Intermediate Accounting 2 Millan 2

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Chapter 1
Current Liabilities
PROBLEM 1: TRUE OR FALSE

1. FALSE
2. FALSE – also contracts and other operation of law
3. TRUE
4. FALSE – minus transaction costs
5. TRUE
6. FALSE
7. TRUE
8. FALSE
9. TRUE
10. FALSE
PROBLEM 2: MULTIPLE CHOICE – THEORY

1. D
2. C
3. A
4. B
5. D
6. A
7. D
8. A
9. B
10. C
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PROBLEM 3: MULTIPLE CHOICE – COMPUTATIONAL

1. A
Notes payable 14,000
Interest payable 12,000
Rent payable 30,000
Cash dividends payable 8,000
Lease liability 70,000
Bonds payable 240,000
Premium on bonds payable 20,000
Security deposit 4,000
Redeemable preference shares issued 28,000
Total financial liabilities 426,000
2. D
Trade accounts payable (600K + 10K + 8K) 618,000
Interest payable on 10%, 4-year note (240K x 10% x 5/12) 10,000
Current portion of bonds payable 400,000
Held for trading financial liabilities 100,000
Income tax payable 100,000
Accrued expenses 10,000
Total current liabilities 1,238,000
3. C
Trade and other payables 2,000,000
Note payable (issued 3 yrs. ago, maturing on Dec. 31, 20x2) 6,000,000
Current portion of serial bonds 800,000
4. B (1.2M x 80%) = 960,000 noncurrent; (1M – 960K) = 40,000 current
5. B 3,120,000 + 480,000 – 600,000 = 3,000,000

 Deposits received for future subscription of shares that are
repayable in cash at any time prior to the issuance of the
subscribed shares are classified as liability. Since the SEC’s
decision is expected to be received in 20x2, the deposit liability
is classified as current in the 20x1 financial statements. If the
SEC approves Poof Co.’s increased capitalization, the liability
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is reverted back to “Subscribed Capital” (and, if appropriate,

‘Share premium’). When the shares are issued, the
“Subscribed Capital” is reclassified to “Share Capital.”
 The bank loan is classified as noncurrent because Poof Co. has
the has the right, at the end of the reporting period, to roll
over the obligation for at least twelve months after the
reporting period under an existing loan facility (i.e., the
original loan contract provides for the option to extend the loan and,
as of Dec. 31, 20x2, Poof Co. has complied with all the conditions
relating to the extension.)
6. A
Accounts payable 750,000
Long-term bank loan (maturing April 1, 20x9) 4,000,000
The grace period is disregarded because it was received after Dec.

31, 20x1.
7. B
Unadjusted accounts payable 2,300,000
(a) Goods in transit purchased FOB destination (23,000)
(b) Unreleased checks 32,000
(c) Freight accommodation on behalf of supplier (5,000)
(d) Consigned goods (90,000)
Adjusted accounts payable 2,214,000
8. C
Inventory Accounts payable
Unadjusted balances 800,000 960,000
(c) Purchase return (20,000)
(d) Post-dated check drawn 60,000
Adjusted accounts payable 800,000 1,000,000
The purchase return is adjusted only to the accounts

payable, and not to the inventory, because the inventory balance
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was determined based on the physical count on Dec. 31, 20x1,

which necessarily already excludes the return which was made on
Dec. 29, 20x1.
9. A
Subscriptions expirations:
− 20x3 (250K + 400K) 650,000
− 20x4 280,000
Unearned subscription revenue - 12/31/2003 930,000
10. C
Plan Initial payment per child No. of children Total
#1 500 15 7,500
#2 200 12 2,400
#3 - 9 -
9,900
Multiply by: Unexpired portion 8/12
Unearned revenue 6,600
11. C
20x1 20x2 20x3 Total
Percentage earned 40% 60%
Percentage earned 40% 60%
First half (2M ÷ 2) 1M 400,000 600,000
Second half (2M ÷ 2) 1M 400,000 600,000
Earned portions 400,000 1,000,000 600,000 2,000,000
12. D
Redemption 108,000
Breakage (200,000 x 10% x 60%*) 12,000
Total revenue in 20x1 120,000
* 108,000 ÷ (200,000 x 90%) = 60%
Gift cards sold 200,000

Redemption (108,000)
Breakage (12,000)
Gift card liability - 12/31/x1 80,000
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13. C
Redemption & expiration(a) of prior yr. GCs 120,000
Redemption of current yr. GCs 760,000
Breakage (1M x 5% x 80% (b)) 40,000
Total revenue in 20x1 920,000
Gift card liability

120,000 beg.
Red’n. & exp’n.(a) - prior yr. 120,000 1,000,000 Current yr. sales
Red’n. - current yr. 760,000
Breakage 40,000
end. 200,000
The unredeemed portion of ₱8,000 (120K – 112K) from prior year

(a)
has expired during 20x1 because the problem states that the gift
certificates sold expire within one year. Accordingly, this amount is
recognized as breakage revenue (and as reduction in liability) in 20x1.
(b) 760,000 ÷ (1M x 95%) = 80%
14. D
15. B
Total tax for the year (72,000 x 2) 144,000
Divide by: No. of months in a year 12
Monthly tax 12,000
April 1, 20x1
Land xxx
Cash xxx
Real property tax payable (12K x 3 mos.) 36,000
April 30, 20x1

Real property tax expense 12,000
Real property tax payable 12,000
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May 1, 20x1
Real property tax payable 48,000
Prepaid real property tax 24,000
Cash 72,000
PROBLEM 4: FOR CLASSROOM DISCUSSION
1. Solution:
Preference shares issued with mandatory redemption 100,000
Utilities payable 16,000
Rent payable 9,000
Total financial liabilities 140,000
2. Solution:
Held for trading financial liabilities 1,000,000
Current portion of Note payable 1,000,000
Unearned revenue 300,000
Dividends payable 800,000
Current liabilities 3,600,000
3. Solution:
Currently maturing long-term debt (a) 10,000,000
5-year loan payable on demand (b) 6,000,000
Loan with breach of provision (b) 14,000,000
“An entity classifies its financial liabilities as current when they are
(a)
due to be settled within twelve months after the reporting period,

even if:
a) the original term was for a period longer than twelve months,
and
b) an agreement to refinance, or to reschedule payments, on a long-
term basis is completed after the reporting period and before the
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financial statements are authorised for issue.” (PAS 1.72)
(b) “When an entity breaches a provision of a long-term loan

arrangement on or before the end of the reporting period with the
effect that the liability becomes payable on demand, it classifies the
liability as current, even if the lender agreed, after the reporting
period and before the authorisation of the financial statements for
issue, not to demand payment as a consequence of the breach. An
entity classifies the liability as current because, at the end of the
reporting period, it does not have a right to defer its settlement for at
least twelve months after that date.” (PAS 1.74)
4. Solution:
Unadjusted accounts payable 1,200,000
Goods in transit shipped FOB shipping point 70,000
Goods in transit shipped FOB destination (80,000)
Adjusted accounts payable 1,190,000
5. Solution:
➢ Subscriptions revenue in 20x2: (160,000 + 2,690,000) = 2,850,000
➢ Unearned subscriptions as of 12/31/x2 = 110,000
6. Solution:
Date Cash 400,000
Gift card liability 400,000
to record the sale of gift certificates
Date Gift card liability 216,000
Revenue 216,000
to record the redemption of gift certificates
Date Gift card liability 24,000
Revenue (400,000 x 10% x 60%*) 24,000
to record the revenue from expected breakage
* 216,000 ÷ (400,000 x 90%) = 60%
7. Solution:
Unadjusted balance 5,480,000
Unpaid utilities 50,000
Understatement in withholding taxes 20,000
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Adjusted total current liabilities 5,550,000
Dividend payable is recognized when the entity declares the

dividends (or when the declaration is approved by a relevant
authority, if such approval is required).
The dividends declared (in the problem) are recognized
only on Jan. 7, 20x2 (assuming it is not subject to further
approval). The dividends are only disclosed in the 20x1 financial
statements as a non-adjusting event after the reporting period.
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Chapter 2
Notes Payable
1. FALSE – interest payable = face amount x nominal rate
2. TRUE
➢ (1,241,843 x 110% x 110%) = 1,502,630 carrying amount on Dec.
31, 20x2
➢ 2M face amount - 1,502,630 = 497,370
3. TRUE
4. FALSE (1M x PV of ordinary annuity of 1 @10%, n=3)
5. TRUE
6. FALSE 40,000 (400,000 cash price equivalent x 10%)
7. TRUE (100,000 x .90) = 90,000 x 10% = 9,000
8. TRUE (100,000 x .90 x 110% x 10%) = 9,900 OR (90,000 + 9,000)

x 10% = 9,900
9. FALSE 850,000 (the note is payable in installments)
10. TRUE
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1. D – a note with below-market interest rate is discounted
2. A
3. C
4. A
5. D
Choice (a) is incorrect because this refers to the income statement
rather than the statement of financial position.
6. C
7. C
8. D
9. B
1st note: 6,000 x 18% = 1,080 interest expense;
2nd note: (7,080 ÷ 118%) x 18% = 1,080 interest expense
10. B
Concept: Pre-acquisition accrued interest
When interest has accrued before the issuance of an interest-
bearing payable, the subsequent payment of interest is allocated
between the pre-acquisition and post-acquisition periods. Only
the portion pertaining to the post-acquisition period is recognized
as interest expense.
Mar. Accounts payable 6,000

1,
Loss on derecognition of liability (squeeze) 120
20x1
Notes payable 6,000
Interest payable (6,000 x 12% x 2/12) 120
July. Notes payable 6,000
1,
Interest expense (6,000 x 12% x 4/12) 240
20x1
Interest payable (from Mar. 1, 20x1) 120
Cash [6,000 + (6,000 x 12% x 6/12)] 6,360
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PROBLEM 3: EXERCISES
1. Solution:
Cash flows 2,000,000
PV of 1 @16%, n=3 0.64066
Present value - 1/1/x1 1,281,320
Date Interest expense Discount Present value

1/1/x1 718,680 1,281,320
12/31/x1 205,011 513,669 1,486,331
12/31/x2 237,813 275,856 1,724,144
12/31/x3 275,856* 0 2,000,000
* Squeezed to eliminate difference due to rounding-off
1/1/x1
Equipment 1,281,320
Discount on notes payable 718,680
Notes payable 2,000,000
12/31/x1
Interest expense 205,011
12/31/x2
12/31/x3
Note payable 2,000,000

Cash 2,000,000
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2. Solutions:
Requirement (a):
PV ord. annuity @18%, n=3 2.17427
Present value - 1/1/x1 2,174,270
Date Payments Interest expense Amortization Present value

1/1/x1 2,174,270
12/31/x1 1,000,000 391,369 608,631 1,565,639
12/31/x2 1,000,000 281,815 718,185 847,454
12/31/x3 1,000,000 152,546* 847,454 0
Current portion = 718,185

Noncurrent portion = 847,454
Requirement (b):
Future cash payments (1M x 2 yrs.) 2,000,000
Carrying amount, 12/31/x1 1,565,639
Discount on note payable, 12/31/x1 434,361
Current portion:
Notes payable (1,000,000 due in 20x2) ₱1,000,000
Discount on notes payable (1M – 718,185 current portion) (281,815)
Notes payable, net (presented in current liabilities) 718,185
Noncurrent portion:
Notes payable (1,000,000 due in 20x3) 1,000,000
Discount on notes payable (1M – 847,454 noncurrent portion) (152,546)
Notes payable - net (presented in noncurrent liabilities) 847,454
Total notes payable, net - Dec. 31, 20x1 ₱1,565,639
Requirement (c):
1/1/x1
Equipment 2,174,270
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12/31/x1
Cash 1,000,000
12/31/x2
Cash 1,000,000
12/31/x3
Cash 1,000,000
3. Solutions:
➢ PV of note = (2M ÷ 4) x PV of an annuity due of P1 @12%, n=4
➢ PV of note = 1,700,916
Interest Present
Date Payments expense Amortization value
Jan. 1, 20x1 1,700,916
Jan. 1, 20x1 500,000 - 500,000 1,200,916
Jan. 1, 20x2 500,000 144,110 355,890 845,026
Jan. 1, 20x3 500,000 101,403 398,597 446,429
Jan. 1, 20x4 500,000 53,571 446,429 -
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Requirement (a):
Jan. 1, Vehicle 1,900,916
20x1
Cash 200,000
Jan. 1, Notes payable 500,000
20x1
Cash 500,000
Dec. 31, Interest expense 144,110
20x1
20x2
Cash 500,000
20x2
20x3
Cash 500,000
20x3
20x4
Cash 500,000
Requirement (b):
Interest expense in 20x2 = 101,403
Requirement (c):
Carrying amt. on 1/1/x2 845,026
Add back: Payment on 1/1/x2 500,000
Carrying amt. on 12/31/x1 1,345,026
4. Solution:
Face amount (1) (400,000 x 4) = 1,600,000
Discount on N/P on initial recognition (2) (1.6M – 1,119,272) = 480,728
Effective interest rate (3) (179,084 ÷ 1,119,272) = 16%
Term of the note (in years) (4) 4 years

1/1/x1 1,119,272
12/31/x1 400,000 179,084 (5) 220,916 898,356
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12/31/x2 400,000 (6) 143,737 256,263 (7) 642,093

12/31/x3 400,000 102,735 (8) 297,265 344,828
(9) 12/31/x4 400,000 (10) 55,172 344,828 0
5. Solution:
First step: Place the given information on the amortization table:
1/1/x1 911,205
12/31/x1 300,000
12/31/x2 300,000 86,466 213,534 507,016
12/31/x3 300,000
12/31/x4 300,000
Second step: Squeeze for the carrying amount of the note on

December 31, 20x1.
1/1/x1 911,205
12/31/x1 300,000 720,550*
12/31/x2 300,000 86,466 213,534 507,016
12/31/x3 300,000
12/31/x4 300,000
* (213,534 + 507,016) = 720,550
Third step: Compute for the effective interest rate

EIR = 86,466 ÷ 720,549 = 12%
Fourth step: Squeeze for the other missing information

1/1/x1 911,205
12/31/x1 300,000 109,345 190,655 720,550
12/31/x2 300,000 86,466 213,534 507,016
12/31/x3 300,000 60,842 239,158 267,858
12/31/x4 300,000 32,142* 267,858 -
* Squeezed to eliminate difference due to rounding-offs.

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1. D
Interest expense in 20x4 (10,000 x 12% x 10/12) 1,000
Interest expense in 20x5 [(10,000 + 1,000) x 12%] 1,320
Interest payable (compounded) - 12/31/x5 2,320
2. B
1/1/x1 2,141,234 2,858,766
12/31/x1 428,815 1,712,419 3,287,581
12/31/x2 493,137 1,219,282 3,780,718
12/31/x3 567,108 652,174 4,347,826
12/31/x4 652,174 (0) 5,000,000
Shortcut:
 (5M x PV of 1 @15%, n=4) = 2,858,766;
 2,858,766 x 115% x 115% = 3,780,718;
 5M – 3,708,718 = 1,219,282
3. B
➢ Shortcut: 418,250 - the cost of the annuity purchased.
➢ Longcut: Reconciliation for the shortcut above
12/31/2000
Investment (annuity product) 418,250
Cash 418,250
Contest prize expense (a) 468,250

Discount on notes payable (1M – 468,250) 531,750
Note payable 1,000,000

Discount on note payable (531,750)
Carrying amount - 12/31/2000 468,250
Current portion of note (due on 1/2/2001) (50,000)
Noncurrent portion 12/31/2000 (equal to cost of annuity) 418,250
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(a) Payment due on 1/2/2001 50,000

Cost of annuity purchased 418,250
Contest prize expense (equal to carrying amount of note) 468,250
1/2/2001
Cash 50,000
4. C
➢ Shortcut: 468,250 the total carrying amount of the note or
(418,250 annuity + 50,000 payment = 468,250)
➢ Longcut: see reconciliation above
5. A
PV factors Present
Future cash flows @ 6%, n= 6 value
Principal 4,000,000 0.70496 a 2,819,840
Semiannual int. (4M x 1.5%) 60,000 4.91732 b 295,039
Total 3,114,879
a (PV of ₱1 @6%, n=6)
b (PV of ordinary annuity of ₱1 @6%, n=6
6. A
Cash flow 20,000
PV of annuity due of 1 @11%, n=8 5.712
PV of note on Dec. 30, 20x6 114,240
Less: First installment on Dec. 31, 20x6 (20,000)
PV of note on Dec. 31, 20x6 94,240
7. D
➢ Future cash flows x (PV of ordinary annuity of 1 @1%, n=300) =
14,000,000
➢ Future cash flows x 94.9465512548 = 14,000,000
➢ Future cash flows = 14,000,000 ÷ 94.9465512548
➢ Future cash flows (monthly payment) = ₱147,451.38
P a g e | 10
Monthly amortization 147,451.38

Monthly expenditure 36,600
Minimum monthly take-home salary 184,051.38
8. A
Monthly amortization 147,451.38
Multiply by: (25 yrs. x 12 months) 300
Total payments 44,235,414
Cash selling price (14,000,000)
Total interest expense 30,235,414
9. C
Loan payable 4,000,000
Transaction costs (4M x 11.19%) (447,600)
Carrying amount - 1/1/x1 3,552,400
Trial and error:

(Principal: 4,000,000 x PV of 1 @ x%, n=4) + (Interest: 480,000 x PV
ordinary annuity @ x%, n=4) = 3,552,400
First trial: @16%

(Principal: 4,000,000 x PV of 1 @ 16%, n=4) + (Interest: 480,000 x PV
ordinary annuity @ 16%, n=4) = 3,552,400
(4,000,000 x 0.55229) + (480,000 x 2.79818) = 3,552,400
(2,209,160 + 1,343,126) = 3,552,400
3,552,286 = 3,552,400
If the difference of ₱114 is deemed immaterial, 16% is regarded as

the effective interest rate.
10. C (194,000 x 12.4% x 1/12) = 2,005

P a g e | 11
PROBLEM 5: CLASSROOM ACTIVITY
Plus points to the learner who went the extra mile and
placed a description for the table.
*********** portion deliberately not presented to save space*****

P a g e | 12
1. Solution:
PV of 1 @17%, n=3 0.62437
Present value - 1/1/x1 998,992
Date Interest expense Discount on N/P Present value

1/1/x1 601,008 998,992
12/31/x1 169,829 431,179 1,168,821
12/31/x2 198,700 232,479 1,367,521
12/31/x3 232,479 0 1,600,000
1/1/x1
Land 998,992
12/31/x1
12/31/x2
12/31/x3

Cash 1,600,000
P a g e | 13
2. Solution:
Requirement (a):
Cash flows 400,000
PV ord. annuity @17%, n=3 2.209585
Present value - 1/1/x1 883,834

1/1/x1 883,834
12/31/x1 400,000 150,252 249,748 634,086
12/31/x2 400,000 107,795 292,205 341,881
12/31/x3 400,000 58,119* 341,881 0
1/1/x1
Land 883,834
12/31/x1
Cash 400,000
12/31/x2
Cash 400,000
12/31/x3
Cash 400,000
P a g e | 14
Requirement (b):
Current portion:
Notes payable (400,000 due in 20x2) ₱ 400,000
Discount on notes payable (400K – 292,205 current portion) (107,795)
Notes payable, net (presented in current liabilities) 292,205
Noncurrent portion:
Notes payable (400,000 due in 20x3) 400,000
Discount on notes payable (400K – 341,881 noncurrent portion) (58,119)
Notes payable - net (presented in noncurrent liabilities) 341,881
Total notes payable, net - Dec. 31, 20x1 ₱ 634,086
3. Solutions:
Initial measurement:
(1.2M ÷ 3) = 400,000;
400,000 x PV of an annuity due of ₱1 @10%, n=3 = 1,094,215
Requirement (a):
1/1/x1 1,094,215
1/1/x1 400,000 - 400,000 694,215
1/1/x2 400,000 69,422 330,578 363,637
1/1/x3 400,000 36,363 363,637 (0)
Requirement (b):
69,422 – see table above.
Requirement (c):
Add back: Payment on 1/1/x2 400,000
P a g e | 15
4. Solutions:
Requirement (a):
Loan payable 3,000,000
Transaction costs (3M x 4.8037%) (144,111)
Requirement (b):
Trial and error:
Working formula:
(Principal: 3,000,000 x PV of 1 @ x%, n=3) + (Interest: 300,000 x PV
ordinary annuity @ x%, n=3) = 2,855,889
First trial: @12%

(Principal: 3,000,000 x PV of 1 @ 12%, n=3) + (Interest: 300,000 x PV
ordinary annuity @ 12%, n=3) = 2,855,889
(3,000,000 x 0.711780) + (300,000 x 2.401831) = 2,855,889
(2,135,340 + 720,549) = 2,855,889
2,855,889 = 2,855,889
❖ The effective interest rate is 12%.
Requirement (c):
Interest
Date Payments expense Amortization Present value
1/1/x1 2,855,889
12/31/x1 300,000 342,707 42,707 2,898,596
12/31/x2 300,000 347,832 47,832 2,946,428
12/31/x3 300,000 353,572 53,572 3,000,000
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Chapter 3
Bonds Payable & Other Concepts
1. TRUE
2. FALSE - A debenture is an unsecured bond.
3. FALSE - Monitoring for compliance with the indenture is the
responsibility of the trustee of the bond issue.
4. FALSE – the conversion option belongs to the bondholder, not
the issuer
5. TRUE – The increased rate is intended to entice investors to
buy bonds during periods when the demand is low.
6. FALSE - lower (*par value of bonds is another term for face
amount of bonds)
7. FALSE
8. FALSE
9. FALSE
10. TRUE

1. C
2. C
3. A
4. D
5. C
6. D
7. C
8. C
Sample assumptions:
 Face amount: 1M
 Nominal int. rate: 10%
 n=3
 Effective int. rate: 12%
Page |2
Initial carrying amount: (1M x PV of 1 @12%, n=3) + (100K x PV

ord. annuity @12%, n=3) = 951,963
Using effective interest method:

Interest Present
Date expense Payments Amortization Value
1/1/x1 951,963
12/31/x1 100,000 114,236 14,236 966,199
Using straight-line method:

Discount on bonds (1M – 951,963) 48,037
Divide by: Term 3
Annual amortization of discount 16,012
Carrying amount - 1/1/x1 951,963

Discount amortization - 20x1 16,012
I. Effect on Bond carrying amount
967,975 SLM vs. 966,199 EIM = Overstated
II. Effect on Retained earnings
 100K interest + 16,012 amort. = 116,012 int. expense under SLM

 116,012 SLM vs. 114,236 EIM: overstated
 Effect on Retained earnings: Understated
9. B
Solution:
EFFECT ON DECEMBER 31, 20X1:
Using straight line method:
Discount on bonds - 1/2/x1 150,000
Divide by: Term 6
Annual amortization of discount 25,000
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Amortization - 20x1 (25,000)
Face amount 1,000,000

Discount on bonds - 12/31/x1 (125,000)
Using effective interest method:

Interest Present
Date expense Payments Amortization Value
1/2/x1 850,000
12/31/x1 102,000 80,000 22,000 872,000
Carrying amounts - 12/31/x1:

Straight line (erroneous) 875,000
Effective interest method 872,000
Difference - overstatement (3,000)
EFFECT ON JANUARY 2, 20X7:

On January 2, 20x7, maturity date, there will be NO EFFECT of the
error on the carrying amount of the bonds because on this date,
the discount would have been fully amortized under both the
straight line method and the effective interest method.
10. C
Page |4
1. Solution:
Jan. 1, Cash 1,903,927
20x1 Discount on bonds payable 96,073
Bonds payable 2,000,000
Interest Interest Present

Date payments expense Amortization value
Jan. 1, 20x1 1,903,927
Dec. 31, 20x1 200,000 228,471 28,471 1,932,398
Dec. 31, 20x2 200,000 231,888 31,888 1,964,286
Dec. 31, 20x3 200,000 235,714 35,714 2,000,000

20x1 Cash 200,000
Discount on bonds payable 28,471
20x2 Cash 200,000
20x3 Cash 200,000

Cash 2,000,000
2. Solution:
Jan. 1, Cash (2,206,168 – 106,694) 2,099,474
20x1 Bonds payable 2,000,000
Premium on B/P (squeeze) 99,474

Jan. 1, 20x1 2,099,474
Dec. 31, 20x1 240,000 209,947 30,053 2,069,421
Dec. 31, 20x2 240,000 206,942 33,058 2,036,363
Dec. 31, 20x3 240,000 203,637 36,363 2,000,000
Page |5

20x1 Premium on bonds payable 30,053
Cash 240,000
Cash 240,000
Cash 240,000
3. Solution:
Jan. 1, 20x1 2,151,632
Dec. 31, 20x1 240,000 215,163 24,837 2,126,795
Dec. 31, 20x2 240,000 212,680 27,320 2,099,475
July 1, 20x3 120,000 104,974 15,026 2,084,449
July 31, Interest expense 104,974

July 31, Bonds payable 2,000,000
Cash (2M x 102%) 2,040,000
Gain on retirement of bonds 164,449
4. Solution:
Initial recognition:
Issue price (2M x 105%) 2,100,000
Fair value of bonds without conversion feature (a) ( 1,903,926)
Equity component 196,074
Page |6
(a)
Future cash flows PV factors @12%, n=3 Present value
Principal 2,000,000 0.711780 1,423,560
Interest 200,000 2.401831 480,366
Fair value of bonds without conversion feature 1,903,926
Jan. Cash (2M x 105%) 2,100,000

1, Discount on bonds payable 96,074
20x1 (2M – 1,903,926)
Share premium – conversion 196,074
feature
Subsequent measurement:
Jan. 1, 20x1 1,903,926
Dec. 31, 20x1 200,000 228,471 28,471 1,932,397
Dec. 31, 20x2 200,000 231,888 31,888 1,964,285
Dec. 31, 20x3 200,000 235,715 35,715 2,000,000

Cash 200,000
Cash 200,000
Dec. 31, Bonds payable 2,000,000
20x2 Discount on bonds payable
(2M – 1,964,285) 35,715
Share capital [(2M ÷ 1,000) x 8 1,600,000
shares x 100 par value)]
Share premium 364,285
to record the conversion
Dec. 31, Share premium 20,000
Page |7
20x2 Cash 20,000

to record the stock issuance costs
Dec. 31, Share premium – conversion feature 196,074
20x2 Share premium 196,074
to transfer within equity the equity
component of the compound instrument
5. Solution:
➢ Initial measurement:
Issue price 2,200,000
(a) Futurecash flows PV factors @12%, n=3 Present value

Principal 2,000,000 0.711780 1,423,560
Interest 200,000 2.401831 480,366
➢ Subsequent measurement:
Jan. 1, 20x1 1,903,926
Dec. 31, 20x1 200,000 228,471 28,471 1,932,397
Dec. 31, 20x2 200,000 231,888 31,888 1,964,285
Dec. 31, 20x3 200,000 235,715 35,715 2,000,000
➢ Retirement:
Retirement price 2,000,000
Fair value of bonds w/o conversion feature – 12.31.20x2 (1,981,982)(b)
Retirement price allocated to equity component 18,018
Future cash flows

(b) PV factors @11%, n=1 Present value
Principal 2,000,000 0.900901 1,802,802
Interest 200,000 0.900901 180,180
Fair value of bonds without conversion feature – 12.31.x2 1,981,982
Page |8
❖ Journal entries:
Jan. Cash 2,200,000
1, Discount on bonds payable (2M – 1,903,926) 96,074
20x1 Bonds payable 2,000,000
Sh. premium – conversion feature 296,074
Dec. Interest expense 228,471
20x1 Cash 200,000
20x2 Cash 200,000
Dec. Bonds payable 2,000,000
31, Loss on extinguishment of bonds 17,697
20x2 Discount on B/P (2M – 1,964,285) 35,715
Cash 1,981,982
to record retirement of convertible bonds
Dec. Share premium – conversion feature 18,018
31, Cash 18,018
20x2 to record the allocation of retirement price to
the equity component
31, (296,074 –18,018)
20x2 Share premium 278,056
to record forfeiture of the conversion feature
of retired convertible bonds
Page |9
1. D
9¾% registered debentures, callable in 2002, due in 2007 700,000
9½% collateral trust bonds, convertible into common stock
600,000
beginning in 2000, due in 2010
Total term bonds 1,300,000
2. B
Interest
Date Payments expense Amortization Present value
1/2/01 469,500
6/30/01 22,500 23,475 975 470,475
3. B
Jan. 1, 20x1 3,807,852
Dec. 31, 20x1 400,000 456,942 56,942 3,864,794
4,000,000 face amount – 3,864,794 = 135,206
4. D
Interest Interest
Date payments expense Amortization Present value
Jan. 1, 20x1 3,628,536
Dec. 31, 20x1 400,000 507,995 107,995 3,736,531
5. D
Issue price of bonds (200 x 1,000 x 101%) 202,000
Accrued interest (200 x 1,000 x 9% x 5/12) 7,500
Total proceeds 209,500
P a g e | 10
6. A
Present
Future cash flows PV @ 10%, n=3 PV factors value
Principal 2,000,000 PV of 1 0.751315 1,502,630
Interest 240,000 PV of ord. annuity of 1 2.486852 596,844
2,099,474
7. B
Solution:
Redemption price (5M x 98%) 4,900,000
Less: Carrying amount of bonds:
Unamortized premium 30,000
Unamortized issue costs (50,000) 4,980,000
Gain on retirement 80,000
8. D
The periodic cash flows are computed as follows:
Due date Amounts due Periodic
Principal Interest Cash flows
12/31/x1 40,000 16,000 56,000
12/31/x2 40,000 12,800 52,800
12/31/x3 40,000 9,600 49,600
12/31/x4 40,000 6,400 46,400
12/31/x5 40,000 3,200 43,200
The amortization table is prepared as follows:

Interest Present
Date expense Payments Amortization value
12/31/x0 190,280
12/31/x1 19,028 56,000 36,972 153,308
12/31/x2 15,331 52,800 37,469 115,839
12/31/x3 11,584 49,600 38,016 77,823
12/31/x4 7,782 46,400 38,618 39,205
12/31/x5 3,920 43,200 39,280 (75)
P a g e | 11
9. A
➢ Total cash flow due at maturity date: (6M x 110% x 110% x
110%) = 7,986,000
➢ Initial measurement of bonds: 7,986,000 x PV of 1 @18%, n=3 =
4,860,526
i. Bonds: 4,860,526 x 118% - 600,000 interest payable =
5,135,421
ii. Interest payable: (6M x 10%) = 600,000
Alternative solution:
PV of
Interest Interest PV of
Date cash Amortization
expense payable bonds
flows
Jan. 1, 20x1 4,860,526 4,860,526
Dec. 31, 20x1 874,895 5,735,421 600,000 274,895 5,135,421
Dec. 31, 20x2 1,032,376 6,767,796 660,000 372,376 5,507,796
Dec. 31, 20x3 1,218,203 7,986,000 726,000 492,203 6,000,000
10. C
Fair value of bonds without the warrants 196,000
Face amount of bonds 200,000
Discount on bonds (4,000)
11. B
Carrying amount of bonds converted 1,300,000
Par value of shares issued (50,000 x 1) (50,000)
Share premium 1,250,000
12. C
P a g e | 12
(a) Future cash flows Present value

PV factors @12%, n=3
Principal 2,000,000 0.711780 1,423,560
Interest 200,000 2.401831 480,366
Jan. 1, 20x1 1,903,926
Dec. 31, 20x1 200,000 228,471 28,471 1,932,397
Dec. 31, 20x2 200,000 231,888 31,888 1,964,285
➢ Retirement:
Retirement price 1,000,000
Fair value of bonds w/o conversion feature
(1,981,982 (b) x ½) ( 990,991)
Allocation of retirement price to equity component 9,009
Future cash flows

(b) PV factors @11%, n=1 Present value
Principal 2,000,000 0.900901 1,802,802
Interest 200,000 0.900901 180,180
Fair value of bonds w/o conversion feature - 12/31/20x2 1,981,982
Carrying amount of bonds retired (1,964,285 x ½) 982,143

Retirement price allocated to bonds 990,991
Loss on retirement (8,849)
Equity component from issuance (296,074 x 1/2) 148,037

Retirement price allocated to equity component (9,009)
Net amount reclassified within equity 139,028
P a g e | 13
Supporting journal entries:

Dec. Bonds payable (2M x ½) 1,000,000
31,
20x2
Loss on extinguishment of bonds 8,849
[(2M – 1,964,285) x ½ ] 990,991
Cash
to record the retirement of bonds
31,
20x2
(296,074 x ½)
Cash 9,009
to transfer within equity the amount allocated
to the equity component of the compound instrument
13. D
Payment for the liability:
Cash 50,000
Carrying amount of investment securities 375,000 425,000
Carrying amount of liability settled:
Principal 500,000
Accrued interest 75,000 575,000
Gain on settlement 150,000
14. B (28,000 – 25,000) = 3,000
15. D
The modification is analyzed as follows:
Old terms New terms
Principal 1,000,000 950,000
Accrued interest 40,000 30,000
Remaining term ('n') 1 year
The present value of the modified liability is computed as follows:

Future cash flows PV of 1 @10%, n=1 Present value
Principal 950,000 0.90909 863,636
P a g e | 14
Interest 30,000 0.90909 27,273

Present value of the modified liability 890,908
The difference between the old liability and the new liability is tested
for substantiality.
Carrying amount of old liability
1,040,000
(1M principal + 40,000 accrued interest)
Present value of modified liability 890,908
Difference 149,092
Difference 149,092
Divide by: Carrying amount of old liability 1,040,000
14.34%
The modification is considered substantial because the modification

resulted to a present value of the new obligation different by at least
10% of the present value (carrying amount) of old obligation.
Therefore, the old liability is extinguished and the difference of
₱149,092 is recognized as gain on extinguishment.
P a g e | 15
Solutions:
Requirement (a): Effective interest rate
Trial & Error
PV = CF x PVF
There is discount. Therefore, the EIR must be higher than 8%.
First trial: @10% per annum (5% semi-annual)

➢ 922,782 = (1,000,000 x PV of 1 @ 5%, n=10) + (40,000 x PV
ordinary annuity @5%, n=10)
➢ 922,782 = 613,913 + 308,869
➢ 922,782 equals 922,782
❖ The EIR is 10% (per annum).
Requirement (b): Amortization table

Interest
Date payments Interest expense Amortization Present value
7/1/x1 922,782
1/1/x2 40,000 46,139 6,139 928,921
7/1/x2 40,000 46,446 6,446 935,367
1/1/x3 40,000 46,768 6,768 942,135
7/1/x3 40,000 47,107 7,107 949,242
1/1/x4 40,000 47,462 7,462 956,704
7/1/x4 40,000 47,835 7,835 964,539
1/1/x5 40,000 48,227 8,227 972,766
7/1/x5 40,000 48,638 8,638 981,404
1/1/x6 40,000 49,070 9,070 990,474
7/1/x6 40,000 49,526* 9,526* 1,000,000*
* The last figures are ‘squeezed’ to eliminate the difference due to rounding-
offs and make the amortized cost at maturity date exactly equal to 1M.
P a g e | 16
Requirement (c): Journal entries

7/1/x1
Cash 922,782
12/31/x1
P a g e | 17
1. Solutions:
Requirement (a):
Transaction costs (473,767)
Requirement (b):
Initial carrying amount (4,326,233)
Net discount on bonds payable 673,767
Requirement (c):
Date Interest paid Interest expense Amortization Present value

1/1/x1 4,326,233
12/31/x1 500,000 692,197 192,197 4,518,430
12/31/x2 500,000 722,949 222,949 4,741,379
12/31/x3 500,000 758,621 258,621 5,000,000
❖ Answer: Periodic interest payments are less than periodic

interest expenses.
Requirement (d):
1/1/x1
Cash 4,800,000
1/1/x1
Discount on bonds payable (Bond issue costs) 473,767
Cash 473,767
P a g e | 18
12/31/x1
Cash 500,000
12/31/x2
Cash 500,000
12/31/x3
Cash 500,000

Cash 5,000,000
2. Solution:
Requirement (a):
Accrued interest (5M x 14% x 3/12) (175,000)
Requirement (b):
4/1/x1
Cash 5,415,183
Interest expense (or Interest payable) 175,000
Requirement (c):
(5,240,183 x 12% x 9/12) = 471,616
P a g e | 19
3. Solution:
Cash flows PV factors Issue price
Principal 5,000,000 0.79383 3,969,161
Interest 700,000 2.57710 1,803,968
5,773,129
4. Solution:
12/31/x2
Loss on derecognition 122,223
Cash (5M + 400,000) 5,400,000

1/1/x1 5,773,129
12/31/x1 700,000 461,850 238,150 5,534,979
12/31/x2 700,000 442,798 257,202 5,277,777
12/31/x3 700,000 422,223 277,777 5,000,000
5. Solution:
Requirement (a):
1/1/x1
Cash 5,200,000
Premium on bonds payable [(5M x 101%) – 5M] 50,000
Share premium – conversion feature (squeeze) 150,000
P a g e | 20
Requirement (b):
1/1/x1 5,050,000
12/31/x1 600,000 585,295 14,705 5,035,295
12/31/x2 600,000 583,591 16,409 5,018,886
12/31/x3 600,000 581,689 18,311 5,000,575
1/1/x3
Ordinary share capital (10,000 sh. x ₱200) 2,000,000
Share premium – conversion feature 150,000

6. Solution:
Total retirement price (5M + 200K) 5,200,000
Fair value of bonds (5M x 102) (5,100,000)
Retirement price allocated to equity component 100,000

1/1/x1 5,050,000
12/31/x1 600,000 585,295 14,705 5,035,295
12/31/x2 600,000 583,591 16,409 5,018,886
12/31/x3 600,000 581,689 18,311 5,000,575
1/1/x3
Loss on derecognition (squeeze) 81,114
Cash (allocation to debt component) 5,100,000
Share premium – conversion feature 150,000

Cash (allocation to equity component) 100,000
P a g e | 21
7. Solution:
Note payable (liability being settled) 1,000,000
Carrying amount of equipment (settlement) 900,000
Gain on derecognition (settlement less than liability) 100,000
8. Solution:
Note payable (liability being settled) 600,000
Fair value of shares (settlement) 750,000
Loss on derecognition (settlement exceeds liability) (150,000)
9. Solution:
Original terms Modified terms
Principal 2,800,000 2,500,000
Accrued interest 400,000 -
Nominal rate 14% 9%
Maturity already due 4 yrs.
Present value of new liability

(Principal: 2.5M x PV of 1 @14%, n=4) + 2,135,786
(Interest: 2.5M x 9% x PV ordinary annuity @14%, n=4)
Carrying amount of old liability (2.8M + 400K) 3,200,000
Difference 1,064,214
Difference 1,064,214
Divide by: Carrying amount of old liability 3,200,000
Change in liability - Substantial 33%
P a g e | 22
Dec. 31, 20x1

Loan payable (old) 2,800,000
Discount on loan payable (new) 364,214
(2.5M – 2,135,786)
Loan payable (new) 2,500,000
Gain on modification 1,064,214
Page |1
Chapter 4
Provisions, Contingent Liabilities and
Contingent Assets

1. TRUE
2. FALSE
3. TRUE
4. FALSE
5. TRUE
6. FALSE
7. FALSE – disclosure is not required
8. FALSE
9. FALSE
10. FALSE

1. D
2. D
3. B
4. B – The Conceptual Framework describes a liability as one that
arises from a past event and has a potential to cause an
outflow of resources embodying economic benefits (which is
the case in the problem). Meeting the definition of a liability
does not automatically warrant an item to be recognized. The
other elements of the recognition criteria must also be met.
5. D
6. C
7. D
8. A
9. C
10. A
Page |2

1. A - A contingent gain that is probable is disclosed only.
2. A ₱200,000 – the reasonable estimate as at year-end. The actual
settlement amount of ₱275,000 is disregarded because the
settlement occurred after the financial statements have been
issued.
3. D
4. C (100M x 80%)
5. D
Minor repairs (4M x 10% defective x ½ x 20%) 40,000
Major repairs (4M x 10% defective x ½ x 70%) 140,000
Total warranty costs 180,000
Multiply by: 30%
Amount to be settled in 20x2 54,000
Multiply by: Risk adjustment factor (100% + 3%) 103%
Total 55,620
Multiply by: Discount factor 0.95238
Warranty provision on Dec. 31, 20x1 52,971
6. B
7. D (60 x 48,000) = 2,880,000
8. D
Warranty liability
Actual warranty Warranty expense - 20x7
costs - 20x7 2,250 9,000 (150K x 6%)
Actual warranty Warranty expense - 20x8
costs - 20x8 7,500 15,000 (250K x 6%)
end. 14,250
9. A
No. of packages sold 110,000
Multiply by: Estimate of redemption 60%
Total 66,000
Divide by: No. of coupons for each toy offering 5
Estimated no. of toys to be given out 13,200
Page |3
Multiply by: Net cost per toy (.80 - .50) 0.30

Premium expense 3,960
10. C
Liability for premiums
6,000,000 Jan. 1, 20x1
Premium expense in 20x1
Actual cost 2,750,000 1,800,000 (2,250,000 x 80%)
Dec. 31, 20x1 5,050,000

1. Answer: Yes. All the elements of the recognition criteria are
met:
a. Present obligation arising from past event – an accident already
happened and a lawsuit was filed against the entity.
b. Probable outflow – the entity expects to lose the case and pay
damages.
c. Reliable estimate – the problem states that “Sufficient data is
available to make a reliable estimate of the damages.”
2. Answer:
Dec. Probable loss on lawsuit 4,000,000
31,
Estimated liability on pending lawsuit 4,000,000
20x1
3. Solution:
At thirty per cent chance: (9M x 30%) 2,700,000
At seventy per cent chance: (4M x 70%) 2,800,000
Total at 100% chance of settlement 5,500,000
Multiply by: Probability of settlement (100% - 20%) 80%
Probability-weighted expected cash flows 4,400,000
Multiply by: Risk adjustment (100% + 4%) 104%
Total 4,576,000
Multiply by: PV of P1 @10%, n=1 0.892857
Provision for pending lawsuit – Dec. 31, 20x1 4,085,714
Page |4
Dec. Probable loss on lawsuit 4,085,714

31,
20x1
4. Answer:
Dec. 31, Probable loss on lawsuit [(2M + 7M) ÷ 2] 4,500,000
20x1
5. Solution:
Dec. 31, Probable loss on lawsuit 5,000,000
20x1
Dec. 31, Estimated liability on pending lawsuit 200,000
20x2
Gain on revision of estimate 200,000
20x3 Estimated liability on pending lawsuit 4,800,000
Loss on lawsuit 300,000
Cash 5,100,000
6. Solutions:
Requirement (a):
20x1:
Warranty expense (10M x 6% (a)) 600,000
Warranty obligation 600,000
to record the provision for warranty costs
Cash (or other asset account) 400,000
to record the actual warranty costs
(a) 2% + 4% = 6%
20x2:
Warranty expense (12M x 6%) 720,000
to record the provision for warranty costs
Warranty expense 500,000
Cash (or other asset account) 500,000
to record the actual warranty costs
Page |5
Requirement (b):
Warranty obligation
160,000 Jan. 1, 20x1
Actual costs – 20x1 400,000 600,000 Warranty expense - 20x1
Actual costs – 20x2 500,000 720,000 Warranty expense - 20x2
Dec. 31, 20x2 580,000
7. Solution:
Requirement (a):
20x1:
Premium expense [(500K x 80% ÷ 5) x ₱100 )] 8,000,000
Estimated liability for premiums 8,000,000
to record the provision for premiums
(60,000 T-shirts x ₱100)
Premiums 6,000,000
to record the actual premiums distributed
20x2:
Premium expense [(900,000 x 80% ÷ 5) x ₱100] 14,400,000
to record the provision for premiums
(147,600 T-shirts x ₱100)
Premiums 14,760,000
to record the actual premiums distributed
Requirement (b):
Estimated premium liability
720,000 Jan. 1, 20x1
Actual cost - 20x1 6,000,000 8,000,000 Premium expense - 20x1
Actual cost - 20x2 14,760,000 14,400,000 Premium expense - 20x2
Dec. 31, 20x2 2,360,000
Page |6
8. Solution:
Jan. 1,
20x1
No entry
Dec. 31, Probable loss on guarantee 1,000,000
20x1 1,000,000
Estimated liability for guarantee
Chapter 5
Employee Benefits (Part 1)

1. TRUE
2. TRUE
3. TRUE
4. FALSE – Both employee and employer will contribute – so is
for PhilHealth and Pag-IBIG.
5. TRUE

1. D
2. D
3. C
4. C
5. D
6. B
7. A
8. B
9. A
10. A
1
1. Solution:
Employee Starting date VL earned to date VL Taken VL Not taken
S. Perkins 1/6/2000 12 7 5
M. Jordan 6/2/2001 18* 3 15
P. Ford 11/4/2002 2 0 2
J. Worthy 7/28/2002 5 1 4
* 12 during the year + 6 carry forward = 18
Vacation Liability for

Days
Employee Not Taken Rate per Day Compensated Absences
S. Perkins 5 ₱70 ₱ 350
M. Jordan 15 60 900
P. Ford 2 48 96
J. Worthy 4 9 316
₱1,662
2. Solutions:
Requirement (a):
Bonus before bonus and before tax
B = P x Br
B = 1,800,000 x 12% = 216,000
Requirement (b):
Bonus after bonus and before tax
P
B = P -
1 + Br
B = 1,800,000 – [1,800,000 ÷ (1 + 12%)]
B = 192,857
Requirement (c):
Bonus before bonus and after tax
B = P x 1 – Tr
2
1/Br – Tr
B = 1,800,000 x {(1 - 30%) ÷ [(1÷12%) - 30%]}
B = 156,846
Requirement (d):
Bonus after bonus and after tax
1 - Tr
B = P x
1/Br - Tr + 1
B = 1,800,000 x {(1 + 30%) ÷ [(1÷12%) - 30% + 1]}

B = 139,483
3. Solution:
1 - Tr
B = P x
1/Br - Tr + 1
44,000 = P x {(1 – 30%) ÷ [(1 ÷ 14%) – 30% + 1]}
44,000 = P x [(0.70) ÷ (7.14 – 0.30 + 1)]
44,000 = P x (0.70 ÷ 7.843)
44,000 = P x .089
P = 44,000 ÷ .089
P = 494,382
Note: The learner’s answer may NOT be exactly equal to the

amount above because of ROUNDING-OFF.
4. Solution:
Plan A: (8% Bonus based on profit after bonus but before taxes)
Bonus after bonus and before tax

P
B = P -
1 + Br
B = 100,000 – [100,000 ÷ (1 + 8%)]
B = 7,407
3
Plan B: (12% Bonus based on profit after bonus and taxes)

1 - Tr
B = P x
1/Br - Tr + 1
B = 100,000 x {(1 + 30%) ÷ [(1÷12%) - 30% + 1]}

B = 7,749
Answer: The executives would prefer Plan B
5. Solution:
20x1
Retirement benefits expense 2,000,000
Accrued retirement benefits 2,000,000
20x2
Accrued retirement benefits 2,000,000
Prepaid retirement benefits 700,000
Cash 4,700,000
20x3
Cash 1,200,000
Accrued retirement benefits 100,000
4
1. C
Salary at regular rate (40 hrs. x 125) 5,000
Salary at special rate [20 x (125 x 150%)] 3,750
Gross pay 8,750
SSS (525)
PhilHealth (131)
Pag-IBIG (25)
Net pay before withholding tax 8,069
Withholding tax (1,210)
Net pay after withholding tax 6,858
2. B Ryan: (800 x 2) = 1,600. None is accrued for Todd because his

vacation rights neither vest nor accumulate.
3. D
Vacation days available at year-end 150
Multiply by: Average salary per day 100
Adjusted liability for compensated absences 15,000
No liability is recognized for the sick days. These are expensed

when actually taken.
4. D
1 – Tr
B = P x
1/Br - Tr + 1
B = 400,000 x {(1 + 30%) ÷ [(1÷10%) - 30% + 1]}
B = 26,168
5. A – the agreed annual contribution to the fund.
5
1. Solutions:
Requirement (a):
Basic salaries 460,000
Cost of living allowances (COLA) 20,000
SSS contribution (employer's share) 24,173
PhilHealth contribution (employer's share) 6,000
Pag-IBIG (employer's share) 2,000
Total salaries expense 512,173
Requirement (b):
Basic salaries 460,000
Cost of living allowances (COLA) 20,000
SSS contribution (employee's share) (11,626)
PhilHealth contribution (employee's share) (6,000)
Pag-IBIG (employee's share) (2,000)
Withholding taxes on salaries (9,112)
“ Take-home” salaries of employees 451,262
Requirement (c):
Debit Credit
Salaries expense 512,173
SSS contribution payable (Ee’s sh. + Er’s sh.) 35,799
PhilHealth contribution payable (Ee’s sh. + Er’s sh.) 12,000
Pag-IBIG contribution payable (Ee’s sh. + Er’s sh.) 4,000
Withholding taxes payable 9,112
Cash (Salaries payable) 451,262
2. Solution:
Year-end Salaries expense 13,390
Accrued salaries payable 13,390*
*Total sick leaves available in current year (20 ee's x 2 each) 40

Sick leaves taken (14)
Excess carried over to future periods 26
Multiply by: Future salary (500 x 103%) 515
Accrued liability as of year-end 13,390
6
The vacation leaves are not accrued because they are non-
accumulating and non-vesting. These are recognized when they
are taken.
3. Solutions:
Requirement (a): Bonus before bonus and before tax
B = P x Br
B = 200,000 x 2% = 4,000
Requirement (b): Bonus after bonus and before tax

P
B = P -
1 + Br
B = 200,000 – [200,000 ÷ (1 + 2%)]
B = 3,922
Requirement (c): Bonus before bonus and after tax

1 – Tr
B = P x
1/Br – Tr
B = 200,000 x {(1 - 30%) ÷ [(1÷2%) - 30%]}
B = 200,000 x (0.7 ÷ 49.7) = 2,817
Requirement (d): Bonus after bonus and after tax

1 - Tr
B = P x
1/Br - Tr + 1
B = 200,000 x {(1 + 30%) ÷ [(1÷2%) - 30% + 1]}

B = 200,000 x (0.7 ÷ 50.7) = 2,761
4. Solution:
20x1
Cash 1,200,000
20x2
7
Cash 700,000
20x3
Cash 1,050,000
8
Page |1
Chapter 6
Employee Benefits (Part 2)

1. TRUE
2. FALSE
3. TRUE
4. FALSE
5. TRUE
6. FALSE – only the net defined benefit liability (asset) is
recognized in the accounts and in the financial statements. The
PV of DBO is disclosed only.
7. FALSE
8. TRUE
9. TRUE
10. TRUE

1. B
2. D
3. A
4. B
5. A
6. D
7. C – the event is “curtailment,” which results in past service
cost. Past service cost can be either positive (increase in PV of
DBO) or negative (decrease in PV of DBO). In the problem, it
is the latter case.
Choice (a) is correct. The termination benefits paid to the

terminated employees increase the termination benefits expense
for the period.
Choice (b) is correct (see discussion above).
Page |2
Choice (d) is correct. A decrease in PV of DBO either decreases the

net defined benefit liability or increases the net defined benefit
asset.
8. C
Side note: The IASB opined that “early retirements” are accounted
for as post-employment benefits rather than termination benefits
because the benefits pertain to employee service rather than the
employer’s act of terminating the employee.
9. D
10. D
PROBLEM 3: EXERCISE
Requirement (a):
Fair value of plan assets
Jan. 1 2,100,000
Return on plan assets 270,000 450,000 Benefits paid
Contributions to the fund 480,000
2,400,000 Dec. 31
PV of defined benefit obligation

2,400,000 Jan. 1
Benefits paid 450,000 600,000 Current service cost
300,000 Past service cost
Actuarial gain 15,000 288,000 Interest cost
Dec. 31 3,123,000
Jan. 1, 20x1 Dec. 31, 20x1

FVPA 2,100,000 2,400,000
PV of DBO 2,400,000 3,123,000
Net defined benefit liability (300,000) (723,000)
Page |3
Requirement (b):
Service cost:
(a) Current service cost 600,000
(b) Past service cost 300,000
(c) (Gain) or loss on settlement -
900,000
Net interest on the net defined benefit liability (asset):
(a) Interest cost on the defined benefit obligation (2.4M x 12%) 288,000
(b) Interest income on plan assets (2.1M x 12%) (252,000)
(c) Interest on the effect of the asset ceiling -
36,000
Defined benefit cost recognized in profit or loss 936,000
Remeasurements of the net defined benefit liability (asset):

(a) Actuarial (gains) and losses (15,000)
(b) Difference between interest income on plan assets
and return on plan assets (252K - 270K) (18,000)
(c) Difference between the interest on the effect of the asset
ceiling and the change in the effect of the asset ceiling -
Defined benefit cost recognized in OCI (33,000)
Total defined benefit cost 903,000
Requirement (c):
20x1 Net defined benefit liability 480,000
Cash 480,000
to record the contributions to the fund
Dec. Retirement benefits expense 936,000
31,
Remeasurement of def. benefit liab. 33,000
20x1
Net defined benefit liability 903,000
to record the defined benefit cost
Requirement (d):
Report form:
Net defined benefit liability, beg. 300,000
Contributions to the fund (480,000)
Defined benefit cost 903,000
Net defined benefit liability, end. 723,000
Page |4
OR
T-account form:
Net defined benefit liability
300,000 Jan. 1
Contributions to the fund 480,000 903,000 Defined benefit cost
Dec. 31 723,000

1. C
Jan. 1 360,000
800,000 Dec. 31
2. B
Jan. 1 234,000
299,000 Dec. 31
3. C
280,000 Jan. 1
30,800 Interest cost
Actuarial gain 50,000
Dec. 31 190,800
Page |5
4. A
130,000 Jan. 1
50,000 Actuarial loss
Dec. 31 110,600
5. A
Jan. 1 960,000
1,100,000 Dec. 31

1,200,000 Jan. 1
Actuarial gain 28,000 108,000 Interest cost
Dec. 31 1,250,000
Jan. 1, 20x1 Dec. 31, 20x1

FVPA 960,000 1,100,000
PV of DBO 1,200,000 1,250,000
Net defined benefit liability (240,000) (150,000)
Service cost:
(b) Past service cost -
260,000
Page |6

(a) Interest cost on the defined benefit obligation 108,000
(b) Interest income on plan assets

(86,400)
21,600
(a) Actuarial (gains) and losses

(28,000)
and return on plan assets (86.4K - 70K) 16,400
Defined benefit cost recognized in OCI

(11,600)
6. C
Service cost:
(c) (Gain) or loss on settlement 45,000
1,035,000
(b) Interest income on plan assets (178,200)
19,800
Defined benefit cost recognized in profit or loss 1,054,800
Page |7

(b) Difference between interest income on plan assets 70,200
and return on plan assets
(c) Difference between the interest on the effect of the asset -
ceiling and the change in the effect of the asset ceiling
Defined benefit cost recognized in OCI 52,200
Total defined benefit cost 1,107,000
7. B
Final monthly salary level (60K x 102%(a)) 73,140
Multiply by: Years of service (from 50 to 60 yrs. old) 11
Lump-sum retirement benefit 804,540
(a) ten (10) times
OR
Year Age Salary
= previous balance x 102%
1 50 60,000
2 51 61,200
3 52 62,424
4 53 63,672
5 54 64,946
6 55 66,245
7 56 67,570
8 57 68,921
9 58 70,300
10 59 71,706
11 60 73,140
OR
60,000 x FV of 1 @2%, n=11; 60,000 x 1.218994 = 73,140
Page |8
Final monthly salary level 73,140

Multiply by: PV of 1 @10%, n=10 (b) 0.385543
Current service cost in Yr. 1 28,199
(b) From end of Yr. 1 to end of Yr. 11 = 10
8. A
Final monthly salary level 73,140
Multiply by: 5
Accumulated benefits to date 365,700
Multiply by: PV of 1 @10%, n=6 (c) 0.564474
Lump-sum retirement benefit 206,428
(c) From end of Yr. 5 to end of Yr. 11 = 6
Alternative solution: Long-cut

Date Interest cost Current service cost(d) PV of DBO
Jan. 1, 20x1 -
Dec. 31, 20x1 - 28,198.64 28,198.64
Dec. 31, 20x2 2,819.86 31,018.50 62,037.00
Dec. 31, 20x3 6,203.70 34,120.35 102,361.05
Dec. 31, 20x4 10,236.10 37,532.38 150,129.54
Dec. 31, 20x5 15,012.95 41,285.62 206,428.12
Dec. 31, 20x6 20,642.81 45,414.19 272,485.11
Dec. 31, 20x7 27,248.51 49,955.60 349,689.23
Dec. 31, 20x8 34,968.92 54,951.16 439,609.32
Dec. 31, 20x9 43,960.93 60,446.28 544,016.53
Dec. 31, 20x10 54,401.65 66,490.91 664,909.09
Dec. 31, 20x11 66,490.91 73,140.00 804,540.00
Benefit entitlement PV of 1 @ 10%, n=10 to 0 (d) Current service cost

73,140 0.38554329 28,198.64
73,140 0.42409762 31,018.50
73,140 0.46650738 34,120.35
73,140 0.51315812 37,532.38
Page |9
73,140 0.56447393 41,285.62

73,140 0.62092132 45,414.19
73,140 0.68301346 49,955.60
73,140 0.75131480 54,951.16
73,140 0.82644628 60,446.28
73,140 0.90909091 66,490.91
73,140 1.00000000 73,140.00
804,540
9. A
10. C 30 employees x 50,000 = 1,500,000

P a g e | 10
1. Solution:

4,645,541 Jan. 1, 20x1
Benefits paid - 239,152 Current service cost
250,395 Interest cost *
Actuarial gain 646,794 Actuarial loss
Dec. 31, 20x1 4,488,294
* (4,645,541 x 5.39% discount rate at the beginning of 20x1) = 250,395
2. Solution:
Jan. 1 1,176,732
Return on plan assets 11,672 - Benefits paid
1,663,338 Dec. 31
3. Solution:
20x1 20x0
Present value of defined benefit obligation (DBO) 4,488,294 4,645,541
Fair value of plan assets (FVPA) 1,663,338 1,176,732
Net defined benefit liability – Deficit 2,824,956 3,468,809
4. Solution:
Service cost:
(b) Past service cost -
239,152
(b) Interest income on plan assets (given) (77,179)
P a g e | 11

173,216

and return on plan assets (77,179 - 11,672) 65,507
ceiling and the change in the effect of the asset ceiling
Defined benefit cost recognized in OCI (581,287)
Total defined benefit cost (168,919)
5. Solution:
Net defined benefit liability (asset) - Jan. 1, 20x1 3,468,809
Contributions (474,934)
Defined benefit cost (168,919)
Net defined benefit liability (asset) - Dec. 31, 20x1 2,824,956
6. Solution:
Dec. 31, Net defined benefit liability (squeeze) 643,853

20x1
Retirement benefits expense 412,368
Remeasurement of defined
benefit pension plan 581,287
Cash (contributions) 474,934
7. D
 Choice (a) is incorrect. No retirement benefits were paid
during the year.
 Choice (b) is incorrect. The total salaries paid during 20x1
decreased. Refer to “Annual covered payroll” in the
“Summary of Valuation Results.”
P a g e | 12
 Choice (c) is incorrect. ABC Co.’s retirement plan provides for

a lump sum payment only. It does not provide for annual
pension payments.
8. A
 Asset ceiling is “the present value of any economic benefits
available in the form of refunds from the plan or reductions in
future contributions to the plan.” (PAS 19.8)
 (See #14 ‘Forfeiture of benefits’ in ‘EXCERPT 6 - OUTLINE OF
BASIC PLAN PROVISIONS’)
 Choices (b) and (c) are incorrect. Amendment of retirement

plan results to either positive or negative past service cost.
 Choice (d). Death or disability of an employee does not relieve
the company of its obligation to pay retirement benefits. See #9
in “Outline of Basis Plan Provisions.”
9. D (See #16 and #17 of ‘EXCERPT 6 - OUTLINE OF BASIC

PLAN PROVISIONS’)
10. B (See ‘STATISTICAL DISTRIBUTION OF ELIGIBLE

MEMBERS’)
11. D
12. A
 Information from excerpts:
Number of male employees: 2
Average age of male employees: 51.5
 51.5 = (65 age of Mr. A + X age of Mr. B) ÷ 2

P a g e | 13
 51.5 x 2 = (65 + X)
 103 – 65 = X
 X = 38
13. B: 4 employees (3 + 1) (see highlighted numbers below.
STATISTICAL DISTRIBUTION OF ELIGIBLE MEMBERS

AS OF DEC. 31, 20X1
AGE less than 5 but less 10 but less 15 but less 20 years TOTA
5 yrs. than 10 than 15 than 20 & above L
20 &
below
21 - 25 1 1
26 - 30 -
31 - 35 -
36 - 40 1 1 2
41 - 45 1 1
46 - 50 1 1
51 - 55 1 1
56 - 60 1 1 2
61 - 65 1 1
66 &
above -
TOTAL 4 1 3 - 1 9
14. D
ABC’s retirement policy:
“Normal retirement date: The normal retirement date of each
member shall be the first day of the month coincident with or next
following his attainment of age sixty (60) with at least ten (10)
years of Credited Service.”
15. A – See #8 in “Outline of Basic Plan Provisions.”
16. D – There was an actuarial gain during the year. This has
decreased the PV of DBO.
P a g e | 14
 Choice (b) is a correct statement. The ₱65,507 remeasurement

is a debit (refer to the computation of defined benefit cost in #4
above).
17. B
18. D – The actuary’s opinion shows the following:
RE: ABC CO. RETIREMENT PLAN (PAS 19 VALUATION)

(Participant to the ABC Co. Multiemployer Retirement Plan)
Valuation Date – December 31, 20x1
19. D – best answer. See discussion below:

 Choice (a) is incorrect. Same discount rate is used in
computing for interest income on FVPA and interest expense
on PV of DBO.
 Choice (b) is incorrect. An employee can estimate his/her
retirement pay using the plan formula, which is “1 month
final salary x No. of service years.”
 Choice (c) is incorrect. No retirement benefits were paid
during 20x1.
20. C (27,000 x 102%) = 27,540
21. D
Solution:
Month Day Year
Date of birth 8 14 1980
Normal retirement age 60
Date of retirement 8 14 2040
ABC Co.’s retirement policy:

following his attainment of age sixty (60).”
P a g e | 15
22. A
Solution:
Month Day Year
Date of employment as "Regular" employee 1 1 2001
Minimum service years 10
1 1 2011
23. A
Solution:
Month Day Year
-
Date of birth -6 -1 1951
0 0 50
Age at date of employment 50
Month Day Year

Minimum service years 10
6 1 2011
ABC’s retirement policy:

following his attainment of age sixty (60) with at least ten (10)
years of Credited Service.”
24. C
Solution:
Month Day Year
Date of birth -9 -1 -1951
-3 0 50
P a g e | 16
Month Day Year

Date of birth 9 1 1951
Normal retirement age 60
Month Day Year

Date of employment as "Regular" employee -6 -1 -2001
Service years 3 0 10
No. of service years 10 yrs. and 3 mos.
Choice (a) is incorrect because, on June 1, 2011, Ms. Munda has

not yet reached the age of 60.
Month Day Year

Birth date -9 -1 -1951
Age at date of retirement -3 0 60
Age on June 1, 2011 59 yrs. and 3 months
Choice (b) is incorrect because, according to ABC’s retirement

plan, an employee only needs to reach the age of 60 and has
rendered at least 10 years of service to be entitled to normal
retirement.
Choice (d) is incorrect because the dates are irrelevant.

P a g e | 17
25. A
Solution:
Month Day Year
Date of employment 1 1 1985
-11 -30 41
Month Day Year

Date of employment 1 1 1985
No. of service years before reaching the
20
age of 60
26. B
Solution:
Final monthly salary level (600K ÷ 12) 50,000
Multiply by: Service years 20
Lump sum retirement benefit 1,000,000
27. C
Benefit earned for services rendered in 20x1 50,000
Multiply by: PV of 1 @ 4.64%a, n=3 0.87278
Current service cost 43,639
a 4.64% = Discount rate at December 31, 20x1.
b No. of years before retirement

Month Day Year
Expected normal retirement date 1 1 2005
End of reporting period -12 -31 -2001
-11 -30 4
P a g e | 18
No. of years before retirement 3
28. B
Solution:
Month Day Year
Date of employment as "Regular"
1 1 1990
employee
Age at date of retirement -11 -30 46
Month Day Year

Service years before reaching the age of 60 15
Month Day Year

End of current reporting period -12 -31 -2001
-11 -30 4
No. of years before retirement 3
Current salary level - Dec. 31, 2001 30,000

Multiply by: (Salary level in 2002) 102%
Future salary level - Jan. 1, 2005 31,836.24
Multiply by: No. of service years 15
Lump sum retirement benefit 477,544
P a g e | 19
29. C
Solution:
(40,000 x PV of 1 @ 4.64%, n=22*) = 14,747
*(60 age of normal retirement – 38 current age) = 22 no. of years

before retirement
30. A
Solution:
Month Day Year
1 1 2002
-7 -1 -1990
-6 0 12
Years of service 11.5

Percentage of benefit (see 'OUTLINE OF BASIC PLAN
PROVISIONS' #8) 55%
Final monthly salary level (240K ÷ 12) 20,000

Multiply by: Years of service 11.5
Multiply by: Percentage of benefit 55%
Termination benefits 126,500
P a g e | 20

1. Solution:
Jan. 1 240,000
420,000 Dec. 31
2. Solution:
200,000 Jan. 1
24,000 Interest cost (200K x 12%)
30,000 Actuarial loss
Dec. 31 234,000
3. Solutions:
Requirement (a):
Present value of defined benefit obligation, Jan. 1 1,800,000
Fair value of plan assets, Jan. 1 1,500,000
Deficit - Net defined benefit liability - Jan. 1 300,000
Requirement (b):
1,800,000 Jan. 1
Actuarial gain 10,000
Dec. 31 2,381,000

Jan. 1 1,500,000
1,650,000 Dec. 31
P a g e | 21
Present value of defined benefit obligation, Dec. 31 2,381,000

Fair value of plan assets, Dec. 31 1,650,000
Deficit - Net defined benefit liability - Dec. 31 731,000
4. Solution:
Service cost:
(c) (Gain) or loss on settlement 40,000
640,000
(a) Interest cost on the defined benefit obligation (1.6M x 10%) 160,000
(b) Interest income on plan assets (1.4M x 10%) (140,000)
20,000

(a) Actuarial loss 10,000
and return on plan assets (140,000 - 90,000) 50,000
Defined benefit cost recognized in OCI 60,000

Page |1
Chapter 7
Leases (Part 1)
1. FALSE
2. TRUE
3. FALSE - When assessing the right to obtain substantially all of
the economic benefits from the use of an asset, an entity
considers only the economic benefits within the defined scope
of its rights to use the asset.
4. TRUE
5. FALSE
6. TRUE
7. FALSE
8. TRUE
9. FALSE (₱10,000 x PV of an annuity due of ₱1 @10%, n=4)

10. FALSE [(₱10,000 x PV of an annuity due of ₱1 @10%, n=4) –
10,000] or (₱10,000 x PV of an ordinary annuity of ₱1 @10%,
n=3)

1. B
2. D
3. D
4. D – The contractual restrictions pertain only to the supplier’s
protective rights.
5. C
6. C
7. D
8. B – reasonably “certain”
9. C (5 yrs. + 2-yr. extension) = 7
Baa Co. will most certainly exercise the renewal option because
there is an economic incentive to do so, i.e., the leasehold
Page |2
improvements, which have a significant value, can only be

realized through continued occupancy of the leased property.
10. C
11. D
12. C
13. A
14. D
15. B
16. A
17. B
18. B – From the perspective of Daddy, the contract contains two
lease components: (1) a lease of the backhoe together with the
accessories and (2) a lease of the dump truck (which is useable
independently from the backhoe).
The administrative tasks are not treated as a separate
component of the contract. The itemized payment for the
administrative tasks is included in the total consideration that is
allocated to (1) and (2) above.
19. D
20. C
Page |3
1. Solution:
1. Identified asset – the contract specifies a particular executive jet.
The aviation company’s right to substitute another aircraft is
not substantive because it would be uneconomic to exercise
this right.
2. Right to obtain economic benefits from use – the customer has the
exclusive use of the jet throughout the period of use
3. Right to direct the use – the customer decides how and for what
purpose the jet is to be used.
❖ Based on the foregoing, the customer has the right to control

the use of the jet. Therefore, the contract is a lease.
2. Solutions:
Requirement (a):
➢ Initial measurements of Lease liability and Right-of-use asset
Fixed payments 200,000

Multiply by: PV of an ordinary annuity of ₱1 @10%, n=3 2.48685
Present value of lease payments 497,370
The entry to record the lease is as follows:

Jan. 1, Right-of-use asset 497,370
20x1 Lease liability 497,370
➢ Subsequent measurement – Lease liability

Date Payments Interest Amortization Present value
1/1/x1 497,370
12/31/x1 200,000 49,737 150,263 347,107
12/31/x2 200,000 34,711 165,289 181,818
12/31/x3 200,000 18,182 181,818 0
Page |4
➢ Subsequent measurement – Right-of-use asset

Cost 497,370
Divide by: Shorter of lease term and useful life 3
Annual depreciation 165,790
The entries on December 31, 20x1 are as follows:

Cash 200,000
Dec. 31, Depreciation expense 165,790
20x1 Right-of-use asset 165,790
Cash 200,000
Requirement (b):
➢ Lease liability – 12/31/x1 = 347,107
➢ Current: 165,289
➢ Noncurrent: 181,818
➢ Right-of-use asset – 12/31/x1 = (497,370 - 165,790) = 331,580
3. Solution:
Requirement (a):
20x1 (18,000 x 10/12)* 15,000
20x2 20,000
20x3 22,000
Total lease payments 57,000
Divide by: Lease term (including rent-free period) 3
Annual expense 19,000
* The first two months are rent-free.
Page |5
Journal entries:
Jan. 1,
No entry
20x1
Dec. 31, Rent expense (Lease expense) 19,000
20x1 Cash 15,000
Rent payable (squeeze) 4,000

20x2 Rent payable (squeeze) 1,000
Cash 20,000

20x3 Rent payable (squeeze) 3,000
Cash 22,000
Requirement (b):
➢ Rent payable, ₱3,000
Page |6

1. C
Solution:
Rentals due at the beginning of the year:
Annual rent 200,000
PV of lease payments 1,351,805

1/1/x1 1,351,805
1/1/x1 200,000 - 200,000 1,151,805
1/1x2 200,000 115,181 84,819 1,066,986
1/1x3 200,000 106,699 93,301 973,685
➢ Right-of-use asset as of Dec. 31, 20x1: 1,351,805 x 9/10 = 1,216,625

➢ Lease liability as of Dec. 31, 20x1: 1,066,986 + 200,000 = 1,266,986
Rentals due at the end of the year:

Annual rent 200,000
PV of ordinary annuity of 1 @10%, n=10 6.144567

1/1/x1 1,228,913
12/31x1 200,000 122,891 77,109 1,151,804
12/31/x2 200,000 115,180 84,820 1,066,984

➢ Lease liability as of Dec. 31, 20x1: 1,151,804
Page |7
2. D
Rentals due at the beginning of the year:
1/1/x1 1,351,805
1/1/x1 200,000 - 200,000 1,151,805
1/1x2 200,000 115,181 84,819 1,066,986
1/1x3 200,000 106,699 93,301 973,685
➢ Depreciation: 1,351,805 ÷ 10 = 135,181
Rentals due at the end of the year:

1/1/x1 1,228,913
12/31x1 200,000 122,891 77,109 1,151,804
12/31/x2 200,000 115,180 84,820 1,066,984
➢ Depreciation: 1,228,913 ÷ 10 = 122,891
3. A
Rent due at beginning:
1/1/x1 1,351,805
1/1/x1 200,000 - 200,000 1,151,805
1/1x2 200,000 115,181 84,819 1,066,986
Total lease liability as of 12/31/x1 (1,066,986 + 200,000) 1,266,986

Allocation:
Current (payment due on 1/1/x2) 200,000
Noncurrent (PV on 1/1/x2) 1,066,986
As allocated 1,266,986
Page |8
Rent due at end:

1/1/x1 1,228,913
12/31x1 200,000 122,891 77,109 1,151,804
12/31/x2 200,000 115,180 84,820 1,066,984
4. A
Lease payments PV factors @10%, n=10 PV
Fixed payments 200,000 PV of ord. annuity of 1 6.144567 1,228,913
Payable on
guaranteed RV 30,000(a) PV of 1 0.385543 11,566
1,240,479
80,000 guaranteed residual value - 50,000 estimate = 30,000 amount

(a)
expected to be payable on the residual value guarantee
➢ Lease liability:
1/1/x1 1,240,479
12/31x1 200,000 124,048 75,952 1,164,527
12/31/x2 200,000 116,453 83,547 1,080,980
5. B
Fixed payments 200,000 PV of ord. annuity of 1 5.334926 1,066,985
Payable on
guaranteed RV 10,000(b) PV of 1 0.466507 4,665
1,071,650

(a)

Page |9
Carrying amount of lease liability on Dec. 31, 20x2 (c) 1,080,980

Revised carrying amount on Jan. 4, 20x3 1,071,650
Adjustment – decrease 9,330
(c) See original amortization table above
➢ Right-of-use asset:
Right-of-use asset, 1/4/x3 (1,240,479 x 8/10) 992,383
Adjustment (9,330)
Revised carrying amount, 1/4/x3 983,053
Divide by: 8
Revised annual depreciation 122,882
Revised carrying amount, 1/4/x3 983,053

Depreciation in 20x3 (122,882)
Right-of-use asset, 12/31/x3 860,171
➢ Lease liability:
1/4/x3 1,071,650
12/31/x3 200,000 107,165 92,835 978,815
6. C
Fixed payments 200,000 PV of annuity due of 1 6.759024 1,351,805
Purchase
option 100,000 PV of 1 0.385543 38,554
1,390,359

1/1/x1 1,390,359
1/1/x1 200,000 - 200,000 1,190,359
1/1x2 200,000 119,036 80,964 1,109,395
P a g e | 10
7. A
❖ Initial measurement:
Fixed payments 200,000 (a) PV of annuity due of 1 6.759024 1,351,805
Purchase option 380,000 PV of 1 0.385543 146,506
1,498,311
(a)Payments for activities or costs that do not transfer goods or

services to the lessee (e.g., the ₱5,000 insurance cost in the problem)
are not a separate component of the contract. The payments for
these items are included in the total consideration that is allocated
to the separately identified components of the contract.
Initial amount of lease liability 1,498,311

Add: Initial direct cost 30,000
Right-of-use asset – Jan. 1, 20x1 1,528,311
❖ Subsequent measurement:
1/1/x1 1,498,311
1/1/x1 200,000 - 200,000 1,298,311
1/1x2 200,000 129,831 70,169 1,228,142
➢ Lease liability as of Dec. 31, 20x1:

1,228,142 + 200,000 = 1,428,142
➢ Right-of-use asset as of Dec. 31, 20x1:

1,528,311 x 11/12 = 1,400,952
P a g e | 11
8. C
Allocation of total consideration:
Stand-alone prices Allocation
Rent 156,000 (200K x 156/195) 160,000
Maintenance 39,000 (200K x 39/195) 40,000
Totals 195,000 200,000
Lease liability as of Jan. 1, 20x1:

Annual rent 160,000

1/1/x1 1,081,444
1/1/x1 160,000 - 160,000 921,444
1/1x2 160,000 92,144 67,856 853,558
Journal entry:
Jan. Right-of-use asset 1,081,444
1, Maintenance expense (Prepaid asset) 40,000
20x1 Cash 200,000
Total lease-related expenses in 20x1:

Depreciation (1,081,444 ÷ 10) 108,144
Maintenance 40,000
Total lease-related expenses in 20x1 240,288
9. A
Journal entry:
Jan. Right-of-use asset 1,181,444
1, Maintenance expense (Prepaid asset) 40,000
20x1 Cash 200,000
Provision for restoration costs (ARO) 100,000
P a g e | 12
10. D
❖ Initial measurement of lease liability & right-of-use asset:
Annual payments (due at beg. of each yr.) 200,000
PV of an annuity due of 1 @10%, n=10 6.759024
Total 1,351,805
❖ Amortization table:
1/1/x1 1,351,805
1/1/x1 200,000 - 200,000 1,151,805
1/1x2 200,000 115,181 84,819 1,066,986
1/1x3 200,000 106,699 93,301 973,685
➢ 20x3:
❖ The revised lease payments are computed as follows:
Original payments 200,000
Multiply by: Change in CPI 108/100
Revised lease payments 216,000
❖ The revised lease liability is computed as follows:

Revised lease payments 216,000
PV of an annuity due of 1 @10%, n=8 5.868419
Revised carrying amount – 1/1/x3 1,267,578
❖ Adjustment to the lease liability (and right-of-use asset):

Carrying amount of lease liability - 1/1/x3 (a) 1,173,685
Revised carrying amount - 1/1/x3 1,267,578
Adjustment (Increase) 93,893
Carrying amount of lease liability – 1/1/x3: ₱973,685 carrying amount on 1/1/x3 after 3rd
(a)
payment add back ₱200,000 = ₱1,173,685 carrying amount on 1/1/x3 before 3rd payment.
P a g e | 13
❖ Revised amortization table:

1/1/x3 1,267,578
1/1/x3 216,000 - 216,000 1,051,578
1/1/x4 216,000 105,158 110,842 940,736
➢ Lease liability as of end of Year 3:

940,736 + 216,000 = 1,156,736
➢ Right-of-use asset as of end of Year 3:

Initial measurement 1,351,805
Depreciation in Years 1 & 2 [(1,351,805 ÷ 10) x 2 yrs.] (270,361)
Carrying amount at the end of Year 2 1,081,444
Adjustment 93,893
Revised carrying amount 1,175,337
Depreciation in Year 3 (1,175,337 ÷ 8 yrs.) (146,917)
Right-of-use asset at end of Year 3 1,028,420
11. A
Year Payments PV of 1 @10% PV factors PV
20x1 150,000(a) n=1 0.909091 136,364
20x2 230,000(b) n=2 0.826446 190,083
20x3 260,000(c) n=3 0.751314 195,342
521,789
(a) 200,000 x 9/12 = 150,000
(b) 200,000 + 30,000 = 230,000
(c) 230,000 + 30,000 = 260,000
➢ Subsequent measurement: Lease liability

Date Payments Int. expense Amortization Present value
1/1/x1 521,789
12/31/x1 150,000 52,179 97,821 423,968
12/31/x2 230,000 42,397 187,603 236,365
12/31/x3 260,000 23,635 236,365 -
P a g e | 14
➢ Subsequent measurement: Right-of-use asset

Initial amount of lease liability 521,789
Lease bonus 20,000
Initial measurement of right-of-use asset 541,789
Divide by: 3

Depreciation expense 180,596
Contingent rent [5% x (9M – 8M)] 50,000
12. D
Year Payments
Lease bonus 20,000
20x1 150,000
20x2 230,000
20x3 260,000
Total 660,000
Divide by: 3
Annual lease expense 220,000

Contingent rent [5% x (10M – 8M)] 100,000
Lease bonus 20,000

20x1 150,000
20x2 230,000
Total payments to date 400,000
Total lease expenses to date (220K x 2) 440,000
Rent payable as of Dec. 31, 20x2 40,000
P a g e | 15
Alternative solution: Journal entry

Debit Credit
Rent expenses 440,000
Cash 400,000
Rent payable (squeeze) 40,000
RECONCILIATION:
13. B
➢ Scenario 8.1:
Payable on
guaranteed RV 20,000(a) PV of 1 0.385543 7,711
Initial measurement of right-of-use asset 1,359,516
Divide by: Shorter of useful life and lease term 10

(a)
➢ Scenario 8.2:
Purchase
option 100,000 PV of 1 0.385543 38,554
Initial measurement of right-of-use asset 1,390,359
Less: Residual value at the end of 12th year 60,000
Depreciable amount 1,330,359
Divide by: Useful life 12
P a g e | 16
14. A
15. B
STEP 1: Make a pro-forma amortization table and place available

information:
12/31/x1
1/1x2 200,000 1,066,986
1/1x3 200,000
This is the lease liability as

of 12/31/x1, net of current
portion.
STEP 2: Squeeze
12/31/x1
1/1x2 200,000 1,066,986
1/1x3 200,000 106,699 93,301 973,685
Optional reconciliation:
Total lease liability as of 12/31/x2 (973,685 + 200,000) 1,173,785
Allocation:
Current (payment due on 1/1/x3) 200,000
Noncurrent (PV on 1/1/x3) 973,685
As allocated 1,173,685
P a g e | 17
Solution:
Requirement (a):
Identifying a lease
Essential elements Guidance
1. Identified asset - The leased premises are an identified
asset because they are physical
distinct (i.e., the 5th, 6th and 7th floors of
the building).
2. Right to obtain - Broccoli, Inc. has the exclusive use of

substantially all of the leased premises throughout the
the economic duration of the contract. Therefore,
benefits Broccoli, Inc. has the right to obtain
substantially all of the economic
benefits of the leased premises.
3. Right to direct the - Broccoli, Inc. has the right to direct

use how and for what purpose the asset is used
throughout the period of use because
the asset’s use is predetermined (i.e.,
as office space) and the lessor is
precluded from changing that
predetermined use.
* Protective rights: The contractual

restrictions on the improvements and
alterations on the leased premises are
designed simply to protect the lessor’s
interest in the asset.
❖ Conclusion: The contract is a lease.

P a g e | 18
Requirement (b):
Multiply by: PV of an annuity due of ₱1 @39%, n=3 2.236996
Total 671,099
Notes:
➢ The 39% is the lessee’s incremental borrowing rate.
➢ The lease term is 3 years.
- The termination option is disregarded because Broccoli,
Inc. is reasonably certain not to exercise it.
- The renewal option is also disregarded because it does not
meet the definition of a “non-cancellable period” under
PFRS 16. The lease is enforceable only during the first
three years. After that, each of the lessor and the lessee can
unilaterally elect not to extend the arrangement and doing
so imposes no penalty. Moreover, the renewal is subject to
new terms and conditions, and thus creates a new contract
different from the existing one.

20x1 Cash 300,000
to record the lease, together with the payment
of the first annual rent due at the beginning of the year
Security deposit paid 50,000

Multiply by: PV of ₱1 @39%, n=3 0.372354
Present value of security deposit receivable 18,618
Jan. 1, Security deposit 50,000

20x1 Unrealized loss – “Day 1” difference 31,382
Cash 50,000
Unearned interest (50,000 – 18,618) 31,382
to record the payment of the security deposit
P a g e | 19
 Side notes:
The security deposit is disclosed as follows:
Unearned interest (31,382)
Carrying amt. - Jan. 1, 20x1 18,618
The “Day 1” difference is recognized in full (in profit or loss) on

January 1, 20x1. The Unearned interest will be amortized as interest income
over the lease term.
Under the PFRS, refundable deposits are considered as loans and
receivable financial asset measured at amortized cost using the effective
interest rate method. The initial recognition may result to day-one loss.
source: https://www.grantthornton.com.ph/globalassets/spdf_illustrative-fs-compilation.pdf
Lease liability:
Interest Present
Date Payments Amortization
expense value
Jan. 1, 20x1 671,099
Jan. 1, 20x1 300,000 - 300,000 371,099
Jan. 1, 20x2 300,000 144,729 155,271 215,828
Jan. 1, 20x3 300,000 84,172 215,828 0
Right-of-use asset:
➢ 671,099 ÷ 3 yrs. = 223,700 annual depreciation
Security deposit:
Date Interest income Unearned interest Present value
Jan. 1, 20x1 18,618
IGNORED
Jan. 1, 20x2 7,261 25,879

Jan. 1, 20x3 10,093 35,972
Jan. 1, 20x4 14,028 50,000
Other journal entries:

to recognize interest expense
P a g e | 20

to recognize depreciation expense
Dec. 31, Unearned interest 7,261
20x1 Interest income 7,261
to record the winding-up of discount on the
security deposit
Jan. 1, Lease liability 300,000
20x2 Cash 300,000
to record the lease payment for 20x2
Requirement (c):
Broccoli, Inc.
Statement of financial position
As at Dec. 31, 20x1
Noncurrent assets
Right-of-use asset (671,099 – 223,700) 447,399
Security deposit (see amortization table above and side note below) 25,879
Current liabilities:
Lease liability (a) 300,000
Noncurrent liabilities:
Lease liability as of Dec. 31, 20x1:

(a)
➢ Using amortization table: 215,828 + 300,000 = 515,828

➢ Using journal entries: 371,099 + 144,729 adjustment = 515,828
Current portion: (the payment due on 1/1/x2) or (155,271 from

amortization table + 144,729 adjustment on 12/31/x1) 300,000
Noncurrent portion: (515,828 total liability – 300,000 current
portion) or (215,828 amortization on 1/1/20x3) 215,828
Total lease liability, 12/31/x1 515,828
P a g e | 21
Broccoli, Inc.
Statement of comprehensive income
For the year ended Dec. 31, 20x1
Unrealized loss – “Day 1” difference 31,382

Interest income (see amortization table above) 7,261
Interest expense (see amortization table above) 144,729
 Side note:
The security deposit is disclosed in the notes as follows:
Unearned interest (31,382 - 7,261) (24,121)
Carrying amt. - Dec. 31, 20x1 25,879
P a g e | 22
1. Solution:
Identifying a lease
1. Identified asset - The car is implicitly specified at the
time that the asset is made available
for use by the customer.
- Substitution right – Supplier Y’s

substitution rights is not substantive
because it is not available to
Supplier Y throughout the period of
use.
 Based on the foregoing, the car is an

identified asset.
2. Right to obtain - Customer X has the exclusive use of

substantially all of the car throughout the duration of
the economic the contract.
benefits  Therefore, Customer X has the right
to obtain substantially all of the
economic benefits of the car.
3. Right to direct the  Customer X has the right to direct

use how and for what purpose the asset is
used throughout the period of use
❖ Conclusion: The contract is a lease.

P a g e | 23
2. Solution:
Identifying a lease
1. Identified asset - There is no identified asset because
Supplier Y’s substitution rights are
substantive.
2. Right to obtain
substantially all of
(irrelevant)
the economic
benefits
3. Right to direct the
(irrelevant)
use
❖ Conclusion: The contract is NOT (does NOT contain) a lease.
3. Solutions:
Requirement (a): Journal entries

Annual rent 100,000 PV of annuity due of 1 3.486852 348,685
Purch. opt. 50,000 PV of 1 0.683013 34,151
382,836

Cash 100,000
Amortization table:
Interest Present
Date Payments Amortization
expense value
Jan. 1, 20x1 382,836
Jan. 1, 20x1 100,000 - 100,000 282,836
Jan. 1, 20x2 100,000 28,284 71,716 211,120
Jan. 1, 20x3 100,000 21,112 78,888 132,232
Jan. 1, 20x4 100,000 13,223 86,777 45,455
Jan. 1, 20x5 50,000 4,545 45,455 0
P a g e | 24

31,
20x1
Dec. Depreciation expense [(382,836 – 25K) ÷ 5 yrs.] 71,567
31,
Right of use asset 71,567
20x1
Jan. Lease liability 100,000
1,
Cash 100,000
20x2
Requirement (b): Partial financial statements

Chirp Co.
As at Dec. 31, 20x1
Noncurrent assets
Right-of-use asset (382,836 – 71,567) 311,269
Current liabilities:
Noncurrent liabilities:
Lease liability as of Dec. 31, 20x1:

(a)
➢ Using amortization table: 211,120 + 100,000 = 311,120

➢ Using journal entries: 282,836 + 28,284 adjustment = 311,120
Current portion: (the payment due on 1/1/x2) or (71,716 from

amortization table + 28,284 adjustment on 12/31/x1) 100,000
Noncurrent portion: (311,120 total liability – 100,000 current
portion) or (PV on Jan. 1, 20x2 in amort. table) 211,120
Total lease liability, 12/31/x1 311,120
Chirp Co.
P a g e | 25
4. Solution:
20x1 (12K x 9/12) 9,000
20x2 12,000
20x3 12,000
20x4 12,000
Total 45,000
Divide by: Lease term 4
Jan. 1,
No entry
20x1
Dec. 31, Rent expense 11,250
20x1 Cash 9,000
Rent payable 2,250
20x2 Rent payable 750
Cash 12,000
Cash 12,000
Cash 12,000
Page |1
Chapter 8
Leases (Part 2)

1. FALSE – lessors only
2. FALSE – finance lease
3. TRUE
4. TRUE
5. FALSE – operating leases are considered “off-balance sheet”
items.
6. TRUE
7. TRUE
8. FALSE – addition
9. FALSE
10. TRUE

1. C
2. C
3. B
4. B
5. C
6. B
7. C
8. C
9. B
10. D
Page |2
1. Solution:
Requirement (a):
➢ Gross investment = (80,000 x 3) = 240,000
➢ Net investment = 80,000 x PV of ordinary annuity of 1 @10%,
n= 3 = 198,948
➢ Unearned interest = 240,000 – 198,948 = 41,052
Requirement (b):
Date Collections Interest Amortization Present value
1/1/x1 278,948
1/1/x1 80,000 - 80,000 198,948
1/1/x2 80,000 19,895 60,105 138,843
1/1/x3 80,000 13,884 66,116 72,727
1/1/x4 80,000 7,273 72,727 0
Jan. 1, Cash 80,000

20x1 Finance lease receivable 240,000
Equipment 278,948
Unearned interest income 41,052
Dec. Unearned interest 19,895

31, Interest income 19,895
20x1
Jan. 1, Cash 80,000
20x2
Jan. 1, Cash 80,000
20x3
Jan. 1, Cash 80,000
Page |3
2. Solution:
➢ Gross investment: (200,000 x 4 yrs.) – (200,000 1st payment) =
600,000
➢ Net investment: (200,000 x PV annuity due @10%, n=4) = 697,370
- 200,000 1st payment = 497,370
➢ Unearned interest: (600,000 - 497,370) = 102,630
Journal entries on Jan. 1, 20x1:

Jan. 1, Finance lease receivable 600,000
20x1 Cash 200,000
Sales 697,370
to record the sales type lease
Jan. 1, Cost of sales 600,000
20x1 Inventory 600,000
to derecognize the asset deemed sold
Jan. 1, Direct costs expense 40,000
20x1 Cash 40,000
to record the direct costs

1/1/x1 697,370
1/1/x1 200,000 - 200,000 497,370
1/1/x2 200,000 49,737 150,263 347,107
1/1/x3 200,000 34,711 165,289 181,818
1/1/x4 200,000 18,182 181,818 0
Dec. Unearned interest income 49,737

20x1 to record the interest income for the year
Page |4
3. Solution:
Lease bonus 20,000
20x1 (100,000 x 6/12) 50,000
20x2 120,000
20x3 140,000
20x4 160,000
Total 490,000
Divide by: 4
Annual lease income 122,500
Jan. 1, Cash 20,000

20x1 Unearned rent income 20,000
Dec. 31, Cash 50,000
20x1 Unearned rent income (20K ÷ 4) 5,000
Rent receivable (squeeze) 67,500
Rent income (Lease income) 122,500
Dec. 31, Cash 120,000

Dec. 31, Cash 140,000

Dec. 31, Cash 160,000

Page |5

1. D – None of the finance lease indicators exist; thus, the lease is
classified as an operating lease.
2. B
Lease payment (220,000 – 18,098) 201,902
PV of ordinary annuity of P1 @10%, n=4 3.1698654
Net investment in the lease – Jan. 1, 20x1 640,000
Gross investment [(220,000 - 18,098) x 4] 807,608

Net investment 640,000
Unearned interest income, Jan. 1, 20x1 167,608

1/1/x1 640,000
12/31/x1 201,902 64,000 137,902 502,098
3. A
Fair value (deemed equal to PV of LP) 323,400
Divide by: PV annuity due @8%, n=5 4.3121
Annual lease payments 74,998
Multiply by: No. of payments in the lease 5
Gross investment in the lease 374,991
Less: Net investment in the lease (323,400)
*Answer choice is rounded-off
4. B
? + ? = 394,833 + 25,000
➢ Net investment = (394,833 + 25,000) = 419,833

Page |6
➢ Net investment = (PV of ₱120,000 annual rent) + (PV of ₱10,000

residual value)
➢ 419,833 = (PV of ₱120,000 annual rent) + (PV of ₱10,000 residual
value)
Trial and error:

➢ 419,833 = (120,000 x PV of annuity due @x%, n=4) + (10,000 x PV
of 1 @x%, n=4)
Trial @11%:
➢ 419,833 = (120,000 x 3.443715) + (10,000 x 0.658731)
➢ 419,833 = (413,246 + 6,587)
➢ 419,833 = 419,833
❖ The implicit interest rate is 11%.

1/1/x1 419,833
1/1/x1 120,000 0 120,000 299,833
1/1/x2 120,000 32,982 87,018 212,815
1/1/x3 120,000 23,410 96,590 116,224
1/1/x4 120,000 12,785 107,215 9,009
12/31/x4
0 991 -991 10,000
(end of lease)
Carrying amount of net investment, Dec. 31, 20x1:

212,815 + 120,000 = 332,815
5. A
? + ? = 593,685 + 25,000
➢ Net investment = (593,685 + 25,000) = 618,685

Page |7
➢ Net investment = (PV of X annual rent) + (PV of ₱10,000 residual

value)
➢ 618,685 = (X annual rent x PV of annuity due @12%, n=4) + (10,000
x PV of 1 @12%, n=4)
➢ 618,685 = (X annual rent x 3.401831) + (10,000 x 0.635581)
➢ 618,685 = (X annual rent x 3.401831) + 6,356
➢ 618,685 – 6,356 = (X annual rent x 3.401831)
➢ 612,329 = (X annual rent x 3.401831)
➢ X annual rent = 612,329 ÷ 3.401831
➢ Annual rent = 180,000
6. B
Sales 3,520,000
Cost of sales (2,800,000)
Gross profit 720,000
Interest revenue = (3,520,000 – 600,000) x 10% x 6/12 = 146,000
7. B
Sales (PV of MLP) 3,300,000
Gross profit 500,000
8. C (135,000 – 20,000) x 10% x 6/12 = 5,750
9. A
Solution:
Sales 77,000
Cost of sales (60,000)
Gross profit 17,000
10. A
Page |8
Sales
Lease payments PV factors @10%, n=4 PV of LP
Annual rent 600,000 3.486852 2,092,111
Guaranteed res. value 180,000 0.683013 122,942
Net investment in the lease equal to Sales 2,215,053
Cost of sale & Net selling profit

Sales 2,215,053
Cost of sales (equal to carrying amount) (1,500,000)
Gross profit from sale 715,053
Direct costs (20,000)
Net profit from sale 695,053
Net investment, end of Year 1

1/1/x1 2,215,053
1/1/x1 600,000 0 600,000 1,615,053
1/1/x2 600,000 161,505 438,495 1,176,558
1/1/x3 600,000 117,656 482,344 694,214
1/1/x4 600,000 69,421 530,579 163,635
12/31/x4
0 16,365 -16,365 180,000
(end of lease)
➢ 1,176,558 from amortization table + 600,000 = 1,776,558
11. D
Net
Lease payments + Unguaranteed PV factors @10%, investment in
residual value n=4 the lease
Annual rent (LP) 600,000 3.486852 2,092,111
Unguaranteed res. value 180,000 0.683013 122,942
Net investment in the lease 2,215,053
Page |9
Sales
➢ PV of lease payments = 2,092,111
Cost of sales
Cost/carrying amount 1,500,000
Less: PV of unguaranteed residual value (122,942)
Cost of sales 1,377,058
Net selling profit

Sales 2,092,111
Gross profit from sale 715,053
Direct costs (20,000)
Net profit from sale 695,053
Net investment, end of Year 1

1/1/x1 2,215,053
1/1/x1 600,000 0 600,000 1,615,053
1/1/x2 600,000 161,505 438,495 1,176,558
1/1/x3 600,000 117,656 482,344 694,214
1/1/x4 600,000 69,421 530,579 163,635
12/31/x4
0 16,365 -16,365 180,000
(end of lease)
➢ 1,176,558 from amortization table + 600,000 = 1,776,558
12. D
PV = Cash flows x PV factor
7,596 = 2,000 x PV annuity due @ x%, n=5
Trial @ 16%:
(2,000 x PV annuity due @ 16%, n=5) = 7,596
(2,000 x 3.7982) = 7,596
7,596 is equal to 7,596. Therefore, the implicit interest rate is 16%.
P a g e | 10
13. A
➢ Guaranteed residual value:
Step 1: Place the given information in the equation.
? + ? = 2,738,081
Step 2: Squeeze
➢ (Annual rent x PV of annuity due @10%, n=4) + (Guaranteed
residual value x PV of 1 @10%, n=4) = 2,738,081
➢ (Annual rent x 3.486852) + (180,000 x 0.683013) = 2,738,081
➢ (Annual rent x 3.486852) = 2,738,081 – 122,942
➢ Annual rent = 2,615,139 ÷ 3.486852 = 750,000
➢ Unguaranteed residual value:

Step 1: Place the given information in the equation.
? + ? = 2,738,081 + ?
☺ Selling price = PV of lease payments (the PV of res. val. is a reduction to cost of sales)
Step 2: Squeeze
➢ (Annual rent x PV of annuity due @10%, n=4) + (Unguaranteed
residual value x PV of 1 @10%, n=4) = 2,738,081 + (Unguaranteed
residual value x PV of 1 @10%, n=4)
➢ (Annual rent x PV of annuity due @10%, n=4) = 2,738,081
➢ (Annual rent x 3.486852) = 2,738,081
➢ Annual rent = (2,738,081÷ 3.486852) = 785,259
Comparison of amortization tables:

(1) Guaranteed residual value
1/1/x1 2,738,081
P a g e | 11
1/1/x1 750,000 0 750,000 1,988,081

1/1/x2 750,000 198,808 551,192 1,436,890
1/1/x3 750,000 143,689 606,311 830,579
1/1/x4 750,000 83,058 666,942 163,636
12/31/x4
0 16,364 -16,364 180,000
(end of lease)
(2) Unguaranteed residual value

1/1/x1 2,738,081
1/1/x1 785,259 0 785,259 1,952,822
1/1/x2 785,259 195,282 589,977 1,362,845
1/1/x3 785,259 136,285 648,974 713,871
1/1/x4 785,259 71,388 713,871 0
12/31/x4
0 0 0 0
(end of lease)
14. B
Straight line rent income per year = 36,000 ÷ 3 = 12,000
Rent income per year 12,000

Multiply by: 2
Total rent income to date (July 1, 20x6 to June 30, 20x8) 24,000
Less: Total rent collections to date (6,000 + 9,000) (15,000)
Rent receivable as of June 30, 20x8 9,000
15. C
➢ Cello Co. (Seller-lessee accounting)
Step 1: Lease liability
Fixed lease payments 120,000
Multiply by: PV ordinary annuity @4.5%, n=18 12.159992
Step 2: Right-of-use asset

PV of lease payments
Right of use asset = Carrying amount x
Fair value of asset
P a g e | 12
Right of use asset = 1,000,000 x (1,459,199 ÷ 1,800,000) = 810,666
Journal entry:
Date Cash 1,800,000
Right-of-use asset 810,666
Building 1,000,000
Lease liability 1,459,199
Gain (squeeze) 151,467
Step 3 (Optional): Reconciliation of Gain or loss

Carrying amount 1,000,000
Right of use retained by seller-lessee (810,666)
Rights transferred to buyer-lessor 189,334
Sale price 1,800,000

Carrying amount (1,000,000)
Total gain 800,000
Multiply by: (189,334 rts. transferred / 1M carrying amt.) 18.9334%
Gain - recognized portion 151,467
P a g e | 13

Solution:
Requirement (a):
The lease is an operating lease because none of the finance lease
indicators exists.
Requirement (b):
Jan. 1, Cash 300,000
20x1 Rent income (Unearned rent income) 300,000
to record the first annual rent due at the
beginning of the year
Security deposit collected 50,000

Multiply by: PV of ₱1 @39%, n=3 0.372354
Present value of security deposit payable 18,618
Jan. 1, Cash 50,000

20x1 Discount on security deposit (50K – 18,618) 31,382
Security deposit payable 50,000
Unrealized gain – “Day 1” difference 31,382
to record the collection of security deposit
 Side notes:
The security deposit is disclosed as follows:
Discount (31,382)
Carrying amt. - Jan. 1, 20x1 18,618
The “Day 1” difference is recognized in full (in profit or loss) on

January 1, 20x1. The Discount will be amortized as interest expense over the
lease term.
Amortization table for the Security deposit:

Jan. 1, 20x1 18,618
IGNORED
Jan. 1, 20x2 7,261 25,879

Jan. 1, 20x3 10,093 35,972
Jan. 1, 20x4 14,028 50,000
P a g e | 14
Adjusting entry if “Unearned rent income” account was used:

Dec. 31, Unearned rent income 300,000
20x1 Rent income 300,000

20x1 Discount on security deposit 7,261
to record the winding-up of discount on the
security deposit
Dec. 31, Depreciation expense (a) 1,448,000
20x1 Accumulated depreciation 1,448,000
to recognize depreciation expense
Carrying amount of Vegetable Bldg. - beg.

(a) 26,416,000
Residual value (see Chapter 7) 1,800,000
Depreciable amount 24,616,000
Remaining useful life (see Chapter 7) 17
Annual depreciation 1,448,000
Requirement (c):
Cauliflower Co.
As at Dec. 31, 20x1
Noncurrent assets
Building, net. (26,416,000 – 1,448,000) 24,968,000
Noncurrent liabilities
Security deposit (see amortization table above) 25,879
Cauliflower Co.
Rent income 300,000

Unrealized gain – “Day 1” difference 31,382
Depreciation expense 1,448,000
P a g e | 15
1. Solutions:
Requirement (a):
➢ Gross investment = (50,000 x 3) = 150,000
➢ Net investment = 50,000 x PV of ordinary annuity of 1 @10%,
n= 3 = 124,343
➢ Unearned interest = 150,000 - 124,343 = 25,658
Requirement (b):
1/1/x1 124,343
12/31/x1 50,000 12,434 37,566 86,777
12/31/x2 50,000 8,678 41,322 45,455
12/31/x3 50,000 4,545 45,455 0
Jan. 1, Finance lease receivable 150,000

20x1 Equipment 124,343
Dec. Cash 50,000
31, Unearned interest 12,434
Interest income 12,434
Dec. Cash 50,000
Dec. Cash 50,000
2. Solutions:
P a g e | 16
Requirement (a): Gross investment

Guaranteed residual value Unguaranteed residual value
Total rentals (200K x 4) 800,000 Total rentals (200K x 4) 800,000
Guaranteed RV 40,000 Unguaranteed RV 40,000
Gross investment 840,000 Gross investment 840,000
Requirement (b): Net investment

➢ Guaranteed residual value:
PV factors Present
Lease payments @10%, n=4 values
Annual rent 200,000 3.169865 633,973
Guaranteed residual value 40,000 0.683013 27,321
Net investment in the lease 661,294
➢ Unguaranteed residual value:

Lease payments + Unguaranteed PV factors
RV @10%, n=4 Present values
Annual rent (LP) 200,000 3.169865 633,973
Unguaranteed RV 20,000 0.683013 27,321
Net investment in the lease 661,294
Requirement (c): Total interest income over lease term

Gross investment 840,000 Gross investment 840,000
Net investment (661,294) Net investment (662,294)
Unearned interest income 178,706 Unearned interest income 178,706
Requirement (d): Sales, Cost of sales and Gross profit

Sales (PV of annual rentals) 633,973 Sales (PV of annual rentals) 633,973
Add: PV of GRV 27,321 Cost of sales 600,000
Adjusted sales 661,294 Less: PV of URV ( 27,321)
Cost of sales (600,000) Adjusted cost of sales (572,679)
Gross profit 61,294 Gross profit 61,294
P a g e | 17
Requirement (e): Journal entries on Jan. 1, 20x1

Fin. lease receivable 840,000 Fin. lease receivable 840,000
Cost of sales 600,000 Cost of sales 572,679
Sales 661,294 Sales 633,973
Unearned int. income 178,706 Unearned int. income 178,706
Inventory 600,000 Inventory 600,000
3. Solutions:
20x1 (200K x 6/12) 100,000
20x2 240,000
20x3 260,000
Total rentals 600,000
Divide by: Lease term 3
Annual lease income 200,000
Journal entries:
Jan. 1, 20x1
No entry
Dec. 31, 20x1

Cash 100,000
Rent receivable 100,000
Rent income 200,000
Dec. 31, 20x2

Cash 240,000
Rent income 200,000
Dec. 31, 20x3

Cash 260,000
Rent income 200,000
Dec. 31, 20x3

P a g e | 18

Rent income 100,000
[10% x (3M – 2M)]
to record the contingent rent receivable
4. Case 1: Sublease as a Finance lease

Head lease:
➢ Initial measurement
200,000 x PV of an annuity due of ₱1 @10%, n=10 = 1,351,805
Jan. 1, Right-of-use asset 1,351,805

20x1 Cash 200,000
➢ Subsequent measurement
Lease liability:
1/1/x1 1,351,805
1/1/x1 200,000 - 200,000 1,151,805
1/1/x2 200,000 115,181 84,819 1,066,986
1/1/x3 200,000 106,699 93,301 973,685
1/1/x4 200,000 97,369 102,631 871,054
Right-of-use asset:
Cost 1,351,805
Divide by: Lease term (shorter than useful life) 10
Sublease:
➢ Gross investment = (208,000 x 8) = 1,664,000 – 208,000 first payment
= 1,456,000
➢ Net investment = (208,000 x PV annuity due @9%, n=8) = 1,254,854
– 208,000 first payment = 1,046,854
Net investment:
P a g e | 19

1/1/x3 1,254,854
1/1/x3 208,000 - 208,000 1,046,854
1/1/x4 208,000 94,217 113,783 933,071
Journal entries:
Jan. Lease receivable 1,456,000
1, Cash 208,000
20x3 Unearned interest income 409,146
(1.456M – 1,046,854)
Right-of-use asset 1,081,443
(1,351,805 - 135,181 - 135,181)
to derecognize the right-of-use asset from
the head lease and recognize the net investment in the
sublease

Dec. 31, Unearned interest income 94,217
20x3 Interest income 94,217
5. Case 2: Sublease as an Operating lease

Jan. 1, 20x3 - Sublease:
Income method:
Jan. 1, Cash 208,000
Liability method:
Jan. 1, Cash 208,000
20x3 Unearned rent income 208,000
Dec. 31, 20x3:

P a g e | 20
Head lease:
Sublease: Adjusting entry if liability method was used

Dec. 31, Unearned rent income 208,000
6. Solution:
Analyses:
 The transaction is accounted for as a sale and leaseback
because the problem states that the transfer of the building
qualifies as a sale under PFRS 15.
 The sale price is not equal to the fair value of the asset, i.e., the
sale price of ₱2M exceeds the fair value of ₱1.8M by ₱200,000.
Because the sale is above market-terms, the ₱200,000 adjustment
shall be accounted for as additional financing provided by the
buyer-lessor to the seller-lessee.
➢ Books of Entity X (Seller/Lessee):

Step 1: Lease liability
Multiply by: PV ordinary annuity @4.5%, n=18 12.15999
Total liability 1,459,199
Of the total liability of ₱1,459,199, ₱200,000 (the

adjustment) relates to the additional financing while the
remaining ₱1,259,199 relates to the lease.
Accordingly, the annual payment of ₱120,000 is
apportioned as follows:
Payment for: Allocation As allocated
Lease ₱120,000 x (1,259,199 /1,459,199) ₱103,553
Additional financing ₱120,000 x (200,000/1,459,199) 16,447
P a g e | 21
Total ₱120,000
Step 2: Right-of-use asset

PV of lease payments
Right of use asset = Carrying amount x
Fair value of asset
Right of use asset = 1M x (1,259,199 ÷ 1.8M) = 699,555
Journal entry:
Jan. Cash 2,000,000
1, Right-of-use asset 699,555
20x1 Building 1,000,000
Financial liability (the additional financing) 200,000
Step 3 (Optional): Reconciliation of Gain or loss

Carrying amount 1,000,000
Right of use retained by seller-lessee (699,555)
Rights transferred to buyer-lessor 300,445
Sale price (at fair value or 2M less 200K adjustment) 1,800,000

Carrying amount (1,000,000)
Total gain 800,000
Multiply by: Transferred portion (300,445 / 1M) 30.0445%
Gain - recognized portion 240,356
➢ Buyer-lessor accounting
Purchase transaction
Jan. 1, Building (at fair value) 1,800,000
20x1 Financial asset (the additional financing) 200,000
Cash 2,000,000
Lease transaction
Entity Y (buyer/lessor) classifies the lease as an operating lease on
the basis that the PV of the lease payments is less than 90% of the
fair value of the building, i.e., (1,259,199 ÷ 1.8M) = 69.96%.
P a g e | 22
In subsequent periods, Entity Y treats the ₱120,000 collections as:

a. ₱103,553 collection of lease payment (i.e., lease income); and
b. ₱16,447 settlement of the principal and interest income on the
financial asset.
Page |1
Chapter 9
Income Taxes

1. FALSE
2. TRUE
3. TRUE
4. FALSE – labiktad
5. FALSE
6. TRUE
7. FALSE - Current tax expense (not income tax expense) is
increased when a deferred tax liability reverses. The reversals
of deferred taxes affect only the current tax expense (income
tax payable); they do not affect income tax expense.
8. FALSE – no effect.
9. FALSE
10. FALSE

1. A
2. B
3. D
4. B
5. C
6. D
7. D
8. D
9. D
10. A
Page |2
1. Solution:
Requirement (a):
Multiply by
Description of items Description of items
Tax rate
Pretax income 900,000
Permanent differences:
Penalty 30,000
Interest on borrowings 3,000
Interest income (9,000)
Acctg. profit subj. to tax 924,000 30% ITE 277,200
Temporary differences:
Less:  TTD Less:  DTL
Excess depreciation (60,000) 30% (18,000)
Excess revenue (45,000) 30% (13,500)
Add:  DTD Add:  DTA:
Excess provision 54,000 30% 16,200
Advanced rent 12,000 30% 3,600
Unrealized loss 18,000 30% 5,400
Taxable profit 903,000 30% CTE 270,900
 DTL (18,000 + 13,500) 31,500

 DTA (16,200 + 3,600 + 5,400) 25,200
Deferred tax expense 6,300
Requirement (b): Current tax liability

➢ 270,900 equal to the current tax expense
Requirement (c): DTL and DTA

Deferred tax liability
0 beg.
31,500 Increase (18,000 + 13,500)
end. 31,500
Deferred tax asset

beg. 0
Increase (16,200 + 3,600 + 5,400) 25,200
25,200 end.
Page |3
Requirement (d): Journal entry

Income tax expense 277,200
Deferred tax asset 25,200
Deferred tax liability 31,500
2. Solutions:
Requirement (a) – DTL and DTA
Assets:
Excess of carrying amount of Trade A/R over its tax base 1,000,000
Excess of carrying amount of Equipment over its tax base 800,000
Taxable temporary difference (TTD) 1,800,000
Multiply by: Tax rate 30%
Deferred tax liability – Dec. 31, 20x1 540,000
Liability:
Excess of carrying amt. of accrued expenses over its tax base 400,000
Deductible temporary difference (DTD) 400,000
Deferred tax asset – Dec. 31, 20x1 120,000
Requirement (b) – Income tax expense and Current tax expense

Description of items Tax rate Description of items
Pretax income 2,000,000
Permanent diff. -
Acctg. profit subj. to tax 2,000,000 30% ITE 600,000
Increase in TTD (1,800,000) 30% Increase in DTL (540,000)
Increase in DTD 400,000 30% Increase in DTA 120,000
Taxable profit – 20x1 600,000 30% CTE 180,000
Requirement (c) – Deferred tax expense/benefit

Increase in DTL (540,000)
Increase in DTA 120,000
Deferred tax expense ( 420,000)
Page |4
Requirement (d) – Journal entry

Page |5

1. C
Impairment 40,000
Fines 16,000
Acctg. profit subj. to tax 375,000 30% Income tax expense 112,500
Depn. (FI>TI) (28,000) 30% Less:  DTL (8,400)
Premium (FI<TI) 25,000 30% Add:  DTA 7,500
Advances (FI<TI) 18,000 30% 5,400
Taxable profit 390,000 30% Current tax expense 117,000

Increase in DTA (7,500 + 5,400) 12,900
Deferred tax benefit 4,500
2. D
Current tax expense 117,000
Less: Quarterly income tax payments (29,000)
Deferred Tax Liability Deferred Tax Asset

6,000 beg.* beg.* 4,500
8,400 Increase Increase 12,900
end. 14,400 17,400 end.
* 20K beg. TTD x 30% = 6,000 beg. DTL

15K beg. DTD x 30% = 4,500 beg. DTA
3. B
Insurance 50,000
Impairment loss 20,000
Page |6
Acctg. profit subject to tax 2,763,000 30% ITE 828,900

Less:  TTD (FI>TI): Less:  DTL:
Sales revenue (1.9M – 1.25M) (650,000) 30% (195,000)
Depreciation (600K – 280K) (320,000) 30% (96,000)
Add:  DTD (FI<TI): Add:  DTA:
Rent (320K – 540K) 220,000 30% 66,000
Warranty (280K – 120K) 160,000 30% 48,000
Taxable profit 2,173,000 30% CTE 651,900
Profit for the year, before tax 2,700,000

Income tax expense (828,900)
Profit for the year, after tax 1,871,100
4. A
Multiply by
Tax rate
Less: Non-taxable income
Income from exempt bonds (60,000)
Proceeds from life
insurance (100,000)
Accounting profit subject Income tax
to tax 440,000 30% expense 132,000
Less:  Taxable temporary Less:  Deferred
difference (TTD) 'FI>TI': tax liability (DTL):
Excess depreciation (120,000) 30% (36,000)
Current tax
Taxable profit 320,000 30% expense 96,000
5. C
Increase in DTL (6,600 – 3,600) (3,000)
Increase in DTA (9,600 – 2,700) 6,900
Page |7
6. C
Income tax payable
8,960 Jan. 1
Income tax payments 67,600 71,520 Current tax expense (squeeze)
Dec. 31 12,880
Income tax expense 65,280 (squeeze)

Increase in DTL (10,560 – 5,760) (4,800)
Increase in DTA (15,360 – 4,320) 11,040
Current tax expense 71,520 (start)
7. D
Pretax income (squeeze) 209,000
Add: Non-deductible expense:
Political contributions 20,000
Less: Interest income subject to final tax (10,000)
Accounting profit subject to tax 219,000
Less:  Taxable temporary difference (TTD) 'FI>TI':
Excess revenue (60,000)
Add:  Deductible temporary difference (DTD) 'FI<TI'
Excess warranty expense 9,000
Excess book depreciation 12,000
Taxable profit (start) 180,000
8. A
Permanent differences: -
Acctg. profit subj. to tax 4,000,000 30% Income tax expense 1,200,000
Trade N/R (CA>TB) (2,000,000) 30% Less:  DTL (600,000)
Bldg. (CA>TB) (1,600,000) 30% (480,000)
Provision 800,000 30% Add:  DTA 240,000
➢ DTL: 600,000 + 480,000 = 1,080,000

➢ DTA: 240,000
Page |8
9. A
CA TB Difference
Equipment 800,000 654,545 (a) 145,455 TTD
Trade N/R 1,000,000 0 1,000,000 TTD
Unearned rent 540,000 0 540,000 DTD
Interest payable 60,000 60,000 permanent diff. (b)
Dividends payable ignored (c) ignored ignored
Carrying amount
(a) 800,000
Divide by: (100% - 10% depn. in Yr. 1 - 10% in Yr. 2) 80%
Historical cost 1,000,000

Multiply by: SLM rate 10%
Annual depreciation (SLM) 100,000

Divide by: Annual depreciation 100,000
Useful life 10 years
SYD rate = 10 x [(10 + 1) ÷ 2] = 55

SYD depreciation:
Year 1 (1M x 10/55) (181,818)
Year 2 (1M x 9/55) (163,636)
Tax base 654,545
(b)The interest creates a permanent difference because it is

recognized as expense under financial reporting but will never be
included in taxation.
(c)The dividends declared do not create any permanent or

temporary difference because the dividends affect neither taxable
Page |9
income nor financial income (i.e., the dividends are tax-exempt

and also not recognized as expense).
 Deferred tax liability, end. = (145,455 + 1,000,000) x 30% = 343,637

 Deferred tax asset, end. = (540,000 x 30%) = 162,000

Interest 60,000
Acctg. profit subj. to tax 2,660,000 30% Income tax expense 798,000
30% Less:  DTL (d) (73,637)
30% Add:  DTA (e) 98,000
Taxable profit 30% Current tax expense 822,363

270,000 beg. beg. 64,000
73,637 (d) Increase Increase 98,000 (e)
end. 343,637 162,000 end.
10. D
Analysis TTD DTD
Revenue (1.8M – 900K) FI>TI 900,000
Unrealized gain FI>TI 12,000
Impairment loss FI=TI - -
Bad debts expense FI<TI 60,000
Retirement benefits (280K – 420K) FI>TI 140,000 -
R&D expense (60K – 20K) FI<TI 40,000
Totals 1,052,000 100,000
Operating loss carryforward (a) 572,000
Totals 1,052,000 672,000
Multiply by: 30% 30%
DTL and DTA, respectively 315,600 201,600
(a) Pretax income 400,000

Less: Gain on involuntary conversion (20,000)
P a g e | 10
Accounting profit subject to tax 380,000

Less: TTD (1,052,000)
Add: DTD before Operating loss carryforward 100,000
Operating loss carry forward (572,000)
11. B
• The higher depreciation recognized in financial reporting
compared to taxation makes financial income less than taxable
income (FI<TI). Therefore, the ₱8,000 difference represents a
deductible temporary difference – an addition in the formula.
• Income under financial reporting (equity method) 35,000
Dividends received 25,000

Tax deduction (80% x 25K) (20,000)
Taxable income 5,000
Taxable temporary difference (FI>TI) – deduction 30,000
Multiply by
Tax rate
Accounting profit subject Income tax
to tax 100,000 30% expense 30,000
Less:  Taxable temporary Less:  Deferred
difference (TTD) 'FI>TI': tax liability (DTL):
Income (equity method) (30,000) 30% (9,000)
Add:  Deductible
temporary difference Add:  Deferred
(DTD) 'FI<TI': tax asset (DTA):
Excess depreciation 8,000 30% 2,400
Current tax
Taxable profit 78,000 30% expense 23,400
P a g e | 11
12. A
Add:  Reversal of TTD Add:  Reversal of DTA
Collection of revenue 920,000 276,000
Less:  Reversal of DTD Less:  Reversal of DTA
Settlement of warranty (140,000) (42,000)
Taxable profit 1,200,000 30% Current tax expense 360,000
13. A
DTA, year-end before adjustment 304,000
Allowance (304,000 x 30%) (91,200)
DTA, year-end after adjustment 212,800
DTA, beg. 197,600
Increase in DTA in current year 15,200
Income tax expense 174,800 (squeeze)

Add: Increase in DTA in current year 15,200
Current tax expense (equal to income tax payable) 190,000 (start)
14. A
Warranty cost expected Applicable tax Deferred tax
Year to be paid rate asset
20x2 100,000 32% 32,000
20x3 75,000 35% 26,250
Total 58,250
P a g e | 12
15. D
Tax rates
Pretax income START 1M
Investment income (60K)
Life insurance proceeds (120K)
Share in profit (a) (580K)
Acctg. profit subj. to tax 240K N/A ITE 75.5K SQUEEZE
Less: Depreciation (FI>TI) (150K) 35% DTL (52.5K)
Add: Accrued expenses (FI<TI) 80K 35% DTA 28K
Taxable profit 170K 30% CTE 51K
(a)
The share in profit of associate is a permanent difference because
dividends received from the associate are tax-exempt. Thus, any
income (loss) recognized on the investment affects only financial
reporting but never taxation.
Solution guide:
Pretax income xx
Fines and penalties xx
Interest income on bank deposits (xx)
Acctg. Income subj. to tax xx Multiply by: 30% ITE xx
Excess depreciation (xx) Multiply by: 30% DTL (xx)
Bad debt expense xx Multiply by: 30% DTA xx
Taxable profit xx CTE xx
DTL (xx)
DTA xx
(Deferred tax expense)/ benefit xx
P a g e | 13
1. Solutions:
Requirements (a): Income tax expense & Current tax expense
Penalties 5,000
Excess revenue (FI>TI) (100,000) 30% Less:  DTL (30,000)
Bad debts (FI<TI) 40,000 30% Add:  DTA 12,000
Advances (FI<TI) 18,000 30% 5,400
Requirement (b): Deferred tax expense/benefit

Increase in DTA (12,000 + 5,400) 17,400
Deferred tax expense (increase in DTL greater than increase in DTA) 12,600
Requirement (c): Current tax payable

Less: Quarterly income tax payments 0
Requirement (d): Deferred tax liability and Deferred tax asset

6,600 beg.* beg.* 4,200
30,000 Increase Increase 17,400
end. 36,600 21,600 end.
* 22K beg. TTD x 30% = 6,600 beg. DTL

14K beg. DTD x 30% = 4,200 beg. DTA
P a g e | 14
Requirement (e): Journal entry

Dec. Income tax expense 145,500
31, Deferred tax asset 17,400
20x1 Deferred tax liability 30,000
2. Solutions:
Requirement (a): Deferred tax liability and Deferred tax asset
Assets:
Excess of carrying amount of software over its tax base 500,000
Excess of carrying amount of machinery over its tax base 400,000
Taxable temporary difference (TTD) 900,000
Deferred tax liability – Dec. 31, 20x1 270,000
Liability:
Excess of carrying amount of accrued liability over its tax base 200,000
Deductible temporary difference (DTD) 200,000
Deferred tax asset – Dec. 31, 20x1 60,000
Requirement (b): Income tax expense and Current tax expense

Multiply by
Tax rate
Permanent differences -
Acctg. profit subj. to tax 1,000,000 30% Income tax expense 300,000
Less:  TTD (900,000) 30% Less:  DTL (270,000)
Add:  DTD 200,000 30% Add:  DTA 60,000
Requirement (c): Deferred tax expense/benefit

Increase in DTA 60,000
Deferred tax expense (210,000)
P a g e | 15
Requirement (d): Journal entry

Dec. Income tax expense 300,000
31,
20x1
3. Solution:
CA TB Difference
(a) A/R 10,000 0 10,000 TTD
(b) Prepaid insurance 20,000 20,000 -
(c) Interest payable 30,000 30,000 -
(d) Accrued expenses 40,000 0 40,000 DTD
➢ Deferred tax liability: (10K TTD x 30%) = 3,000

➢ Deferred tax asset: (40,000 DTD x 30%) = 12,000
4. Answer: (300,000 + 50,000) x 30% x ¾ = 78,750
5. Solution:
Year Financial reporting Taxation Difference (FI > TI)
20x1 960,000 360,000
20x2 1,560,000 840,000
Totals 2,520,000 1,200,000 1,320,000
Deferred tax liability - Dec. 31, 20x2 330,000
6. Solution:
Description of items Tax rates
Pretax income START 1M
Permanent differences -
Acctg. profit subj. to tax 1M N/A ITE 298K SQUEEZE
Less: Revenue (FI>TI) (200K) 32% DTL (64K)
Add: Warranty (FI<TI) 300K 32% DTA 96K
Taxable profit 1.1M 30% CTE 330K
P a g e | 16
Alternative solution:
Deferred tax
Income tax expense = + Current tax expense
expense/(benefit)
Deferred tax expense (benefit) is computed as follows:

Increase in Taxable temporary difference (FI>TI) 200,000
Multiply by: Substantially enacted future tax rate 32%
Increase in Deferred tax liability 64,000
Increase in Deductible temporary difference (FI<TI) 300,000

Multiply by: Substantially enacted future tax rate 32%
Increase in Deferred tax asset 96,000
Increase in Deferred tax liability 64,000

Increase in Deferred tax asset (96,000)
Deferred tax benefit (increase in DTA exceeds increase in DTL) (32,000)
Current tax expense is computed as follows:

Add: Increase in Taxable temporary difference (200,000)
Less: Increase in Deductible temporary difference 300,000
Taxable profit 1,100,000
Multiply by: Tax rate for the current year – 20x1 30%
Income tax expense is computed as follows:

Income tax expense = (32,000) + 330,000
Income tax expense = 298,000
Journal entry:
Dec. 31, Income tax expense 298,000
20x1 Deferred tax asset 96,000
P a g e | 17
7. Solution:
Dec. Income tax expense (1.2M x 32%) 384,000
31,
Deferred tax liability (decrease) 64,000
20x1
Deferred tax asset (decrease) 96,000
[(1.2M + 200K – 300K) x 32%] or
(384K + 64K – 96K)
Chapter 10
Shareholders’ Equity (Part 1)

1. FALSE
2. FALSE – SEC not DTI
3. FALSE
4. TRUE
5. FALSE
6. FALSE
7. FALSE – fair value
8. FALSE
9. FALSE
10. FALSE

1. B - 2,000 sh. x (18 – 5) = 26,000 share premium recorded at the
subscription date, not collection date
2. A
3. A
4. D – The purchase of treasury shares is recorded as debit to
treasury shares and credit to cash.
5. D – The pro forma entry to record the reissuance of treasury
shares above cost is as follows:
Cash 120 (above cost)
Treasury shares 100 (cost)
Share premium 20
Choice (c) is incorrect. Although ‘share premium – retirement’ is

credited, any share premium from the original issuance is also
debited. The net effect on share premium is a credit.
6. A
7. A
Choice (b) can happen if there is no down payment.
8. C
9. D
10. D
1. Solutions:
Requirement (a):
Jan. 1, 20x1
Memorandum method Journal entry method
Memo entry – Authorized Unissued share capital 2M
capitalization is ₱2,000,000 divided into Authorized share capital 2M
10,000 shares with par value per share
of ₱200.
Cash 125K Cash 125K

(2M x 25% x 25%) (2M x 25% x 25%)
Subscription receivable 375K Subscription receivable 375K
Subscribed share capital 500K Subscribed share capital 500K
(2M x 25%) (2M x 25%)
Feb. 1, 20x1
Cash 300K* Cash 300K*
Subscription receivable 300K Subs. receivable 300K
Share capital 400K Unissued share capital 400K
* Subscription price of 2,000 shares (2,000 x ₱200) 400,000

Portion already paid (400,000 x 25%) (100,000)
Balance collected 300,000
Feb. 28, 20x1

Cash (1,000 x ₱200) 200K Cash (1,000 x ₱200) 200K
Requirement (b):
Share capital 600,000 Authorized sh. capital 2,000,000
Subscribed sh. capital 100,000 Unissued sh. capital (1,400,000)
Subs. receivable (75,000) Issued share capital 600,000
Subscribed sh. capital 100,000
Subs. receivable (75,000)
Total Share capital 625,000 Total Share capital 625,000
2. Solution:
Jan. Cash (5,000 x ₱120) 600,000
1,
20x1
Share capital (5,000 x ₱100) 500,000
Share premium [5,000 x (₱120 – ₱100)] 100,000
Jan. Subscription receivable (2,000 x ₱160) 320,000
31,
20x1
Subscribed share capital (2,000 x ₱100) 200,000
Share premium [2,000 x (₱160 – ₱100)] 120,000
3. Solutions:
July 1, Treasury shares (1,000 x ₱90) 90,000
20x1 Cash 90,000
July 1, Retained earnings – unrestricted 90,000
20x1 Retained earnings – appropriated 90,000
Requirement (a):
Sept. 1, Cash (1,000 x ₱140) 140,000
20x1 Treasury shares (1,000 x ₱90) 90,000
Share premium – treasury shares 50,000
Sept. 1, Retained earnings – appropriated 90,000
20x1 Retained earnings – unrestricted 90,000
Requirement (b):
Sept. 1, Cash (1,000 x ₱60) 60,000
20x1 (a) Share premium – treasury shares -
(b) Retained earnings 30,000
Treasury shares (1,000 x ₱90) 90,000
4. Solution:
Requirement (a):
July 1, Treasury shares (1,000 x ₱80) 80,000
20x1 Cash 80,000
July 1, Retained earnings – unrestricted 80,000
Sept. 1, Share capital (1,000 x ₱100) 100,000

20x1
Share premium – original issuance 20,000
(₱320K x 1,000/16,000)
Share premium - retirement 40,000
20x1
Retained earnings – unrestricted 80,000
Requirement (b):
July Share capital (1,000 x ₱100) 100,000
1, Share premium – original issuance 20,000
20x1 (₱320K x 1,000/16,000)
(a) Share premium – treasury shares 10,000
(b) Retained earnings (balancing figure) 10,000
Cash (1,000 x ₱140) 140,000
5. Solution:
June 1, No entry (memo only)
20x1
June 20, Cash (30,000 x ½ x ₱50) 750,000
20x1 Ordinary share capital (30K x ½ x ₱10) 150,000
Share premium – Ordinary share 600,000
June 30, No entry (memo only)
20x1

1. A
Ordinary shares, ₱5 par 800,000
Subscribed share capital 100,000
Subscription receivable (80,000)
Cumulative losses on translation of foreign operation (60,000)
Retained earnings - appropriated 320,000
Retained earnings - unappropriated 700,000
Treasury shares, at cost (200,000)
Total shareholders' equity 2,700,000
2. A
Share capital (30K x 10) 300,000
Subscribed shares (40K x 10) 400,000
Subscriptions receivable (40K x 18 x 25%) (180,000)
Share premium (30K x 2) + (40K x 8) 380,000
Total SHE 900,000
Short-cut for total equity: (30,000 x 12) + (40,000 x 18 x 75%) = 900,000
3. C
Date Cash (10,000 x ₱14) 140,000
Share capital (10,000 x ₱1) 10,000
Date Share premium 2,000
Cash 2,000
Date Cash (20,000 x ₱20 x 25%) 100,000
Subscriptions receivable (20K x ₱20 x 75%) 300,000
Subscribed share capital (20,000 x ₱1) 20,000
Date Cash (15,000 x ₱20 x 75%) 225,000
Subscriptions receivable 225,000
Date Subscribed share capital (15,000 x ₱1) 15,000
Share capital 15,000
Date Share premium 3,000
Cash 3,000
Total SHE before share transactions 900,000

Share capital (10,000 + 15,000) 25,000
Subscribed share capital (20,000 - 15,000) 5,000
Subscription receivable (300,000 – 225,000) (75,000)
Share premium (130,000 – 2,000 + 380,000 – 3,000) 505,000
Total SHE after share transactions 1,360,000
Short-cut: 900,000 + (10,000 x 14 – 2,000) + (20,000 x 20 x 25%) +

(15,000 x 20 x 75% - 3,000) = 1,360,000
4. C
Jan. 3 No entry (memorandum method assumed)

Jan. 5 Cash (5K x ₱52) + (60K x ₱14) 1,100,000
Preference share capital (5K x ₱50) 250,000
Share premium - PS [5K x (₱52 - ₱50)] 10,000
Ordinary share capital (60K x ₱10) 600,000
Share premium - OS [60K x (₱14 - ₱10)] 240,000
Jan. 24 Organization costs (2K x ₱16) 32,000
Share premium - OS [2K x (₱16 - ₱10)] 12,000
Feb. 3 Land 250,000

Building 1,000,000
Share premium - OS 450,000
Sept. 12 Cash (3K x ₱53 x 40%) 63,600
Subscription receivable (3K x ₱53 x 60%) 95,400
Subscribed share capital – PS (3K x ₱50) 150,000
Share premium - PS [3K x (₱53 - ₱50)] 9,000
Oct. 1 Cash 15,900
Subscription receivable 15,900
Preference share capital 250,000

Subscribed sh. Capital - PS 150,000
Share premium - PS (10K + 9K) 19,000
Subscription receivable (95.4K - 15.9K) (79,500)
Ordinary share capital (600K + 20K + 800K) 1,420,000
Share premium - OS (240K + 12K + 450K 702,000
Total contributed capital 2,461,500
5. D
Par No-par
Ordinary share capital 1,600,000 1,600,000
Subscribed share capital 200,000 200,000
Legal capital 1,800,000 2,400,000
6. B
Jan. 2, Cash (25,000 x 15 x 50%) 187,500
20x1 Subscription receivable (25,000 x 15 x 50%) 187,500
Subscribed share capital (25,000 x 10) 250,000
Jan. 28, Cash (20,000 x 15 x 50%) 150,000
20x1 Subscription receivable 150,000
Subscribed share capital (20,000 x 10) 200,000

Ordinary share capital 200,000
July Treasury shares (5,000 x 17) 85,000

14, Cash 85,000
20x1
Dec. Cash (2,500 x 20) 50,000
27, Treasury shares (2,500 x 17) 42,500
20x1 Share premium – Treasury shares 7,500
Share premium, Dec. 31, 20x1: (125K + 7.5K) = 132,500
7. A
Date Cash (10,00 x ₱48) 480,000
(a) Share premium – treasury shares (1) -
There is no balance in this account because the problem states that

(1)
the reacquisition was the first treasury share transaction of Entity A.
8. D
Date Cash (10,000 x ½ x ₱58) 290,000

Treasury shares (10,000 x ½ x ₱50) 250,000
Date Share capital (5,000 x ₱10) 50,000

Share premium – original issuance (5K x ₱5) 25,000
(a) Share premium – treasury shares (see above) 40,000
Treasury shares (5,000 x 50) 250,000
9. A
Jan. Share capital (150,000 x ₱2 par) 300,000
2, Share premium (2.55M x 300K ÷ 1.7M) 450,000
20x3 Retained earnings 450,000
Cash 1,200,000
Ordinary shares (1,700,000 – 300,000) 1,400,000

Share premium (2,550,000 – 450,000) 2,100,000
Retained earnings (6,700,000 – 450,000) 6,250,000
10. D
Date Share capital (1,000 x ₱10) 10,000
Share premium – original issuance (1K x ₱20) 20,000
Cash (1,000 x 25) 25,000
Share premium – retirement 5,000
11. C
➢ Proportional method:
Fair
No. of value Total fair
shares per sh. value Fraction Allocation
Preference shares 200 150 30,000 30/150 40,000
Ordinary shares 1,000 120 120,000 120/150 160,000
Totals 1,200 150,000 150/150 200,000
Date Cash 200,000

Preference share capital (200 x ₱130 par) 26,000
Share premium – PS (40,000 – 26,000) 14,000
Ordinary share capital (1,000 x ₱100 par) 100,000
Share premium – OS (160,000 – 100,000) 60,000
➢ Incremental method:
Lump sum price 200,000
Allocation to ordinary shares, at fair value (1,000 x ₱120) (120,000)
Excess allocated to preference shares 80,000
The entry to record the issuance is as follows:

Date Cash 200,000
Preference share capital (200 x ₱130 par) 26,000
Share premium – PS (80,000 – 24,000) 54,000
Ordinary share capital (1,000 x ₱100 par) 100,000
Share premium – OS (120,000 – 100,000) 20,000
12. C (120,000 rights x ₱0.10) = 12,000 debit to share premium
13. B
(a) Cash (3,000 x ₱18) 54,000
Callable preference shares (3,000 x ₱10) 30,000
Share premium – Callable PS 24,000
to record issuance of callable preference shares
(b) Cash (2,000 x ₱25) 50,000
Convertible preference shares (2,000 x ₱20) 40,000
Share premium – Convertible PS 10,000
to record issuance of convertible preference shares
(c) Callable preference shares (2,000 x ₱10) 20,000
Share premium – Callable PS (24K x 2K/3K) 16,000
Cash (2,000 x ₱17) 34,000
Share premium – redemption 2,000
(d) Convertible preference shares (1,000 x ₱20) 20,000
Share premium – Convertible PS (10K x 1/2) 5,000
Ordinary share (1,000 x ₱25 par) 25,000
Share premium, beg. 280,000

(a) 24,000
(b) 10,000
(c) (16,000)
(c) 2,000
(d) (5,000)
Share premium, end. 295,000
14. C
Case (1):
Fair value Total Fair
Equity instruments per sh. value Fraction Allocation
Preference sh. 4,000 100 400,000 400/500 396,800
Warrants 4,000 25 100,000 100/500 99,200
500,000 500/500 496,000
Date Cash (4,000 x 124) 496,000
Preference share capital (4,000 x ₱80 par) 320,000
Share premium – PS (396,800 – 320,000) 76,800
Share premium – warrants outstanding 99,200
Case (2):
Fair value of ordinary share 58
Subscription price (10)
Intrinsic value per share of warrant 48
Number of ordinary shares purchasable under the warrants 2,000*
Assigned value of share warrants 96,000
* 4,000 preference shares ÷ 2 warrants per ordinary sh. = 2,000
Issue price 496,000

Assigned value of share warrants (96,000)
Excess allocated to preference shares 400,000
Date Cash (4,000 x 124) 496,000

Preference share capital (4,000 x ₱80 par) 320,000
Share premium – PS (400,000 – 320,000) 80,000
Share premium – warrants outstanding 96,000
15. D

Answer:
Cash 45,678.60
Share capital 16,000.00
(100 shares per certificate x 16 certificates x ₱10 par*]
Share premium 29,678.60
* See share certificate below.

P a g e | 13

1. Solution:
Requirement (a):
Jan. 6, 20x1
Memo entry – Authorized Unissued share capital 3M
capitalization is ₱3,000,000 divided into Authorized share capital 3M
600,000 shares with par value per share
of ₱5.
Cash (3M x 25% x 25%) 187.5K Cash (3M x 25% x 25%) 187.5K
Subscription receivable 562.5K Subscription receivable 562.5K
(3M x 25%) (3M x 25%)
Jan. 31, 20x1

Cash 450K* Cash 450K*
Subscription receivable 450K Subscription receivable 450K
* Subscription price of 120,000 shares (120,000 x ₱5) 600,000

Portion already paid (120,000 x ₱5 x 25%) (150,000)
Balance collected 450,000
Feb. 14, 20x1

Cash (60,000 x ₱20) 1.2M Cash (60,000 x ₱20) 1.2M
Share capital (60K x ₱5) 300K Unissued sh. capital (60K x ₱5) 300K
Share premium 900K Share premium 900K
Cash 12K Cash 12K
Feb. 28, 20x1

Subs. receivable (150K x ₱25) 3.75M Subs. receivable (150K x ₱25) 3.75M
Subs. sh. capital (150K x ₱5) 750K Subs. sh. capital (150K x ₱5) 750K
Share premium 3M Share premium 3M
P a g e | 14
Requirement (b):
Share capital 900,000 Authorized sh. capital 3,000,000
Subscribed sh. cap. 900,000 Unissued sh. capital (2,100,000)
Subs. receivable (3,862,500) Issued share capital 900,000
Share premium 3,888,000 Subscribed sh. capital 900,000
Subs. receivable (3,862,500)
Total Share capital 1,825,500 Total Share capital 1,825,500
2. Solutions:
Sept. 1, Treasury shares (3,000 x ₱90) 270,000
20x1 Cash 270,000
Sept. 1, Retained earnings – unrestricted 270,000
Requirement (a):
Nov. 1, Cash (3,000 x ₱140) 420,000
20x1 Treasury shares (3,000 x ₱90) 270,000
Nov. 1, Retained earnings – appropriated 270,000
Requirement (b):
Nov. 1, Cash (3,000 x ₱60) 180,000
20x1 (a) Share premium – treasury shares -
Nov. 1, Retained earnings – appropriated 270,000
P a g e | 15
3. Solution:
Requirement (a):
May Share capital (4,000 x ₱100 par) 400,000
20x1 (320K x 4,000/16,000 issued shares)
Cash (4,000 x ₱80) 320,000
Share premium – retirement 160,000
Requirement (b):
May Share capital (1,000 x ₱100) 400,000
20x1 (320K x 4,000/16,000 issued shares)
(a) Share premium – treasury shares 10,000
Cash (4,000 x ₱140) 560,000
4. Solution:
Sept 1, No entry (memo only)
20x1
Sept. Cash (30,000 x ₱60) 1,800,000
21, Ordinary share capital (30,000 x ₱50) 1,500,000
20x1 Share premium – Ordinary share 300,000
Sept. No entry (memo only)
30,
20x1
5. Solution:
May 21, Cash 200,000
20x1 Share premium – donated capital 200,000
July 5,
No entry (memo only)
20x1
July 20, Land 1,000,000
20x1 Share premium – donated capital 1,000,000
Dec. 19, Cash (1,000 x ₱260) 260,000
20x1 Share premium – donated capital 260,000
Page |1
Chapter 11
Shareholders’ Equity (Part 2)

1. FALSE
2. FALSE
3. FALSE
4. TRUE
5. FALSE
6. FALSE – fair value
7. FALSE
8. TRUE
9. TRUE
10. FALSE

1. D
2. B
3. A
4. B
5. D
6. D
7. C
8. C
9. C
10. A
Page |2
1. Solution:
Shares issued (1,600,000 ÷ 100 par) 16,000
Shares subscribed (440,000 ÷ 100 par) 4,400
Treasury shares (288,000 ÷ 120 cost) ( 2,400)
Outstanding shares 18,000
Multiply by: Dividends per share 50
Total cash dividends declared 900,000
(Date of Retained earnings 900,000

declaration)
(Date of
record)
No entry
(Date of Cash dividends payable 900,000
distribution)
Cash 900,000
2. Solution:
➢ Date of declaration:
Retained earnings 1,600,000
Property dividends payable 1,600,000
NCA held for distribution to owners 1,600,000
Investment in associate 2,000,000
➢ End of reporting period:

Retained earnings 600,000
Property dividends payable 600,000
NCA held for distribution to owners 400,000
Gain on impairment recovery 400,000
➢ Date of distribution:
Loss on distribution of property dividend 100,000
Page |3
3. Solution:
➢ Date of declaration:
Inventory 400,000
➢ Date of distribution:
Inventory 1,600,000
Gain on distribution of property dividend 600,000
4. Solution:
Requirement (a):
(Date of Retained earnings (18,000 x 1/10 x ₱120) 216,000
declaration)
Share dividends distributable 180,000
(18,000 x 1/10 x ₱100)
(Date of
record)
No entry
(Date of Share dividends distributable 180,000
distribution)
Requirement (b):
(Date of Retained earnings (18,000 x 1/5 x ₱100) 360,000
declaration)
Share dividends distributable 360,000
(18,000 x 1/5 x ₱100)
(Date of
record)
No entry
(Date of Share dividends distributable 360,000
distribution)
Page |4
5. Solutions:
Requirement (a): Noncumulative and non-participating
Total dividends declared 3,600,000
Allocation:
PS (20,000 x 200 x 10% x 1 yr.) 400,000
OS (3,600,000 - 400,000) 3,200,000
Balance -
Requirement (b): Cumulative and non-participating

Allocation:
PS (20,000 x 200 x 10% x 3 yrs.) 1,200,000
OS (3,600,000 – 1,200,000) 2,400,000
Balance -
Requirement (c): Noncumulative and fully participating

Allocation:
PS (20,000 x 200 x 10% x 1 yr.) 400,000
OS (160,000 x 100 x 10%) 1,600,000
Excess subject to participation (3.6M – 400K - 1.6M) 1,600,000
PS (1,600,000 x 4M par/ 20M par) 320,000
OS (1,600,000 x 16M par/ 20M par) 1,280,000
Balance -
PS (400K basic + 320K participation) 720,000

OS (1.6M basic + 1.28M participation) 2,880,000
Requirement (d): Cumulative and fully participating

Allocation:
PS (20,000 x 200 x 10% x 3 yrs.) 1,200,000
OS (160,000 x 100 x 10%) 1,600,000
Excess subject to participation (3.6M – 1.2M - 1.6M) 800,000
PS (800,000 x 4M/20M) 160,000
OS (800,000 x 16M/20M) 640,000
Page |5
Balance -
PS (1.2M basic + 160K participation) 1,360,000

OS (1.6M basic + 640K participation) 2,240,000
Requirement (e): Cumulative and participating up to 16%

Allocation:
PS (20,000 x 200 x 10% x 3 yrs.) 1,200,000
OS (160,000 x 100 x 10%) 1,600,000
Excess subject to participation (3.6M – 1.2M - 1.6M) 800,000
PS [20,000 x 200 x (16% - 10%)] 240,000
Excess allocated to ordinary shares (800,000 - 240,000) 560,000
Balance -

OS (1.6M basic + 560K participation) 2,160,000
6. Solution:
Date Share capital 2,000,000
Share capital [(2M ÷ ₱100) x ₱80] 1,600,000
Share premium – recapitalization 800,000
Shareholders' equity, ₱80 par 1,600,000

Total shareholders’ equity 3,000,000
Page |6
7. Solution:
1 Building (3M – 1.6M) 1,400,000
Revaluation surplus 1,400,000
to record revaluation of building
2 Retained earnings 1,200,000
Receivables (4,000,000 x 30%) 1,200,000
to record write-off of receivables
3 Retained earnings 1,100,000
Inventory (3.1M – 2M) 1,100,000
to record write-down of inventory
4 Retained earnings 100,000
Goodwill 100,000
to record write-down of goodwill
5 Retained earnings 60,000
Estimated liability on pending 60,000
lawsuit
to recognize provision for probable loss on
pending lawsuit
6 Share capital 5,000,000
to record recapitalization effected through
reduction of share capital
7 Revaluation surplus 1,400,000
to wipe out deficit
ASSETS LIABILITIES & EQUITY

Cash 200,000 Liabilities (2.94M + 60K) 3,000,000
Receivables 2,800,000 Share capital, ₱100 par 5,000,000
Inventory 2,000,000 Retained earnings (deficit) -
Building - net 3,000,000
Goodwill -
Total 8,000,000 Total 8,000,000
Page |7

1. C
Retained earnings, Jan. 1 1,780,000
Profit 2,260,000
Cash dividends (260,000 x 8) (2,080,000)
Share dividends (260,000 x 1/20 x 22) (286,000)
Retained earnings, Dec. 31 1,674,000
 The treasury shares do not affect retained earnings because

they were reissued above cost. Also, the treasury shares do not
affect the outstanding shares because all of them were
reissued before the dividends were declared.
 The share dividends are accounted for at fair value because
they are considered “small” (i.e., 1/20 = 5%).
2. A
Outstanding shares, Jan. 1 100,000
May. 21, 20x1 (2,000)
July 20, 20x1 30,000
Total 128,000
Multiply by: 2
Sept. 21, 20x1 256,000
Oct. 5, 20x1 1,000
Outstanding shares, Dec. 19 257,000

Multiply by: Cash dividends per share 3 771,000

Multiply by: Share dividends 2/5
Multiply by: Revised par after stock split 5 514,000
Total debit to retained earnings 1,285,000
Page |8
3. B
Multiply by: Par 100
Aggregate par 1,800,000
Multiply by: Scrip dividends 50%
Total dividends 900,000
Add: Interest (900K x 10% x 5/12) 37,500
Total cash payment on Aug. 31 937,500
4. A
2.4M fair value on distribution date – 2M carrying amount of
inventories = 400,000 gain

Date of Retained earnings 2,200,000
declaration
The inventories are not written-up above the ₱2,000,000 cost.
Date of Retained earnings (2.4M – 2.2M) 200,000

distribution
Date of Property dividends payable 2,400,000
distribution
Inventory 2,000,000
Gain on distribution 400,000
5. B

Page |9
6. C
NCA held for distribution to owners 150,000

Impairment gain 150,000
7. C

Gain on distribution 250,000
Alternative solution: 2,050,000 fair value on Jan. 15, 20x2 – 1,800,000

carrying amount of investment on Jan. 15, 20x2 = 250,000 gain
8. A – a net debit equal to the carrying amount of the non-cash

asset as at the date of declaration.
9. B
Dr. to ret. earnings
Outstanding shares, beg. 10,000
July 1 (2-for-10) 20%
2,000
Multiply by: Par value 100 200,000
Outstanding sh., Dec. 31 (10,000 + 2,000) 12,000
Dec. 31 (1-for-20) 5%
600
Multiply by: Fair value 120 72,000
272,000
P a g e | 10
10. C
SHE, beg. 3,670,000
Jan. 7 - cost of retirement (3,000 x 10) (30,000)
June 30 - semi-annual profit 2,080,000
July 20 - reverse split -
Sept. 21 - cost of treasury shares (500 x 25) (12,500)
Oct. 20 - reissuance price of TS (300 x 30) 9,000
Nov. 23 - issuance price (1,000 x 32) 32,000
Dec. 31 - (4.260M annual profit - 2.08M first half) 2,180,000
Dec. 31 - Dividends (1) (3,672,000)
SHE, end. 4,256,500
(1) Outstanding OS after reverse split (180K ÷ 2) 90,000

Sept. 21 treasury shares (500)
Oct. 20 reissuance 300
Nov. 23 issuance 1,000
Outstanding ordinary shares on Dec. 31 90,800
Multiply by: 40
Dividends to OS 3,632,000
Dividends to PS (50K x 10% x 8 par x 1 yr.) 40,000
Total dividends 3,672,000
Only one-year dividend is paid to the PS because the PS is

noncumulative.

Jan. 7 Ordinary share capital 15,000
Cash 30,000
June 30 Income summary 2,080,000

July 20 Memo entry (90,000 new sh. @ ₱10 new par)

P a g e | 11
Sept. 21 Treasury shares (500 x 25) 12,500

Cash 12,500
Oct. 20 Cash (300 x 30) 9,000

Treasury shares (300 x 25) 7,500
Share premium – T/S 1,500
Nov. 23 Cash (1,000 x 32) 32,000

Ordinary share capital (1,000 x 10) 10,000
Dec. 31 Inc. summary (4.26M – 2.08M) 2,180,000

Dec, 31 Retained earnings (1) 3,672,000

Cash 3,672,000
11. D
Total cash dividends declared 1,000,000
Dividends to PS
(1,000,000)
(100,000 sh. x ₱100 par x 6% x 2 years = 1.2M)
Dividends to OS 0
12. B
Total dividends declared 75,000
Allocation:
① Allocation to preference shares (a) 60,000
② Excess allocated to ordinary shares 15,000
As allocated -
100,000 x ₱10 par x 5% = 50,000 entitlement per year x 3 years (i.e.,

(a)
20x0 to 20x2) = 150,000 total – previous payments (40,000 + 50,000) =

60,000
P a g e | 12
② Excess allocated to ordinary shares 15,000

Divided by: Outstanding OS 300,000
Cash dividends per OS 0.05
13. D
(1) Noncumulative and non-participating

Allocation:
① Preference shares (100,000 x ₱50 x 10% x 1 year) 500,000
② Ordinary shares (₱3.5M - ₱.5M) 3,000,000
As allocated -
(2) Cumulative and non-participating

Allocation:
① Preference shares (100,000 x ₱50 x 10% x 2 years) 1,000,000
② Ordinary shares (₱3.5M - ₱1M) 2,500,000
As allocated -
(3) Noncumulative and participating

Allocation:
① Basic allocation to PS (100,000 x ₱50 x 10% x 1 year) 500,000
② Basic allocation to OS (500,000 x ₱40 par x 10%) 2,000,000
Excess subject to participation (3.5M – 500K – 2M) 1,000,000
③ Participation of preference sh. (1M x 5M par ÷ 25M par) (d) 200,000
③ Participation of ordinary sh. (1M x 20M par ÷ 25M par) 800,000
As allocated -
P a g e | 13
PS: 100,000 x ₱50 = 5M;

(d)
OS: 500,000 x ₱40 = 20M;

5M + 20M = 25M
Preference shares: (₱500,000 basic + ₱200,000 participation) 700,000

Ordinary shares: (₱2,000,000 basic + ₱800,000 participation) 2,800,000
(4) Cumulative and participating

Allocation:
① Basic allocation to PS (100,000 x ₱50 x 10% x 2 years) 1,000,000

② Basic allocation to OS (500,000 x ₱40 par x 10%) 2,000,000
Excess subject to participation (3.5M – 1M – 2M) 500,000
③ Participation of preference sh. (500K x 5M par ÷ 25M par) 100,000
③ Participation of ordinary sh. (500K x 20M par ÷ 25M par) 400,000
As allocated -
Preference shares: (₱1,000,000 basic + ₱100,000 participation) 1,100,000

Ordinary shares: (₱2,000,000 basic + ₱400,000 participation) 2,400,000
14. B
Allocation:
① Basic allocation to 6% PS (100,000 x ₱50 x 10% x 3 years) 1,500,000
① Basic allocation to 3% PS (50,000 x ₱60 x 5% x 1 year) 150,000
② Basic allocation to ordinary sh. (250,000 x ₱40 par x 5%) 500,000
Excess subject to participation (4M – 1.5M – 150K – 500K) 1,850,000
③ Participation of 6% PS (₱1.85M x 5M par ÷ 18M par) 513,889
③ Participation of 3% PS (₱1.85M x 3M par ÷ 18M par) 308,333
③ Participation of ordinary sh. (₱1.85M x 10M par ÷ 18M par) 1,027,778
As allocated -
P a g e | 14
(a) 10% PS: 100,000 x ₱50 = 5M;

5% PS: 50,000 x ₱60 = 3M;
OS: 250,000 x ₱40 = 10M;
5M + 3M + 10M = 18M
10% PS: (₱1,500,000 basic + ₱513,889 participation) 2,013,889

5% PS: (₱150,000 basic + ₱308,333 participation) 458,333
Ordinary shares: (₱500,000 basic + ₱1,027,778 participation) 1,527,778
15. B
Step 1:
Total dividends declared ?
Allocation:
PS (20,000 x 200 x 10% x 3 yrs.) 1,200,000
OS (160,000 x 100 x 10%) 1,600,000
Excess subject to participation ?
PS ?
OS ?
Balance -
Step 2:
Total dividends to OS (160,000 sh. x 14 per share) 2,240,000
Basic dividend of OS (1,600,000)
Participation of OS 640,000
➢ Participation of OS = Excess subject to participation x 16M/20M*

* PS total par: 20,000 x 200 = 4M;
OS total par: 160,000 x 100 = 16M;
4M + 16M = 20M
➢ 640,000 = Excess subject to participation x 16M/20M

➢ Excess subject to participation = 640,000 x 20/16 = 800,000
Step 3:
P a g e | 15
Total dividends declared (squeeze) 800K + 1.6M + 1.2M 3,600,000

Allocation:
PS 1,200,000
OS 1,600,000
Excess subject to participation 800,000
PS (800,000 x 4M/20M) 160,000
OS 640,000
Balance -

OS (160,000 x 14) 2,240,000
PS 1,360,000
Divide by: outstanding PS 20,000
Cash dividend per PS 68
16. D – Dividends on redeemable preference shares are recognized

as interest expense.
Date of Interest expense (100,000 x 10 x 6%) 60,000
declaration Interest payable 60,000
Date of
No entry
record
Date of Interest payable 60,000
distribution Cash 60,000
17. C
18. D
Dividends declared after the reporting period but before the
financial statements are authorized for issue are not recognized as
a liability at the end of the reporting period because no obligation
exists at that time. The dividends are disclosed only in the notes.
The ₱100,000 dividend in arrears on the preference shares
are also only disclosed and are not accrued as liability.
P a g e | 16
19. B
1 Assets (770,000 – 400,000) 370,000
Revaluation surplus 370,000
2 Share capital (2,600,000 x ½) 1,300,000
3 Revaluation surplus 370,000
Ordinary share capital (2,600,000 – 1,300,000) 1,300,000

Retained earnings (-1,670,000 + 1,670,000) 0
Total shareholders’ equity 1,300,000
20. C
Total SHE (before and after recapitalization & share dividend) 10,000,000
Retirement price of PS - Sept. 30, 20x1 (5,000 x 440) (2,200,000)
Dividends on retired - Sept. 30, 20x1 (5,000x 400 x 10% x 3/12) (50,000)
Proceeds from issuance of OS on Oct. 31, 20x1 (3,000 x 600) 1,800,000
Profit for the 6 months ended Dec. 31, 20x1 4,400,000
Dividends to PS - Dec. 31, 20x1 (1) (100,000)
Dividends to OS - Dec. 31, 20x1 (1) (36,000)
Total shareholders' equity - Dec. 31, 20x1 13,814,000
(1) Preference Ordinary

Outstanding shares as of June 30, 20x1 10,000 20,000
Recapitalization on July 1, 20x1 (10,000)
Share dividends on July 1, 20x1 5,000
a - Retired on Sept. 30, 20x1 (5,000)
Issuance on Oct. 31, 20x1 3,000
Outstanding shares as of Dec. 31, 20x1 5,000 18,000
Dividends (PS: ₱400 par x 10% x 1/2 semi-annual) ₱20.00 ₱2.00
Dividends payable 100,000 36,000

July Ordinary share capital – old 8,000,000
P a g e | 17
1, OS capital – new (8M ÷ 2) 4,000,000

20x1
to record the recapitalization
July Retained earnings [(4M ÷ 400) x ½ x ₱400) 2,000,000
1,
Ordinary share capital – new 2,000,000
20x1
to record the ordinary shares issued as
dividend to preference shareholders
July Share premium 4,000,000
1,
20x1
to wipe out the deficit
Sept Preference shares (5,000 x ₱400 par value) 2,000,000
30,
20x1
Cash [5,000 x (₱400 par + ₱40 premium)] 2,200,000
to record the retirement of preference shares
Sept Retained earnings 50,000
30,
Cash (5,000 x ₱400 x 10% x 3/12) 50,000
20x1
to record the dividends on shares retired
Oct. Cash (3,000 x ₱600) 1,800,000
31,
OS capital – new (3,000 x ₱400) 1,200,000
20x1
to record the issuance of ordinary shares
Dec. Income summary 4,400,000
31,
20x1
to close the profit to retained earnings
Dec. Retained earnings 4,000,000
31,
Retained earnings –appropriated 4,000,000
20x1
to restrict retained earnings for the deficit
wiped out on the quasi-reorganization on July 1
Dec. Retained earnings 136,000
31,
Dividends payable – PS (1) 100,000
20x1
Dividends payable – OS (1) 26,000
to record the dividend declaration
Alternative solution using the journal entries

10% Preference shares (4M – 2M) 2,000,000
Ordinary shares (8M – 8M + 4M + 2M + 1.2M) 7,200,000
Share premium (0 + 4M – 4M + 600K) 600,000
Retained earnings (-2M - 2M + 4M – 200K – 50K + 4.4M – 136K) 4,014,000
Total shareholders’ equity, Dec. 31, 20x1 13,814,000
P a g e | 18

1. Solution:
➢ Outstanding shares:
Issued shares 10,000
Shares subscribed 2,000
Treasury shares (1,200)
(Date of Retained earnings (10,800 x ₱60) 648,000

declaration)
(Date of
record)
No entry
distribution)
Cash 648,000
2. Solution:
➢ Dec. 1, 20x1: Date of declaration
Dec. Retained earnings 1,100,000
1,
20x1
Dec. NCA held for distribution to owners 1,100,000
1,
20x1
➢ Dec. 31, 20x1: End of reporting period

Dec. Retained earnings 150,000
31,
Property dividends payable (1.250 – 1.1M) 150,000
20x1
Dec. NCA held for distribution to owners 100,000
31,
Gain on impairment recovery 100,000
20x1
➢ Feb. 1, 20x2: Date of distribution

Jan. Property dividends payable 250,000
15,
Retained earnings (1.1M – 950K) 250,000
20x2
Jan.. Property dividends payable 1,000,000
15,
Loss on distribution of property dividend 200,000
20x2
P a g e | 19
3. Solutions:
Case 1:
(Date of Retained earnings 2,400,000
declaration) (600,000 sh. x 2/5 x ₱10 par)
Stock dividends payable 2,400,000
(600,000 sh. x 2/5 x ₱10 par)
(Date of record) No entry
(Date of Stock dividends payable 2,400,000
distribution)
Share capital 2,400,000
Case 2:
(Date of Retained earnings 2,500,000
declaration) (600,000 sh. x 1/6 x ₱25 fair value)
Stock dividends payable 1,000,000
(600,000 sh. x 1/6 x ₱10 par)
(Date of record) No entry
(Date of Stock dividends payable 1,000,000
distribution)
4. Solutions:
a) Noncumulative and non-participating
Allocation:
① Preference shares (100,000 x ₱50 x 6% x 1 year) 300,000
② Ordinary shares (₱2M - ₱300K) 1,700,000
As allocated -
b) Cumulative and non-participating

Allocation:
① Preference shares (100,000 x ₱50 x 6% x 3 years) 900,000
② Ordinary shares (₱2M - ₱900K) 1,100,000
As allocated -
P a g e | 20
c) Noncumulative and participating

Allocation:
① Basic allocation to PS (100,000 x ₱50 x 6% x 1 year) 300,000
② Basic allocation to OS (250,000 x ₱40 par x 6%) 600,000
Excess subject to participation (2M – 300K – 600K) 1,100,000
③ Participation of preference sh. (1.1M x 5M par ÷ 15M par) (d) 366,667
③ Participation of ordinary sh. (1.1M x 10M par ÷ 15M par) 733,333
As allocated -
PS: 100,000 x ₱50 = 5M;

(d)
OS: 250,000 x ₱40 = 10M;

5M + 10M = 15M
Preference shares: (₱300,000 basic + ₱366,667 participation) 666,667

Ordinary shares: (₱600,000 basic + ₱733,333 participation) 1,333,333
d) Cumulative and participating

Allocation:
① Basic allocation to PS (100,000 x ₱50 x 6% x 3 years) 900,000
Excess subject to participation (2M – 900K – 600K) 500,000
③ Participation of preference sh. (500K x 5M par ÷ 15M par) 166,667
③ Participation of ordinary sh. (500K x 10M par ÷ 15M par) 333,333
As allocated -
Preference shares: (₱900,000 basic + ₱166,667 participation) 1,066,667

Ordinary shares: (₱600,000 basic + ₱333,333 participation) 933,333
e) Cumulative and participating up to 16%

P a g e | 21

Allocation:
① Basic allocation to PS (100,000 x ₱50 x 6% x 3 years) 900,000
Excess subject to participation (2M – 900K – 600K) 500,000
③ Participation of preference sh. [(16% - 6%) x ₱5M par] 500,000
③ Participation of ordinary sh. (500K – 500K) -
As allocated -
Preference shares: (₱900,000 basic + ₱500,000 participation) 1,400,000

Ordinary shares: (₱600,000 basic + ₱0 participation) 600,000
f) Dividends in arrears computation

Allocation:
① Allocation to preference shares (a) 720,000
② Excess allocated to ordinary shares (₱2M - ₱720K) 1,280,000
As allocated -
100,000 x 6% x ₱50 par = 300,000 entitlement per year x 3 years (i.e.,

(a)
Years 1 to 3) = 900,000 total – previous payments (100,000 + 80,000) =

720,000
5. Solution:
P a g e | 22

Allocation:
① Basic allocation to 6% PS (100,000 x ₱50 x 6% x 3 years) 900,000
① Basic allocation to 3% PS (50,000 x ₱60 x 3% x 1 year) 90,000
② Basic allocation to ordinary sh. (250,000 x ₱40 par x 3%) 300,000
Excess subject to participation (2M – 900K – 90K – 300K) 710,000
③ Participation of 6% PS (₱710K x 5M par ÷ 18M par) 197,222
③ Participation of 3% PS (₱710K x 3M par ÷ 18M par) 118,333
③ Participation of ordinary sh. (₱710K x 10M par ÷ 18M par) 394,444
As allocated -
(a) 6% PS: 100,000 x ₱50 = 5M;

3% PS: 50,000 x ₱60 = 3M;
OS: 250,000 x ₱40 = 10M;
5M + 3M + 10M = 18M
6% PS: (₱900,000 basic + ₱197,222 participation) 1,097,222

3% PS: (₱90,000 basic + ₱118,333 participation) 208,333
Ordinary shares: (₱300,000 basic + ₱394,444 participation) 694,444
6. Solution:
(Date of Capital liquidated 15,000
declaration)
(Date of
record)
No entry
distribution)
Cash 80,000
7. Solutions:
P a g e | 23
Requirement (a):
Date Ordinary share capital 8,000,000

Ordinary share capital (400,000 x ₱25) 10,000,000
Ordinary shares (₱25 stated value, 400,000 outstanding shares) 10,000,000

Total stockholders' equity 21,200,000
Requirement (b):
Memo entry: “Issued 800,000 shares with par value of ₱10 as a

result of a “2-for-1” split of 400,000 old shares with par value of
₱20.”
Same capital structure after stock split:

Ordinary shares (₱10 par, 800,000 outstanding shares) 8,000,000
Total stockholders' equity 21,200,000
8. Solution:
(a) Retained earnings (1) 440,000
Building 440,000
(b) Share capital (@ ₱50 par) 1,600,000
Share capital [(1.6M ÷ 50 par) x 20 par] 640,000
(c) Share premium 860,000
Retained earnings (2) 860,000
(1) Fair value (1.1M x 60%) 660,000

P a g e | 24
Carrying amt. of building 1,100,000

Impairment loss (440,000)
(2) Retained earnings (deficit)

Before quasi-reorganization 420,000
(a) 440,000
Before elimination 860,000
ASSETS LIABILITIES & EQUITY

Current assets 400,000 Current liabilities 200,000
Land 200,000 Share capital (₱20 par) 640,000
Building, net 660,000 Share premium (1.28M – 860K) 420,000
Retained earnings -
Total 1,260,000 Total 1,260,000
Page |1
Chapter 12
Share-based Payments (Part 1)
1. TRUE
2. TRUE
3. TRUE
4. TRUE
5. FALSE
6. FALSE
7. FALSE
8. TRUE
9. TRUE
10. TRUE

1. C
2. D
3. C
4. B
5. D
6. B
7. C
8. A
9. B
10. D
11. C
12. C
13. C
14. B
15. C – The addition of an exercise price (when supposedly the
share options are exercisable for free) is not beneficial to the
employee. Fogs Co. should ignore the repricing and continues
to account for the grant under the original terms.
Page |2
1. Solution:
May No entry
22,
20x1
June Inventories (1,000 x 3,000) 3,000,000
21,
20x1
Subscribed share capital 2,000,000
(10,000 x 200)
Share premium (squeeze) 1,000,000
July 5, Subscribed share capital 2,000,000
20x1
2. Solution:
Jan. No entry
1,
20x1
Dec. Salaries expense – share options 800,000
31,
[(100 x 1,000) x 80% x 30 x 1/3] 800,000
20x1
Share premium – sh. options outs.
31, [(100 – 15 – 3 -5) x 1,000 x 30 x 2/3] – 800K 740,000
20x2
31, [(100 – 15 – 3 -0) x 1,000 x 30 x 3/3] – 800K – 740K 920,000
20x3
3. Solution:
January 1, 20x1:
No entry
December 31, 20x1:

Salaries expense [1,000 x (200 – 8) x 25 x 1/3)] 1,600,000
Share premium – options outstanding 1,600,000
December 31, 20x2:

Salaries expense [1,000 x (200 – 8) x 25 x 2/3)] – 1.6M 1,600,000
Page |3
December 31, 20x3:

Salaries expense 1,550,000
[1,000 x (200 – 6 – 1 - 3) x 25 x 3/3)] – 1.6M – 1.6M

1. C
January 1, 20x1:
Salaries expense (5 x 1,000 x 60) 300,000
Share premium – options outstanding 300,000
NOTE: There are no vesting conditions.
2. C
December 31, 20x1
Salaries expense [(10 -1 -1) x 500 x 60 x ½] 120,000
December 31, 20x2

Salaries expense [(10 -1) x 500 x 60 x 2/2] – 120K 150,000
3. A
December 31, 20x1:
Salaries expense (3.2M x 90% x 1/3) 960,000
December 31, 20x2:

Salaries expense (3.2M x 96% x 2/3) – 960K 1,088,000
➢ Cumulative share premium, Dec. 31, 20x2: (960,000 + 1,088,000) =

2,048,000
Page |4
December 31, 20x3:

Salaries expense 1,152,000
[(3.2M x 100% x 3/3) – .96M – 1.088M]
4. B
20x1: (100 – 6 – 3) x 1,000 x 12 x 1/3 = 364,000
20x2: (100 – 8) x 1,000 x 12 x 2/3 – 364,000 = 372,000
20x3: (100 – 6 – 1 – 2) x 1,000 x 12 x 3/3 – 364K – 372K = 356,000
5. D - The share options vested in 20x2 because the average

profit in 20x1 and 20x2 increased by more than 15% [(18% +
14%) ÷ 2 = 16%]. Consequently, no salaries expense is
recognized in 20x3.
➢ 20x1: 1,000 x (100 – 5 – 6) x 45 x ½ = 2,002,500
➢ 20x2: 1,000 x (100 – 5 – 3) x 45 x 2/2 – 2,002,500 = 2,137,500
➢ 20x3: 0
6. A
20x1: (100 – 8 – 10) x 1,400 sh. (a) x 45 x 1/3 = 1,722,000
20x2: [(100 – 15) x 1,200 sh. (b) x 45 x 2/3] – 1.722M = 1,338,000
20x3: [(100 – 8 – 5 – 2) x 1,000 sh. (c) x 45 x 3/3] – 1.722M – 1.338M =
765,000
(a)
(21% actual sales increase in 20x1 + 21% expected in 20x2 + 21%
expected in 20x3) ÷ 3 = 21% (vesting condition iii)
(b)
(21% in 20x1 + 18% in 20x2 + 18% expected in 20x3) ÷ 3 = 19%
(vesting condition ii)
(c)
(21% in 20x1 + 18% in 20x2 + 6% in 20x3) ÷ 3 = 15% (vesting
condition i)
Page |5
7. D (1,000 x 82 x 45) = 3,690,000
8. A
20x1: (100 x 92%) x 1,000 x 24 x 1/3 = 736,000
20x2: [(100 – 10) x 1,000 x 24 x 2/3] – 736,000 = 704,000
20x3: [(100 – 5 – 3 – 1) x 1,000 x 24 x 3/3] – 736K – 704K = 744,000
9. B
20x1: (100 – 6 – 3) x 1,000 x 12 x 1/3 = 364,000
20x2: [(100 – 6 - 1) x 1,000 x 12] – 364,000 = 752,000
10. D
20x1: (100 – 17 - 3) x 1,000 x 24 x 1/3 = 640,000
20x2:
− from original value: [(100 – 17 - 3) x 1,000 x 24 x 2/3] – 640,000 =
640,000
− from incremental fair value: [(100 – 17 - 3) x 1,000 x (36 – 22) x
1/2] = 560,000
Total salaries expense in 20x2: (640,000 + 560,000) = 1,200,000
20x3:
− from original value: [(100 – 17 – 1 - 1) x 1,000 x 24 x 3/3] – 640,000
– 640,000 = 664,000
− from incremental fair value: [(100 – 17 – 1 - 1) x 1,000 x (36 – 22) x
2/2] - 560,000 = 574,000
Total salaries expense in 20x3: (664,000 + 574,000) = 1,238,000
Cumulative share premium, Dec. 31, 20x3: (640,000 + 1,200,000 +

1,238,000) = 3,078,000
Page |6
Reconciliation:
Employees who remained until vesting date (100 - 17 - 1 - 1) 81
No. of share options per employee 1,000
No. of share options that actually vested 81,000
Fair value on Jan. 1, 20x1 24
Incremental fair value from repricing 14
Total fair value 38
Total salaries expense/share premium 3,078,000
11. C
20x1: (100 – 30 – 0) x 1,000 x 9 x 1/5 = 126,000;
20x2: [(100 – 30 – 40) x 1,000 x 9] x 2/3 – 126,000 = 54,000;
20x3: [(100 – 30 – 40 - 0) x 1,000 x 9] x 3/3 – 126,000 - 54,000 = 90,000
12. B
Date Salaries expense
1.1.x1 -
12.31.x1 [100 x 1,000 x ₱9 x 1/5)] 180,000
12.31.x2 [(100 - 40) x 1,000 x ₱9 x 2/5)] – 180,000 36,000
12.31.x3 Reversal of previously recognized amounts (216,000)
13. C
20x1: (100 – 5) x 1,000 x 9 x 1/5 = 171,000;
20x2: [(100 – 1) x 1,000 x 9 x 2/5] – 171,000 = 185,400;
[(100 – 1) x 1,000 x 10 x 1/4] = 247,500;
Total salaries expense for 20x2: (185,400 + 247,500) = 432,900
14. D – 1,000 sh. opt. x (20 employees – 2 – 8) x ₱12 x 2/3* = 80,000
* The extension of the vesting period is ignored because it is not

beneficial to the employee. November Rain Co. accounts for the
grant under the original conditions.
Page |7
15. C
Salaries Cumulative
Date
expense salaries expenses
1.1.x1 - -
12.31.x1 [10 x 1,000 x ₱30 x 1/3)] 100,000 100,000
12.31.x2 [(10 – 2) x 1,000 x ₱30)] – 100,000 140,000 240,000
12.31.x3 - -
The salaries expenses that would have been recognized in 20x2 and
20x3 are simply recognized immediately on Dec. 31, 20x2.

1. Solution:
May.
21, 20x1
No entry
July 5, Equipment (cash selling price) 2,000,000
20x1
Subscribed capital (10,000 x ₱100) 1,000,000
July 21, Subscribed capital 1,000,000
20x1
2. Solution:
May.
21, 20x1
No entry
July 5, Equipment (10,000 x ₱192) 1,920,000
20x1
Subscribed capital (10,000 x ₱100) 1,000,000
July 21, Subscribed capital 1,000,000
20x1
3. Solution:
Jan. 1, Salaries expense (1,000 x 10 x ₱50) 500,000
20x1
Share premium - sh. options outstanding 500,000
Page |8
4. Solution:
Jan.
1, Memo entry
20x1
31,
(10 – 3) x 1,000 x 21 x 1/3
20x1
Share premium – sh. options outstanding 49,000
31,
[(10 – 2 – 1 - 1) x 1,000 x 21 x 2/3] – 49,000
20x2
31,
[(10 - 2 - 1 - 0) x 1,000 x 21 x 3/3] - 49K - 35K
20x3
5. Solution:
Jan.
1, Memo entry
20x1
31,
(10 – 1 - 2) x 1,000 x 21 x 1/3
20x1
31,
[(10 – 1 – 0 - 2) x 1,000 x 21 x 2/3] – 49,000
20x2
31,
[(10 – 1 – 0 - 1) x 1,000 x 71(a) x 3/3] – 49K – 49K
20x3
[(18% + 19% + 23%) ÷ 3] = 20% average increase. Therefore, the

(a)
exercise price decreases to ₱50 and the fair value per share option
increases to ₱70.
6. Solution:
Jan.
1, Memo entry
20x1
31,
(10 – 1 - 1) x 1,000 x 21 x 1/3
20x1
Page |9

31,
[(10 – 3) x 1,000 x 21 x 2/3] – 56,000
20x2
31,
[(10 – 1 – 1 - 0) x 1,000 x 21 x 3/3] – 56K – 42K
20x3
NOTE: Because the share price target is a market condition, it

makes no difference whether it is achieved. The salaries expenses
as computed are nonetheless recognized. The reason for this is
that the fair value estimate has already taken into account the
possibility that the share price target will not be achieved.
7. Solution:
Jan.
1, Memo entry
20x1
31,
(10 – 1 - 2) x 1,000 x 21 x 1/3
20x1
Dec. Salaries expense – share options 63,000(a)
31,
Share premium – sh. options outstanding 63,000(a)
20x2
Dec. Salaries expense – share options 88,000(b)
31,
Share premium – sh. options outstanding 88,000(b)
20x3
(a) The salaries expense in 20x2 is computed as follows:

Salaries expense on original value of equity instruments granted:
[(10 – 3) x 1,000 x 21 x 2/3] – 49,000 49,000
Salaries expense on incremental fair value from repricing:
(10 – 3) x 1,000 x (₱12 - ₱8) x 1/2* 14,000
Salaries expense in 20x2 63,000
* 20x2 and 20x3
P a g e | 10
(b) The salaries expense in 20x3 is computed as follows:

Salaries expense on original value of equity instruments granted:
[(10 – 1 – 1 - 0) x 1,000 x 21 x 3/3] – 49,000 – 49,000 70,000
Salaries expense on incremental fair value from repricing:
[(10 – 1 – 1 - 0) x 1,000 x (₱12 - ₱8) x 2/2] – 14,000 18,000
Salaries expense in 20x3 88,000
8. Solution:
Jan.
1, Memo entry
20x1
31,
(10 – 1 - 2) x 1,000 x 21 x 1/3
20x1
31,
[(10 – 3) x 1,000 x 21 x 2/3] – 49,000 49,000
20x2
Share premium – sh. options outstanding
31,
[(10 – 1 – 1 - 0) x 1,000 x 21 x 3/3] – 49K – 49K 70,000
20x3
NOTE: The modification is ignored because adding an exercise

price, when originally there was none (i.e., free), is not beneficial
to the employee (this is also evidenced by the decrease in the fair
value per share option). The grant is accounted for under the
original conditions.
9. Solution:
Jan.
1, Memo entry
20x1
31,
(10 – 0) x 1,000 x 21 x 1/3
20x1
31,
[(10 – 1) x 1,000 x 21] – 70,000 119,000
20x2
P a g e | 11
10. Solution:
Jan.
1, Memo entry
20x1
31,
[10 x 1,000 x 70% x (41 – 20) x 1/3]
20x1
31,
[(10 – 2 – 0 – 1) x 1,000 x (38 – 20) x 2/3] – 49K 35,000
20x2
31, [(10 – 2 – 0 – 2) x 1,000 x (42 – 20) x 3/3] – 49K – 35K 48,000
20x3
Page |1
Chapter 13
Share-based Payments (Part 2)
1. TRUE
2. FALSE
3. TRUE
4. FALSE
5. TRUE

1. A
2. C
3. D
4. D
5. C
1. Solution:
Jan. 1,
20x1
Memo entry
Dec. Salaries expense – SARs [900 x 24 x 1/3] 7,200
31,
Accrued salaries payable 7,200
20x1
Dec. Salaries expense – SARs 8,800
31,
[800 x 30 x 2/3] – 7,200
20x2
Dec. Salaries expense – SARs 8,000
31,
[750 x 32 x 3/3] – 16,000
20x3
Dec. Accrued salaries payable 24,000
31,
Cash (750 x 32) 24,000
20x3
Page |2
2. Solution:
➢ Bulldozer Co. has issued a compound financial instrument
because the choice of settlement is given to the counterparty.
The fair values of the debt and equity alternatives of the
compound instrument on Jan. 1, 20x1 are determined as
follows:
Fair value of equity alternative (1,200 x ₱112) 134,400
Fair value of debt alternative (1,000 sh. x ₱120) 120,000
Because the fair values of the settlement alternatives differ,

the fair value of the equity component will be greater than zero, in
which case the fair value of the compound financial instrument is
the greater of the amounts determined. The difference between
that amount and the fair value of the debt alternative is attributed
to the equity alternative.
Fair value of compound instrument (the greater amount) 134,400
Fair value of debt alternative (120,000)
Fair value of equity alternative at grant date 14,400
➢ The salaries expenses are computed as follows:

20x1:
Salaries expense related to the equity component:
(14,400 x 1/3) 4,800
Salaries expense related to the liability component:

(1,000 x ₱144 x 1/3) 48,000
Total salaries expense - 20x1 52,800
20x2:
(14,400 x 2/3) – 4,800 4,800

(1,000 x ₱156 x 2/3) – 48,000 56,000
Page |3
20x3:
(14,400 x 3/3) – 4,800 – 4,800 4,800

(1,000 x ₱162 x 3/3) – 48,000 – 56,000 58,000
Journal entries:
Jan. 1,
Memo entry
20x1
Dec. 31, Salaries expense 52,800
20x1
Share premium – sh. options outs. 4,800
Salaries payable 48,000
20x2
20x3
Settlement
Scenario (a) Scenario (b)
Employee chooses equity. Employee chooses cash.
Dec. 31, 20x3: Dec. 31, 20x3:
Salaries payable 162K Salaries payable 162K
Share capital (1,200 x ₱100 par) 120K Cash (1,000 sh. x ₱162) 162K
Share premium 42K
Dec. 31, 20x3: Dec. 31, 20x3:

Sh. prem. - sh. options outs. 14.4K Sh. prem. - sh. options outs. 14.4K
Share premium 14.4K Share premium 14.4K
to transfer the equity component directly to transfer the equity component directly
within equity within equity
Page |4
1. D (20,000 x 16 x1/2) = 160,000
2. D
 Jan. 1, 20x1: 0
 Dec. 31, 20x2: (10,000 SARs x 10 employees x 18 x 2/3) = 1,200,000
 Dec. 31, 20x3: (10,000 x 10 x 20 x 3/3) = 2,000,000
3. C
 20x1: (10,000 SARs x 10 employees x 15 x 1/3) = 500,000

 20x2: (10,000 x 10 x 18 x 2/3) – 500,000 = 700,000
 20x3: (10,000 x 10 x 20 x 3/3) – 500,000 – 700,000 = 800,000
4. B [10,000 rights x (10 – 2) x ₱10 x 2/3 = 533,333
5. B
Salaries expense:
20x1: [30,000 x (25 – 20) x 1/3] = 50,000
20x2: [30,000 x (28 – 20) x 2/3] – 50,000 = 110,000
Salaries payable:
20x2: [30,000 x (28 – 20) x 2/3] = 160,000
6. C
Jan. 1, 20x1:
Inventory (@ fair value of asset received) 960,000
Accounts payable (10,000 x 88) 880,000
7. B (720K + 80K ‘see entries below’) = 800K total credit

➢ The liability component is remeasured to fair value as follows:
Fair value of debt component, Dec. 31, 20x1 (10,000 sh. x ₱112) 1,120,000
Fair value of debt component, Jan. 1, 20x1 (10,000 sh. x ₱88) (880,000)
Loss on remeasurement of liability (increase in liability) 240,000
Page |5
Dec. Loss on remeasurement of liability 240,000

31, Accounts payable 240,000
20x1 to remeasure the liability to fair value on settlement date
Scenario 1 Scenario 2
Equity settlement. Cash settlement.
Dec. 31, 20x1: Dec. 31, 20x1:
Accounts payable 1.120M Accounts payable 1.120M
Share capital (10,000 x ₱40 par) 400K Cash 1.120M
Share premium 720K to record the payment in cash
to record the issuance of equity instrument
Dec. 31, 20x1: Dec. 31, 20x1:

Sh. prem. - sh. options outs. 80K Sh. prem. - sh. options outs. 80K
8. D (10,000 x ₱112) = 1,120,000
9. A
Fair value of debt alternative (2,500 sh. x ₱30) 75,000
Fair value of equity alternative (3,000 x ₱28) 84,000
Fair value of compound instrument (the greater amount) 84,000

Fair value of debt alternative (75,000)
10. A (2,500 x 39 x 2/3) = 65,000
11. C
➢ Salaries expense in 20x1:
(9,000 x 1/3) 3,000

(2,500 x ₱36 x 1/3) 30,000
Page |6

(9,000 x 2/3) – 3,000 3,000

(2,500 sh. x ₱39 x 2/3) – 30,000 35,000

(9,000 x 3/3) – 3,000 – 3,000 3,000

(2,500 sh. x ₱40 x 3/3) – 30,000 – 35,000 35,000
12. C
The fair values of the alternatives are determined as follows:
Fair value of debt component [800K x PV of ₱1 @10%, n=3] 601,052
Fair value of equity component (given) 8,000
The amortization table for the debt component is prepared

as follows:
Jan. 1, 20x1 198,948 601,052
Dec. 31, 20x1 60,105 138,843 661,157
Dec. 31, 20x2 66,116 72,727 727,273
Dec. 31, 20x3 72,727 0 800,000
Journal entries (before settlement):

Jan. 1, Salaries expense (601,052 + 8,000) 609,052
20x1
20x1
20x2
Page |7

20x3
13. A
Dec. 31, Salaries expense (2,000 x ₱165 x 1/3) 110,000
20x1

Fair value of original instrument at grant date (2,000 x ₱165) 330,000
Fair value of debt component (2,000 x ₱125) (250,000)
Fair value of equity component 80,000

(80,000 newly assigned value x 2/3) – 110,000 (56,667)

(2,000 sh. x ₱125 x 2/3) 166,667

(80,000 x 3/3) - 110,000 – (56,667) 26,667

(2,000 sh. x ₱110 x 3/3) – 166,667 53,333
14. B
Tax deduction - intrinsic value - (1.2M x 1/3) 400,000

Salaries expense (500 x 100 x 30 x 90% x 1/3) (450,000)
Excess tax deduction -

Multiply by: 30%
Tax benefit recognized in profit or loss 120,000
Page |8
15. C

Salaries expense (500 x 100 x 30 x 90% x 1/3) (450,000)
Excess tax deduction 50,000

Multiply by: 30%
Excess tax deduction 50,000

Multiply by: 30%
Tax benefit recognized in OCI 15,000
Optional Reconciliation:
Tax benefit recognized in OCI 15,000
Total tax benefit 150,000
Divide by: Tax rate 30%
Total tax deduction (intrinsic value) 500,000
Page |9

1. Solution:
January 1, 20x1:
Memo entry
December 31, 20x1:

Salaries expense (1,000 x 20 x 96% x 112 x 1/3) 716,800
December 31, 20x2:

(1,000 x 20 x 98% x 117 x 2/3) – 716,800
December 31, 20x3:

(1,000 x 20 x 97% x 120 x 3/3) – 716,800 – 812,000
Accrued salaries payable 2,328,000

Cash 2,328,000
2. Solution:
Bridge Co. has issued a compound instrument because the choice
of settlement is given to the counterparty. The fair value of the
equity component is computed as follows:
Fair value of machine received (Asset) 500,000

Fair value of debt component (Liability) on 1/1/x1 (2,000 sh. x ₱220) (440,000)
Fair value of equity component (Equity) 60,000
Journal entry:
Jan. Machine 500,000
1, Accounts payable 440,000
20x1
➢ The liability component is remeasured to fair value as follows:

Fair value of debt component, Dec. 31, 20x1 (2,000 sh. x ₱215) 430,000
P a g e | 10
Fair value of debt component, Jan. 1, 20x1 (2,000 sh. x ₱220) (440,000)
Gain on remeasurement of liability (decrease in liability) (10,000)
Journal entry:
Dec. Accounts payable 10,000
31, Gain on remeasurement of liability 10,000
20x1 to remeasure the liability to fair value on settlement
date
Journal entries:
Golf Co. chooses equity Golf Co. chooses cash settlement.
settlement.
Dec. 31, 20x1: Dec. 31, 20x1:
Accounts payable 430K Accounts payable 430K
Share capital (2,000 x ₱100 par) 200K Cash 430K
Share premium 230K to record the payment in cash
Dec. 31, 20x1: Dec. 31, 20x1:

3. Solution:
The fair values of the debt and equity alternatives of the
compound instrument on Jan. 1, 20x1 are determined as follows:
Fair value of debt alternative (8,000 sh. x ₱220) 1,760,000
Fair value of equity alternative (given) 1,970,000
Because the fair values of the settlement alternatives differ,

the fair value of the equity component will be greater than zero, in
which case the fair value of the compound financial instrument is
the greater of the amounts determined. The difference between
that amount and the fair value of the debt alternative is attributed
to the equity alternative.
P a g e | 11
Fair value of compound instrument (the greater amount) 1,970,000

Fair value of debt alternative (1,760,000)
➢ The salaries expense in 20x1 is computed as follows:

(210,000 x 1/3) 70,000

(8,000 x ₱270 x 1/3) 720,000
Journal entry:
Jan. 1,
Memo entry
20x1
20x1

(210,000 x 2/3) – 70,000 70,000

(8,000 sh. x ₱240 x 2/3) – 720,000 560,000
Journal entry:
20x2

(210,00 x 3/3) – 70,000 – 70,000 70,000

(8,000 sh. x ₱280 x 3/3) – 720,000 – 560,000 960,000
P a g e | 12
Total salaries expense - 20x2 1,030,000
Journal entry:
Dec. 31, Salaries expense 1,030,000
20x3
Settlement
Employee chooses equity. Employee chooses cash.
Dec. 31, 20x3: Dec. 31, 20x3:
Salaries payable 2.24M(a) Salaries payable 2.24M(a)
Share capital (10,00 x ₱10 par) 100K Cash (8,000 sh. x ₱280) 2.24M
Share premium 2.14M to record the payment in cash
Dec. 31, 20x3: Dec. 31, 20x3:

(a) (720K + 560K + 960K = 2.24M)
Notes:
 The components of the compound financial instrument are accounted for
separately as liability and equity.
 The equity component is not subsequently remeasured; the liability
component is remeasured at each year-end.
 The total salaries expense recognized on the equity component is equal to
₱7,200 (i.e., the assigned value on grant date). The total salaries expense
recognized on the debt component is equal to ₱81,000 (i.e., the fair value on
Dec. 31, 20x3).
Page |1
Chapter 14
Book Value per Share

1. TRUE
2. TRUE
3. TRUE – For example, if the market value per share is lower
than the book value per share, this may indicate that the stock
price is undervalued.
4. TRUE
5. FALSE

1. C
2. C
3. A
4. C To test-check the accuracy of the answer, we’ll make the
following assumptions:
Share capital (100 sh. @ ₱1 par) 100
Share premium 20
Retained earnings 200
Total equity 320
Divide by: Outs. Shares 100
BVPS 3.20
➢ The entity acquires 50 shares at ₱1.50 each (i.e., ‘price greater

than both the par value and the original issue price’).
Before After
Share capital (100 sh. @ 1 par) 100 100
Share premium 20 20
Retained earnings 200 200
Treasury sh. (50 sh. @ 1.50) (75)
Total equity 320 245 Decrease
Page |2
Divide by: Outs. Shares 100 50

BVPS 3.20 4.90 Increase
5. B

1. A
9.2M + 800K subscription receivable = 10M;
100,000 issued sh. + 50,000 subscribed (2M / 40par) – 10,000
treasury sh. = 140,000 outstanding;
10M / 140,000 = 71.43
2. B
(PS): 8M par + (8M x 10% x 3 years) = 10.4M / 20,000 pref. sh. = 520
(OS): (15.280M – 10.4 pref. equity) / 100,000 ord. sh. = 48.80
3. A
Solution:
Preference shareholders' equity:
Liquidation value (20,000 shares x ₱105) 2,100,000
Dividends in arrears - (2,100,000)
Ordinary shareholders' equity 7,800,000

Divide by: No. of ordinary shares outstanding 60,000
Book value per share (Ordinary shares) 130.00
4. A
Solution:
Total shareholders' equity, excldg.
5,980,000
subscription receivable (5.9M + 80K)
Liquidation value (6,000 shares x 250) 1,500,000
Dividends in arrears (1.2M x 8% x 4 yrs.) 384,000 (1,884,000)
Page |3
Preference shareholders' equity 1,884,000

Divide by: No. of preference shares
6,000
outstanding
Book value per share (Preference shares) 314.00

Divide by: No. of ordinary shares
36,250
outstanding a
Ordinary shares issued (3.6M / 100par)

a 36,000
Subscribed shares (400K / 100par) 4,000
Treasury shares (300K / 80 cost per share) (3,750)
Outstanding ordinary shares 36,250
5. B
Solution:
5,980,000
Liquidation value (6,000 shares x 250) 1,500,000
Dividends in arrears (1.2M x 8% x 1 yr.) 96,000 (1,596,000)

6,000
outstanding

36,250
outstanding a
a Ordinary shares issued (3.6M / 100par) 36,000

Page |4

Treasury shares (300K / 80 cost per
share) (3,750)
6. D
Solution:
5,980,000

6,000
outstanding

36,250
outstanding a
aOrdinary shares issued (3.6M / 100par) 36,000

Treasury shares (300K / 80 cost per share) (3,750)
7. C
Page |5
Solution:
12% PS (aggregate par value) (2,000,000)
12% PS (dividends) - (2M x 12% x 3 yrs.) (720,000)
14% PS (dividends) - (3M x 14% x 1 yr.) (420,000)
Common stock (aggregate par value) (5,000,000)
Common stock (dividends) - (5M x 12% x 1 yr.) (600,000)
Amount for allocation 2,000,000
12% PS (2M x 2/10) (400,000)
14% PS (2M x 3/10) (600,000)
Common stock (2M x 5/10) (1,000,000)
As allocated -
Ordinary shareholders' equity:

Aggregate par value 5,000,000
Dividends 600,000
Participation 1,000,000
Total 6,600,000
Divide by: Outstanding shares 50,000
Book value per ordinary share 132.00
8. B
Solution:
10% PS (dividends) - (8M x 10% x 3 yrs.) (2,400,000)
8% PS (aggregate par value) (800,000)
8% PS (dividends) - (800K x 8% x 1 yr.) (64,000)
Ordinary shares (aggregate par value) (4,000,000)
Ordinary shares (dividends) - (4M x 8% x 1 yr.) (320,000)
Amount for allocation 496,000
10% PS (496K x 8/12.8) (310,000)
8% PS (496K x .8/12.8) (31,000)
Ordinary shares (496K x 4/12.8) (155,000)
As allocated -
Page |6
10% preference shareholders' equity:

Dividends 2,400,000
Participation 310,000
Total 10,710,000
9. A
8% preference shareholders' equity:
Aggregate par value 800,000
Dividends 64,000
Total 895,000
10. C
Dividends 320,000
Total 4,475,000
Page |7

1. Solution:
4,740,000
Dividends in arrears (1M x 10% x 3 yrs.) 300,000 (1,500,000)

Divide by: No. of preference shares outstanding 10,000

Divide by: No. of ordinary shares outstanding a 29,000
aOrdinary shares issued (3M / 100par) 30,000

Treasury shares (2,000)
2. Solution:
4,740,000
Dividends in arrears (1M x 10% x 1 yr.) 100,000 (1,300,000)

Page |8

3. Solution:
4,740,000


4. Solution:
8% PS (dividends) - (3M x 8% x 3 yrs.) (720,000)
10% PS (dividends) - (4.5M x 10% x 1 yr.) (450,000)
Ordinary shares (aggregate par value) (7,500,000)
Ordinary shares (dividends) - (7.5M x 8% x 1 yr.) (600,000)
Amount for allocation 3,830,000
8% PS (3.83M x 3/15) (766,000)
10% PS (3.83M x 4.5/15) (1,149,000)
Ordinary shares (3.83M x 7.5/15) (1,915,000)
As allocated -
Page |9

Dividends 600,000
Participation 1,915,000
Total 10,015,000
Divide by: Outstanding shares (7.5M ÷ ₱150 par) 50,000
Page |1
Chapter 15
Earnings per Share

1. FALSE
2. TRUE
3. FALSE – “addition” not “reduction”
4. TRUE
5. TRUE
6. FALSE
7. TRUE
8. TRUE
9. TRUE
10. FALSE

1. A
2. D
3. D
4. A
5. C
6. D
7. D
8. B
9. A
10. C
Page |2

1. B
Solution:
Basic Profit or loss less Preferred dividends
=
EPS Weighted average number of outstanding ordinary shares
Basic 1,000,000 – (10,000 x 5% x ₱100)

=
EPS 100,000
Basic EPS = (1,000,000 – 50,000) ÷ 100,000 = 9.50
2. A
Solution:
=
Basic 960,000 – 100,000

=
EPS (200,000 x 110%)
Basic EPS = 860,000 ÷ 220,000 = 3.91
3. B
Date No. of shares Months outstanding Weighted average
(a) (b) (c) = (a) x (b)
Jan. 1 20,000 + 20,000 12/12 40,000
Apr. 1 N/A (effect is on Jan. 1) - -
July 1 10,000 6/12 5,000
Weighted average number of ordinary shares 45,000
4. C
Solution:
1/1/x8 Shares outstanding (30,000 + 3,000) x 12/12 33,000
2/1/x8 10% share dividend see effect on Jan. 1
3/1/x8 Business combination (9,000 x 10/12) 7,500
7/1/x8 Issued for cash (8,000 x 6/12) 4,000
Weighted average shares 44,500
Page |3
5. B
Solution:
The weighted average outstanding shares are computed as
follows:
Outstanding Months
shares outstanding Weighted average
Jan. 1, 20x3 20,000.00 12/12 20,000
May 1, 20x3 10,500.00 8/12 7,000
27,000

=
Basic 96,700 – (10,000 x ₱4)

=
EPS 27,000
Basic EPS = 56,700 ÷ 27,000 = 2.10
6. C
Solution:
=
Basic 10,075,000 – 0
=
EPS 1,625,000(a)
Basic EPS = 10,075,000 ÷ 1,625,000 = 6.20
(a) Jan.
1, 20x3 (500,000 x 110% x 2 x 12/12) 1,100,000
• (180,000 x 110% x 2 x 10/12) 330,000
• -
• (200,000 x 2 x 6/12) 200,000
• -
• -
• (-60,000 x 1/12) (5,000)
Weighted average outstanding shares 1,625,000
Page |4
7. D
Solution:
20x2 20x1
Profit 350,000 410,000
Weighted ave. outs. Sh.
(200,000 x 3 x 12/12) - (30,000 x 3 x 9/12) 532,500
(200,000 x 3 x 12/12) 600,000
Basic EPS 0.66 0.68
8. B
Solution:
Fair value of shares selling right-on (given) 1.25
Less: Value of 1 right (a) (0.05)
Fair value of shares selling ex-right 1.20
Fair value of share right-on – Subscription price

(a) Value of 1 right =
No. of rights needed to purchase one share + 1
1.25 – 0.70
Value of 1 right =
10 + 1
Value of 1 right = (0.55 ÷ 11) = 0.05
Adjustment Fair value of shares selling right-on

=
factor Fair value of shares selling ex-right
Adjustment factor = 1.25/1.20 or 1.04167
Alternative solution: Using the definition

For this solution, we’ll need to assume a value for the number of
outstanding shares before the rights issue. Let’s assume 1,000
shares.
Aggregate mkt. value of shares before exercise of rts.

(1,000 sh. x ₱1.25) 1,250
Add: Proceeds from exercise of rts. [(1,000 rts. ÷ 10) x ₱0.70] 70
Total 1,320
Divide by: Outstanding shares after exercise of rts.
[1,000 sh. + (1,000 rts. ÷ 10 rts. per sh.)] 1,100
Page |5
Adjustment factor = 1.25/1.20 or 1.04167
9. A
Fair value of shares selling right-on (given) 1.40

Less: Value of 1 right (a) (0.05)

1.40 – 1.00
Value of 1 right =
7+1
Value of 1 right = (0.40 ÷ 8) = 0.05

=
Adjustment factor = 1.40/1.35
Jan. 1: (350,000 x 1.40/1.35 x 3/12) 90,741

Apr. 1: (400,000(b) x 9/12) 300,000
Weighted average no. of outstanding ordinary shares 390,741
(b) [350,000 before issue + (350,000 rts. ÷ 7)] = 400,000
Profit for the year 275,000

Divide by: Weighted average no. of outstanding shares 390,741
Basic earnings per share 0.704
Page |6
10. D
Solution:
Fair value of shares selling right-on (given) 160

Less: Value of 1 right (a) (10)
Fair value of shares selling ex-right 150

160 – 100
Value of 1 right =
5+1
Value of 1 right = (60 ÷ 6) = 10

=
Adjustment factor = 160/150
Jan. 1: (300,000 x 160/150 x 3/12) 80,000

Apr. 1: (360,000(b) x 9/12) 270,000
(b) [300,000 before issue + (300,000 rts. ÷ 5)] = 360,000
Profit for the year 6,000,000

11. C
Solution:
Profit or loss plus After tax interest expense on
convertible bonds
Diluted Weighted average number of outstanding ordinary
=
EPS shares plus Incremental shares arising from the
assumed conversion or exercise of dilutive
potential ordinary shares
Page |7
Numerator on Diluted EPS = 900,000 + 0 = 900,000
12. C
Solution:
Jan. 1, 20x3 Outstanding shares (600,000 x 12/12) 600,000
Apr. 1, 20x3 Additional shares issued (180,000 x 9/12) 135,000
Incremental shares from conv. bonds (150,000 x 12/12) 150,000
Weighted average outstanding shares 885,000
13. D
Solution:
=
Basic 2,400,000 – (6% x 1,000,000)

=
EPS 200,000
Basic EPS = 2,340,000 ÷ 200,000 = 11.70

convertible bonds
=
Diluted EPS = (2,400,000 + 0) ÷ [200,000 + (50,000 x 2)]

Diluted EPS = 2,500,000 ÷ 300,000 = 8.00
Page |8
14. B
Solution:
convertible bonds
=
Diluted 840,000 + 0
=
EPS 200,000 + (20,000 x 5)
Diluted EPS = 840,000 ÷ 300,000 = 2.80
15. D
Solution:
convertible bonds
=
Diluted 1,000 + (10,000 x 4% x 50%)

=
EPS 1,000 + 1,000
Diluted EPS = 1,200 ÷ 2,000 = 0.60
16. B
Solution:
convertible bonds
=
Page |9
Diluted 35,000 + (20 bonds x 10,000 face amt. x 7% x 6/12 x 70%)

=
EPS 10,000 + (20 x 200)
Diluted EPS = (35,000 + 4,900) ÷ (10,000 + 4,000) = 2.85

Diluted EPS = 39,900 ÷ 14,000 = 2.85
17. A
Solution:
Basic EPS = (3.6M profit – 0 preferred dividends) ÷ 280,000 sh. = 12.86
Diluted Profit (Loss) plus After tax interest expense

=
EPS Weighted average shares plus Incremental shares
3,600,000 + 0
Diluted EPS =
280,000 + 12,500(a)
Diluted EPS = 3,600,000 ÷ 292,500 = 12.31
(a) Option shares 50,000

Multiply by: Total exercise price 90
(80 exercise price + 10 fair value of each share option)
Proceeds from assumed exercise of options 4,500,000
Divide by: Average market price 120
Treasury shares assumed to have been purchased 37,500
Option shares 50,000

Less: Treasury shares assumed to have been purchased (37,500)
Incremental shares 12,500
18. D
Solution:
Basic EPS = (285K profit – 0 preferred dividends) ÷ 180,000 sh. = 1.58

P a g e | 10

=
285,000 + 0
Diluted EPS =
180,000 + 1,500(a)
Diluted EPS = 285,000 ÷ 181,500 = 1.57

Proceeds from assumed exercise of options 300,000

Multiply by: Months outstanding (i.e., July 1 to Dec. 31) 6/12
Weighted average incremental shares 1,500
19. D
Solution:
=
Basic -900,000 – (500,000 x 6%)

=
EPS 200,000
Basic EPS = (-900,000 - 30,000) ÷ 200,000

Basic EPS = -930,000 ÷ 200,000 = (4.65)

Diluted convertible bonds
=
EPS Weighted average number of outstanding ordinary
shares plus Incremental shares
Diluted -900,000 + 0
=
EPS 200,000 + (50,000 x 2)
P a g e | 11
Diluted EPS = -900,000 ÷ 300,000 = (3.00)
The diluted loss per share decreased the basic loss per share
(anti-dilutive). Therefore, Party, Inc. shall report only the Basic
loss per share.
20. C
Solution:
Basic earnings per share:
=
Basic 6,000,000 – (8% x ₱100 par x 100,000 sh.)

=
EPS 500,000
Basic EPS = (6,000,000 – 800,000) ÷ 500,000

Basic EPS = 5,200,000 ÷ 500,000 = 10.40
Diluted earnings per share:

The multiple potential ordinary shares are ranked according to
their dilutive effect as follows:
Options Convertible bonds Convertible PS
Incremental earnings - 159,930 800,000
Incremental shares 8,000 20,000 200,000
Incremental EPS - 8.00 4.00
Ranking 1st 3rd 2nd
➢ Options:
Multiply by: Exercise price 100

P a g e | 12
➢ Convertible bonds: (1,903,927 x 12% x 70% = 159,930); [(2M ÷ 1,000) x 5 = 10,000]
➢ Convertible PS: (100,000 sh. x ₱100 par x 6% = 600,000); (100,000 x 2 = 200,000)

➢ Ranking: The Options are ranked 1st because they have the least
incremental EPS. The Convertible bonds are ranked last because they have
the highest incremental EPS.
Ordinary
Profit sh. EPS
Basic EPS 5,200,000 500,000 10.40
Options (1st rank) - 8,000
Diluted EPS #1 5,200,000 508,000 10.24 Dilutive
Convertible PS (2nd
rank) 800,000 200,000
Convertible bonds
(3rd rank) 159,930 10,000
Anti-
Diluted EPS #3 6,159,930 718,000 8.58 dilutive
Answers:
➢ Basic EPS = 10.40
➢ Diluted EPS = 8.47
P a g e | 13

1. Solution:
=
Basic EPS = [500K - (250K x 4%)] ÷ 200,000 sh. = 2.45
2. Solution:
Date No. of sh. Months outstanding Weighted average
(a) (b) (c) = (a) x (b)
1/1/2003 660,000* 12/12 660,000
7/1/2003 - - -
10/1/2003 (48,000) 3/12 (12,000)
648,000
* 600,000 x 110% = 660,000
3. Solution:
2005 2004
Profit 410,000 350,000
Weighted ave. outs. sh.
(100,000 x 2 x 12/12) + (20,000 x 2 9/12) 230,000
(100,000 x 2 x 12/12) 200,000
Basic EPS 1.78 1.75
4. Solution:
Fair value of shares selling right-on (given) 480
Less: Value of 1 right (a) ( 30)
Fair value of shares selling ex-right 450

480 – 300
Value of 1 right =
5+1
Value of 1 right = (180 ÷ 6) = 30
P a g e | 14

=
Adjustment factor = 480/450
Jan. 1: (400,000 x 480/450 x 9/12) 320,000

Apr. 1: (480,000 (b) x 3/12) 120,000
(b) Ordinary shares before the exercise of rights 400,000

Shares issued on the exercise of rights
(400,000 rights ÷ 5 rights needed to purchase one share) 80,000
Outstanding shares after the exercise of rights 480,000
Profit for the year 8,000,000

5. Solution:
Profit (Loss) plus After tax interest expense on

convertible bonds
=
assumed conversion or exercise of dilutive potential
ordinary shares
840,000 + 0
Diluted EPS =
200,000 + (20,000 x 5)
Diluted EPS = 840,000 ÷ 300,000 = 2.80

P a g e | 15
6. Solution:
Profit (Loss) plus After tax interest expense on
convertible bonds
=
assumed conversion or exercise of dilutive potential
ordinary shares
Diluted 500,000 + (50,000 x 4% x 60%*)

=
EPS 5,000 + 5,000
*60% = 1 – 40% tax rate
Diluted EPS = (500,000 + 1,200) ÷ 10,000
Diluted EPS = (501,200 ÷ 10,000) = 50.12
7. Solution:

=
15,000,000 + 0
Diluted EPS =
500,000 + 10,000(a)
Diluted EPS = 15,000,000 ÷ 510,000 = 29.41

(180 exercise price + 20 fair value of each share option)

P a g e | 16
8. Solution:
 Concept:
If the contract can be settled in ordinary shares or in cash at the
entity’s option, it is presumed that the contract will be settled in
ordinary shares.
Accordingly, the “regular” computations for both basic and
diluted EPS will be applied to the problem. The settlement option
is simply ignored.
Basic EPS = (2M profit – 0 preferred dividends) ÷ 100,000 sh. = 20.00

=
2,000,000 + 73,482(a)
Diluted EPS =
100,000 + 50,000
Diluted EPS = 1,073,482 ÷ 150,000 = 13.82
(a)
 Fair value of bonds without conversion feature:

(₱1M x PV of ₱1 @10%, n=3) + (₱120K x PV of an ordinary annuity @10%,
n=3) = (₱1M x 0.751315) + (₱120K x 2.486852) = 1,049,737
 After tax interest expense:
(1,049,737 x 10% x 70%) = 73,482
9. Solution:
=
Basic -900,000 – (5,000,000 x 6%)

=
EPS 2,000,000
Basic EPS = (-900,000 - 300,000) ÷ 2,000,000

Basic loss per share = -1,200,000 ÷ 2,000,000 = (0.60)
P a g e | 17

Diluted convertible bonds
=
EPS Weighted average number of outstanding ordinary
shares plus Incremental shares
Diluted -900,000 + 0
=
EPS 2,000,000 + (500,000 x 2)
Diluted EPS = -900,000 ÷ 3,000,000 = (0.30)
Answer: The diluted loss per share decreased the basic loss per
share (anti-dilutive). Therefore, Bark Co. shall report only the
Basic loss per share.
10. Solution:
Basic earnings per share:

=
Basic 5,000,000 – (6% x ₱100 par x 100,000 sh.)

=
EPS 200,000
Basic EPS = (5,000,000 – 600,000) ÷ 200,000

Basic EPS = 4,400,000 ÷ 200,000 = 22.00
Diluted earnings per share:

The multiple potential ordinary shares are ranked according to
their dilutive effect as follows:
Convertible PS Options Convertible bonds
Incremental earnings 600,000 - 146,963
Incremental shares 200,000 10,000 40,000
Incremental EPS 3.00 - 3.67
Ranking 2nd 1st 3rd

P a g e | 18
➢ Convertible PS: (100,000 sh. x ₱100 par x 6% = 600,000); (100,000 x 2 = 200,000)
➢ Options:
Multiply by: Exercise price 200

➢ Convertible bonds: (2,099,474 x 10% x 70% = 146,963); [(2M ÷ 1,000) x 20= 40,000]
➢ Ranking: The Options are ranked 1st because they have the least
incremental EPS. The Convertible bonds are ranked last because they have
the highest incremental EPS.
Ordinary
Profit sh. EPS
Basic EPS 4,400,000 200,000 22.00
Options (1st rank) - 10,000
Convertible PS (2nd
rank) 600,000 200,000
Convertible bonds
(3rd rank) 146,963 40,000
Answers:
➢ Basic EPS = 22.00
➢ Diluted EPS = 11.44

Intermediate Accounting 2 Millan 2

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Intermediate Accounting 2 Millan 2

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Page |1

PROBLEM 1: TRUE OR FALSE

PROBLEM 2: MULTIPLE CHOICE – THEORY

PROBLEM 3: MULTIPLE CHOICE – COMPUTATIONAL

4. B (1.2M x 80%) = 960,000 noncurrent; (1M – 960K) = 40,000 current

5. B 3,120,000 + 480,000 – 600,000 = 3,000,000

is reverted back to “Subscribed Capital” (and, if appropriate,

The grace period is disregarded because it was received after Dec.

The purchase return is adjusted only to the accounts

was determined based on the physical count on Dec. 31, 20x1,

* 108,000 ÷ (200,000 x 90%) = 60%

Gift cards sold 200,000

Gift card liability

The unredeemed portion of ₱8,000 (120K – 112K) from prior year

(b) 760,000 ÷ (1M x 95%) = 80%

April 30, 20x1

PROBLEM 4: FOR CLASSROOM DISCUSSION

due to be settled within twelve months after the reporting period,

financial statements are authorised for issue.” (PAS 1.72)

(b) “When an entity breaches a provision of a long-term loan

Adjusted total current liabilities 5,550,000

Dividend payable is recognized when the entity declares the

4. FALSE (1M x PV of ordinary annuity of 1 @10%, n=3)

6. FALSE 40,000 (400,000 cash price equivalent x 10%)

7. TRUE (100,000 x .90) = 90,000 x 10% = 9,000

8. TRUE (100,000 x .90 x 110% x 10%) = 9,900 OR (90,000 + 9,000)

9. FALSE 850,000 (the note is payable in installments)

PROBLEM 2: MULTIPLE CHOICE – THEORY

Mar. Accounts payable 6,000

Date Interest expense Discount Present value

Note payable 2,000,000

Date Payments Interest expense Amortization Present value

Current portion = 718,185

Notes payable 3,000,000

Date Payments Interest expense Amortization Present value

12/31/x2 400,000 (6) 143,737 256,263 (7) 642,093

Second step: Squeeze for the carrying amount of the note on

* (213,534 + 507,016) = 720,550

Third step: Compute for the effective interest rate

Fourth step: Squeeze for the other missing information

* Squeezed to eliminate difference due to rounding-offs.

PROBLEM 4: MULTIPLE CHOICE – COMPUTATIONAL

Contest prize expense (a) 468,250

Note payable 1,000,000

(a) Payment due on 1/2/2001 50,000

Monthly amortization 147,451.38

Trial and error:

First trial: @16%

If the difference of ₱114 is deemed immaterial, 16% is regarded as

10. C (194,000 x 12.4% x 1/12) = 2,005

PROBLEM 5: CLASSROOM ACTIVITY

*********** portion deliberately not presented to save space*****

PROBLEM 6: FOR CLASSROOM DISCUSSION

Date Interest expense Discount on N/P Present value

Notes payable 1,600,000

Date Payments Interest expense Amortization Present value

First trial: @12%

❖ The effective interest rate is 12%.

PROBLEM 2: MULTIPLE CHOICE – THEORY

Initial carrying amount: (1M x PV of 1 @12%, n=3) + (100K x PV

Using effective interest method:

Using straight-line method:

Carrying amount - 1/1/x1 951,963

I. Effect on Bond carrying amount

******* portion deliberately not presented to save space*