Net cash provided by opera ting activities 4,200,000 a 2,900,000
b. 2,100,000
Cash flows from investing activities c. 900,000
Sale of equipment 950,000 d. 600,000
P urchase ofland • (2,000,000)
Purchase of equipment (3,800,000) (4,850,000) . ~I
What is the balance of retained earnings on December 31, 20 13?
Cash flows frowtmancing aetiYitics
a. 10,000,000
Payment of cash diYidend (1,200,000) b. 8,800,000
Issue of ordinary shares at par for casl 3,200,000 2,000,000
c. 7,600,00b
Net increase in cash 1,350,000 d. 3,600,000
Cash, January 1, 2013 3200,000
Cash, Dccer11bcr 31, 2013 4,550,000 What is the share capital on December 31, 2013?

Total assets on December 31, 20 13 amounted to P22, 100,000. Tlie a. J 2,400,000

accumulated ~:"!preciatiun ·:.m the rgt:ipmcr~! :;o1d \\'as P' t 00!000. b. 9,200,000
c. 5,200,000
d. 8,000,000
~otullon 35-11
QuC'stion 1 Answer c 36
Proceeds fro.m sale of equipment 950,000
Carrying amount of equipment sold (SQUEEZE) ( 500,000)
450,000
Gain on sale of equipment IIYPERINFLATION-
Cost of equipment sold (SQUEEZE) 1,600,000
Accumulated depreciation (1,100,000)

Carrying amount of equipment sold 500,000 l"roblem 36-1 (AICPAAdapted)

t lardcnia Company reported the following assets in the statement of
Question 2 Answer a
12,000,000 lillancial position:
Building and equipn?ent-January 1, 2013
Purcha~e of equipment
3,800,000 { .csh in bank 2,000,000
( 1,600,000)
Cost of equipment sold Arcounts receivable 4,000,000
Building and equipment- December 31,2013 14,200.000 ln-.cnlory 1,500,000
I• 1nancial asset at fair value 500,000
Ac-:.umulatcd depreciation- January 1, 2013 4,000,000
l'atc•nt 1,000,000
1,200,000
Depreciation for 2013 Advances to employees 200,000
~ 1,100,000)
Accumulated depreciation of equipment sold ..
4,100,000
Advances to suppliers 400,000
Accumulated dept.!ciation- Decenber 31,2013 !'repaid expenses 1OG,OOO

Building and equipment 14,200,000 l11 pr~paring fmancial statements in a hyperinflationary economy. what
Accurnulatcd depreciation ( 4,100,000)
total amount should be classified as monetary assets? '
Carrying amount;:__ December 31, 2013 ~~ II 6,200,000
Que<::tion 3 Answer b h 6,600,000
Ac..counts payab\e- January 1, 2013 1,500,0vC 6,700,000
600,000 7,700,000
1ncrcase in accounts payable
Accounts payable- December 31,2013 2,100,000
So/litton 36- I Answer a
Question 4 Answer c
4,800,000 l'ush tn bank 2,000,0()()
Retained eamin~s -January 1, 20 13 J\~\
ounts receivable 4,000,000
4,000,000
Net income (1,200,000) Adva•1ccs to employees 200,000
Cash dividend paid
7,600,000 I ur.d monetary assets 6.!..~poo
Retained c,.mings- Decer.'lber 31, 2013
Question 5 A12swer a I'AS 21 ~eflnes ~onetary assets as "money held. :ud assets to l~c
S!-larcca]Jital-January 1,2013
9,200,000 1c
1 ctvcd
1 m
f fixed or determinrble amount ofmonev"
J •
The css• en 1I.lt
·. •
1ssuc of ordinary shares at par for cash 3,200,000 • me .o a monetary asset i.> tl;e right to receiv~ a fixed or
11
~~ tic h·rmtnable amount of m<>nc-.. ·
~,hre capit<1~ ···December 31, 2013

587
586
:JolULwn 3 5-11
Quc>stion 1 Answer c 36
Proceeds fro.m sale of equipment 950,000
Carrying amount of equipment sold (SQUEEZE) ( 500,000)
450,000
Gain on sale of equipment IIYPERINFLATION.
Cost of equipment sold (SQUEEZE) 1,600,000
Accumulated depreciation (1,100,000)

Carrying amount of equipment sold 500,000 l"roblem 36-1 (AICPAAdapted)

<lardenia Company reported the following assets in the statement of
Q~estion 2 Answer a
12,000,000 tin<ulcial position:
Building and equipment- January 1, 201.3
Purcha~c of equipment
3,800,000 t ash in bank 2,000,000
Cost of equipment sold ( 1,600,000)
Accounts receivable 4,000,000
Building and equipment- December 31,2013 14,200.000 Invcntory 1,500,000
I•111ancial asset at fair value 500,000
Ac~umlJ1ated depreciation-January 1, 2013 4,000,000
1,200,000
Patl'nt 1.000,000
Depreciation for 2013 Advances to employees 200,000
Accumulated depreciation of equipment sold \ 1,100,000)
·-
4,100,000
Advances to suppliers 400,000
Accumulated dept~ciation- Decenber 31,2013 l'rcpa td expenses 1OG ,OOO
Building and equipment 14,200,000 l11 prt.!paring fmancial statements in a hyperinflationary economy: whllt
( 4,100,000)
Accumulated dcprecia ti on. lotul amount should be classified as monetary assets?
Carrying amount.:... December 31, 2013 10,100,000
I 6,200,000
Que<::tion 3 Answer b ,, 6,600,000
1,500,0vC 6,700,000
Ac..counts payable- January I, 2013
600,000 d 7,700,000
Jncrcase in accounts payable
Accounts payable -December 31, 2013 2,100,000
Sol11tion 36-1 Answer a
Question 4 Answer c
l ',tsh in bank 2.,000,00(!
Retained eamin:;s -January 1, 20 13 4,800,000
4,000,000 J\ta ounts receivable 4,000,000
Net income (1,200,000) Ad'vn'lccs to employees 200,000
Cash dividend paid
7,600,000 lut,tl monetary assets ~!Q.QQ
Retained c,"mings - December 31, 2013
Question 5 Ans-wer a I'AS 21 ~eflnes ~onetary assets as "money held. :u J assets to be
Share caJJital- January 1, 2013
9,200,000 ' 'c1vcd m fixed or determinrble amount of money''. The csscnrial
lssuc of ordinary shares at par for cash 3,200,000 I · time .of a monetary asset i.5 tl;e right to receiv~ a fixed or
~QMQ2 tit ll't'mtnable amount of m<,nc·..
~h:1rc ca:,i:a~ --- Deccmt.cr 31, 2013

587
586
Monetary assets are those whose amounts are fixed in the sense l'AS '21 defines monetary liabilities as ''liabilities to paid 1n fixed or
that the amounts uitimately realizable are the same amounts that determinable amount of money". The essential feature of a monrtary
appear on the historical financial statements; liability is the obligation to deliver a fixed or determinable amount
Monetary assets are by their very natu_re already expressed in of money. ·
terms of c:•.1rrent pesos and therefore realizable at no more or l~ss
Monetary li~bilities are those whose amounts arc fixed in the scm;c rh<~t
than their face or stated amounts.
the amounts ultimately payable are the same amounts that appear llll the
Accordingly, the inventory, financial a·ssct at fair value, patent, historical financial statements.
advances to suppliers and prepaid expenses are nonmonetar~
because they do not represent fixed amounts to be recei~ed. T~e1r Stated differently, liabilities are classified as monetary because by their
ultin,ate realizable amounts definitely will differ from the1r earrymg vety nature they are already expressed in current pesos and therefore
puyablc at no more or no less than their face or stated amou:1ts.
ar. ~ 0unts.
Accordingly, the unearned revenue, advances from customers. esli rn:.1tcd
Probkm 36-2 (ACP) wftrranty liability and-deferred tax liability are nonmonetary because-
:')Unt1ower Company reported the following liabilities in the statement they do not represenffixed amounts to be paid. Their ultimate Hlllounts
payable will surely differ from their carrying amounts.
of financial position:
Accounts payable 1,000,000 Problem 36-3 (AICPAAd apted)
Accrued expenses 500,000
Bonds payable 3,000,000
l{cena Company reported the following assets at the cum:nt ye<~r enJ
Fl-Mnce lease liability 4,000,000
Unearned revenue 300,000 Merchandise inventory .()()0,000
A.' vances from customers 1,200,000 I mms to employees 20,000"
t:stm.atcd warrarrt)' 1iabi I ity 200,000
Deferred ta:x liability . 400,000
What amount should be classified as monetary assets in preparin g. ·
ln ptepaling financial statements in a hypetinflati_on~ry ~c~omy, what nmstant peso financial statements?
total amounr should be classified as monetary hab1hties.
II 620;000
a. 4,500,0u0 b 600,000
b. 8,500,000
20,000
c. 9,700,000
d. 8,900,000
cl 0

Solution 36-2 Answer b Solution 36-3 Answer c

Accoun t:; payable 1,000,000 I ~111ns to employees

Accrued expense's 500.000
Bonds payable 3,000,000 I he merchandise inventory is a 11011QlOnctary asset bccaUS<.; I( does not
Fi•tam;e lease liability 4,000.000 1c:present a right to receive a fixed or dc~enninable amount or money
T~o"Jl :nondary liCJb ;~ll i cs· 8.500,000

588 589
Problem 36-4 (AICPAAdapter'' Problem 36-5 (IAA)
Dahlia Company was formed on January I, 2007. Selected balance
The use of'Comparative data may necessitate the restatement of a base
from histoncal cost statement of financial position on December 31,
p<.!nod. Rosa! Company decides to use 20 J I as a base period ( 100)
2013 were:
and desires to compare 2011, 2012 and 20 13 industry index numbers.
Land (purchased on January I, 2007) 2,400,000 The index numbers are 2010- 100,2011- 120,2012-360 and
Investment in long-tem1 bonds (purchased on 20 13 - 384. What would be the restated index number of 2013 if
January 1, 2010) 1,200,000 20 11 is used as base year?
Long term debt (issued on January l, 2007) 1,600,000 a. 320
The general price index was 120 on Januar.J 1, 2007, 150 on January b. 300
l 2010 and 300 on December 31,2013. c. 120
What amount should be reported in a hyperinflationary statement of d. 100
financial position?
Solution 36-5 ·Answer a
Land Investment Long-term debt
a. 2,400,000 1,200,000 1,600,000 Index number 2013 (384 I 120)
b. 6,000,000 2,400,000 4,000,000
c. 6,000,000 2,400,000 1,600,000 Problem 36-6 (IFRS)
d. 6,000,000 1,200,000 1,600,000
Vcranus Company operated in a hyperinflationary economy and
Solution 36-4 Answer d provided the following information on December 31, 2013:
Land (2,400YOOO x 3.00/120) 6,000,000
Property, plant and equipment -900,000
Investment in bonds - monetary 1,200,000
Long-term debt - monetary Inventory 2,700,000
1,600,000
<-'ash 350,000
Sh..1rc capital issued December 31, 2009 400,000
Only nonmonetary items are restated when preparing
Noncurrent liabilities 500,000
hyperinflationary financial s~tements.
Current liabilities 700,000
Retained earnings 2,350,000
Monetary items are not restated anymore because they are
automatically stated in terms of current pesos at the end ofthe reporting
The index number had moved on December 31 of each year:
period. 2009 - 100, 2010- 130, 2011 - 150, 2012- 240 and 2013 - 300.
The property, plant and equipment were put"chased on Decemb~r 31,
The formu Ia for restatement is to multiply the historical amount by 201 1. The noncurrent liabilities were loans raised on December 31,
a fraction whose numerator is the index number at the end of 2012. What is the balance of retained earnings on December 31, 2013
.eporting period and whose denominator is the index number-on after adjusting for hyperinflation?
acquisition date.
a. 2,350,000
h. 2,750,000
t:. 3,550,000
tl 2,625,000
590
C01
 Solution 36-6 Answer b Solution 3 6-7 Answer a
Historkal Fraction Restated Liabilities 2,500,000
Share capital ~ 8,500,000
Property, plant and equipment 900,000 3001150 1,800,000
3,000,000 Re tained earnings (balancing) 5,000,000
Inventory 2,700,000 300/270
Cash 350,000 350,000 Totalliabi1ities and equity 16,000,000
· Tolal assets 3,950,000 5, 150,000
PAS 29, paragraph 24, provides that any revaluation surplus
500,000 recognized previously is eliminated.
Noncurrent liabilities 500,000
Current liabilities 700,000 700,000
Problem36-8 (IAA)
Share capital 400,000 300/100 1,200,000
Retained earni ngs 2,350,000 227502000 Camia Company provided the following information about the
5,150,00~
inventory d~ng 20 13:
Total liabilities and equity 3,950,000 .
Inventory- January 1 1,575,000
The retained earnings balance on December 31, 2013 ofP2, 750,000 Purchases 5,400,000
is simply the balancing figure. The cash, noncurrent liabilities and Inventory - December 3 l 4,800,000
current liabilities are monetary. The inventory is restated using the The relevant index numbers are:
average index for 2013 as the denominator (300 + 240 equals 540
divided by 2 equals 270). January 1, 2013 110 Average index for 2013 240
December 31 , 2013 370 Average index for 2012 105
Problem 36-7 (IFRS) What is the co~t of goods $O ld in a hyperinflationary income
statement?
The following liabilities and equity relate to Maximus Company
operating in a hyperinflationary economy: a. 7,315,909
b. 3,353,125
Before restatement After restatement c. 6,475,000
<.1 . 2,250,000
Liabilities 2,000,000 2,500,000
Share capital 5,000,000 8,500,000
?
Solution·3 6-8 Answer c
Revaluation surplus 1,000,000
Retained earnings 1,500,000 ? Historical Fraction Restated
Total liabilities and equity 9,500,000 ' 16,000,000 Inventory- January 1 1,575,000 3701105 5,550,000
Purchases 5,400,000 370/240 82325,000
What amount should be reported as revaluation surplus and retained Goods available for sale 6,975,000 13,875,000
earnings, respectively after restatement? · Inventory -December 31 (4,800,000) 370/240 ( /24002000)
a. 0 and 5,000,000 Cost of goods sold 2,175,000 6,475,000
b. 5,000,000 and 0
c. 1,000,000 ~d 4,000,000 For practical purposes, the average index number is used as
d. 3,500,000 and 1,500,000 denominator for purchases and inyen.tory.

592 593
Problem 36-9 (IAA) \ul11tio11 36-9 Answer a

Smatlville Company reported the f?llowing historical income Historical Fraction Restated
statement for 20 13: I tl Ctl 52ooo2ooo 360/250 72200,000
l oil of goods sold:
Sales 5,000,000 Inventory- January 1 350,000 3601140 900,000
Inventory- January' 1 350,000 l'ttrchases 225002000 360/250 316002000
Purchases 2,500,000
Inventory - December 31 500,000 <rAS 2,850,000 4,500,000
Expenses 2,000,000 Inventory- December 31 ( 500,000) . 360/360 ( 500,000)
Depreciation 2,000,000 Cost of goods sold 2]5Q,OOO 4,000,000
( 11 n~s income
* Sales are earned and expenses are incurred evenly throughout 2,650,000 3,200,000
the year. Jixpcnscs (2,000,000) 360/250 (2,880,000)
I)"pr cciation (2,000,000) 360/125 (5,760,000)
* Inventory was acquired during the last week of each year.
I ural expenses (4,000,000) (8,640,000)
* Depreciable assets have a 5-year life and were acquired on
Ncr loss (1,350,000) (5,440,000)
January 1, 2010.
* The general index numbers were 125 on January 1, 2010, 140 l•or practical purposes, sales, purchases, inventory and expenses
on January 1, 2013,360 on December 31,2013 . uthcr than depreciation are restated using the average index number
[Ill denominator. ·
Ifthe entity is operating in a hyperinflationary economy, what amount
llowcvcr, in this case, the ending inventory was acquired during
should be reported as net loss?
Chl' last week of the year and therefore the fraction is 360/3 60.
a. 5,440,000
I Ius means that the ending inventory is already expressed in terms
b. I ,350,000
of current pesos.
c. 1,944,000
d. 4,824,000

594 595
Problem 36-10 (IAA) P.robJem 36-12 (AICPAAdapted)
. .
On January 1, 2010, Santan Company purchased equipment for Mariposa Company repoi:ted the following property, plant and
P3,000,000. The equipment was depreciated over 1.0 years using ••quipment on December 31, 2013:
straight line with no residual value. On October l, 2013 the equipment
was sold for P2,000,000. The general price index numbers are: Year acquired Percent depreciated Cost Index number
January l, 2010 100 October 1, 2013 280 2011 30 3,000,000 100
December 3 i, 2010 120 December 31, 2013 300 2012 20 2,000,000 125
What is the loss on sale of equipment in a hyperinflationa1y income 2013 10 1,000,000 300
statement?
a. 3.,250,000 Ih:preciation i.s calculated at 10% straight line. A full year's
b. 3,625,000 1 kprcciation is charged in the year of acquisition and no depreciation

c. 2,375,000 •n the year of disposal. There were no disposals in 201~.

d. 2,687,500
Solution 36-10 Answer a What amount of depreciation should be included in the 2013 income
Cost 3,000,000 ,t oll\.!tnCnt adjusted for hyperinflation?
Accumulated depreciation (3,000,000/1 0 x 3.75 years) (1,125,000)
I,t180,000
Carrying amount- October I, 2013 1,875,000 h I,800,000
l I,620,000
Sale price 2,000,000
d 600,000
Carrying amount as restated ( 1,8 75 ,00.0 x 280.'1 00) (5,250,000)
Loss on sale of equipment (3,250,000) 811/ution 36-12 Answer a

Problem 36-11 (AICPAAdapted) II II (300,000 X 300/1 00) 900,000

111 2 (200,000 X 300/125) 480,0QO
Sampaguita Company purchased land for P3 ,000,000 on December
31,2012 when the index number was 120. The land was held until Ill\ (100,000x300/300) 100,000
December 31, 2013 when it was sold for P4,000,000. The index l1 d,d depreciation for 2013 1,480,000
number on December 31 , 2013 'was 300. What amount should be
reported as gain or loss on sale of land in a hyperinflationary income
statement?
a. 1,000,000 gain
b. 1,000,000 loss
c. 3,500,000 gain
d. 3,500,000 loss
Solution 36-11 Answer d
Sale price 4,000,000
Cost of land as restated (3,000,000 x 300/120) (7 ,500,000)
Loss on sale of land (3,500,000)

596 597
Problem 36-13 (AICPAAd apted) 1'1 uhlt>m 36-14 (AJCP/\Ad aptt:d)
Acacia Company reported the following machinery and equipment l h1 Junuary 1, 2013, Gumamela Company had monetary assets of
on December~ 1, 2013: P«i,OOO,OOO and monetary liabilities ofP3,000,000. During 2013, the
Cost Accumulat ed t ill ity's monetary inflows and outflows were relatively constapt and
depreciatio n equal so that it ended the. year with the same net monetary assets of
Acquired in December 2010 4,000,000 1,600p00 1'2,000,000. The index number on January 1, 2013 was 125 and
Acquired in December 2012 1,000,000 200,000 lh(• Index number on December 31, 2013 was 280. What is the
flit m or loss on purchasing power during the year?
Index numbers at the end of each year are 120 for201 0, 125 for 2012
and 350 for 2013. What should be reported in a hyperinflationary n. 2,480,000 gain
statement of fmancial position prepared on December 31, 2013 as the b. 2,480,000 loss
carrying amount ofmachinery and equipment? . 3,720,000 gain
a. 8,960,000 d. 3,720,000 loss
b. 7,800,000
S1J/ution 36-14 Answer b ·
c. 9,240,000
d. 3,200,000 Monetary assets 5,000,000
Monetary liabilities 3,000,000
Solution 36-13 Answer c Net monetary assets- Decem'ber 31 at cost 2,000,000
Net monetary assets - December 3ll as restated
Acquired in December 2010 (2.400,000 x 350/120) (2,000,000 X 280/125)
7,000,00 '· • (4,480,000)
Acquired in Deccmber'2 012 ( 800,000 x 350/125) 2,240,00)
toss on purchasing power (2,480,000)
Total carrying amount as restated 9,240.000
Observe that the computation of gain or loss on purehasing power
ll'quires only the comparison of net monetary assets at the end
of the year at historical cost and the net monetary assets at
the end of year restated at current pesos.

If the entity has net monetary assets in period of rising prices,

there is a loss on purchasing power.

If the entity has net monetary assets in period of declining prices,

tlu.:re is a gain on purchasing power.

59 ~ 599
Problem 36-15 (AlCPAAdap ted) l 1t uhlt•m 36-16 (IAA)
Cherry Company reported that the financial position did not change llolr.-~1 <'ompanyprovided the follo\ving information for the current year:
during 2013. The general price index was 120 on January 1 and
300 on December 31,2013 . Munclnry assets:
lunuary l 250,000
Cash 250,000 l)e\.:CIIlbCr 3 1 700,000
Accounts receivable 500,000 Mouctnr y I iabilities:
Trading securities 400,000 Jnuuary 1 100,000
Inventory I >t·c~.~mber 31 300,000
2,500,000
Land 1111 rl'.tsc tn net monetary items as restated for
1,350,000
--- hypcri nflation 3,500,000
5,000,000 I l''l' l t·asc in net monetary items as restated for
hyperinflation 3,000,000
Accounts payable 1,500,000 t •Cnrr al price index :
Mortgage payable 500,000 r.111uary l 125
Share capital 2,500,000 I >cccmber 31 300
Retained earnings 500,000
Wll.tlls the gain or loss on purchasing power for the current vear?
5,000,000
·loO,OOO gain
What is the purchasing power gain or loss fo'r 20 13? It, ·1(>0,000 loss
a. 1,875,000 gain ) 50,000 gain
b. 1,875,000 loss d. )1)0,000 loss
c. 1,275,000 gain
d. 1,275,000 loss \'nlulivn 36-1 6 Answer b
Solution 36-15 Answer a 1\l•>nctary assets- January t 250,000
l\1onctary liabi lities - January 1 _100,000
Monetary assets:
Cash 250,000 Nl'l monetary assets- January 1, at cost 150,000
Accounts receivable 500,000 750,00u -===
Monetary liabilities: Nt•t monetary assets - January 1, as restated
Accounts payable 1,500,000 ( 150,000 X 300/125)
Mortgage payable 500,000 2,000,000 360,000
lnncase in net monetary ite ms as restated 3,500,000
Net monetary liability - December 31 1,250,000 I >lcrease in net monetary items as restated (3,000,000)
Net monetary liability- December~ 1 .as restated N~.;t monetary assets - December 31, as restated 860,000
(1 ,250,000 X 300/120) 3,125,000
Net monetary liability - December 31, at cost ( 1,250,000) Monetary assets - December 31 700,000
Gain on purchasing power 1,875,000 Monetary liabilities - December 31 -~~o,oou
Net monetary assets - December 31 a! cost '!C't'.OOO
If the entity has net monetary liability in period of rising prices,
there is a gain or.. purchasing power. · Nd monetary aJsets - December 31 as restated 18o0,000)
I uss on purchu:.ing power
If the entity has net monetary liability in period of declining ~9~)
prices, there is a loss on purchasing power.
60U 4'01
 -
Problem 36-17 (IAA)
Achilles Compan y provide d the following infonna tion for 2013: 37
Net monetary assets- January 1, 2013 880,000
Sales 3,900,000
Purchas es
~~~s
2,340,000 CUR REN T COS T ACC OUN TING
n~~
Income tax 5.85,000
Cash dividend paid on December 31, 2013 200,000
.. roblem3 7-1 {IAA)
The sales, purchas es, expense s and income tax accrued evenly S1mple Compan y purchased land on January 1; 2013 for P500,000
during the year. Index number s for 2013 are 110 on January 1 cash. On Decemb er 31, 2013, the land has a current replacem ent
and 280 on l)ecem ber 31. What is the gain or loss on purchas ing l:OSt ofP600 ,000. On Decemb er 31,2014 , the land has a current
power for 2013? tcplacem ent cost of P750,00 0. The entity sold the land for
I' I .000,000 cash on Decemb er 31, 2015. On this date, the current
a. 1,360,00 0 ~ 11.·placement cost of the land is P800,00 0.
b. 1,360,000 loss
I What is the unreali zed holding gain to be reported in 2013?
c. 200,000 gain
d. 200,000 ' loss a. 600,000
b. 500,000
c. 100,000
Solution 36-1 7 Answer b d 0
. Historic al Fraction Restate d 2. What is the unrealiz ed holding gain to be reported in 2014?
Net moneta_ry assets- 1/1 880,000 "280/110 2,240,000 a 250,000
Sales 3,900,000 280/195 5,600,000 b. 150,000
Purchas es (2,340,000) 280/195 (3,360,000) c. 100,000
Expenses ( 975,000) 280/195 (1 ,400,000) d. 0
Income tax ( 585,000) 280/195 ( 840,000)
Cash dividend ( 200,000) 280/280 ( 200,000) J, What is the realized holding gain to be reported in '2015?
Net monetary assets - 12/31 680,000 2,040,000 a. 300,000
b 250,000
Net monetary assets - Decemb er 31, at cost 680,000 c. 50,000
Net monetary assets- Decemb er 31, as restated (2,040,000) d. 0
Loss on purchasing power (1,360,000) l. What is the gain on sale· of land _to be reported in 2015?
The cash dividen d was paid on Decemb er 31, 2013 and therefor e ll.500,000
the fraction is 280/280 . h 250,000
c. 200,000
d. 150,000 .

602
603
Solution 37-1
Jlroblern37-2 (IAA)
Question I Answer c
EHsy Company acquired an equipment on January I, 2013 for
· Curre.nt c~st - December 3 1, 20 13 600,000 PS,OOO,OOO. Depreciation is computed using the straight line method.
Historical cost 500,000 The estimated useful life of the equipment is 5 years with no residual
Unrealized holding gain in 2013 _!QQ,.QQQ value.

For nondepreciable asset' or land, unrealized holding gain or loss A specific price index applicable to the equipment was I 50 on
is the difference between the ~urrent cost and historical cost of the January 1, 2013 and 225 on December 31, 2013 .
asset unsold at the end of the year. 1
J. What is the amount of depreciation that should be reported in
Qut!stion 2 {f.nswer b the current cost income statement for 2013?
Curre nt cost - December 3 1, 2014 750,000 a. 1,500,000
q istorical cost 500,000 b. 1,250,000
Cumulative unrealized hold ing gain in 2014 250,000 c. 1,000,000
Les:. : Unreali zed holding gain recognized in 2013 100,000 d. 2,500,000
Unrea lized hold ing gain to be reported in 2014 150,000 I. What is the realized holding gain on the equiptpent to be
Question 3 Answer c reported in 20 13? ·

Ct:rrent cost - December 31, 2015 800,000 a. 500,000

Historical cost 500,000 b. 250,000
c. 300,000
Realized holding :ain in 20 15 300,000 d. 0
Less: Unrealized holding gain reported in 20 13 and 2014 250,000
Realized holding gain to be reported in 201 5 50,000 3. What is the unrealized holding gain on the equipment to be
reported in 20 13?
For nondepreciable asset, realized holding gain or loss is the
difference between current cost at the time of sale and historical a. 1,250,000
cost of the asset sold. b. 2,500,000
c. 2,000,000
Question 4 Answer c d. 1,500,000
Sale price 1,000,000
Less: Current cost-- December 31, :o 15 ~00,000

Gain on sale of land 200,000

. 604
oo5
Solution 37-2 Problem 37-3 (AICPAAdapted)
Question 1 Answer b Kerr Compa~y ~urchased a machine forP1,150,000 on January I,
Current cost (5,000,000 x 22511 50) 7,500,000 2013, the entity s first d~y of operation. At the end of the year, the
Average current cost (5,000,000 + 7,500,000 I 2) 6,250,000 current cost of the machme was PI ,250,000. The machine has no
residual value, has a five-year life, and is depreciated by the straight line
Depreciation on average current cost (6,250,000 I 5) 1,2)0,000 method.

Under current cost accounting, depreciation is based on average l. What is the amount of depreciatio .~ that should be reported in the
current cost. current cos.t income statement for 2013?
Question 2 Answer b a. f40,000
1,250,000 . b. 230,000
Depreciation on average current cost (6,250,000 / 5)
Depreciation on historical cost (5 ,000,000 /5) 1,000,000 c. 2~0,000
' holding gain
d. 250,000
Realized 250,000

For depreciable asset, realized holding gain or loss is the difference 2. What is the realized holding gain on the equipment to be reported
between depreciation based on average current cost and depreciation in the current cost income statement for 2013?
based on historical cost. a. 30,000
b. 20,000
Question 3 Answer c c. 10,000
Current cost 7,500,000 d. 0
Accumulated depreciation (7,500,000 /5) 1,500,000
3 What is the unrealized holding gain on the equipment to be
Net current cost 6,000,000
reported in the current cost income statement for 20 13?
Historical cost 5,000,000 a. 90,000
Accumulated depreciation (5,000,000 /5) 1,000,000 b. IO,OOO
Carrying amount 4,000,000 c. 80,000
d. 0
Net current cost 6,000,000
Carrying amount 4,000,000

Unrealized holding gain 2,000,000

For depreciable asset, unrealized holding g?.in or loss is the

difference between net current cost and carrying amount of the asset.

tl06 607
Solution 3 7·3 l'1 oblem 37-4 (AICPAAdapted)

Question 1 An.~wer c Wt ·aver Company reported the following property, plant and equipment
1111Dccember31, 2013:
Historical cost- January 1 1,150,000
Current cost - December 31 1,250,000 Year Percent Historical Current
Total 2,400,000 Acquired depreciated cost cost
2011 30 . 1,000,000 1,400,000
Average current cost (2,400,000 I 2) 1,200,000 2012 20 300,000 380,000
2013 10 400,000 440,000
Depreciation on average current cost (1,200;000 I 5) 240,000.
'l"hc entity calculated depreciation at 10% straight .line. A full year's
QuestiotJ 2 AnsWer c 'lt·preciation was charged in the year ofacquisition and no depreciation
DepreCiation on average current cost 240,000 111 the year of disposal. There were no disposals of property.
Depreciation on historical cost (1,150,000 IS) 230,COO
Realized holding gain 10,000 What total amount should be reported as net current cost of the
111 opcrty, plant and equipment on December 31, LO 13?
Question 3 Answer c
II , 1,160,000
CUrrent cost 1,250,000
Accumulated depreciation ( 1,250,000 I 5)
h. 1,300,000
_250,000
( ' 1,680,000
Net current cost 1,000,000 d, 1,820,000

Historical cost 1,150,000

Accumulated depreciation 230,000 Solution 37-4 Answer c
Carrying amount 920,000 I() ll (1,400,000x 70%} 980,000
012
1 ( 380,000 X 80%) 304,000
Net current cost 1,000,000 20 13 ( 440,000 X 90%) 396,000
Carrying amount 920,000
1,680,000
Unrealized holding gain 80,000

608 609
Problem 37-5 {AICPAAdapted) Solution 3 7-5

Roundtree Company provlded the following information for 2013: Question 1 Answer a

Uai1s Historical ~ost Inventory- December 31 (15,000 x. 72) 1,080,000

Inventory -January I 10,()00 . 530,000

Question. 2 An.swer b
Purchases 45,000 21790,000
]nventory, December 31 at current cost 1,080,000
Goods available for sale 55,000 3~20~000
Inventory, December 3 I at hjstorical cost 945,000
Inventory- Decembe~ 31 (15,000) ' 945,000)
Unrealized holding gain 135,000
Cost of goods sold 40,000 ·2,375,000

The current cost per unit of inventory was P58 on JanuM)' 1·. 2.0 l 3 and For inventory; the unreaUzed holding gain or loss is the difference
P72 on December 31, 2013. between ending inventory at current cost and ending inventory at
historical cost
1. In the statement offmancial position restated10 current cost, what
amount should be repor:ted as inventory on December 3 1, 20 13? Question 3 Answer c
a. ··1,080,000 Cost of goods sold at average.curren1 cos1 (40,000 x 65) 2,600,000
b. 2',~80,000
c. 975.000 Average curr~nt cost (58 + 72 = 130 I 2) 65
d. 870~000

2. Whatis.the~reali:r.edholdblg gainonl>ecember31,2013 ?· Question 4 Answer a

a; 210,000 Cost of goods sold at average current cost (40,000 x 65) 2,600,000
b: 135,000 Cost of goods sold at historical cost 2,375,000
c. 560,000 Realized holdillg gain 225,000
d.. .. 0
3. In the cuxrtirtcost income statement foc20l3, whai amount should For inventory; the realized holding gain or loss is the difference
be t:_eported as ~st ofgoods sold? · betweencostofgoods sold at average current cost and cost of goods
a. 3,575,000 sold at historical cost.
b. 2,880,000
c. 2,600,000
d. 2,375,000
4. What is theruUzedholdloggaln for 2013?
a. 225,000
b. 135,000
c. /3so,ooo·
d. 505,000

610 611
 I'• n hlt•m 37-7 (AICPAAdapted)
Problem 37-6 (IFRS)
ltu Company provided the following infom1ati on for 2013:
Rice Company accounted for inventory on FIFO basis. There were
8,000 units in inventory on January l, 2013. Historical cost Units

Units lnvl'nlory, January I 1,060,000 20,000

Historical •
l' tllllw ses during the year _1580,000 90,000
cost purchased Units sold
ltiHHi s avai lable fo r sale 6,640,000 110,000
First quarter 410,000 7,000 7,500
111 vc utory, December 31 (2,520,000) ( 40,000)
Second quarter 550,000 8,500 7,300
Third queatcr 425,000 6,500 8,200 1 n o.; I of goods so ld 4, 120,000 70,000
Fourth quarter 630,000 9,000 7,000
llw current cost per unit of inventory was P58 on January t 2013 and
2,015,000 31,000 30!000 1' / J on December 31,2013. . '
--
The cun·entcostperunitofinventorywas P57 0nJanuary l, 2013 and In the income statement for 20 13 1estated to curTent cost, what
P71 onDecember31 , 2013. amount should be reported as cost of goods sold?
a 5,040,000
1. In the statement of financial position restated to current cost, what h. 4,550,000
amount should be reported as December 31 , 2013 inventory? l:. 4,4 10,000

a. 576,000 <L 4,060,000

b. 585,000 In the income statement for 2013 restated tb current cost what
c. 630,000 amount should be reported as realized holding gain? '
d. 639,000
a. 980,000
2. In the income statement restated to current cost, what amount should b. 430,000
be reported as cost of goods sold for 20 13? l' 920,000
d. 560,000
a. 1,920,000
b. 1,944,000 Under current cost accounting, what amount should be reported as
c. 2,100,000 mvcntory on December 31, 2013?
d. 2,130,000 a. 2,600,000
b. 2,880,000
)ofution 37-6 c. 2,52.0,000
Question 1 Answer d d. 2,320,000

nventory - December 3 1 at curre nt cost (9,000 x 7 1) 639,000 What amount should be reported as unrealized hoJdino gain 011
December 31, 2013? e
Question 1 Answer a a. 560,000
t ost of good sold at average· current cost (30.000 x 64) I ,920,000 b. 360,000
c. 180,000
Average-. unit cost (57+ 7 1 = l 28 I 2) (,4 d. 80,000

6 12 613
Solution 3 7-7 l'ruhlcm'37-8 (IAA)

Question 1 Answer b 1 111January I, 2013, Autumn Company purchased 50,000 units at

I' I(10 per unit. During the year, the entity sold 40,000 units at P 180 per
Current cost per unit- January 1 58 111111 The entity paid P700,000 for operating expenses. The current
Current cost per unit - December 3 J 72 lt.:J>Iaccmentcost ofthe inventory on December3 I, 2013 is P150per
130 Ill HI.
Total
=
What is the realized holding gain on inventory for 2013?
Average current cost (130 I 2) 65
a 2,000,000
Cost of goods sold at average current cost (70,000 x 65) 4,550,000 b. 1,000,000
c. 1,500,000
Question 2 Answer b d. 0
Cost of goods sold at average curent cost 4,550,000
Cost of goods sold at historical cost 4,120,000 2 What is the unrealized holding gain on inventory for 2013?
Realized holding gain 430,000 a. 600,000
b. 250,000
Question 3 Answer b c. 500,000
d. 0
Inventory, December 31 at current cost
(40,000 X 72)
1 What is the net income under current cost accounting for 2013?
Question 4 Answer b a. 3,200,000
Inventory, December 31 at current cost 2,880,000 b. 2,500,000
Inventory, December 31 at historical cosf 2,520,000 c.. 3,700,000
360,000 d. 3,000,000
Unrealized holding gain

What is the net income under historical cost accounting for 2013?
a. 2,500,000
b. -3,200,000
c. 2,200,000
d. 4,000,000

614 61'S
Solution 37-8 Problem 37-9 (AlCPAAdapted)

Question I Answer b In the financial statements, Mikhail Company disclosed supplemental

in formation on the effects ofchanging prices. The entity computed the
Cost of sales at average current co_s t (40,000 x 125) 5,000,000 increase in current cost of inventory at P15,000 in terms of nominal
Historical cost (40,000 x 100) 4,000,000 peso and P 12,000 in terms of constant peso. What amount should be
Realized holding gain 1,000,000 disclosed as the inflation component ofthe increase in current cost of
inventory?
Average current cost (100 + 150 = 250 /2) 125
a. 3,000
Quest_ion. 2 Answer c b. 12,000
Inventory - 12/3 1 at current cost- (10,000 x 150)
c. 15,000
1,500,000
Inventory- 12/3 1 at historical cost (10,000 x 100~ 1,000,000
d. 27,000
l i nrealized holding gain 500,000 Solution 37-9 Answer a

Question 3 Answer d Increase in current cost in tenns of nominal peso 15,000

Increase in current cost in terms of constant peso (12,000)
Sales (40,000 x 180) 7,200,000
Inflation component 3,000
Cost of sales (40,000 x 125) 5,000,000
Gross income 2,200,000 Problem 37-10 (AICPAAdapted)
Other income:
Realized holding gain ( 000,000 On December 31, 2013, Michelle Company owned two assets as
Unrealized holding gain 500,000 1,500,000 follows:
Total income 3,700,000 Eq~ipment Inventory
Operating expenses 700,000 Current cost 100,000 . 80,000
Recoverable amount 95,000 90,000
Net income 3,000,000
·n1e entity voluntarily disclosed supplemental information about current
Question 4 Answer a cost on December 31, 20 13. In such a disclosure, what amount should
Sales 7,200,000 be reported as total assets?
Cost of sales:
a. 175,000
Purchases 5,000,000 b. 180,000
Inventory, December 31 ( 1,000,000) 4,000,000 c. 185,000
Gross income 3,200,000 d. 190,000
Operating expenses 700,000
Solution 3 7-10 Answer a
Net mcomc
.
2.500,000
( 'urrent CQSt for inventory and equipment is measured at the lower of
current cost and recoverable amount.

616 617
 Problem 37-11 (AICPAAdapted)

On January 1, 2013, Zoe Company paid P2,000,000 for land. On

38
December 31,2013, the current cost of the land was P2,200,000.ln
January2014, the land was sold forP2,250,000. · _ .
SMEs - Part l
· 1. Under current cost accounting, what is the increase in shareholders'
equity in 2013?
Problem 38-1 (IFRS)
a. 200,000
b. 250,000 SME provided the following data on December 3 I, 2013:
c. 50,000 Cash 26,000
d. 0 Accounts receivable 530,000
Pre.; payments 60,000
Inventories 60,000
2. Under current cost accounting, what is the increase in shareholders' Investment in associate 110,000
equity in 2014? Property, plant and equipment 3,250,000
Accumulated depreciation and impairment .. 700,000
Software- net of amortization and impairment 10,000
a. 250,000 I >cferred tax asset · 4,000
b. 200,000 Bank overdraft 80,000
c. 50,000 B,mk loan, payable in 2016 and prepayable without penalty 50,000
d. 0 'I 1ade payables 430,000
Interest payable 2,000
<'urrent tax liability 270,000
Solution 37-11 Provision for warranty 4,000
J1mployee benefit obligation (.current portion, P4,000) 10,000
Question 1 Answer a I· inance lease liability (current portion, P20,000) 44,000
Share capital 30,000
Retained earnings 2,430,000
Current cost - December 31, 20 13 2,200,000
Historical cost 2,000,000 I . What is the total amount ofcurrent assets?
Unrealized holding gain in 2013 200,000 a. 676,000
b. 616,000
c. 786,000
Question 2 Answer c
d. 726,000
Sale price . 2,250,000 2. What is the total amount of current liabilities?
Current cost - December 3 1, 2013 2,200,000
a 810,000 ·
Ga in on sale in 2014 50,000 b. 860,000
(.' 786,;. ;0
d. 806,000

618 619
Solution. 38-1

Question 1 Answer a Problem 38-2 (IFRS)

Cash 26,000 SME provided the following data for 20 13:

.Accounts receivable 530,000
Prepayments 60,000 Sales 6,700,000
Inventories 60,000 Royalty revenue 120,000
·Total current assets 676,000 Cost of goods sold 5,100,000
Dividend received from an associate - cost model 25,000
Question 2 Answer a Gain on disposal of property 60,000
Distribution costs 175,0CO
Admirustrative expenses
Bank overdraft 80,000
430,000 (including amortization on goodwill ofP2,000) 810,000
Trade payables.
2,000 Research and development cost (5 years) 70,000
Interest payabre
Foreign exchange loss Qn trade payablcs 30,000
Current tax liability 270,000
Interest on bank loan and overdraft 20,000
Provision for warranty 4,000
Interest on finance lease 5,9()0
Employee benefit obligation 4,000
Current tax expense 270,000_
Finance lease liability 20,000
Deferred tax benefit 10,000
Total current liabilities 810,000 Retained earnings- January 1 2,100,000
Dividends 150,000
PFRS for SMEs and full PFRS have the same definition of current
assets and current liabilities. 1. What is the profit for year ended December 31, 20 13?

a. 435,000
b. 410,000
c. 437,000
d. 695,000

2. What is the retained €amings balance on December 31, 2013?

a. 2,535,000
b. 2,385,000
c. 2,387,000
d. 2,441,000

620

621
Solution 38-2 Problem 38-3 (IFRS)

Question 1 Answer a SME provided the following information in relation to the preparation
of a statement of cash flows for 2013: ·
Sales 6,700,000 Profit for the year 380,000
Cost of goods sold (5,100,000)
Noncash ~nance costs (finance costs paid, P25,000) 1,000
Gross profit 1,600,000 Noncas? l!lcome tax expense (income taxes paid, Pl90,000) 79,000
Other income: Depreciation of property, plant and equipment 270,000
Royalty revenue 120,000 Impairment loss 30,000
Dividend received from an associate 25,000 Amortization of intangibles 2,000
Gain on disposal of property 60,000 205,000 Gain on sale of equipment 60,000
Increase in trade and other receivables 10,000
Total income 1,805,000 Decrease in inventories · 9,000
Distribution costs 175,000
Administrative expenses Increase in trade payables (including unrealized foreign
810,000
Research and development expense exchange loss of P 1,000 charged to other expenses) 11,000
70,000
Finance cost (30,000 + 20,000 + 5,000) Increase in current and long term benefit payable 3,000
55,000 1,110,000
Proceeds from sale of equipment 100,000
Income before tax 695,000 Purchase of equipment 485,000
Tax expense: Payment of finance lease liability 19,000
Current tax expense 270,000 Repayment of borrowings 100,000
Deferred tax benefit ( 10,000) 260,000 Dividends paid 150,000
Profit for the year 435,000
1. What is the net cash provided by operating activities?
Under the fair value and cost model, dividend received from associate a. 715,000
is recognized as income. b. 635,000
c. 714,000
Under the PFRS for SMEs, it is appropriate to amortize goodwill. d. 565,000

Research and development cost should not be amortized but recognized 2. What is the net cash used in investing activities?
immediately as expense when incurred. a. 485,000
b. 38.5,000 ..
Question 2 Ans~-ver b ·c. s8s,ooo
d. 100,000
Retained earnings- January 1 2,100,000
. Profit for the year 435,000 3. What is the net cash used in financing activities?
Total 2,535,000
Dividends a. 269,000
( 150,000)
b. 119,000
~.etained ea~ings - December 31 2,385,000 c. 250,000
d. 169,000
622 623
 SoLution 38-3 l"roblem 38-4 (lFRS)

Question I Answer a "'ME prepared the following statement offmancial position on December
I I, 20 13:
Profit for the year
380,000
Noncash finance costs ( ·.,sh 200
1,000
Noncash ~ncome tax expense < '.tsh equivalent 30
79,000
Depreciation Noncontrolling interest's share of profit for the year 120
270,000
Impairment loss I>tvidends declared by SME 100
30,000
Amortization Accounts receivable 1,900
2,000
Gain on sale of equipment Inventory, at cost 1,000
( 60,000)
Increase in trade and other receivables Inventory, at fair value less costs to comp lete and sell 180
( 10,000)
Decrease in inventories Investment property, at fair value 2,500
9,000
Increase in trade payables Property, plant and equipment, at cost 4,970
11,000
Increase in current and long-term benefit payable
_3,000 Total assets 11,000
Net cash provided by opere~:ting activities
715,000
Long-term debt (P500 due on January 1 each year) 2,300
Question 2 Answer b Interest accrued on long-term debt
(due in less than 12 months) 230
Proceeds from.sale of equipment Share capital 1,500
100,000
Purc~:ise of equipment Retained earnings at the beginning of year 1,910
(485,000) Profit for the year 1,000
Net cash us~d in investing activities
(385,000) Noncontrolling interest . 730
Accumulated depreciation on property, plant and eqmpment 1,450
Question 3 .Answerg Allowance for doubtful accounts 200
Trade payables 250
Payment of finance lease liability Accrued payables 200
( 19,000)
Repayment of borrowings Warranty provision (expires 12 months after the date of sale) 400
(100,000)
Dividend paid Envirorunental restoration provision
(150,000)
Net cas~1 used in financing activities (restoration is expected to take place in 2022) 280
(269,000) Provision for vacation leave (unused leave
expires 12 months after the year in which it accrues) 450
PFRS for SMEs and full PFRS have the same basic principles in the Dividends payable
preparation of a statement of cash flows. 100
Total claims against assets 11,000
Cash flows are classified as operating, investing and financing.

624 625
· 1. What is the total amount of current assets? Solution 38-4

a. 5,610 Ouestion I Answer c

b. 3,310
c. 3,110 Cash and cash equivalents 230
Accounts receivable 1,900
d. 3,210 .
Allowance for doubtful accounts ( 200)
Inventory (1 ,000 + 180) 1,180
2. What is the total amount of current liabilities?
Total current assets 3,110
a. 2,410
Question 2 Answer c
b. 1,400
c. 2,130 Trade payables · 250
d. 1,900 Accrued payables 200
Warranty provision 400
Provision for vacation leave 450
3. What is the balance of retained earnings on Decem~r 31, 2013? Dividends payable 100
Current portion oflong-term debt 500
a. 2,810 Interest on long-term debt 230
b. 2,910 Total current liabilities 2,130
c. 2,690
d. 2,810 Question 3 Answer c

4. \Vhat is the equity attributable to the parent? Retained earnings- January 1 1,910
Profit for the year 1,000
Noncontrolling interest's share of profit for the year ( 120)
a. 4,920 Dividends declared ·
b. 4,310 ( 100)
c. 4,190 RetaineJ earning<:> - December 31 2,690
d. 1,500
Question 4 Answer c
5. What is the total shareholders' equity on December 31, 2013? Share capital 1,500
Retained earnings 2,690
a. 4,820 Equity attributable to parent 4,190
b. 5,040
c. 4,920 Question 5 Answer c
d. 2,230
Equity attributable to parent 4,190
Noncontrolling interest 730
Total shareholders' equity 4,920
.....___

626 627
Problem 38-5 (IFRS) What is the total amount of current assets?
a. 25,300
SME provided the following information on December 31, 20 13: b. 18,800
.c. 18,300
Property, plant and equipment: d. 19.,120.
Vaeantland 3,200
Land and buildings 9,600 2. What is the total amount ofnoncurrent assets?
Plant 4,500 a. 53,780
Equipment 8,300 b. 53,280
Investment property -carried at fair value 6,500 c. 46,780
Intangible assets 15,200 d. 46,460
Investments in associates - carried at cost 5,660
Deferred tax assets 320 What is the totql amount ofcurrent liabilities?
Inventories 15,800 a. 16,680
Trade and Gther receivables 1,200 b. 17,940
Prepayments 500 c. 18,005
Cash and cash equivalents 1,300 d. 18,485
Total assets _72,080
·1. What is the total amount ofnoncurrent liabilities?
a. 14,925
. Share capital 22,500
b. 14,990
Treasury shares ( 340)
c. 16,250
Retained earnings 10,360
d. 16,840
Other reserves 4,250
Noncontrolling interest 2,380
5. What is the equity attributable to the parent?
Interest-bearing loans and borrowings- noncurrent 9,545
a. 35,520
Interest-bearing loans and borrowings - current portion 5,000
b. 36,770
Government grants- noncurrent 925
c. 34,900
Government grants- cutTent portion 1,260
d. 39,150
Deferred revenue - noncurrent 65
Deferred revenue- current portion 590
2,130
\'olution 38-5
Other long-tem1liabilities
Long-term provisions 1,780
9,630 Jucstion I Answer b
Trade and other payables
Income tax payable 225
1,235 l11vcntories 15,800
Short-term provisions
54-5 lr adc and other receivables 1,200
Deferred tax liability
l'rl·payments 500
Total equity and liabilities 72,080 I 'a~h and cash equivalents . 1,300
li1tal current assets 18,800

628 629
Question 2 Answer b Problem 38-6 (IFRS)

Property, plant and equipment . 2-5,600 SME provided the following analysis of income and expenses for the
Investment property- carried at fair value 6,500 year ended December 31, 2013:
Intangible assets 15,200
Investments in associates 5,660 Revenue 5,500,000
Deferred tax assets 320 Other income 100,000
Total noncurrent asset:, 53,280 Cost of sales:
Materials 1,100,000
Question 3 Answer b Change in inventory - decrease 130,000
Wages, sa~ar1es and benefits 900,000
Depreciation 300,6oo
Trade and other payables 9,630
Other expenses 120,000
Interest-bearing loans and borrowings 5,000
Distribution costs:
Government grants 1,260
Advertising 150,000
Deferred revenue 590
Wages, salaries and benefits 110,000
Income tax payable 225
Administrative expenses:
Short-term provisions 1,235
Wages, salaries and benefits 1,250,000
Total current liabilities 17,940 Depreciation 220,000
Other expenses 100,000
Question 4 14.nswer b Other expenses 160,000
Finance cost . 60,000
Interest-bearing loans and borrowing 9,545 Income tax expense · 300,000
Government grants 925 Exchange differences on translating foreign
Deferred revenue 65 operation, net of tax- credit 10,000
Other long-term liabilities 2,130 Decrease in the fair value of hedging
Deferred tax liability 545 instruments, net of tax -loss 6,000
Long-term provisions 1,780
I. What is the profit for the year?
Total noncurrent liabilities 14,990
a. 1,000,000
Question 5 Answer b b. 1,260,000
c. 700,000
Share cap.ital d. 882,000
22,50Q
Treasury shares ( 340)
Retained earnings
2. What is the total comprehensive income for the year?
10,360
"other reserves ~ a. 684,000
b. 716,000
Total equity attributable to parent 36,770
c. 710,000
d. 704,000
630 631 ...
Solution 38-6 Problem 38-7 (IFRS)
'

Question 1 Answer c SME provided the following infom1ation about the financial perfom1ance
and changes in equity for the year ended December 31, 20 13:
Revenue 5,500,000
Other income 100,000 Revenue 6,000,000
iti
Change inventory ( 130,000) Other income 100,000
· Raw materials and consumables used (1,100,000) Net decrease in inventories of_ finished goods
Wages, salaries and benefits . and work in progress 600,000
(900,000 + 110,000 + 1,250,000) (2,260,000) Raw materials ~nd consumables used 3,100,000
Depreciation (300,000 + 220,000) ( 520,000) Employee benefit expense 800,000
Advertising ( 150,000) Depreciation and amortization expense 400,000
Other expenses (120,000 + 100,000 + 160,000) ( 380,000) ' expenses
Other 80,000
:Fmance costs ( 60,000) Finance cost 120,000
Income tax expense 300,000
Profit befon~ tax 1,000,000
Income tax expense ( 300,000)
..700,00Q SME declared and paid dividends ofP 150,000 in 2013 and P300,000
Profit for the year in 20 12. in the financial statements for 2012, SME reported retained
earnings ofP I, 100,000 on January 1, 2012 and profit for 2012 of
Question 2 Answer d
P600,000. In 2013, afterthe20 12 financial statements were approved
Profit for the year 700,01 I() for issue, SME discovered an error in the Deeember 31, 20 II fmanc1al
Other comprehensive income: statements. The effect of the error was a P650,000 overstatement of
·Exchange differences on translating foreign profit for the year ended December 31, 20 ll·due to underdeprcci;.t[on.
operation, net of tax- credit .1o,ooq
Decrease in the fair value of hedging instrument, 1. What is the net income for 20 13?
net of tax ( 6,000)
- a 1,000,000
Total comprehensive income for the· year 704,000 b. 900,000
c. 700,000
d. 630,000

2. What is the balance of retained eamings on December 31,20 13?

a. 1,950,000
b. 2,600,000
c. 1,400,000
., ~)0
d. 1,300. .

632 633
Solution 38-7 Problem 38-8 (IFRS)

Question I Answer c An SME sold goods with list price of.Pl,OOO,OOO to a customer
on
nonnal credit terms of30 days interest-free credit. Ten days after
the
Revenue sale, the customer paid the entity P690,000 in full as fmal settlement
6,000,000 of
Other income a debt that arose from the sale ofthe goods . The amount received
100,000 from
the customer included P50,000 value added tax collected by the
Total income 6,100,000 entity
on behalfot me national government. The settlement amount is
Decre ase in inventories 600,000 net of
Raw matei ials and consumables P200,000 trade discount, PlOO,OOO volume rebate and PlO,O
3,100,000 OO
Employee benefit expense prompt settlement discount. At what amount should the entity meas
800,000 ure
Depreciation and amortization 400,000 I
revenue from the sale ofthe goods?
Othe;.r expen ses 80,000
Finan ce costs 120,000 5,100,000 a. 1,000 ,000
Income befor e tax
b. 640,000
1,000,000 c. 700,000
Income tax expense 300,000
d. 690,000
Net income 700,000
Solution 38-8 Answer b
Question 2 Answer d
List price
Retain ed eamin gs - January 1, 2012 1,000,000
1,100,000 Trade discount
Net ~ncomc for 2012 ( 200,000)
600,000 Volume rebate
Dividend declared and paid in 2012 ( 100,000)
( 300,000) Prompt settlement discou nt
( 10,000)
R'-tain l!d earnings - D(!cember 31, 2012 1,400,00Q Remittance
690,000
Value added tax
Retain ed earnings - Janua ry 1, 20 13 ( 50,000)
1,400,000
Prior period error in 2011 due to underdeprcciation Revenue from sales
( 650,000) 640,000
~et incom e for 2013 700,000
Dividend declared and paid in 2013 ( 150,000) As in full PFRS, an SME shall measure revenue at the fair value
of
consideration received or receivable.
Retai ned earnings - De::cmbcr 31, 2013 1,300,000

As ir. full PFRS, an SME can p:-esent the income state1~1ent by The fair value ofthe consideration shall take into account any
using trade
d•scount, prompt settlement discount and volume rebate.
either the "natural'' presentation or "functional" presentation.

..

63-4 635
-- -
Problem 38-11 (IFRS)
Pr ob lem 38-9 (IF RS )
ppl~~ards thee ordinary
ced at P500.per uni~. The sure. acquired goods for sale in the
An SME buys goods prion ermor ' On January l, 2013, an SME da ble
~ d' un t ord ers of 10 0 umts or mo
a en da r year, us ine ss for P 1,0 00 ,00 0, including P50,000 ref un
20 in cal cours e ofb
.buyer a b o th o rch ased 1 000 units or moreCO f10 %o fthe r usually sold the goods on
30 days'
b fu' rthervo)ume . dis W lto . . ed tpurchase taxes. The supplie hase.
when the . uy
the supph~r award
er as pu
s the uyer a
all d ree a special promotion, the pLJrc
lum e discount ap ph es to 1ln tts aeq mr
ase ~terest-f cre dit. Ho we ve r, as
in full on
1·. . Th ad dition al vo 20 1: the SM E pu rch vided for payment to be made
tst pnce ,. e O1n~ 4' 20 i 3' the·SM
2 1 E purchased· . agreement for these goods pro
during. tlie calendar ye~.
of
31 20 13 1'50 · r 31 , 20 13 . In acq uir ing the goods, transport charges
. er Decembe What is
On ~e~~~te{s th~ cost ~fthe propriate discount rate is· 10%.
800 umts from the sup ph er. On
0 un its fro m 'the ~up phe r. P2 0,000 we re inc urr ed . An ap
a further uir20 her were unso · the cost ofpurchase?
units acq ed from the supp2013?
inveutory on December 31 ;
a. 1,020,000
a. 52,500 863,550
b. 75,000 b.
c. 67,500 c. 970,000
a. 60,000 d. 883,550

Solution 38-9 An sw er a 500 So lution 38-JJ An sw er d

Pu rch ase price (20 %x 50 0)
(100)
Volume discount (10 % X 50 0)
(2Q) Purchase pri ce 1,000,000
nt
Addition al vo lum e discou 350 ' Refundable pu rch ase taxes ( 50,000)
Ne t pu rch ase pric~ Net purchase pri ce 950,000
52,500 10% for on e per iod
Mu ltip ly by PV of of l at .909
Co st ofi nv en tor y (150 x
35 0)
Cash pri ce 863,550
Pr ob lem 38-10 (..FRS) Freight 20,000

~~~~ ~u h/ :~ ?t .~ ~m t~ :f .r ~~ ~! ir ~: :~ :~ :; :: ~ Co st of purchase 883,550

~! t e
mventory m e samco
· ' ·
st of purchase for the mven o
ry? t
for SM Es and full PFRS are the same in the matter ofdet
ermining
is l 0%. What is the PF RS
of inventory.
the costs ofpurchase
a. 2,000,000
1

b. 1,818,182 rt duties,
rise the purchase price, im po
c. I ,652,800 The costs of purchase comp ort and
rab le or no nre fun dable purchase taxes and transp
d. 1,800,000 no nre co ve
to the acquisition.
other costs directly attributable
Solution 38-10 An sw er c 2,000,000 items are deduct~d.
Pu rch ase pri ce 10% for tw o pe
· ds
no
.8264 ·,1 aJe discount, rcb Jte s and oth er s;milar
Multiply by py · of 1 at 1,652,800
G· t of pu rch ase

63 6 63 7
Problem 38-12 (IFRS) Solution 38-12

An SME prepared the following postcJosing trial balance on December Question 1 Answer b
31,2013.
Trade receivables ·600,000.
Property, plant nnd equipment 2,300,000 Cash on hand 1,150,000
Intangible assets 850,000 Investment in nonputtable ordinary shares 550,000
Investment in associate 1,100,000
Deferred tax asset Investment in noncovertible nonputtable preference shares 500,000
40,000 Investment in term bonds 400,000
Inventory 500,000
Trade receivables 600,000 Demand deposit in bank 200,000
Cashon hand 1,150,000 Loan receivable from employee 10,000
Investment in nonputtable ordinary shares -listed 550,000 Loan receivable from associate - on demand 300,000
Investment in nonconvertible and nonputtable
Total basic financial assets 3,710,000
preference shares - unlisted 500,000
Investment in term bonds 400,000
Demand deposit in bank 200,000 Question 2 Answer c
Loan receivable from employee- ftxcd term 10,000
Loan receivable from associate - on demand 300,000 Bank loans .1,100,000
Bank loans 1,100,000 Trade payables 550,000
Other Iong-temt employee benefits· 250,000. Rent payable 10,000
Obligations under fmancc leases 400,000 Interest payable 20,000
Trade payables 550,000' Bank overdraft 40,000
Warranty obligation 20,000
Rent payable 10,000 Total basic financial liabilities 1,720,000
Interest payable 20,000
Current tax liability 210,000 Under PFRS for SMEs, the basic financial instruments include the
Bank overd.ra~--on demand 40,000 following ·
Share capital 4,000,000
Retained earnings 1,900,000 1. Cash, demand and fixed term deposits or bani\ accounts
2. Trade accounts and notes receivable and payable
l. What is the total amount ofbasic financial assets? 3. Accounts payable in foreign cun·ency
a. 4,810,000 4. Loans from bank and other third parties
b. 3,710,000 5. Bonds and similar debt instrument
c. 3,750,000 . 6. Commercial papers or commerical bills
d. 3,160,000 7. Investments in nonputtable ordinruy shares whether listed or unlisted
8. Investments in nonconvertible and nonputtalbe preference shares
2. What is the total ammmt ofbasic fmancialliabili~ies? whether listed or unlisted .
a. 2,330,000 9. Cornrnitment to receive a loan if the commitment "cannot be net
b. 2,120,000 settled" in cash
c. 1,720,000 10. Loans to or from subsidiaries or assoc~ates that are due on
d. 1,930,000 demand
638 639
The investment in ordinaty shares and nonconvet1ible preference shan:~
is nonputtable:
a. When the entity does not have an option to sell the shares back
to the issuer for cash.
b. When there js no.arrangement that could result in the shares being
automatically sold or returned to the issuer because of a future
event. 39
Not basic financial instruments of an SME

1. Asset-backed securities, such collateralized mortgage obligations, SMEs Part II

repurchase agreements and securitized packages of receivables
2. Derivativecontracts
3. Hcdgingins~ents· Problem 39-1 (IFRS)
4. Commitments to make a loan to another entity .
5. Commitments to receive a loan if the commitment can be net On January 1, 2013, SME acquired 25% of the equity of each of
settled in cash entities B, C and D for Pl,OOO,OOO, Pl,SOO,OOO and P2,800,000
6. Investments in subsidiaries, associates and joint ventures respectively. Tr-cmsaction costs of 1% ofthe purchase price were itlCW'l'ed
7. Fim~ricial instruments that meet the definition ofan entirys own equity bySME.
insturments
8. Leases On January 2, 2013 entity B declared and paid dividend ofP 100,000.
9. Employee benefit plans On December 31, 20 13a entity C declared and paid a dividend of
P800,000.

For the year ended December 31, 2013, entities Band C recognized
profi~, respectively ofP500,000 and P l ,800,000. However, entity D
recognized a loss ofP2,000,000. ·

Published price quotations do not exist for the shares of entities B, G

and D. Using appropriate valuation techniques SME determined the
fair value ofthe investments in entities B, C and Don December 31,
2013 at P 1,300,000, P2,~00,000 and P 1,500,000, respectively.

Costs ofdisposal are estimated at 5% ofthe fair value ofthe investments.

641
1. Under the cost model, what is the tot~l carrying amount of the Investment in associate B
investments in associates on December 31, 2013? 1,000,000
fransaction cost ( 1% x 1,000,000)
'' 10,000
a. 3,950,000 Total cost
b.
1,010,000
5,353,000
c. 5,300,000 Fair value
1,300,000
d. 3,925,000 Cost of disposal (5% x 1,300,000) ( 65,000)
Fair value less cost of disposal
2. Under the equity method, what is the total carrying amount of the 1.235,000
investments in associates on December 31, 20 13? The investment in associate B is.not impaired because the fair value
a. 5,203,000 Jess cost ofdisposal is higher that carrying amount ofP 1,01 0~000.
b. 4,300,000
Investment in associate C
c. 4,525,000 1,500,000
Transaction cost · (1% X J,500,000)
d. 5,928,000 15,000
Tqtal cost
1,515,000
3. Under the fair value model, what is the total carrying amount of
the investments in associates on December 31, 2013? Fair value
2,900,000
Cost ofdisposal (5% X 2,900,000)
a. 5,647,000 ( 145,000)
Fair value less cost of disposal
b. 5,753,000 2,755,000
c. 5, 700,000
d. 5,415,000 The investment in associate C is not Impaired because the fair value
less cost ofdisposal is higher than the carrying amount ofP 1,235,000.
Solution 39-1 Investment in associate D
Transaction cost 2,800,000
Question 1 Answer a ( 1% X ~,800,000) 28,000
Total cost
An SlvfE shall account for investments in associates or jointly controlled 2,828,000
entities using the cost model, equity method or fair value model Foirvalue
Cost of disposal 1,500,000
and using the same accounting policy for all investments in {5% X 1,500,000) ( 75,000)
associate". J•nir value less of disposal
Cnrrymg amount
1,425,000
Under the cost model, the investment in associate is initially measured 2,828,000
at the transaction price including transaction cost. Subsequently, hnp:tinnent loss
(1,403,000)
the investor shall measure its investment in assoctate at cost less any
Investment in associate B
accumulated impairm~nt losses. All dividends and other dtstributions Investment in associate C 1,010,000
received are recognized as income without regard whether the Investment in associateD 1,515,000
dividends are from preacquisition or postacquisition retamed eamings 1,425,000
ofthe associate. This is the same cost method under full PFRS. rota I carrying amount - December 31, 2013
3,950,000

642 643
Question 2 Answer b Question J Answer c
Under the eq~ity method, the investment account is initially recognized
at the transaction price including transaction cost. Subsequently, Under the fair value model, the investment in associate is imtially
the investment is adjusted to reflect the investor's share in profit or loss IIH.:nsured at the transaction price excluding transaction cost.
and other comprehensive income ofthe associate. Di~idends and ot~er
distributions received from the associate are recognized as reductzon At each reporting date, the investment is measured atfazr value With
of the carrying amount of the investment. This is the same equity changes in fair value recognized in profit or loss.
method under full PFRS. .
Itt he fair value model is used, the investment in associate is I}Ot tested
Investment in associate B 1,000,000
Transaction cost 10,000
len· impair ment.
Cash dividend (25% X 100,000) ( 25,000)
Share in net income o~B (25% X 500,000) 125,000) Investment in associate B 1,000,000
Increase in fair value- gain (1,300,000-1 ,000,000) 300,000
Carrying amount 1,110,000
'm rying amount 1,300,000
The investment in associate B is not impaired because the fair value
less cost of disposal ofP 1,23 5,000 is higher than the carrying amount. !11 vestment in associate C 1,500,000
IJil'ICase in fair v~lue- gain (2,900,000-1,500,000) 1,400,000
Investment in associate C 1,500,000 ':u1 ying amount 2,900,000
Transaction cost 15,000
Cash dividend (25% X 800,000) ( 200,000) Investment in associateD
Share in net income of C (25% X 1,800,000) 450,000 2,800,000
I )ccn.;ase
in fair value- loss (2,800,000-1,500,000) ( 1,300,000)
Carrying amount ' 1,765,000
Cm•ying amount 1,500,000
The investment in associate Cis not impaired because the fair value
less cost of disposal ofP2,755,000 is higher than the carrying amount. Note that under the fair value model, the investments are measured at
lair value, not at fair value less cost of disposal. Thus, the cost of
Investment in associate D d1sposal is ignored.
~800,000
Transaction cost 28,000 .
Sh~re in net loss ofD (25% x 2,000,000) ( 500,000) lll\'c•stment in associate B !,300,000
Investment in associate C 2,900,000
Carrying amount 2,328,000
Fair value less cost of disposal lllvcstment in associateD 1,500,000
1.425.000
lmpaim1ent loss ( 903,001)) llltal carrying amount- December 31. 2013 5,700,000

Investment in associate B 1,1 10,000 lr,linfrom change in fair value- B 300,000

Investment in associate C 1,765,000 (ruin from change in fair value- C 1,400,000
Investment in ossociatc D _1425.01)0 I oss from change in. fair value-D (1 ,300,000)
Total carrying amount -December 3 I. 20 l3 ~300,000 Nd gain from change in fa1r value
~
644 645
Problem 39-2 (IFRS) Solution 39-2

On January 1, 2013, an SME acquired 30% oftheordinary shares of Question I Answer d

an investee forP1,000,000 plus transaction costofP10,000. The SME
used the cost model to account for the investment in associate. The Purcqase price 1,000,000
investee recognized a net loss ofPSOO,OOO for 2013 and paid dividends Transaction cost 10,000
·ofP200,000 on December 31, 20 13. The fair value ofthe investment Total acquisition cost 1,010,000
is P1,020,000 on December 31, 2013 and the cost of disposal is Fair value less cost of disposal (1,020,000- 40,000) 980,000
estimated at P40,000. There is no published price quotation for the
lmpainnent loss 30,000
investment in associate. .
Investment in ass6ciate 1,010,000
1. What is the carrying amount of the investment in associate on Cash 1,010,000
December 31, 2013?
Cash (30% x·200,000) 60,000
a. 1,020,000 Dividend income 60,000
b. 1,010,000
c. 950,000 lmpainnent loss 30,000
d. 980,000 Investment in associate 30,000

2. What is the carrying amount of the investment in associatt on Question 2 Answer a

December 31, 2013 assuming there is a published price
quotation? Smce the investment in associate has a published price quotation,
the SME is not permitted to use the cost model but shall use the fair
a. 1,020/lOO value model.
b. 1,010,000
Investment in associate 1,000,000
c. 1,000,000
Transaction cost 10,000
d. 980,000 Cas11 1,010,000
Cash 60,000
Dividend inwme 60,000
Investment in associate 10,000
Gain from increase in fair value 10,000
Fair value 1,020,000
Carrying amount 1,010,000
lncrc.:ase in fair value 10,000

646 647
Problem 39-3 (IFRS) Problem 39-4 (JFRS)

On January 1, 2013, an SME acquired a buil~ing to be held as

investment property in a remote location for P l ,000,000. After initial
recognition, the entity measured the investment property using the cost-
depreciation-impairment model, because the fair value cannot be
measured reliablywitbout undue cost or effort on an ongoing basis. On
December 31,2013, management assesst:d the building's useful life at
50 years from the date of acquisition and presumed the residual value
to be nil because the fair value cannot be determined reliably. On
December 31, 2013, the entity declined an unsolicited offer to purchase
the building for P 1,300,000. This is a one-time offer that is unlikely to
be repeated in the foreseeable future. What is the carrying amount of
the building on December 31, 2013?
a. 1,000,000
b. 1,300,000
c. 1,274,000
d. 980,000
?n J~nuary l, 2013, an SME acquired property consisting of ten
Jdcnttcal freehold detached houses each \vith separate legal title including
the land on which it is built for P200,000,000, 20% of which is
attributable to the land. The units have a useful life of50 years. The
following costs are atso incurred on such date:
Nonrefundable transfer taxes not iAcluded
in the purchase price 20,000,000
Legal cost directly attributable to the acquisition 1,000,000 .
Reimbursement to the previous owner for
preJlaying nonrefundable property taxes
for the six-month period ending June 30, 2013 10,000
Advertising campaign
500,000
• Opening function to celebrate new rental business
200,000
On June _30, 2013, SME paid local property taxes ofP20,000 for the
year endmg J~ne 30, 2014.

Solution 39-3 Answer d Throughout 2013, SME incurred repairs and maintenance cost of
Pl20,000.
Cost of the investment property 1,000,000
Accumulated depreciation (1,000,000/50~ ( 20,000) S ME used one of the ten units to accommodate the administration
and maintenance staff. The other nine units were rented out to
Carrying amount- December .3 1. 20 13 • 980,000
mdependent parties under operating leases.
Under PFRS for SMEs, investment property is mta-;ured at fair value
Refundable deposits held by SME on December 31, 2013 totaled
if the fair value can be measured reliably without undue cost or effort
P270,000. Rent received in the year ended December 31, 2013 totaled
on an ongoing basis. P 1,550,000 ofwhich P50,000 related to January 2014.
Otherwise, the cost model is used and the investment property is
On December 31,2013, thefairvalueofeachunitwasreliablyestimatcd
accounted for as property, plant and equipment and presented as a
at P25,000,000. The fair value ofthe unit~ can be measured reliably on
separate class of property, plant and equipment. an ongoing basis without undue cost or effort.

648
1. What is the initiai measurement of the investment property? .. Solution '39-4

a. 19S,900,000 Question I Answer a

b. 198,000,000
c. 176,800,000 Purchase price (200,000,000 x 9/1 0) 180,000,000
d. i80,000,000 Nonrefundable transfer taxes ( 20,000,000 x 9/1 0) 18,000,000
Legal cost · ( 1,ooo:ooo x 9/1 0) 900,000
2. What is the initial measurement ofthe lanq to be accounted f()r :.~~ · Initial cost of investment property 198,900,000
property, plant and equipment?
· Question 2 Answer b
a. 4,400,000
b. 4,420,000
Purchase· price (200,000,000 x 1110 x 20%) 4,000,000
1~.4,000,000
Nonrefundable transfer taxes ( 20,000,000 x 1/10 x 20%) 400,000
J. 4,430,000 Legalcost ( 1,000,000xl/10x20%) 20,000
Imtial cost of land
3. W hat is the initial measurement ofthe building to be accounted for 4,420,000
as property, plant and equipment?
Question 3 Answer c
a. 17,690,000
b. 17,600,000 . Purchase price (200,000,000 x Ill 0 x 80%) 16,000,000
c. 17,680,000 Nonrefundable transfer taxes ( 20,000,000 x 1110 x 80%) 1,600,000
d. 16,000,000 Legal cost · ( 1,000,000 x 1/10 x 80%) __ 80,000
Initial cost of building 17,680,000
4. What is the gain from the increase in fair value of investment property
in 2013? Question 4 Answer d
a. 51,100,000
b. 2J,OOO,OOO Fair value- December 31,2013 (25,000,000 x 9 units) 225,000,000
Carrying an1ount 198,900,000
c. 45,000,000
d. 26,100,000 Gain from increase in fair value 26,100,000

5. What is the depreciation of the building for 20 13? Question 5 Answer a

a. 353,600 Depreciation ofbuilding for2013 (17,680,000 I 58 yeMs) 35J,GOO

b. 320,000
·c. 352,ooo Note that the property taxes, advertising, cost of onening !'mctton, and
d. 353,800 r L'pairs and m:::intenance are expensed immediately when mcutTed

650 651
Problem 39-5 (I FRS)
l'roblem 39-6 (I FRS)
On January 1, 20 t 3, an SME acquired a building for PSO,OOO,OOO.
On December 31, 2013, management assessed that the useful life of An SME incurred and pai_d the foll()wing cxpcndjturcs in 2013:
the building is 40 years from the date ofacquisition with residual value
of PI 0,000,000. The fair value of the building on same date is January I 20% ofI'! the pt icc is attributable to land 50,000,000
P65,000,000. On December 31, 20 I 5, SME reassessed that the useful January 1 Nonrc,undable transfer taxes not included
life ofthe building is 50 years from January 1, 20 15 with residual value in the P50,000,000 purchase price 1,000 '0()()
ofPS,OOO,OOO. The fair value ofthe building on December 31,2015 is January 1 Legal cost directly attrihol:lblc to the
P80,000,000. acquisition
· 1.. 200,000
January 1 ReJmuursin g the previous owner for prCJ'laying
l. \Vhat is the carrying amount ofthe building on December 31. 2013? the nonrefundable local government
a. 50,000,000 property taxes for the six-month period
b. 49,000,000 euding Jupc 30,20 )3 100,000
c. 65,000,000 June 30 Nonrefundable annualloc-.l government
d. 63,625,000 property taxes for the year ending
June 30,2014 200,000
2. What is the calT';ing amount ofthe building on December 31, 20 15? During2011 Day-to-day repairs and maintenance 250,000
a. 47,000,000 ~Decembe~ 31, 2~ l3, SME assessed that the useful life ofthe building
b. 80,000,000 rs 40 years wtth res1dual value ofP2,000,000.
c. 47,140,000
d. 47,600,000 I. What is ~e initial c~g amount ofthe land'?
Solution 39-5 a. i0,240,00 0
b. 10,000,000
Qut.)·tion 1 Answer b c. 10,200,000
Cost- January 1, 2013 ·so,ooo.ooo d. 10,040l000
Accumulated depreciation (50,000,000- 10,000,000 I 40) ( 1,000,000)
49,000.000 2. What is the initial canying amo\Ult ofthe building?
Carrying amount- Decembe r 31, 2013
a. 40,800,000
Question 2 An~ wer c b. 40,960,000
c. 40,000,000
Cost- January 1, 2013 50,000,000 d. 48,000,000
Accumulated depreciation 1/1/2015 ( 1,000 000 x 2) · ( 2,000.000)
Ca:-rying amount- January 1, 2015 4R,OOO,OOO 3. What is the depreciation of the building for 20 13?
Depreciation for 2015 (4&,000,00 0- 5,000,000150) ( 8<10,000) a. 1,024,000
Can1'ing.amount - December 31, 2015 47,140,000 b. 1,000,000
c. 974,000
d. 950,000
652
653
 Problem 39-8 (IFRS)
Solution 39-6
Question 1 Answer a On January 1, 2013, an SME acquired, free of charge, a herd of 100
· cattle by way of government grant when the fair value ofthe herd was
Purchase price (20% x 50,000,000) 10,000,000 Pl ,000,000. On average the remaining life. of the cattle is expected to
Nonrefundable transfer taxes (20% x I ,000,000) 200,000 be 10 years. The grant did not impose future performance conditions
Legal cost . (20% x 200,000) 40,000 on the entity. What amount ofincome from the government grant should
Initial carrying amount ofland 10,240,000
be recognized in 20 13?

Question 2 Answer b a. 1,000,000

b. 500,000
Purchase price . (80% x 50,000,000) 40,000,000 c. 100,000
Nonrefundable transfer taxes (80% x I,000,000) 800,000 d. 0
Legal cost (80% x 200,000) 160,000
Initial carrying amount ofbuilding 40,960,000
Solution 39-8 Answer a

Question 3 Answer c (38,960,000 I 40) 974,000 Income from govemm~nt grant 1,000,000

Depreciable amount (40,960,000- 2,000,000) 38,960,000

Under PFRS for SMEs, a grant that does not impose specified future
performance conditions is recognized in income when the grant is
1'roblem 39-7 (lFRS) receivable.

~n January 1~ 2013, an SME acquired a building for PI0,450,000 Problem 39-9 (IFRS)
mcluding P500.,000 nonrefundable purchase taxes. The purchase
agreement provided for payment to be made in full on December 3 1 On January 1, 2013, an SME acquired, free of charge, a nontransferable
2013. ~ega! fees ofP220,000 were incurred in acquiring the building nine-year taxi license byway of government grant when the fair value
and pa1d on January 1, 20 13. The bui !ding is held to earn lease rentals of the taxi license was P900,000. In accordance with the terms of the
and for capital appreciation. An appropriate discount rate is 10%. What license, the entity must operate at least 10 taxis in a deprived
is the initial cost of the inyestment property? neighborhood ofthe city during that nine-year period. failure to do so
will result in the taxi license being revoked immediately. What amount
a. 10,170,000 ofincome from the government grant should be recognized in 2013?
b. 9,700,000
c. 9,500,000 a. 900,000
d. 9,720,000 b. 450,000
c. 100,000
Solution 39-7 Answer d d. - 0
Pl'esent value of purchase price ( 10,450,000 I 1.1 0) 9,500,000 Solution 39-9 Answer c
Legal fees 220,000 '
Total initial cost of investment property Income from government grant (900,000 I 9) 100,000
9,720,000

655
654
 Problem 39-10 (IFRS) Sulution 39-10

OnJanuacy 1, 2013, an SMEreceivcdaP 1,000,000 grant from natiaual Question 1 AnS1"CI' d

government as an incentive to establish and operate a manufacturing
plant in a particular development zone. FundA lire remitted from the '\!o income 1s recognized in 2013 because the perfonnanc e conditions
government to SME when SME incurs the expenditure.
for the grant are not yet fuily metj n 2013.

P2,000,000 in the development zone and the p lant commencin g

at
Grant ofP600,000 is conditional on erecting the plant costing least
~Jr dcr PF~S for SMEs, a- grant that imposes spcci(ied future
commercial production on or before December 31, 20 14. Certa:in pcrfmmance condit1cns is recognized in income only when the
conditions arc attached to the type of expenditure making up the lcdom1ance conditions are met.
P2,000,000. lftbese conditions are not met, SME will be obliged to
refund the P600,000 to the national government. · G1,mt recclvcct before therecoguitwn criteria arc satisfied is recognized
Grant of P400,000 is conditional upon maintaining commercial ·'!l a liability
production at the plant for a period of four years from the date when
corrunercial production begim. SME will become LmCOnditionall.y entitled Question 2 Answer b
toP 100,000 at the end ofeach ofthe fli'St four years of the commercial
· operation ofthe plant Income from government grant 600,000
During 2013, SME constructed the plant at a cost ofP2, 100,000~ all
ofwhich met the type ofexpenditure specified under the conditions of The two performance condi~ons on the P600.000 grant are construction
the ~t. During the ftrst quarter of2013, SME tested the plant's of a plant and the plant must commence commercial production on or
manufacturing process. On April I. 2014, SME began commercial before December J I, 2014.
production at the plant.
The construction was completed in 2013 but the commercial production
1. Whatamo•Ult ofincome from government grant .should be recognized ofthe plant began on Apri: I, 20 14. Since the two conditions are fully
in2013? met in 20 14, income is recognized in 20 l4.
a. 1,000,000
b. 600,000 The grant ofP400,000 is recognized at the en d of each of the first
c. 700,000 rouryears of commercial production.
d. 0
Since the comrr:erc iaJ producnon began on April I, 2014, the income
'
2. What amount ofincome from government grant should be recognized orPlOO,OOO (P400,000 14 years) lS recognized on April!, 2015, end
in 2014? · of the first year ofcommercial production.
a. 1,000,000
b. 600,000
c. 700,000
d. 0

65/t 657
 Problem39-ll (IFRS) Problem 39-12 (IFRS)

An SME incurred the following expenditures in estabhshing a taxi On January 1, 2009, an SME acquired a patent for Pl ,OOO,OOO. On
business during 20 I3: December 31,2009, management assessed that the useful life of the
patent is 20 years from the date of acquisition. The fair value of the
May 1 General start-up cost 15,000 patent is P1,300,000 on same date. On December 31, 2013, the
'JWle 30 Legal cost directly attributable to the acquisition management assessed that the useful life of the patent is 14 years frorp.
of the taxi license 30,000 date of acquisition. The fair value less cost of disposal ofthe patent is
Jun.c 30 Payment to the taxi licensing authority for the
P600,000 on same date. What amount of impainnent loss should be
license, including P1 0,000 refundable purchase
taxes recognized for the patent in 2013?
100,000
July Printing business cards of the drivers 10,000
July Payment for an advertisement to be published a. 300,000
every month for the next 12 months in a local b. 200,000
daily newspaper 50,000 c. 120,000
d. 0
The economic life ofthe taxi license is 5 years from the date ofacquisition
on June 30, 2013 with NIL residuaT value. The taxi drivers own the Solution 39-12 Answer c
. vehides wbic~ they operate urtder the SME taxi license. What is the
initial cost ofthe intangible asset? Cost- January 1, 2009 1,000,000
Accumulated amortization- l/1/20 13 ( 1,000,000/20 x 4) ( 200,000)
a. 120,000 Carrying amount - January 1, 20 13 800,000
b. 130,000 Amortization for 2013 (800,000/l 0 years) . ( 80,000)
c. 135,000
Carrying amount - December 31, 20 13 720,000
d. 145,000
Fair value less cost of disposal- December 31, 2013 ~0,000

Solution 39- J1 Answtr a Impairment loss 120,000

Lega! cost 30,000 Remaining life ( 14- 4) 10 years

Payment to the taxi licensing authority 100,000
Refundable purchase taxes ( 10,000) As in full PFRS, an SME shall recognize an impairment loss when
carrying amount exceeds recoverable amount.
Initial cost of taxi license 120,000
The recoverable amount is the higher between fair value less cost of
Under PFRS for SMEs and full PFRS, the principles are the same
disposal
., and valu,e in use.
with respect to the initial measurement of an intangiblaasset.

658 659
 I'• ,,hl cm 39- 14 (IFRS)
Pro ble m 39-13 (IFR S)
On Janu~ 1, 2~10, SME acquired a tradema 1 11 trn1g 2013, an SME is the defe
ndant in a patent infringement lawsuit.
rk for a line ofproducts
from~ comp~tttor for P300,~00. 1h~.: l.:nlity's lawyers believe there is a 30% chan
The SME expected to continue ce that the court will
mazketmgthe line ~~productsusmg the tradema ch miss the case and the entity will incur no
of~ket, compettttve and environmental trenrkindefinitely. An analY3is outflow ofeconomic benefits.
llowcvcr, if the court rules in favor of the clai
d, provides evidence that mant. the lawyers believe
the~~ of~emarked products
may generate net tash inflows for the·
· acqwrmg eu~tyfor ~indefinite period Man
agement is unableto estimate
tl mttherd.is a 20% chance that the entity will
llt'P200,000 and an 80% chance that the enti
be required to pay damages
the useful hfe oftlle ~demark. In 2013, a ty will be required to pay
com
revealed a technologtcal breakthrough that petitor unexpectedly cl:unages of P l 00,000 .. Other outcomes are
unlikely. The court is
is expected to result in a expected to rule in late December2014. The
product, ~t when launched ~ythc competit re is no indication that the
Qr, will extinguish demand llaimant will. settle out of court. A 7% risk
~or S~E s patented produ~t lme. Dem
~d for SME's patented product adjustment factor to the
hne ts ~xp~cted to remam strong untJl Dec probability-weighted expected cash flows is
emb considered appropriate to
competitor lS expected to launch the new prod er 2015, wh(m the· reflect the uncertainties in the cash flow esti
2013, SME ass~ssed the recoverable amo uct. On December 3 1 mates. An appropriate
P50,000. S~1E mtended to C?Ontinue man
unt of the trademark
ufacturing the patented
at discount rate is 5% per year. The PV of 1 at
On December 31, 2013, what is the measure
5% for one period is .95.
products untll December 31 , 2015. The fina ment of the provision for ,
ncia
3 ~ · Wh at amount of impainnent loss should l year-end is December lawsuit?
w1th respect to the trademark? be recognized in 201 3
·
a. 100,000
a. 300,000
b. 'b. 84,000
2SO,OOO
c. 90,000 c. 89,880
d. 0 d. 85,386
Solution 39-13 Ans wer c Solution 39-14 Answer d
Tra dem ark- January 1, 2010
Amortization for 2010, 2011 and 2012 300:000 Weighted probabilities:
(300,000 /10 year s x 3) (20% X 200,000 X 70% )
( 90~000} 28,000
Carrying amo unt - Jan uar y 1, 2013 (80 %x lOO,OOOx 70%) 56,000
Amortization for 2013 (21 0,000 I 3 years rem 210J)OO
aining) ( 70~000) Total 84,000
Carrying amo unt - Dec emb er 31, ·zo1 Multiply by risk adjustment factor (100
Recoverable amount
3 140,000 % + 7%) L07
( 50,000) Adjusted estimate 89,880
Impairment loss Multiply by-PV 1 at 5% for one peri od .95
90,000
On January 1, 2013, the remaining life ofthe Measurement of provision 85,38~
trademark is 3 yeprs from
January 1, 2013 to December 31,2015.
Under PFRS for SMEs and full PFRS, when
Under PFR.Sjbr SMEs, the uscfulli fe ofan inta the provisio n involves a
large population of items, the estimate of the
to ~e flnl~e: If the useful life of an intangible ngible asset is considered amount sl~all reflect the
asset cannot be esti mat ed "weighting" of all possible outcomes Dy thei r
rehably, at Js assumed to be J0 years. associated probabili~ies.
6/ll
6~
Problem 39-15 (IFRS) Problem 39-16 (IFRS)
On January 1, 2013, an SME entered into an arrangement to sell a On June 30, 2013, an SME entered into an arrangement to sell a
bui1ding to a bank and lease it back for a period of 20 years. The building occupied by the sales staff to a bank and lease it back for a
economic life ofthe building is 25 years. The sale price of the building period oftwo years. The remaining economic life of the building is 5
which is equivalent to the fair value is P5,000,000 and the carrying years with no residual value. The sale price is equivalent to the fair
amount of the building is P 1,500,000. The building has NIL residual value ofP4,000,000 and the carrying amount is P3,500,000. The annual
value. The annuallec:..;e payment is P509,260 payable in arrears on rental is P 1,250,000 payable in arrears on July 1 of each year. What
December 31 of each year based on an implicit interest rate of 8%. amount of gain on sale ofbuilding should be recognized in 20 13?
What is the deferred gain on sale and leaseback on December 31,
2013? a. 500,000
b. 250,000
a. 3,500,000 . c. 625,000
b. 3,325,000 d. 0
c. 3,360,000
d. 0 Solution 39-16 Answer a
Solution 39-15 Answer o Sale price 4,000,000
Carrying amount (3,500,000)
Sale price 5,000,000
Carrying amount Gain on sale of building 500,000
·(1,500,000)
Deferred gain - January 1, 2013 3,500,000 Under PFRS for SMEs and full PFRS, if the sale and leaseback
Realized gain in 2013 (3 ,500,000 I 20 years) ( 175,000) transaction results in an operating lease and it is clear that the
Deferred gain - December 31, 2013 3,325,000 transaction is established at fair value, the seller-lessee shall recognize
any gain or loss immediately.
Under PFRS for SMEs and full PFRS, if the sale and leaseback
transaction results in a finance lease, any excess of sale proceeds The leaseback is an operating lease because the lease tennis only 40%
over the carrying amount is deferred and amortized over the lease tenn. of the life of the asset (2/5).

The leaseback is a finance lease because the lease term is 80% of the Thus, the gain on sale is recognized immediately.
life of the asset (20/25).

Thus, the gain is deferred and amortized over the lease terni.

662 663
 Prob lem 39.-17 (IFR~)

On January 1~ 2013, an SMB entered into a lease to acquire a mach

ThefairValueofthemachineisPI,OOO,OOOwithaneconomiclife
ine. 40
oflO
years and no residual value. The-initial lease term is 5 years but
the
lessee bas an option to renew the lease for a further 5-year lease term.
The annual rental for the initial term is P231 ,900 payable in advan~ SELF-TEST
on
· January 1 ofeach year' based on an implicit interest rate of8%
. Ifthe
lease is renewed after 5 years, the annual rental is P 100 payab 1 On Dece mber 31, 2013, Abysmal Com pany repor ted
le in ~he
. advance on January 1 of each year. What is the leas~ liabil
ity o~ following current assets:
December 31, 2014? · · Cash 3.200.000
Accounts receivable 2,000,000
a. 768,100 Inventory 2,800,000
b. 597,648 Deferred ~:harges 200,000
c. 848,100
d. 684,048 ~J2QQ .

Customers' accounts 1,420,000

Solution 39-17 Answer b Accou nts receiv able- assigned (net of equity of
assignee in aceau nt:> ~ss1gneu, P60,000) 240,000
Lease liabil ity- January 1, 20 13 Advances to subsidiary 260,000
1,000,()( 0 Allowance for sales return
Payment on January 1, 2013 (all applicable to principal) ( 120 000)
( 231,9l J()) Claims against shipper for goods lost in transtt 100,000
Lease liabi lity- Dece mber 31, 2013 Subscription receivable due on December 3 i, '20 14 _j_QO.OQQ
768,100
Payment on January 1, 20 14 231,~
Interest for 2013 Total act:ounts receivable bQ_~O_QQ
(8% ~ 768,100) 61,448 ( 170,452)
Lease liability - Dece mber 31, 2014 What amount should be recognized as tutal ct.. r<:-nt assets
597,648 on
December 31,20 13?
Under PFRS for SMEs and full PFRS, the lease is a finance lease a. 7,740,000
if the
lease term is for the major part of the economic life dfthc b. 7,700,000
asset even if
title is not transferred. c. 7,600,000
d. 7,800,000
The initial lease tem1 is 5 years which is 50% of the life ofthe asset 2. AffableCompanyshowednet incomeofP4,SOO,OOO in their.
of 10 come
years. However, the lessee has the option to renew the lease statement for the current year. Selling expenses were equa!
for ·a further to
5-year tenn which is reasonably certain to be cicercised 15% of sales and 25% of cost of sales. A!l other ~;,xpcnst::> \Vct·c
because the 13% of salt.:s. What is the gross profit for the ctmc nt ~ t:<• ~--
annual ;ental in the renewal period is only a no~in~l amou
nt ofPlOO.
Thus, in substance, the lease tcm1 is 10 years wh.ich is 100% a. 40,000,000
oftke life
of the asset and therefore the lease is a fihancc !esse. b. 24.00i,,OOO
c. 16,0 ~ 0,000
d. 20,000,000
664 .- 665
3. Benevolent Company reported operating exp~nses_ in ~fwlo 5. Chaste Company purchased a machine for P4,500,000 on January
categories, namely selling and general an~ adtmmstrattve. . 1e I, 2012. The machine.had an estimated life of five years and a
adjusted trial balance at the current year-end mcluded the followmg residual value·ofP500,000. The machine was depreciated using
expense accounts: straight line method. On January I, 2014, the entity switched to
sum of years' digits method. What is the carrying amount of the
Accounting and legal fees . 140,000 machine on December 31, 2014?
Advertising ,120,000
Freight out 75,000 a. 1,200,000
Interest expense 60,000 b. 1,7C,O,OOO
Loss on sale of long-term investments 30,000
c. 1,600,000
180,000
d. 2,400,000
Officers' salaries
Rent for office space 180,000
Sales salaries and commissions 110,000 6. 'Chivalrous Coinpanyreporte.d income before tax ofP5,000,000
400,000. for the current year. The auditor questioned the following an10unts
Research and development expense
that had been included in income before tax:
One-half of the rented premises is occupied by t~1e sales
Equity in earnings of Sam Company- 40% interest 1,600,000
department. What total amount of the expenses should be mcluded
Dividends received from Sam Company • 320,000
in boeneral and administrative expenses for the current year?
Equity in earnings of Jam Company- 15% interest 900,000
Dividends received from Jam Company 150,000
a. 410,000
Adjustment of profit of prior year for
b. 440,000
depreciation error · (lAOO,OOO)
c. 470,000
d. 810,000
What amount should be reported as income before tax?
4. Bizarre Company purchased equipment for P5d,750,00~d o~
January l 2012 with a useful life of 10 years an n~ res1 ua a. 3,400,000
value. On Januai-y l, 2014, the entity classified the eqmpment ~ b. 4,680,000
hdd for sale. The fair value of the equipment on such date:'-' c. 5,180,000
P3 795 000 and the cost of disposal is P 115,000. On Decembe1 d. 6,080,000
31:20 l4, the fair value of the equipment is P4,3 70,000 and t~e
cost of disposal is P230,000. On December 31, 2014, the ent1ty 7. Dainty Company had income before tax for the first, second and
determined that the criteria as held for sale c~n n? longer be met third quarter, respectively of P5,000,000, P8,000,000 and
and decideJ not to sell the asset but continue usmg 1t. What_an1o~t P3,000,000. The effective annual income tax rates for the first,
should be recognized in profit or loss as a result ofthe reclassdicatlon se-cond and third quarters, respectively are 30%,35% and 40%.
in 2014? Wha~ amount should be reported as income tax expense in the
interim income ~tement for the third quarter?
a. 920,000
b. 460~000
a. 1,850, 000 .
c. 345,000 b. 1,200,000
d. 0 c. 1,400,000
d. 6,400,000
8. Delectable Company had three manufacturing divisions, each of
which had been detennined to be a reportable segment. Common
costs were a~propriately allocared on the basis ofeach division's
sales in relation to the entity's aggregate sales. During the current
year, Division I bad sales of PI 0,000,000, which was 200/o of the
entity's total sales, and had traceable operating costs of
P6,000,000. During the current year, the entity incurred costs of
P2,000,000 that were not directly traceabl~ to any ofthe divisions.
These costs included general corporate expenses ofP500,000.
In addition, the entity incurred interest expense ofPSOO,OOO which
was directly traceable to Division I. Information about interest
expense·is regularlyprovided to the chiefoperating decision maker.
What amount shoould be reported as operating profit ofDivision
Tfor the current year?
a. 4,000,000
b. 3,700,000
c. 3,600,000
d. 3,200,000
9. Earnest Company's checkbook balance on December 31, 2013
was P8,000,000. In addition, the entity held the following items
on December 31, 2013:
Check payable to the entity, dated January 2, 2014,
not induded in December 31 checkbook
balance 2,000,000
Check payat le to the entity, deposited December 20,
and included in December 31 checkbook balance,
but returned by bank on December 30, stamped
"NSF," 1 he check was redeposited January
2, 2014, and cleared January 3, 2014 400,000
Postdated checks not.included in the checkbook balance 150,000
Check dra\\rn on the entity's account. payable to a
vendor, dated and recorded December 31 , 20 13
but not maaed until January 15,2014 1.000,000
What amount ofcash should be reJX>rted on December 3 I, 20 13?
I 0. The August 31 bank statement ofEcstatic Company showed a
balance ofP 1,130,000. Deducted in aiTiving at this amount was a
customer's NSF check for P24,000 that had been returned. The
entity had received no prior notice concerning this check. In
addition to the bank statement, other records showed there were
deposits in transit of P 172,000 and outstanding- checks of
p 108,000. What is the cash balance per book on August 31
prior to adjustments?
a. 1,218,000
b. 1,194,000
c. 1, 170,0Q6
d. 1, 154,000
11. Fabulous Company had signfiicaJlt accounts receivable ftom three
customers, P4,800,000 due from Step Company, P9,000,000
due from War Company, and P7 ,600,000 due from Hal~ Company.
The entity had other accounts receivable totaling P4,400,000.
The entity determined that the War receivable is impaired by
PI ,600,000 and the Hall receivable is impaired by P2,000,000.
The receivable from Step is not impaired. The entity determined
that a composite rate of 5% is appropriate to measure impairment
on all other accounts receivable. What is the tot~l impairment of
accounts receivable in the current year? ·
a. 3,820,000
b. 3,140,000
c. 4,060,000
d. 3,600,000
12. Fallible Company harvested wool on July 1, 2013. On such date,
the fair value less cost of disposal at the point of harvest is
P6,500,000. On December 31,2013, the wool was still on hand
and the fair value less cost of disposal and net realizable value
were P7,000,000 and P6,000,000, respectively. Wl1at amount
should be recognized as gain on agricultural produce in 20 13?

a. 7,600,000 a. 1,500,000
b. 8.000,000 b. 1,000,000
c. 8 ,60~).000 c. 6,500,000
d. 9,7.'i0,000 d. 6,000,000

669
 13 .. Gallant Compan y provide d the following infonnation: 15. Haggard Company reported inventory on December 3 l, 2013 at
P7,500,00 0 based on a physica l count of goods priced at cost,
and before any necessary year-end adjustm ent relating to the
January I, 2013 Decembe r31, 2013
fODowing:
Accounts receivabl e 2,400,000
Allowance for doubtful accounts 120,000 • Included in the physical count were goods billed to a customer
Sales 16,000,000 FOB shippin g point on Decemb er 31, 2013. These goods
Cash collection s from customers 14,000,000 had a cost ofP150, 000 and were picked up by the carrier on
January 10,2014.
l11e cash collections included recovery ofP20,000 from a customer
whose account had been written offas worthless in 2012. During • Goods shipped FOB destina tion on Decemb er 31,2013
2013, it was necessary to recogniz~ doubtful accounts expense from a vendor to the entity were received on January 3, 2014.
ofP200 ,000 and write off worthle ss account s ofP60,0 00. On The invoice cost was P250,000.
Decemb er 1, 2013, a custome r settled an account by issuing a
12%, six-mon th note for P800,00 0. What is the net realizable What amount should be reported as inventory on Decem~er 31,
value of accounts receivable on Decemb er 31, 2013? 2013?

a. 3,280,00 0 a. 7,350,0 00
b. 3,340,00 0 b. 7,400,00 0
c. 3,560,0 00 c. 7,500,00 0
d. 3,260,0 00 d. 7,650,00 0

14. On July 1, 2013, Garrulous Company sold P750,000 of accounts 16. On Decemb er 31, 2013, Hapless Compan y provide d the
receivable to a finance entity. The finance entity assessed a finance
following infonnation:
fee of 4% and retained a holdbac k of 12%. Op Decemb er 15,
2013, th~ entity assigne d P2,500, 000 as· a co!Htteral on a Cost Retail
P2,000, 000 12% annual interest rate bank loan. The bank Inventory 220,500 304,500
assessed a 5% service charge on t:Re amount of the loan. On Purchases 1,249,500 1,732,500
Decemb er 31, 2013, the allowance for doubtful accounts before Additional markup 63,~
adjustm ent is P50,000 and the balance of account s receivable,
excludin g the factored and assigned account s is P500,000. No Available for sale 1,470,000 2,100,000
assigned account s have been collecte d by the end of the year. f
What total amount was initially received from the financing of Sales for the year totaled P1,660,000. Markdo wn amounte d to
accounts receivable? Pl40 000. Under the average cost retail method, what is the
' . .
inventory on Decemb er 31, 2013?
a. 2,530,0 00 a. 210,000
b. 2,505,0 00 b. 225,000
c. 3,530,0Q9
c. 330,000
''d. 2,620,0 00
d. 308,000

670 671
! 7. On Dccemher 31, 2013, a fire destroyed tQl;,lly the r-aw 1~ On J anuary I, 20 13 , Jocose Company purchased 25 ,000
marerials ofignoblc Company. The entity provided th<:' folkiWUtg -s hare s of another entity '.:vhich represent a J 0% interest for
information for the cunent year: P2,000,000. The entity elected to measure tJ'le investment at
January 1 Deccmht.>r 3\ FVTOCI. The investee reported net income ofP4,000,000
and paid no dividends in 20 I 3. The fair value of the investment
Raw materials 900,000 0 was Pl ,900,000 on December 31,2013. On January 1, 2014,
Factory supplies 60,000 50,000 · the·entity paid P5,000,000 for 50,000 additional·shares of the
Goods in process 1,850,000 2,100,000
Finished goods 2,200,000 2,250,000 of
same investee. The fair value of the identifiable assets the
investee equaled cal"fo/ing amount ofP20,000,000 on purchase
Sales 12,000,000 date except for land whose fair value exreeded carrying amount
Purchase of raw materials 4,000,000 by P3,000,000. The inve!tee reported net income of
Purchase of factory supplies 300,000 P6,000,000 for 2014 and paid dividends ofP20 per share on
Freight in far raw materials 150,000 December 31, 2014. What is the carrying amount of the
Direct labor 2,200,000 investment on December 31, 2014?
.Manufacturing overhead is 75% of direct labor and gross profit
.
a. . 7, i 00,000
rate is 35% of sales. What is the cost of the raw materials · b. 6,900,00Q
destroyed by fire? c. 7,200,000
a. 1,110,000 d. . 5,200,000
b. 750,000
c. 800,000 20. Jovial Company purchased 30% of the ordinary share capital
d. 650,000 of Joyous Company on January 1, 7013. The following events
occurred after the purchase:
18. On January 1, 2013, Illusive Company acquired 200,000 • Joyous sold, goods costing P500,000 for P150,000 to
ordinary shares of another entity for P9,000,000. At the time Jovial in 2013. On December 31,·2013,. the ·goods
of purchase, the investee had 800,000 outstanding ordinary remained unsold by Jovial. In 2014, Jovial sold such goods
shares with a carrying amount ofP36,000,000. On December to the customers.
31, 2013, the investee reported net income of P 1,800,000, • On January 1, 2013, Joyous also sold machinery with u
declared and paid a cash dividend ofP0.75 per share when carrying amount ofP3,000,000 for P4,200,000 to Jovial.
the market value of the share was P40. The investment was The machinery's remaining life was 6 years.
measured at fair value through profit or ~oss . What net • Joyous reported net income of P3,500,000 an d
amount must be recognized in profit or loss for 2013? ' P2,500,000 in 2013 and2014, respectively.

a. 1,,450.QOO profit What amount of equity in earnings of the in vestee should

b. 1,ooo,boo loss be reported in 2014?
c. 850.000 loss a·. 825,000
d. 45 0.000 profit b. 750,000
c. 675 ,000
d .. 885,000

672. 673
 '
21. Kam1a Company purchased P l ,000,000 of 8% bonds on 23. Lackadaisical Company purchased bonds at a premium of
January 1, 2013 for P922,780 to yield 10%. The bonds mature P250,000. Subseque~tly, the entity sold these bonds at a
on January l, 2018 and interest is payable each January l.and premium afP300,000. During the p'e riod that the entity held
July I. The entity bad ubusiness model whose objective is to the bonds as a long-term investment, a~ortization of the
hold assets in order to collect contractual cash flows and the premium am~unted to P40,000 . .What amount should be
contractual tem1s of the financial asset provided specified dates reported as gain on the sale ofbonds? ·
with regard to cash flows that are solely payments of principal
and interest. On December 31, 20 13, the market rate of interest a. 510,000
is 12% and the fair value of the bonos is P875,790 at the 12% b. 300,000
market rate. What amount should be recognized as interest c. 90.;000
mcome for 20 13? d. 50,000

a. ~2,278
b. 92,585 24. At the beginning of the current year, Laconic Company
c. 73,822 purchased a commercial Ian~ as a site of a future commercial
d. 80,000
0
building for P800,000. An old dilapidated building on the land
was demolished and a new commercial building was constructed
22. Kibitzer Company has the Philippine peso as the functional and completed on December 31. The following disbursements
currency. The entity expects to purchase goods from USA for and receipt were incurred and realized during the period:
$50,000 on March 31, 2014. Accordingly, the entity is exposed Legal and registration fees paid for the deed of
to a foreign currency risk. If the dollar increases before the sale and registration of the title 9,000
purchase takes place. the entity will have to pay more pesos Demolition of the old building 10,000
to ot;>tain the $50,000 that it will have to pay for the goods ..On Construction cost of the new commercial building 1,000,000
October 1, 2013, the entity entered into a forward currency Architect professional fee 20,000
contract with a bank speculator to purchase $50,000 in six Proceeds from the sale of salvaged wood from the
months for a fixed amount ofP2,000,000 or P40 to $1. This demoli3hed old building 3,000
forward currency contract is designated as cash t1ow hedge. What amount should be reported as cost ofland and building,
On D'e cember 31, 20 13, the exchange rate is P42 to $1 and respectively?
on March 31, 2014, the exchange rate is P43 to $1. On
December 31, 2013, what amount should be reported as a. 807,000 and 1,029,000
derivative asset or liability? b. 809,000 and 1,020,000
c. 816,000 and 1,020,000
a. 100,000 asset d. 816,000 and 1,029,000
b. 150,000 asset
c. 100,000 liability
d. 150,000 liability

674
675
25. On January 1, 2008, Magnanimous Company purchased 28. Nebulous Company was constructing a building. Construction
equipment at a cost of P6,000,000. Depreciation was began on Jamiary l , 2013 and was completed on December
. computed on the straight line basis at 4% per year. On January 31, 2013. The average expenditures in 2013 amo•Jnted to
1, 20 l3, the l>pilding was revalued at a fair value of P3,200,000. The entity borrowed P 1,200,000 on January I,
P8,000,000. The income tax rate is 30%. What is the 2013 on a 5-year, 12% note to help finance construction of
revaluation surplus on December 31, 2014? the buildin~. In addition, the entity had outstanding all year a
10%, 3-yeaT, P3,000,000 note payable and a 12%, 4-year,
a. 2,128,000 PS ,000,000 note payable. What amount should be charged to
b. 2,240,000 interest expense for 20 13?
c. 2,880,000 a. 369,000
d. 2,016,000 b. 900_,000
c. 675,000
26. Magnificent Company purchased a machine on July 1, 20 13 d. 600,000
for P750,000. The machine bad a useful life of 1.0 years with
29. At the beginning_ of the cur~ent year, Oblivious Company
resioual value ofP42,000. During 2016, it became apparent
exchanged 20,000 treasury shares of P25 par value for a patent
that the machine would become uneconomical after December
owned by another entity. The treasury shares were acquired in
31, 2020, and that the machine would have no residual value:
2012 for P450,000. On the date of exchange, the treasury
What is the charge for depreeiation in 20 16? share was quoted at P34, and the patent had a carrying amount
ofP550,000 with no determinable fair value. What is the initial
a. 106,200 cost of patent? ·
b. 114,600
c. 123,000 a. 450,000
d. 143,250 b. 500,000
c. 550,000
d. 680,000
27. Naive Company reported an impairment loss ofP 1,600,000
in 20 12. This loss·was related to an item of property, plant and 30. Obstinate Company acquired a mineral right for P5,280,000 in
equipment which was acquired on January 1, 2011 with cost 1anuary 2013 . The mine had removable ore estimated at
ofP 10,000,000, useful life of 10 years and no residual value. 1,200,000 tons. After it has extracted all the ore, the entity. is
On December 31, 2012, the entity reported this asset at required by law to restore the land to the original condition at a
P6,400,000 which is the fair value on such date. On December discounted amount ofP360,000. The entity believed it wiil be
Jl, 20 13, the entity determined that the fair value ofthe impaired able to sell the property afterwards for P600,000. During
asset had increased to P7,200,000. The s'traight line method 2013, the entity incurred P720,000 of development costs
is used. What amount of gain on reversal of impairment should preparing the mine for production and removed 80,000 tons
be reported in 20 13? · of ore but sold only 60,000 tons of ore. What amount of
depletion should be included in cost of goods sold in 2013 ?
a. I ,6()0,000 a. 318,000
b. I ,400,000 b. 270,000
c. 600,000 c. 288,000
d. 0 d. 384,000

676 677
31. During the current year, Pallid Company incurred the follow~g 33. Quagm-ire Company provided the following information at
GOSts: year-end:

Testing in search for process alternative 350,000 Organization cost 200,000

Cost of marketing research for new product iso,ooo Deposit with advertising agency which will be
Modification of the fonnulation of a process 510,000 used 10 promote goodwill 320,000
Research and development services performed by Discount on bon,Js'payab1e 600,000
another entity for Pallid 425,000 Excess of cost over fair value of net assets of
wholly-owned subsidiary 2,800,000
What amount should be reported as research and development Trademark 2,000;000
expense~
What total amount should be reported as intangible assets?
a. r,535,000 a. 5,000,000
-b. 1,185,000 ·b. 4,800,000
.c. 1,285,000 c. 2,000,000
d. 860,000 d. 2,200,000

32. Paramount Company purchased two machines for P 1,800,000 34. In ftlleffortto increase sales, Quondam Company inaugurated a
each on January 1, 2013. The machines were put into use sales promotion campaign on June 30, 2013 whereby tbe entity
·immediately. Machine A bas a ~sefullife of 4 years and car . be p~acouponineachpackageofrazorbladessold. The coupons
used only in one Rand D project. Machine B can be used ip Jne are redeemable for a premium. Each premium has a cost ofP50
Rand D project for 3 years and then used by the production and five coupons must be presented by a customer to receive a
division for an additional 3 yeClrs. What amount should ~e premium. The entityestimated that only 600/o ofthe coupons issued
recognized as research and development exp!!nse for 2013? · will be redeemed. For the six months ended December 31, 2013,
the following infonnation is available:
a . 1,80~,000
Packages of razor blades sold 400,000
b. 2,100,000
Premiums purchased 30,000
c. 2,400,000 Coupons redeemed 100,000
d. 750,000
Wbat is :lte estimated liability for premiums on December 31,
20L3?
a. L,OOO,OOO
b. L,400,000
c. 1,800,000
d. 2,400,000

67 8 . 679
 3 S,. Sleek Company manufactured equipment tor sale o1 h.:asl' On
3 5. Rampant Company estimated annual warranty expense at 2% of December 3 1, 2013, the entity leased equipment to another cnt1ty
annual net sales. The net sales for 20 l3 amounted to P4,000,000. fora five-year periodafterwhich ownership ofthe leased asst:t
On January 1, 2013 , the warranty liability is PGO,OOO and th~ will ~transferred to the lessee. The lease called for equal annual
warranty payments during 2013 totaled P50,000. What is the payments ofP500,000 due on December 31 of each year. The
warranty liability on December31, 2013? · first payment was made on December 31,2013. The normal sale
price oft he equipment is P2,200,000 and carrying amount is
a. 10,000 P1,760,000. For the year ended December 31, 2013, what
b. 70,000 amount of gross profit should be reported from the lease
transactiqn?
c. 80,000
d. 90,000 a. 100,000
b. 300,000
36. On January 1, 2013, the city government granted Rapaciou~ c. 440,000
Company a zero interest P3,000,000 loan with a 3-year tenn . d. 740,000
Interest is payable annually every December 31. The prevail~ng 39. On March 1, 2013, Tactless Company leased an equipment
market rate of interest for this type ofloan is 8%. The PV of 1 at for P1,200,000 a year for a four-year period ending February
8% is .79 for three periods. What amount of income from 28,2017. The equipment was purchased on January 1, 2013
govemment grant should be recognized in 2013? for P3,000,000 and was actually intended for leasing. The
equipment has a five-year life with no residual value.
a. 630,000 Depreciation was computed on a straight line basis. As
b. 189.,600 provided in the lease contract, the lessor incurred total
c. 240,000 maintenance cost of P50,000 relating to the year ended
d. 210,000 December 31,2013. The lessee paid Fl,;WO,OOO to the lessor
on March I, 2013. Under the operating lease, what amount
should be reported as income before tax derived from"the lease
37. Sacrosanct Company leased a ma·chine on December 31,
for2013?
2013. Annual payments under the !_ease are Pl,100,000
including P l 00,000 annual executory costs and are due on a. 450,000
December 31 each year fer a ten-year period. The first payment b. 400,000
was made on December 31, 2013, and the second pa)ment c. 550,000
was made on December 31, 2014. The lease payments are d. 350,000
discounted at I 0% O\·er the lease tenp. The pres~nt value of
40. On july 1, 2013, Temporal Company issued 3,000 of 10%,
minimum lease payments at the 1nception of the lease and P2,000 face value bonds at 99 plus accrued interest. The oonds
before the first annual payme11t was P6, 150,000 and t!1e are dated April I , 20 13 and mature on April 1, 2023. fut~~est
entity appropriately classified the lease as a finance lease. is payaD-le semiannually on April 1 and October 1. The issuer
What amount of lease liabil ity should be reponed on paid bond issue cost ofP 100,000. What amount·was received
December31,2014? ·• from the bond 1ssuance?
a. ·. 4,665,000 a. 5,94D,OOO
b. 5,150,000 b. 6,090,000
c. 5,341,500 c. 5,990,000
d. 5,765,000 d. 6,190,000

681
680
41, Ultimate Company was organized on January l, 2013 and had
pretax accounting income ofP5,000,000 and taxable ipcome of 43. Vaga~ond Company accompl~shed a quasi-reorganization
effecttve December 3 ~, 2013. Pnor to the quasi-reorganization.
P8,000,000 for 20 13. The only temporary difference is accrued
the shareholders' equtty was as follows:
product warranty costs that are expected to be paid respectively,
P1,000,000, P500,000, P500,000 and Pl,OOO,OOO, in 2014.. Share capital, par value ofPIO, 400,000 shares 4,000,000
Share premium 600,000
2015,2016 and 2017. Theentitybasneyer had any net operating Retained earnings (deficit) ( 900,000)
loss and does not expect any in the future. The enacted tax rates
are 35% for 2013, 30% for 2014 to 2016 and 25% for 2017. Undet the te~s of the quasi-reorganization, the par value of
On December 31, 2013, what amount should be reported as the sha!e capt tal was reduced from Pl 0 toPS and plant asset
deferreq income tax? was v:ntten down by PI ,200,000. After the quasi-reorganization,
what ts the to.tal shareholders' equity?
a. 750,000 asset a. 2,500,000
b. 750,000 liability b. 2,000,000
c. 850,000 asset
c.·1,700,000
d. I ,600,000
d. 850,000 liability
44. Valedictory Co~pany wa~organized on January l, 2013 with
42. Unscrupulom; Company obtained the following information at the 100,000 authonzed shares ofPlOO par value. During 2013
beginning of the current year prior to the adoption of PAS 19R. the following transactions occurred: '
January 15 Sold 30,000 shares at P 150 per share
Projected benefit obligation 9,000,000 February 14 Issued 2,000 shares for legal services with a·
Fair value of plan assets 10,000,000 billing price ofP300,0'00. The share on this date
Unrecognirect actuarial loss 1,500,000 is quoted at Pl40 _ .
March 27 Purchased 5,000 treasury shares at a cost of
During the :urrent year, the actuary determined the current service P 120 per ~hare
cost at P2,500,000 and the discount rate is 10%. The actual return October 31 Issued P4,000,000 convertible bonds at J 10.
The bonds an: quoted at 97 without the
on plan 3Ssets was Pl ,200,000. Contribution to the plan amounted
conversion feature.
to PSOO~OOO. The average remaining service period is 10 years. November 15 Declared a 2-for-1 share split when the market
What is the prepaid or accrued benefit cost at year-end? value of the share was P160
December 17 Sold 10,000 shares at P75 per share
a. 800,000 prepaid December 31 Declared a 10% stock dividend when the fair
value of the share was P80
b. 800,000 accrued
c. 700,000 prepaid What total amount should be recognized as share premium on
d. 700,000 accrued December 31, 2013?
a. 1,800,000
b. 2,320,000-
c. 2,542,000
d. 2,562,000

682
45. Wayward Company had 700,000 ordinary shares issued and 47. Yeoman Company reported cash balance on January 1, 2013
outstanding on December 31, 20 12 and there was no change at P 10,000,000. During the current year, the changes in certain
for the year ended December 31,2013. In computing for tlw accou_f\ts were:
2013 basic earnings per share, it was determined that the net
income in the income statement was P6,200,000. However, Accounts receivable 4,000,000 increase
lhe ~ntity had the following potentially dilutive securities and Inventory 3,500,000 decrease
the respective effect on net income represented by the annual Accounts p·ayable 5,000,000 decrease
dividend which was all declared in 20 13:
Total sales and c:~t of goods sold were P30,000,000 and
Effect on Potential P20,000,000, respectively. All sales and purchases were on
net income ordinary shares account. Vari9us operating expenses ofP3,000,000 were paid
Convc.rtible preference security A 300,000 120,000 in cash. There were no other transactions during the year. What
.ConV'ertible preference security B 1,200,000 200,000 is the cash balance on December 31, 2013?
Convertible preference securi_ty C 150,000 100,000
a. 11,500;000
What amount should be reported as diluted earnings per b. 14,500,000
share for 2013?
c. 17,000,000
d. 8,000,000
a. 6.50
b. 5.54
c. 5.43 48. Youngish Company reported that total assets decreased by
d. 5.88 P4,000,000 and total liabilities decreased by P7,000,000 in
the current year. Upon review of the accounting records, it
46. ' Wearisome Company revealed the following errors which were was determined that financial assets at fair value through other
discovecd on January 1, 20 13: comprehensive income increased by P200,000 and financial
assets held for trading decrease-d by P400,000 all due to
2010 2011 2012 changes in fair value. During the year, the entity received
Ending inventory overstated 900,000 800,000 equipment valued at P200,000 from a nonshareholder as
Depreciation understated 300,000 donation with no restrictions attached, and corrected a prior
Accrued rent revenue not recorded 140,000 250,000 period error resulting from an overstatement of ending
Accrued interest expense not recorded 20,000
inventory for Pl,OOO,OOO. What is the net income for the current
What is the net effect of the errors on the January 1, 2013 year?
retained earnings? . ·
a. 3,800,000
a. b. 3,600,000
1,120,000 over
"b. 82?.0,000 c. 4,200,000
over
c. 730,000 d. 4,000,000
over
d. 570,000 over
•