ACC 314 INTERMEDIATE ACCOUNTING 3

A31

Group 1
PROBLEM 1
At the beginning of current year, Songs Company leased a new machine from Bee with the
following information:
Lease Term - 5years
Annual rental payable at beginning of each year - 650,000
Useful life of machine - 10 years
Implicit interest rate in lease - 12%
Borrowing rate - 10%
Present value of an annuity of 1 in advance for 5 periods at 12% - 4.04
Present value of an ordinary annuity of 1 for 5 periods at 12% - 3.60

The lease is not renewable, and the machine reverts to Bee at the termination of the lease. The
cost of the machine on Bee’s accounting records is P3,755,000.
1. At the beginning of the lease term, what amount should be recorded as cost of right of use
asset?
a. 2,020,000
b. 2,340,000
c. 2,626,000
d. 5,375,000
Answer: c. 2,626,000
Solution:
PV of Rentals (650,000 x 4.04) = 2,626,000
2. What amount should be reported as depreciation of the right of use asset for the current
year?
a. 404,000
b. 1,075,000
c. 468,000
d. 525,200
Answer: d. 525,200
Solution:
Depreciation = (2,626,000/5 years) = 525,200
PROBLEM 2
Premiums Company entered into a nine-year lease on a warehouse on December 31, 2020. Lease
payment of P 600,000.00 which included executory cost of P 80,000.00 is due annually, beginning
on December 31, 2021 and every December 31 thereafter.
The cost of restoring the underlying asset to its original conditions as required by the contract is
estimated at the present value of P 250,000.00
The interest rate implicit in the lease is 10%. The present value of an ordinary annuity of 1 for
nine years is 5.759.

1. What amount should be reported as lease liability on December 31, 2020?

a. 3,455,400
b. 2,800,000
c. 3,375,400
d. 2,994,680

Answer: d. 2,994,680
Solution:
Lease Liability (600,000 – 80,000 = 520,000)
520,000 x 5.759 = 2,994,680

2. What is the cost of the right of use asset?

a. 3,625,400
b. 3,244,680
c. 3,000,000
d. 3,705,400
Answer: b. 3,244,680
Solution:
Initial lease liability 2,994,680
Cost of restoration 250,000
Cost of right of use asset 3,244,680
Group 2
PROBLEM 1
In 2019, Phobes Company began selling new line of products that carry a two-year warranty
against defects. Based upon past experience with other products, the entity estimated warranty
costs as a percentage of peso sales.
First year of warranty 2%
Second year of warranty 5%
2019 2020
Sales 5,000,000 7,000,000
Actual warranty cost 100,000 300,000
What amount should be reported as warranty expense for 2019?
Answer: 350,000
Solution:
Warranty Expense for 2019 (5,000,000 x 7%) = 350,000
PROBLEM 2
In 2019, Phobes Company began selling new line of products that carry a two-year warranty
against defects. Based upon past experience with other products, the entity estimated warranty
costs as a percentage of peso sales.
First year of warranty 2%
Second year of warranty 5%
2019 2020
Sales 5,000,000 7,000,000
Actual warranty cost 100,000 300,000

What should be reported as warranty liability on December 31, 2020?

Answer: 440,000
Solution:
Warranty Liability – Dec. 31, 2019 250,000
Warranty Expense for 2020 490,000
Total 740,000
Warranty cost in 2020 (300,000)
Warranty Liability – Dec. 31, 2020 440,000
Group 3
PROBLEM 1
Isabel Company negotiated with a major creditor to restructure a maturing debt on December 31,
2019. The creditor was owed a principal of P8,000,000 and interest of P960,000 but agreed to
accept equipment with fair value of 9,000,000 and note receivable from Isabel Company's
customer with face value of 500,000. The equipment had a carrying amount of P7,000,000.

What amount should be recognized as gain or loss on extinguishment of debt on December 31,
2019?

a. 540,000 gain
b. 540,000 loss
c. 1,460,000 gain
d. No gain or loss
Answer: c. 1,460,000 gain
Solution:
Note payable 8,000,000
Acc. int. payable 960,000
Total liabilities 8,960,000
Less:
CA of equipment 7,000,000
Note receivable from Isabel Company's customer 500,000
Gain on extinguishment 1,460,000

PROBLEM 2
On January 1, 2019, Wayne Company issued 9% bonds in the amount of 500,000 which mature
on January 1, 2029. The bonds were issued for P469,500 to yield 10%. Interest is payable annually
on December 31. The entity uses the effective interest method of amortizing bond discount and
does not elect the fair value option for reporting financial liabilities.

On June 30, 2021, what amount should be reported as bonds payable?

a. 470,475
b. 474,775
c. 473,595
d. 475,955

Answer: b. 474,775

Solution:
 Date Interest paid Interest expense Discount Amortization Carrying Amount
01/01/19 489,500
12/31/19 45,000 46,950 1,950 471,450
12/31/20 45,000 47,145 2,145 473,595
06/30/21 22,500 23,680 1,180 474,775

06/30/21 Interest Paid (500,000 x 9% x 6/12) = 22,500

Interest Expense (473,595 x 10% x 6/12) = 23,680

Group 4

PROBLEM 1
At the beginning of current year, Bright Company leased a machinery with the following
information:
Annual rental payable at the end of each year 1,000,000
Residual value guarantee 500,000
Payment to lessor to obtain a long-term lease 400,000
Cost of dismantling and restoring the asset as required
by contract at present value 370,000
Annual executory cost paid by lessee 50,000
Lease term 5 years
Useful life of machinery 8 years
Implicit interest rate 10%
Present value of an ordinary annuity of 1 at 10% for 5 periods 3.79
Present value of 1 at 10% for 5 periods 0.62

What is the initial lease liability?

Answer: 4,100,000
Solution:
Present value of annual rental (1,000,000 x 3.79) 3,790,000
Present value of residual value guarantee (500,000 x .62) 310,000
Initial lease liability 4,100,000

PROBLEM 2
Win Company, transferred real estate to Oreos Company pursuant to a debt restructuring in full
liquidation of Win’s liability to Oreos:

Carrying amount of liability liquidated 1,700,000

Carrying amount of real estate transferred 1,200,000
Fair value of real estate transferred 950,000
Under IFRS, what amount should be reported as gain on extinguishment of liability?

Answer: 500,000

Solution:

Carrying amount of liability 1,700,000

Carrying amount of real estate 1,200,000
Gain on extinguishment 500,000

Group 5
PROBLEM 1
Sawa Nako entered into a 6-year lease agreement on January 1, 2020 with Kaya Pa for industrial
equipment having a useful life of 8 years and a fair value of P400,000 at the end of its useful life.
The entity recorded the lease liability at P6,100,000 and the right of use asset at P6,200,000 which
included a purchase option and is certain to exercise it. However, at the end of the lease term, the
entity did not exercise the purchase option and recognized P1,750,000 as loss on finance lease in
2026.

What is the carrying amount of the lease liability on January 1, 2026?

a. 150,000
b. 200,000
c. 100,000
d. 0

Answer: c. 100,000
Solution:
Cost of right of use asset – 01/01/2020 6,200,000
Accumulated depreciation – 01/01/2026 (4,380,000)
(6,200,000-400,000 / 8 x 6 years)
Carrying amount – 01/01/2026 1,850,000
Lease Liability – 01/01/2026 (SQUEEZED) (100,000)
Loss on Finance Lease 1,750,000

PROBLEM 2
ABC Company had bonds payable with a face amount of P8,000,000 and a carrying amount of
P7,500,000. In addition, unpaid interest on the bonds accrued in the amount of P350,000. The
creditor had agreed to the settlement of the bonds payable in exchange for 100,000 shares of P50
par value. The shares have no reliable measure of fair value. However, the bonds are quoted at
P6,500,000.
 1. What amount should be reported as gain on the extinguishment of the bonds payable?
a. 1,850,000
b. 1,350,000
c. 1,750,000
d. 0

2. What amount should be recorded as share premium from the issuance of the share?
a. 3,000,000
b. 1,000,000
c. 2,500,000
d. 0

Answers: 1. b. 1,350,000
2. b. 1,000,000
Solutions:
1. Carrying amount of bonds payable 7,500,000
Accrued interest on bonds payable 350,000
Total 7,850,000
Fair value of bond payable (6,500,000)
Gain on extinguishment of bonds payable 1,350,000

2. Fair value of bonds payable 6,500,000

Par value of shares (100,000 x 50) (5,000,000)
Share Premium 1,000,000

Group 6
PROBLEM 1
SKL Company had an overdue 9% note payable to Banko de Uno at P9,500,000 with accrued
interest of P855,00.
The following are the agreed provisions as a result of restructuring agreement on January 1,
2021.
The P855,000 accrued interest is forgiven.
Principal obligation is reduced to P8,000,000.
Maturity value is extended to December 31, 2025 with a new annual interest of 11%.

Compute the following:

a. Present value of the new note payable on January 1, 2021.
b. Gain or loss on the extinguishment of debt.
c. Suppose the principal obligation is not reduced and the new annual interest is 10%, what
will be amortized for the whole duration of the new note payable?
 Answers: a. 8,623,200
b. 1,731,800
c. 370,500
Solution:
a. PV of 1 of 9% at 5 periods 0.65
PV of Annuity 3.89

Present Value of Principal (8,000,000 x 0.65) 5,200,000

Present Value of annual interest payments (880,000 x 3.89) 3,423,200
Total Present Value of new liability 8,623,200

b. Note payable – old 9,500,000

Accrued interest payable 855,000
Carrying Amount of old liability 10,355,000
Present Value of new liability 8,623,200
Gain on extinguishment of debt 1,731,800

c. Present Value of Principal (9,500,000 x 0.65) 6,175,000

Present Value of annual interest payments (950,000 x 3.89) 3,695,500
Total Present Value of new liability 9,870,500
Less: Face amount of new note payable 9,500,000
Premium on the new note payable 370,500

PROBLEM 2
On January 1, 2020, an entity leased a 7000 square-meter floor space with a useful life of 9
years. The terms of the lease are the following:
Annual rental payable at the beginning of each year 400,000
Guaranteed residual value by a party related to lessor 200,000
Lease term 8 years
Implicit interest rate 8 percent
Payment to lessor to obtain the lease contract 150,000

Three years after the commencement of the lease, the parties agreed to amend the original terms
of the lease with the following information:
Floor space 5250 𝑚2
Annual rental payable at the beginning of each year 300,000
Implicit interest rate 10 percent

Compute the following:

a. Initial cost of the right of use asset.
 b. Termination gain or loss on January 1, 2023.
c. Remeasure the lease liability upon the amendment.
Answers: a. 2,450,000
b. 34,773 loss
c. 98,880
Solutions:
a. PV of annuity of 8% at 8 periods 5.75
Present Value of Rentals (400,000 x 5.75) 2,300,000
Payment to Lessor 150,000
Cost of right of use asset 2,450,000

b. Amortization Schedule for 2020 to 2023

Date Payment 8% interest Principal Present Value
Jan. 1, 2020 2,300,000
Jan. 1, 2021 400,000 400,000 1,900,000
Jan. 1, 2022 400,000 152,000 248,000 1,652,000
Jan. 1, 2023 400,000 132,160 267,840 1,384,160

Decrease in floor space (7,000 – 5250) 1,750 𝑚2

Decrease in scope of the lease (1750/5000) 25%
Cost 2,450,000
Accumulated Depreciation ((2,450,000/8) x 3) 918,750
Carrying Amount – January 1, 2023 1,531,250

Decrease in lease liability (1,384,160 x 25%) 346,040

Decrease in carrying amount of right of use asset (1,531,250 x 25%) (382,813)
Termination loss ( 36,773)

c. PV of annuity of 10% at 5 periods 3.79

Present Value of new lease payment (300,000 x 3.79) 1,137,000
Remaining lease liability (1,384,160 - 346,040) (1,038,120)
Increase in lease liability 98,880

Group 7
PROBLEM 1
COVID Company provided the following information on December 31, 2020:
Notes Payable
Trade 2,000,000
 Bank loans 1,000,000
Advances from officers 0,400,000
Accounts payable – trade 3,000,000
Bank overdraft 0,200,000
Dividends payable 1,000,000
Withholding tax payable 0,100,000
Mortgage payable 2,800,000
Income tax payable 0,700,000
Estimated warranty liability 0,500,000
Estimated damages payable by reason of breach of contract 600,000
Accrued liabilities 0,800,000
Estimated premium liability 0,100,000
Claim for increase in wages by employees covered in a pending lawsuit 2,500,000
Contract entered into for the construction of building 4,000,000

What is the total current liabilities on December 31, 2020?

Answer: 10,400,000
Solution:
Notes Payable
Trade 2,000,000
Bank loans 1,000,000
Advances from officers 0,400,000
Accounts payable – trade 3,000,000
Bank overdraft 0,200,000
Dividends payable 1,000,000
Withholding tax payable 0,100,000
Income tax payable 0,700,000
Estimated warranty liability 0,500,000
Estimated damages payable by reason of breach of contract ,600,000
Accrued liabilities 0,800,000
Estimated premium liability 0,100,000
Total Current Liabilities 10,400,000

PROBLEM 2
On January 1, 2020, COVID Company leased an equipment with the following information:
Annual fixed payment in advance at the beginning of each lease year 2,000,000
Initial direct cost paid 0,200,000
Lease incentive received 0,100,000
Residual value guarantee 0,400,000
Lease term 3 years
Useful life of equipment 5 years
Implicit interest rate 10%
Present value of an annuity of 1 in advance at 10% for 3 periods 2.4879
Present value of 1 at 10% for 3 periods 0.7513

What amount should be capitalized as cost of the right of use asset?

Answer: 5,376,320
Solution:
PV of rentals (2,000,000 x 2.4879) 4,975,800
PV of residual value guarantee (400,000 x 0.7513) 0,300,520
Lease liability- 1/1/2020 5,276,320
Initial direct cost 0,200,000
Lease incentive received 0,100,000
Cost of right of use asset 5,376,320

Group 8
PROBLEM 1
At the beginning of current year, Roblox company entered into a 7-year lease for drilling
machinery. The entity accounted for the acquisition at the present value of lease payments of
P3,800,000 which included a P120,000 purchase option. The entity is certain to exercise the
purchase option at the end of the lease. The asset is expected and as estimated by the entity to have
a fair value of P450,000 at the end of the 10-year life. The entity regularly used straight line
depreciation on the similar machinery.
What amount should be recognized as depreciation expense on the right of use asset for the
current year?
Answer: 335,000
Solution:
Cost of right of use asset 3,800,000
Residual Value (450,000)
Depreciable Amount 3,350,000

Depreciation for the current year (3,350,000/10) 335,000

PROBLEM 2
During 2015, Dobby company experienced financial difficulties and is likely to default on a
P7,400,000, 12% three-year note dated January 1, 2013 payable to Midwest BankCentre. On
December 31, 2015, the Midwest BankCentre agreed in settling the note and unpaid interest of
P888,000 for 2015 for P6,500,000 cash payable on January 31, 2016.
What amount should be reported as gain from extinguishment of debt in 2015?
Answer: 1,788,000
Solution:
Note Payable 7,400,000
Accrued Interest Payable 888,000
Total Liability 8,288,000 Cash Settlement (6,500,000)
Gain on extinguishment of debt 1,788,000