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Problem 1 Debt Classifications B. A short-term obligation of P3,600,000 in the form of notes payable
due February 5, 2022. The company issued 75,000 ordinary shares
On December 31, 2020, the bookkeeper of the Carmilla, Inc. gave the for P36 per share on January 25, 2022. The proceeds from the
following information: issuance, plus P900,000 cash, were used to fully settle the debt on
February 5, 2022.
Notes Payable: C. A long-term obligation of P2,500,000 on December 1, 2021. On
Arising from purchase of goods P47,200 November 10, 2021, Clint breaches a covenant on its debt
Arising from banks loans, of which marketable obligation and the loan becomes payable on demand. An
securities valued at P28,000 have been placed agreement is reached to provide a waiver of the breach on
as security 20,000 December 11, 2021.
Arising from advances by officers 25,000 D. A long-term obligation of P4,000,000. The loan is maturing over 4
Appropriation for general contingencies 50,000 years in the amount of P1,000,000 per year. The loan is dated
Employees’ income taxes withheld 960 September 1, 2021, and the first maturity date is September 1,
Advances received from customers on purchase orders 6,400 2022.
Accounts payable arising from purchases 38,000 E. A debt obligation of P1,000,000 maturing on December 31, 2024.
Customers’ accounts with credit balances arising from The debt is callable on demand by the lender at any time.
sales returns 2,600
Stock dividend payable 24,000 1. What amount of current liabilities should be reported on the
First mortgage serial bonds, payable in semiannual December 31, 2021, statement of financial position?
installments of P15,000 due on April 1 and October 1 A. 3,750,000
of each year 150,000 B. 4,750,000
Overdraft with Cecilion Rural Bank 5,000 C. 5,750,000
Estimated damages to be paid as a result of D. 8,250,000
unsatisfactory performance on a contract 2,400 2. What amount of noncurrent liabilities should be reported on the
Estimated expenses of meeting guarantee for service December 31, 2021, statement of financial position?
requirements on merchandise sold 4,800 A. 3,000,000
Accrued interest on bonds payable 5,750 B. 5,500,000
Unused letters of credit 10,000 C. 6,500,000
D. 7,500,000
How much is the total liabilities to be presented on the balance sheet as
of December 31, 2020? Problem 4 Debt Classifications
A. 308,110
B. 322,510 Cyclops Company is planning to refinance certain short-term obligations
C. 332,110 on a long term basis. The 2021 financial statements will be published on
D. 339,510 March 15, 2022. On December 31, 2021, before reclassification of short-
term debt, the liabilities are:
Problem 2 Debt Classifications
Accounts payable P7,000,000
Following information pertain to Claude Corporation as at June 30: Notes payable – bank 12,000,000
Accrued expenses 4,000,000
a. Accounts payable arising from purchase of Mortgage payable 4,000,000
merchandise (net of debit balances of P15,000) 245,000 Note payable – due in 2023 3,000,000
b. Notes payable – Bank 100,000
c. Mortgage payable 300,000 The entity intends to refinance P9,000,000 of the P12,000,000 bank note
d. Accrued interest payable 34,000 payable on a long-term basis. Although the entire P12,000,000 is due on
e. Customers’ deposit 9,500 June 30, 2022, the bank has informally agreed to extend the maturity
f. Stock dividend payable 30,000 date for P6,000,000 to June 30, 2023, if necessary.
g. Dividends in arrears on cumulative preferred
stock not yet declared 20,000 On January 31, 2022, the entity issued share capital for P4,000,000, net
h. Deficiency income tax assessment being of issue costs and underwriting fees of P500,000.
contested 15,000
i. Other accrued liabilities 6,500 On January 15, 2022, the entity entered into a financing agreement with
Total 760,000 a financially capable commercial bank, permitting the entity to borrow up
to P3,000,000. Borrowings available at the entity’s option on April 1,
How much is the amount of liabilities? 2022 will mature five years after the loan date.
A. 680,000
B. 710,000 The entity used the entire proceeds of the issue price of share capital to
C. 760,000 retire part of the current note payable and now intended to draw down
D. 775,000 the entire available commitment of the five-year debt on April 1, 2022.

Problem 3 Debt Classifications 1. The total current liabilities on December 31, 2021
A. 17,000,000
Clint, Inc. is a manufacturer and retailer of household furniture. Your B. 23,000,000
audit of the company’s financial statements for the year ended C. 26,000,000
December 31, 2021, discloses the following debt obligations of the D. 30,000,000
company at the end of its reporting period. Clint’ financial statements are 2. The total noncurrent liabilities on December 31, 2021
authorized for issuance on March 6, 2022. A. 3,000,000
B. 4,000,000
A. A P150,000 short-term obligation due on March 1, 2022. Its maturity C. 7,000,000
could be extended to March 1, 2024, provided Clint agrees to D. 12,000,000
provide additional collateral. On February 12, 2022, an agreement
is reached to extend the loan’s maturity to March 1, 2024.

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Problem 5 Debt Classifications Inventory of Premium AM/FM radio P39,950
Estimated Premium Claims Outstanding 44,800
One Team Company provided the following information on December Estimated Liability from Warranties 136,000
31, 2021:
Based on the above and the result of your audit, determine the
Accounts payable P6,500,000 amounts that will be shown on the 2020 financial statements for the
Notes payable – bank 8,000,000 following:
Interest payable 150,000
Mortgage note payable – 10% 2,000,000 1. Warranty expense
Bonds payable 4,000,000 A. 80,000
B. 108,000
A. Bank notes payable include two separate notes payable to Iloilo C. 144,000
Bank. D. 164,000
2. Estimated liability from warranties
A P3,000,000, 10% note issued March 1, 2020, payable on A. 80,000
demand. Interest is payable every six months. B. 108,000
C. 136,000
A one-year, P5,000,000, 11% note issued January 2, 2021. On D. 164,000
December 31, 2021, the entity negotiated a written agreement with 3. Premium expense
Iloilo Bank to replace the note with a 2-year, P5,000,000, 10% note A. 75,600
to be issued January 2, 2021. B. 108,000
C. 126,000
B. The 10% mortgage note was issued October 1, 2018 with a term of D. 183,600
10 years. 4. Estimated liability for premiums
A. 36,400
The terms of the note give the holder the right to demand immediate B. 44,800
payment if the entity fails to make a monthly interest payment within C. 63,450
10 days of the date the payment is due. D. 75,600
5. Inventory of AM/FM radio
On December 31, 2021, the entity is three months behind in paying A. 39,950
the required interest payment. B. 46,950
C. 56,950
C. The bonds payable are 10-year, 8% bonds, issued June 30, 2012. D. 77,350
Interest is payable semiannually on June 30 and December 31.
Problem 7 Estimated Premium Liability
1. The total current liabilities on December 31, 2021.
A. 5,000,000 Pop Company sells banana juice. In order to promote the drink among
B. 6,650,000 teenagers and others who might otherwise be indifferent to the product,
C. 11,650,000 the company inaugurates in the current year a premium plan called
D. 15,650,000 “Drink-N-Win.”
2. The total noncurrent liabilities on December 31, 2021.
A. 5,000,000 For every 10 bottle caps and P5 turned in, customers receive an
B. 6,650,000 attractive ball-pen and become eligible for a grand prize of P5,000 in
C. 11,650,000 cash awarded for every 100 tops turned in.
D. 15,650,000
The entity estimated that only 25% of bottle caps reaching the hands of
Problem 6 Estimated Warranty and Estimated Premium Liability customers will be presented for redemption.

GMA’ Music Emporium carries a wide variety of music promotion During the current year, the entity sold 400,000 bottles of banana juice
techniques - warranties and premiums – to attract customers. at P9 each, purchased 10,000 ball point pens for a total cost of
P900,000, and incurred non-deferrable costs of P30,000 applicable to
Musical instrument and sound equipment are sold in a one-year warranty the premium plan.
for replacement of parts and labor. The estimated warranty cost, based
on past experience, is 2% of sales. A total of 8,000 pens have been redeemed and thirty grand prizes have
been awarded. At the end of each year, the company recognizes an
The premium is offered on the recorded and sheet music. Customers estimated liability equal to the estimated cost of prizes outstanding.
receive a coupon for each peso spent on recorded music or sheet music.
Customers may exchange 200 coupons and P20 for an AM/FM radio. After examining the above information, you are to determine the
GMA pays P34 for each radio and estimates that 60% of the coupons following:
given to customers will be redeemed.
1. The total premium expense of the current year
GMA’ total sales for 2020 were P7,200,000 - P5,400,000 from musical A. 680,000
instrument and sound reproduction equipment and P1,800,000 from B. 860,000
recorded music and sheet music. Replacement parts and labor for C. 1,030,000
warranty work totaled P164,000 during 2020. A total of 6,500 AM/FM D. 1,450,000
radio used in the premium program were purchased during the year and 2. The estimated premiums payable at the end of the current year
there were 1,200,000 coupons redeemed in 2020. A. 0
B. 120,000
The accrual method is used by GMA to account for the warranty and C. 160,000
premium costs for financial reporting purposes. The balance in the D. 170,000
accounts related to warranties and premiums on January 1, 2020, were
as shown below:

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Problem 8 Provisions Problem 10 Accrued Commissions

You are engaged to audit the December 31, 2021, financial statements Cindy Company pays its outside salespersons fixed monthly salaries
of Paula Company, a manufacturer of household appliances. Your audit and commissions on net sales. Sales commissions are computed and
disclosed the following situations. paid on a monthly basis (in the following the month of sale) this purpose.

A. In June 2021, the company began producing and selling a new line However, if the salaries for salespersons exceed their sales
of dishwasher. By the end of the year, it had sold 120,000 to various commissions earned for a month, such excess is not charged back to
dealers for P15,000 each. The product was sold under a 1-year them. Pertinent data for the month of March 2021 for the three
warranty, and the company estimates warranty costs to be P750 salesperson in sales region 6 are as follows:
per dishwasher. Paula had paid out P30,000,000 in warranty
expenses as of December 31, 2021, which is also the amount Fixed Commission
shown as warranty expense in its income statement for the current Salesperson salary Net Sales rate
year. 1 2,500 100,000 2%
B. In response to your letter of audit inquiry, Paula’s lawyer informed 2 3,500 200,000 3%
you that the company is involved in a lawsuit for violating 3 4,500 300,000 3%
environmental laws regulating hazardous waste. Although the
litigation is pending, Paula’s lawyer is certain that Paula will most
In respect of sales region 6, what total amount should Cindy accrue for
probably have to pay cleanup costs and fines of P5,500,000. Paula
sales commissions’ payable at March 31, 2021?
neither accrued nor disclosed this loss in the financial statements.
A. P6,500
C. Paula is the defendant in a patent infringement suit by Pauline over
B. P7,000
Paula’s use of a hydraulic compressor in several of its
C. P17,000
manufactured appliances. Paula’s lawyer informed you that if the
D. P17,500
suit goes against your audit client, the loss may be as much as
P10,000,000. However, the lawyer believes that the loss of this suit
Problem 11(A) Bonus Computation
is only possible. Paula did not in any way disclose this pending
litigation in its financial statements.
Nature Company has an agreement to pay the sales manager a bonus
of 5% of the entity’s earnings. The income for the year before bonus and
1. What amount of warranty expenses should be shown on
tax is P5,250,000. The income tax rate is 30% of income after bonus.
Paula’s income statement for the year ended December 31,
Determine the bonus under each of the following independent
2021?
assumptions:
A. 0
1. Bonus is a certain percent of the income before bonus and before
B. 30,000,000
tax.
C. 60,000,000
A. 177,536
D. 90,000,000
B. 186,548
2. What amount of warranty liability should be shown on Paula’s
C. 250,000
statement of financial position as of December 31, 2021?
D. 262,500
A. 0
2. Bonus is a certain percent of income after bonus but before tax.
B. 30,000,000
A. 177,536
C. 60,000,000
B. 186,548
D. 90,000,000
C. 250,000
3. What amount of lawsuit liability should be reported as a
D. 262,500
provision on Paula’s December 31, 2021, statement of
3. Bonus is a certain percent of income after bonus and after tax.
financial position?
A. 177,536
A. 0
B. 186,548
B. 5,500,000
C. 250,000
C. 10,000,000
D. 262,500
D. 15,500,000
4. Bonus is certain percent of income after tax but before bonus.
A. 177,536
Problem 9 Accrued Expenses
B. 186,548
C. 250,000
Angat Pinoy Corporation must determine the December 31, 2021, year-
D. 262,500
end accruals for advertising and rent expenses. A P50,000 advertising
bill was received January 10, 2022, comprising costs of P37,500 for
Problem 11(B) Bonus Computation
advertisements in December 31, 2021 issues, and P12,500 for
advertisements in January 2022 issues of the newspaper.
The following data were taken from the records of PRRD Corporation:
A store lease, effective December 16, 2020, calls for fixed rent of
Net income before deducting income tax and bonus P50,000
P120,000 per month, payable one month from the effective date and
Net taxable income before deducting bonus 60,000
monthly thereafter. In addition, rent equal to 5 % of net sales over
Bonus rate 10%
P6,000,000 per calendar year is payable on January 31 of the following
Income tax rate 30%
year. Net sales for 2021 were P7,500,000.
Compute the income tax and bonus under each of the following
What is the total accrued liabilities that should be reported by Angat
assumptions:
Pinoy Corporation in its statement of financial position as at December
1. The bonus is 10% of the net income before deducting tax and
31, 2021?
bonus.
A. 97,500
A. 2,990.65
B. 110,000
B. 3,298.97
C. 172,500
C. 4,545.45
D. 185,000
D. 5,000.00
2. The bonus is 10% of the net income before deducting tax but after
deducting bonus.
A. 2,990.65
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B. 3,298.97 3. MSG Corp’s accounts payable at December 31, 2021, totaled
C. 4,545.45 P1,600,000 before any necessary year-end adjustments relating to
D. 5,000.00 the following transactions:
3. The bonus is 10% of the net income before deducting bonus but
after deducting tax.  On December 27, 2021, MSG wrote and recorded checks to
A. 2,990.65 creditors totaling P700,000 causing an overdraft of P200,000
B. 3,298.97 in MSG’s bank account at December 31, 2021. The checks
C. 4,545.45 were mailed out on January 10, 2022.
D. 5,000.00  On December 28, 2021, MSG purchased and received goods
4. The bonus is 10% of the net income after deducting tax and bonus. for P300,000, terms 2/10, n/30. MSG records purchases and
A. 2,990.65 accounts payable at net amounts. The invoice was recorded
B. 3,298.97 and paid January 2, 2022.
C. 4,545.45  Goods shipped FOB destination on December 20, 2021 from
D. 5,000.00 a vendor was received January 2, 2022. The invoice price was
P130,000.
Problem 11(C) Bonus Computation
At December 31, 2021, what amount should MSG report as total
Manny Corporation provides an incentive compensation plan under accounts payable?
which its President is to receive a bonus equal to 10% of Manny’s A. 1,900,000
income in excess of P100,000 before deducting income taxes but after B. 2,100,000
deducting the bonus. If income before income taxes and the bonus is C. 2,594,000
P320,000, how much should be the amount of the bonus? D. 2,724,000
A. 10,000
B. 20,000 Problem 13 Vouchers Payable / Accounts Payable
C. 22,000
D. 32,000 In the audit process, the following data were obtained from the books of
the Iloilo Company which uses a voucher system. All invoices are
Problem 12 Accounts Payable subject to term 2/10, n/30 and are entered net with the discount entered
in the Purchase Discount column of the voucher register. The
1. The balance in Cesar Company’s accounts payable at December accountant in charge of the books went on leave to attend to his family
31, 2021 was P1,170,000 before any adjustments relating to the based in Antique. A fresh accounting graduate has been assigned to
following: record the transactions. At year-end, the substitute accountant finds that
the unpaid vouchers do not agree with the Vouchers Payable control
 Goods were in transit from a vendor to Cesar on December account. You are called to adjust the matter.
31, 2021. The invoice cost was P65,000 and the goods were
shipped FOB shipping point on December 29, 2021. The A schedule of unpaid vouchers as of December 31, 2020, all of which
goods were received on January 2, 2022. are net of discount, is presented to you:
 Goods shipped FOB shipping point on December 20, 2021
from a vendor to Cesar, were lost in transit. The invoice cost Date Voucher Supplier Amount
was P32,500. On January 5, 2022, Cesar filed a P32,500 claim No.
against the common carrier. Nov. 27 797 San Joaquin Supply Co. P 78,400
 Goods shipped FOB destination on December 31, 2021, from Dec. 02 821 Miag-ao Distributors 19,600
a vendor to Cesar, were received on January 6, 2022. The 11 829 Guimbal Sales 44,100
invoice cost was P19,500. 20 836 Igbaras Dealers 17,150
21 842 Tubungan Merchandising 22,050
What amount should Cesar report as accounts payable on its 22 856 Tigbauan Mercantile 80,850
December 31, 2021 statement of financial position? 31 865 Oton Traders 78,400
A. 1,202,500 P340,550
B. 1,222,500
C. 1,235,000 Vouchers Payable (control account)
D. 1,267,500 Cash P1,309,500 Purchases P1,645,000
disbursements journal
2. The balance in Shane Corporation’s accounts payable account at Purchase 36,750*
December 31, 2021 was P1,350,000 before any adjustments returns journal
relating to the following:
* Voucher Nos. 821 and 836 cancelled as goods were returned in
 Goods were in transit to Shane from a vendor on December December.
31, 2021. The invoice cost was P75,000. The goods were
shipped FOB shipping point on December 29, 2021 and were Based on the above and the result of your audit, compute for the
received on January 2, 2022. following as of December 31, 2020:
 Goods shipped FOB Destination on December 21, 2021 from 1. Adjusted balance of Vouchers Payable
a vendor to Shane, were received on January 6, 2022. The A. P310,000
invoice cost was P37,500. B. P306,750
 On December 27, 2021, Shane wrote and recorded checks C. P303,800
totaling P60,000 which were mailed on January 10, 2022. D. P344,250
2. Purchase discounts lost on unpaid vouchers
In Shane’s December 31, 2021 statement of financial position, how A. P6,200
much should be the accounts payable? B. P2,950
A. 1,410,000 C. P3,700
B. 1,425,000 D. P0
C. 1,462,500 3. Purchase discounts lost on paid vouchers
D. 1,485,000 A. P28,750
B. P8,000
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C. P5,050
D. P41,800
4. Adjusting journal entry or entries to correct the accounts will include
A. A debit to Purchase Discounts Lost of P11,250.
B. A debit to Purchase Discounts Lost of P5,050.
C. A credit to Vouchers Payable of P8,000.
D. A credit to Vouchers Payable of P11,250.
Problem 16 Accounting for Noninterest-bearing note (Payable in
Installments)
Janna Company purchased machinery on December 31, 2021, paying
P80,000 down and agreeing to pay the balance in four equal installments
of P60,000 payable each December 31. Implicit in the purchase price is
an assumed interest of 12%.

Problem 14 Notes Payable (Round off the present value into 5 decimal places)

1. At year-end, Estes Company issued a P1,000,000 face amount 1. What is the cost of the machinery purchased on December 31,
note payable to Fanny Company in exchange for services rendered 2021?
to Estes. The note, made at usual trade terms, is due in nine months A. 233,083
and bears interest, payable at maturity, at the annual rate of 3%. B. 262,241
The market interest rate is 8% is 0.944. at what amount should the C. 290,842
note payable be reported at year-end? D. 320,000
A. 1,030,000 2. How much interest expense should be reported in Janna’s income
B. 1,000,000 statement for the year ended December 31, 2022?
C. 965,200 A. 17,293
D. 944,000 B. 21,869
2. On January 1, 2019, Franco Company borrowed P500,000 8% C. 38,121
interest bearing note due in four years. The present value of the D. 42,707
note on January 1, 2019 was P367,500. The entity has elected the 3. What is the carrying amount of the note at December 31, 2023?
fair value option for reporting the financial liability. On December A. 99,310
31, 2019, the fair value of the note is P408,150. B. 101,403
1. What is the carrying amount of the note payable on December C. 120,000
31, 2019? D. 144,110
A. 367,500
B. 408,150 Problem 17 Debt Restructure
C. 460,000
D. 500,000 1. Khaleed Company transferred real estate to Masha Company
2. What amount should be reported as interest expense for pursuant to a debt restructuring in full liquidation on Khaleed’s
2019? liability to Masha:
A. 20,000
B. 29,400 Carrying amount of liability liquidated 1,500,000
C. 32,562 Carrying amount or real estate transferred 1,000,000
D. 40,000 Fair value of real estate transferred 900,000
3. What amount should be reported as net gain from change in
fair value in 2019? 1. Under IFRS, what amount should be reported as gain on
A. 0 extinguishment of liability?
B. 40,650 A. 100,000
C. 91,850 B. 500,000
D. 132,500 C. 600,000
4. At what amount should the discount on note payable be D. 900,000
presented on December 31, 2019? 2. Under USA GAAP, what amount should be reported as gain
A. 0 or loss on restructuring?
B. 100,000 A. 0
C. 103,100 B. 100,000 loss
D. 132,500 C. 500,000 gain
D. 600,000 gain
Problem 15 Accounting for Noninterest-bearing note (Lump-sum 3. Under USA GAAP, what amount should be reported as gain
Payments) or loss on transfer of real estate?
A. 0
On December 31, 2021, Vin Company acquired a piece of equipment B. 100,000 loss
from Cent Company by issuing a P1,200,000 note, payable in full on C. 500,000 gain
December 31, 2025. Vin’s credit rating permits it to borrow funds from D. 600,000 gain
its several lines of credit at 10%. The equipment is expected to have a 2. Sun Company is experiencing financial difficulty and is negotiating
5-year life and a P150,000 salvage value. debt restructuring with its creditor to relieve its financial stress. Sun
has a P2,500,000 note payable to Odette Bank. The bank accepted
(Round off the present value into 5 decimal places) an equity interest in Sun Company in the form of 200,000 ordinary
shares quoted at P12 per share. The par value is P10 per share.
1. What is the carrying amount of the equipment on December 31, The fair value of the note payable on the date of restructuring is
2023? P2,200,000.
A. 341,767 1. What amount should be recognized as gain from debt
B. 497,767 extinguishment as a result of the equity swap?
C. 551,767 A. 100,000
D. 630,000 B. 200,000
2. What is the carrying amount of the note at December 31, 2023? C. 400,000
A. 819, 612 D. 500,000
B. 991,730 2. What amount should be recognized as share premium from
C. 1,090,903 the issuance of the shares?
D. 1,200,000 A. 100,000
B. 200,000
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C. 400,000 A. 5,300,000
D. 500,000 B. 5,450,000
3. If the shares have no fair value, what amount should be C. 5,550,000
recognized as gain on extinguishment? D. 5,650,000
A. 200,000 2. On April 1, 2020, Grace Company issued, at 99 plus accrued
B. 300,000 interest, 4,000 8% bonds with face amount of P1,000 per bond. The
C. 400,000 bonds are dated January 1, 2020, mature on January 1, 2030, and
D. 500,000 pay interest on January 1 and July 1. The entity paid bond issue
4. If both the shares and the note payable do not have fair value, cost of P140,000. How much was received from the bond
what amount should be recognized as gain from issuance?
extinguishment of debt? A. 3,820,000
A. 0 B. 3,900,000
B. 200,000 C. 3,960,000
C. 300,000 D. 4,040,000
D. 500,000 3. Albert Company is authorized to issue P5,000,000 of 6%, 10-year
3. Gusion Company had an overdue 8% note payable to Granger bonds dated July 1, 2020 with interest payments on June 30 and
Bank at P8,000,000 and accrued interest of P640,000. As a result December 31. When the bonds are issued on November 1, 2020,
of a restructuring agreement on January 1, 2019, Granger Bank the entity received cash of P5,150,000 including accrued interest.
agreed to the following provisions: What is the discount or premium from the issuance of the bonds?
 The principal obligation is reduced to P7,000,000. A. 150,000 bond discount
 The accrued interest of P640,000 is forgiven. B. 150,000 bond premium
 The date of maturity is extended to December 31, 2022. C. 50,000 bond premium
 Annual interest of 10% is to be paid for 4 years every D. No bond premium or discount
December 31. 4. On November 1, 2020, Macky Company issued P4,000,000 of 10-
year, 8% term bonds dated October 1, 2020. The bonds were sold
The present value of 1 at 8% for 4 periods is 0.735 and the present to yield 10% with total proceeds of P3,500,000 plus accrued
value of an ordinary annuity of 1 at 8% for 4 periods is 3.31. interest. Interest is paid every April 1 and October 1. What amount
1. What amount should be reported as gain on extinguishment of should be reported as accrued interest payable on December 31,
debt for 2019? 2020?
A. 538,000 A. 53,333
B. 1,000,000 B. 80,000
C. 1,178,000 C. 87,500
D. 1,640,000 D. 100,000
2. What amount should be reported as interest expense for
2019? Problem 19 Bonds Payable – Effective Interest Method
A. 596,960
B. 640,000 1. Baxia Company received permission on January 1, 2020 to issue
C. 700,000 12% bonds with face amount of P6,000,000 maturing on January
D. 746,200 1, 2030. Interest is payable annually on December 31. The bonds
4. Due to adverse economic circumstances and poor management, are callable at 102 plus accrued interest. On January 1, 2020, the
Tigreal Company had negotiated a restructuring of the 9% entity issued the bonds for P6,737,000 with an effective yield of
P6,000,000 note payable to Terizla Bank due on January 1, 2019. 10%. The fiscal year of the entity ends December 31. The effective
There is no accrued interest on the note. The bank has reduced the interest amortization is used.
principal obligation from P6,000,000 to P5,000,000 and extend the
maturity to 3 years on December 31, 2021. However, the new After examining the above information, you are to determine the
interest rate is 13% payable annually every December 31. The balances of the following on December 31, 2020:
present value of 1 at 9% for three periods is 0.77 and the present 1. Interest expense
value of an ordinary annuity of 1 at 9% for three periods is 2.53. A. 600,000
1. What is the present value of the modified liability? B. 673,700
A. 5,000,000 C. 720,000
B. 5,494,500 D. 808,440
C. 5,823,400 2. Premium on bonds payable
D. 6,000,000 A. 0
2. What amount should be reported as gain on modification of B. 648,560
debt for 2019? C. 690,700
A. 0 D. 737,000
B. 350,000 3. Carrying amount of Bonds payable
C. 500,000 A. 6,000,000
D. 505,500 B. 6,648,700
3. What amount should be reported as interest expense for C. 6,690,700
2019? D. 6,737,000
A. 450,000 2. On January 1, 2020, Claude Company was authorized to issue a
B. 494,505 6% bonds with face amount of P5,000,000 maturing on December
C. 650,000 31, 2021. Interest is payable semiannually on June 30 and
D. 780,000 December 31. On January 1, 2020, the entity issued all of the bonds
for P4,818,500 with an effective rate of 8%. The fiscal year of the
Problem 18 Bonds Payable - Issuance entity is the calendar year and the effective interest method of
amortization is used.
1. On October 1, 2020, Shine Company issued 5,000 12% bonds with
face amount of P1,000 per bond at 110. The bonds which mature After examining the above information, you are to determine the
on January 1, 2025, pay interest semiannually on January 1 and balances of the following on December 31, 2020:
July 1. The entity paid bond issue cost of P200,000. How much was 1. Interest expense
received from the issuance of the bonds? A. 290,773
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B. 300,000 Company at specified option price of P25 per share. The par value
C. 387,190 of the ordinary share is P20. Immediately after issuance, the market
D. 400,000 value of the bonds without warrants was P5,400,000 and the
2. Discount on bonds payable market value of the warrants was P600,000. What is the carrying
A. 0 amount of bonds payable at year-end?
B. 94,310 A. 4,900,000
C. 96,020 B. 4,950,000
D. 72,273 C. 5,000,000
3. Carrying amount of Bonds payable D. 5,400,000
A. 4,903,980
B. 4,905,690 6. At the beginning of current year, Masha Company issued
C. 4,927,727 P5,000,000 face amount, 5-year bonds at 109. Each P1,000 bond
D. 5,000,000 was issued with 50 detachable share warrants, each of which
entitled the bondholder to purchase one ordinary share of P5 par
3. Diggie Company issued bonds with face value of P6,000,000 on value at P25. Immediately after issuance, the market value of each
January 1, 2020. The nominal rate of 6% is payable annually on warrant was P5. The stated interest rate on the bonds is 11%
December 31. The bonds are issued with an 8% effective yield. The payable annually every December 31. However, the prevailing
bonds mature on every December 31 each year at the rate of market rate of interest for similar bonds without warrants is 12%.
P2,000,000 for three years. The present value of 1 at 12% for 5 periods is 0.57 and the present
value of an ordinary annuity of 1 at 12% for 5 periods is 3.60.
Note: Round off present value factor into four decimal places. 1. What is the initial carrying amount of the bonds payable?
A. 4,380,000
After examining the above information, you are to determine the B. 4,830,000
balances of the following: C. 5,000,000
D. 5,450,000
1. The market price or issue price of the bonds on January 1, 2. What amount should be recorded initially as discount or premium
2020. on bonds payable?
A. 5,154,000 A. 170,000 discount
B. 5,346,000 B. 450,000 discount
C. 5,788,332 C. 450,000 premium
D. 6,000,000 D. 800,000 discount
2. The interest expense for 2020 3. What amount should be reported as equity component arising from
A. 347,300 the issuance of bonds payable?
B. 360,000 A. 0
C. 463,067 B. 450,000
D. 480,000 C. 500,000
3. The carrying amount of the bonds payable on December 31, D. 620,000
2020. 4. What amount should be recorded as share premium if all of the
A. 3,788,332 warrants are exercised?
B. 3,891,399 A. 1,250,000
C. 4,000,000 B. 2,500,000
D. 5,891,399 C. 5,000,000
D. 5,620,000
4. On March 1, 2020, Pharsa Company issued 10% bonds with face
amount of P7,000,000 to yield 8%. Interest is payable semiannually 7. Miya Company issued P5,000,000 face amount 12% convertible
on March 1 and September 1. The bonds mature in 10 years. The bonds at 110 at the beginning of current year. The bonds pay
entity follows the calendar year. interest semiannually on January 1 and July 1. It is estimated that
the bonds would sell only at 103 without the conversion feature.
Note: Round off present value factor into four decimal places. Each P1,000 bond is convertible into 10 ordinary shares with P100
par value. What is the increase in shareholders’ equity arising from
After examining the above information, you are to determine the the original issuance of the convertible bonds payable?
balances of the following: A. 0
B. 150,000
1. The market price or issue price of the bonds on March 1, 2020. C. 350,000
A. 6,127,716 D. 500,000
B. 7,000,000
C. 7,394,905 8. On January 1, 2019, Aamon Company issued convertible bonds
D. 7,951,405 with a face amount of P5,000,000 for P6,000,000. The bonds are
2. The interest expense for 2020 convertible into 50,000 shares with P100 par value. The bonds
A. 529,241 have a 5-year life with 10% stated interest rate payable annually
B. 583,333 every December 31. The fair value of the convertible bonds without
C. 634,834 conversion option is computed at P5,399,300 on January 1, 2019.
D. 700,000
3. The carrying amount of the bonds payable on December 31, On December 31, 2021, the convertible bonds were not converted
2020. but fully paid for P5,550,000. On such date, the fair value of the
A. 7,886,239 bonds without conversion privilege is P5,400,000 and the carrying
B. 7,887,517 amount is P5,178,300.
C. 7,897,313 1. What is the carrying amount of the bonds payable on January
D. 7,919,461 1, 2019?
A. 5,000,000
5. At year-end, Franco Company issued 5,000 8%, 10-year bonds, B. 5,399,300
P1,000 face amount with detachable share warrants at 110. Each C. 5,500,000
bond carried a detachable warrant for ten ordinary shares of Franco D. 6,000,000
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2. What is the premium on bonds payable on January 1, 2019? Problem 21 Bonds Payable
A. 0
B. 399,300 In your initial audit of Best Finance Co., you find the following ledger
C. 500,000 account balances.
D. 1,000,000
3. What amount should be recorded as equity component arising 12%, 25-year Bonds Payable, 2016 issue
from issuance of bonds payable on January 1, 2019? 01/01/2016 CR P 1,600,000
A. 0
B. 450,000
C. 500,000 Treasury Bonds
D. 600,700 10/01/2020 CD P 216,000
4. What amount should be recorded as loss on the
extinguishment of the convertible bonds payable on December
31, 2021? Bond Premium
A. 0 01/01/2016 CR P 80,000
B. 150,000
C. 221,700
D. 371,700
Bond Interest Expense
Problem 20 Bonds Payable 01/01/2020 CD P 96,000
07/01/2020 CD 96,000
You are examining the records of the Lacson Corporation for the year
ended December 31, 2020. This is the first time the Company has been
audited. The company floated a serial bond issue in 2018. The details of The bonds were redeemed for permanent cancellation on October 1,
the issue and the accounts, as of December 31, 2020 are presented 2020 at 105 plus accrued interest.
below:
Based on the above and the result of your audit, determine the following:
Total amount P250,000 1. The adjusted balance of bonds payable as of December 31, 2020
Date of issue October 1, 2018 is
Proceeds from issue P245,000 A. 1,000,000
Interest rate 5% B. 1,384,000
Interest payment date October 1 C. 1,400,000
Maturity date P50,000 annually, starting October 1, 2020 D. 1,600,000
2. The unamortized bond premium on December 31, 2020 is
A. 56,000
5% Serial Bonds Payable B. 58,800
10/1/2020 50,000 10/1/2018 245,000 C. 64,000
D. 80,000
3. The total bond interest expense for the year 2020 is
A. 182,800
Accrued Interest Payable B. 182,900
1/1/2020 3,125 C. 188,800
D. 189,100
4. The gain or loss on partial bond redemption is
A. 1,900 gain
Required:
B. 1,900 loss
Determine the balances of the following accounts as of December 31,
C. 18,100 gain
2020.
D. 18,100 loss
1. Bonds Payable
A. 195,000
Problem 22 Notes Payable, Estimated Warranty, Trade Payables,
B. 200,000
Dividends Payable, Bonds Payable
C. 245,000
D. 250,000
Chester Corporation is selling audio and video appliances. The
2. Discount on Bonds payable
company’s fiscal year ends on March 31. The following information
A. 2,000
relates to the obligations of the company as of March 31, 2018:
B. 2,150
Notes payable
C. 2,250
Chester has signed several long-term notes with financial institutions.
D. 2,275
The maturities of these notes are given below. The total unpaid interest
3. Carrying Amount of Bonds Payable
for all of these notes amounts to P340,000 on March 31, 2018.
A. 192,750
B. 197,750
Due date Amount
C. 200,000
April 31, 2018 P 600,000
D. 237,750
July 31, 2018 900,000
4. Accrued interest payable
September 1, 2018 450,000
A. 1,750
February 1, 2019 450,000
B. 2,500
April 1, 2019 – March 2,700,000
C. 2,750
31, 2020
D. 3,000
P 5,100,000
5. Interest expense for December 31, 2020 P
A. 13,062.50
Estimated warranties
B. 13,260.50
Chester has a one-year product warranty on some selected items. The
C. 13,602.50
estimated warranty liability on sales made during the 2016 – 2017 fiscal
D. 14,620.50
year and still outstanding as of March 31, 2017, amounted to P252,000.
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The warranty costs on sales made from April 1, 2017 to March 31, 2018, Present value of 1 at 10% for 4 periods 0.68
are estimated at P630,000. The actual warranty costs incurred during
2017 – 2018 fiscal year are as follows: 1. What is the initial lease liability?
A. 3,170,000
Warranty claims honored on 2016 – 2017 P 252,000 B. 3,510,000
sales C. 4,000,000
Warranty claims honored on 2017 – 2018 285,000 D. 4,010,000
sales 2. What is the cost of right use asset?
Total P 537,000 A. 3,810,000
B. 3,900,000
Trade payables C. 4,200,000
Accounts payable for supplies, goods, and services purchases on open D. 4,250,000
account amount to P560,000 as of March 31, 2018. 3. What is the depreciation for current year?
A. 462,500
Dividends B. 850,000
On March 10, 2018, Chester’ board of directors declared a cash dividend C. 925,000
of P0.30 per common share and a 10% common stock dividend. Both D. 965,000
dividends were to be distributed on April 5, 2018 to common 4. What is the lease liability at year-end?
stockholders on record at the close of business on March 31, 2018. As A. 2,510,000
of March 31, 2018, Chester has 5 million, P2 par value, common shares B. 2,861,000
issued and outstanding. C. 3,159,000
D. 3,620,000
Bonds payable
Chester issued P5,000,000, 12% bonds, on October 1, 2012 at 96. The 2. At the beginning of current year, Akai Company leased a building
bonds will mature on October 1, 2022. Interest is paid semi-annually on from a lessor with the following pertinent information:
October 1 and April 1. Chester uses the straight line method to amortize
bond discount. Annual rental payable at the end of each year P1,000,000
Initial direct cost paid 400,000
Based on the foregoing information, determine the adjusted balances of Lease incentive received 100,000
the following as of March 31, 2018: Leasehold improvement 200,000
Purchase option that is reasonably certain to be
1. Estimated warranty payable exercised 500,000
A. P252,000 Lease term 5 years
B. P345,000 Useful life of building 8 years
C. P630,000 Implicit interest rate 10%
D. P882,000 PV of an ordinary annuity of 1 for 5 periods at 10% 3.79
2. Unamortized bond discount PV of 1 for 5 periods at 10% 0.62
A. P110,000
B. P200,000 1. What is the cost of the right of use asset?
C. P100,000 A. 4,400,000
D. P90,000 B. 4,500,000
3. Bond interest payable C. 4,600,000
A. P0 D. 4,700,000
B. P300,000 2. What is the depreciation for current year?
C. P150,000 A. 550,000
D. P250,000 B. 575,000
4. Total current liabilities C. 880,000
A. P6,445,000 D. 900,000
B. P5,105,000 3. What is the interest expense for current year?
C. P5,445,000 A. 379,000
D. P3,945,000 B. 410,000
5. Total noncurrent liabilities C. 429,000
A. P7,700,000 D. 450,000
B. P7,590,000 4. What is the lease liability at year end?
C. P7,500,000 A. 3,169,000
D. P7,610,000 B. 3,510,000
C. 3,719,000
Problem 23 Lessee Accounting D. 3,950,000

1. At the beginning of current year, Alice Company leased a 3. At the beginning of current year, Badang Company leased a new
machinery with the following information: machine from Barats with the following pertinent information:

Annual rental payable at the end of each year P1,000,000 Lease term 5 years
Residual value guarantee 500,000 Annual rental payable at beginning of each year 500,000
Payment to lessor to obtain a long-term lease 300,000 Useful life of machine 8 years
Cost of dismantling and restoring the asset as Implicit interest rate in lease 12%
required by contract at present value 390,000 PV of an annuity of 1 in advance for 5 periods at 12% 4.04
Annual executory cost paid by lessee 50,000 PV of an ordinary annuity of 1 for 5 periods at 12% 3.60
Lease term 4 years
Useful life of machinery 8 years The lease is not renewable and the machine reverts to Barats at
Implicit interest rate 10% the termination of the lease. The cost of the machine on Barats’s
Present value of an ordinary annuity of 1 at 10% accounting records is P3,755,000.
for 4 periods 3.17
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1. At the beginning of the lease term, what amount should be 7. Gusion Company entered into a lease of building on January 1,
recorded as cost of right of use asset? 2019 with the following information:
A. 1,800,000
B. 2,020,000 Annual rental payable at the end of each year P500,000
C. 2,100,000 Lease term 5 years
D. 3,755,000 Useful life of building 20 years
2. What amount should be reported as depreciation of the right Implicit interest rate 10%
of use asset for the current year? PV of an ordinary annuity of 1 at 10% for 5 periods 3.79
A. 252,500
B. 360,000 The lease contained an option for the lessee to extend for a further
C. 404,000 5 years. At the commencement date, the exercise of the extension
D. 751,000 option is not reasonably curtained.

4. On December 31, 2021, Benedetta Company signed a 7-year After 3 years on January 1, 2022, the lessee decided to extend the
finance lease for an airplane. The airplane’s fair value was lease for a further 5 years.
P8,415,000. The entity made the first annual lease payment of
P1,530,000 on December 31, 2021. The entity’s incremental New annual rental payable at the end of each year P600,000
borrowing rate was 12%, and the interest rate implicit in the lease, New implicit interest rate 8%
which was known by Benedetta, was 9%. The rounded present PV of an ordinary annuity of 1 at 8% for 5 periods 3.99
value factors for an annuity due are: PV of 1 at 8% for 2 periods 0.86
PV of an ordinary annuity of 1 at 8% for 2 periods 1.78
9% for 7 years 5.5
12% for 7 years 5.1 1. What amount should be reported as lease liability on
December 31, 2021?
1. What amount should be reported as lease liability on A. 867,245
December 31, 2021? B. 1,242,950
A. 6,273,000 C. 1,584,500
B. 6,885,000 D. 1,895,000
C. 7,803,000 2. What amount should be reported as depreciation for 2019?
D. 8,415,000 A. 25,000
2. What amount should be reported as interest expense for B. 94,750
2022? C. 100,000
A. 619,650 D. 379,000
B. 757,350 3. What amount should be reported as new lease liability on
C. 826,200 January 1, 2022?
D. 841,500 A. 2,058,840
B. 2,394,000
5. On December 31, 2021, Cyclops Company leased equipment for C. 2,948,840
10 years. The entity contracted to pay P400,000 annual rent on D. 3,261,245
December 31, 2021, and on December 31 of each of the next nine 4. What is the carrying amount of right of use asset on January
years. The lease liability was recorded at P2,700,000 on December 1, 2022?
31, 2021, before the first payment. The equipment’s useful life is 12 A. 1,608,000
years, and the interest rate implicit in the lease is 10%. The entity B. 2,081,595
used the straight line method to depreciate all equipment. C. 2,190,840
D. 2,839,595
1. In recording the December 31, 2022 payment, by what amount 5. What amount should be reported as depreciation for 2022?
should the lease liability be reduced? A. 141,980
A. 170,000 B. 297,370
B. 225,000 C. 379,000
C. 230,000 D. 405,656
D. 270,000
2. What amount should be reported as interest expense for Problem 24 Operating lease – Lessor
2020?
A. 0 1. Hanzo Company leased a new machine to Harley Company on
B. 200,000 January 1, 2021. The lease expires on January 1, 2026. The annual
C. 230,000 rental is P900,000. Additionaly, on January 1, 2021, Harley paid
D. 270,000 P500,000 to Hanzo as a lease bonus and P250,000 as a security
deposit to be refunded upon expiration of the lease. What amount
6. On December 31, 2021, Gatotkaca Company leased equipment of rental revenue should be reported for 2021?
with annual lease payments of P200,000 due December 31 for 10 A. 900,000
years. The equipment’s useful life is 10 years and the interest rate B. 1,000,000
implicit in the lease is 10%. The lease obligation was recorded on C. 1,250,000
December 31, 2021 at P1,350,000 and first lease payment was D. 1,400,000
made on that date. What amount should be included in current
liabilities in relation to the lease on December 31, 2021? 2. At the beginning of current year, Kaja Company leased a building
A. 65,000 to Karina under an operating lease for ten years at P500,000 per
B. 85,000 year, payable the first day of each lease year. Kaja Company paid
C. 115,000 P150,000 to a real estate broker as a finder fee. The building is
D. 200,000 depreciated P120,000 per year. Kaja Company incurred insurance
and property tax expense totaling P90,000 for the current year.
What amount should be reported as net rent income for the current
year?
A. 275,000
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B. 290,000 2. On June 30, 2021, what amount should be reported as
C. 350,000 accrued rent receivable?
D. 365,000 A. 0
B. 900,000
3. Natalia Company purchased a tractor on January 1, 2019 at a cost C. 1,200,000
of P1,600,0000 for the purpose of leasing it. The tractor is estimated D. 2,100,000
to have a useful life of 5 years with residual value of P100,000.
Depreciation is on a straight line basis. 7. At the beginning of current year, Tigreal Company leased office
premises to Gusion Company for a five-year term. Under the terms
On April 1, 2019, Natalia entered into a lease contract for the lease of the operating lease, rent for the first year is P800,000 and rent
of the tractor for a term of two years up to March 31, 2021. The for years 2 through 5 is P1,250,000. However, as an inducement to
lease fee is P50,000 monthly and the lessee paid P600,000, the enter the lease, Tigreal Company granted Gusion Company the first
lease fee for one year. Natalia paid P120,000 commission six months of the lease rent-free.
associated with negotiating the lease, P15,000 minor repairs and 1. What is the total rental revenue over the lease term?
P10,000 transportation of the tractor to the lessee during the current A. 5,000,000
year. What amount of net rent revenue should be reported for the B. 5,400,000
current year? C. 6,200,000
A. 80,000 D. 6,250,000
B. 85,000 2. What amount should be reported as rental income for the
C. 160,000 current year?
D. 235,000 A. 800,000
B. 1,080,000
4. On January 1, 2019, Edith Company leased a building to Diggie C. 1,160,000
Company for a ten-year term at an annual rental of P500,000. At D. 1,200,000
the inception of the lease, Edith received P2,000,000 covering the
first two years’ rent of P1,000,000 and a security deposit of Problem 25 Sales Type Lease – Lessor
P1,000,000. This deposit will not be returned to Diggie upon
expiration of the lease but will be applied to payment of rent for the 1. Alice Company leased equipment to Alucard Company on January
last two years of the lease. 1, 2021 for an eight-year period expiring December 31, 2028. Equal
payments under the lease are P500,000 and are due on January 1
1. What portion of the P2,000,000 should be reported as current of each year. The first payment was made on January 1, 2021. The
liability on December 31, 2019? selling price of the equipment is P2,900,000 and the carrying
A. 0 amount is P2,000,000. The lease is appropriately accounted for as
B. 500,000 a sales type lease. The implicit interest rate in the lease is 12%.
C. 1,000,000 What amount of profit on the sale should be reported for the year
D. 1,500,000 ended December 31, 2021?
2. What portion of the P2,000,000 should be reported as A. 240,000
noncurrent liability on December 31, 2019? B. 333,600
A. 0 C. 780,000
B. 1,000,000 D. 900,000
C. 1,500,000
D. 2,000,000 2. Angela Company leased equipment from Argus Company on July
1, 2021 for an 8-year period. Equal payments under the lease are
5. Fanny Company owns an office building and normally charges P600,000 and are due on July 1 of each year. The first payment
tenants P3,000 per square meter per year for office space. Because was made on July 1, 2021. The interest rate contemplated by
the occupancy rate is low, Fanny agreed to lease 100 square Angela Company and Arggus Company is 10%. The cash selling
meters to Faramis Company at P1,200 per square meter for the first price of the equipment is P3,520,000 and the cost of the equipment
year of a three-year operating lease. Rent for remaining years will on Argus Company’s accounting records is P2,800,000. The lease
be at the P3,000 rate. Faramis moved into the building on January is appropriately recorded as a sales type lease. What amount of
1, 2019 and paid the first year’s rent in advance. What amount of profit on sale and interest revenue should be recognized for the
rental revenue should Fanny report from Faramis in the income year ended December 31, 2021, respectively?
statement for the year ended September 30, 2019? A. 45,000 and 146,000
A. 90,000 B. 45,000 and 176,000
B. 120,000 C. 720,000 and 146,000
C. 180,000 D. 720,000 and 176,000
D. 240,000
3. Baxia Company is a dealer in equipment. On January 1, 2021, and
6. On July 1, 2019, Leomord Company leased a delivery truck to Ling equipment was leased to another entity with the following
Company under a 3-year operating lease. Total rent for the term of provisions:
the lease will be P3,600,000 payable as follows:
Annual rental payable at the end of each year P1,500,000
12 months at P50,000 Lease term and useful life of machinery 5 years
12 months at P75,000 Cost of equipment P4,000,000
12 months at P175,000 Residual value – unguaranteed P500,000
Implicit interest rate 12%
All payments were made when due. PV of an ordinary annuity of 1 at 12% for 5 periods 3.60
1. What amount should be reported as rent revenue for the year PV of 1 at 12% for 5 periods 0.57
ended June 30, 2020?
A. 500,000 At the end of the lease term on December 31, 2025, the equipment
B. 750,000 will revert to the lessor. The perpetual inventory system is used.
C. 1,200,000 The entity incurred initial direct cost of P200,000 in finalizing the
D. 2,400,000 lease agreement.

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1. What is the total financial revenue over the lease term? The interest rate implicit in the lease is 10%. On December 31,
A. 1,815,000 2021, Yin Company actually sold the leased machinery to the lease
B. 2,100,000 for P3,250,000 cash.
C. 2,315,000
D. 2,600,000 1. What is the interest income for 2021?
2. What amount of interest income should be reported for 2021? A. 0
A. 648,000 B. 325,000
B. 682,200 C. 485,000
C. 900,000 D. 585,000
D. 960,000 2. What is the carrying amount of the lease receivable on
3. What amount should be reported as gross profit on sale for December 31, 2021?
2021? A. 4,850,000
A. 1,485,000 B. 5,335,000
B. 1,685,000 C. 5,365,000
C. 3,500,000 D. 5,850,000
D. 4,000,000 3. What is the loss on sale of machinery that should recognized
on December 31, 2021?
4. Estes Company used leases as a method of selling products. In A. 1,600,000
2021, Estes Company completed construction of machinery. On B. 2,015,000
January 1, 2021, the machinery was leased on a contract specifying C. 2,085,000
that ownership of the machinery will transfer to the lessee at the D. 2,600,000
end of lease period. The annual lease payments do not include
executory cost. Problem 26 Direct Financing Lease – Lessor

Original cost of the machinery P9,000,000 1. Zilong Company is in the business of leasing new hi-tech
Lease payments payable in advance 2,000,000 equipment. As lessor, Zilong Company expects a 12% return on the
Estimated residual value 1,000,000 net investment. All leases are classified as direct financing lease.
Implicit interest rate 12% At the end of the lease term, the equipment will revert to Zilong
Date of first lease payment January 1, 2021 Company. On January 1, 2021 an equipment is leased to another
Lease term 10 years entity with the following information:
Present value of an annuity due of 1 at 12% for
10 periods 6.33 Cost of equipment to Zilong Company 5,500,000
Present value of 1 at 12% for 10 periods 0.32 Residual value-guaranteed 400,000
Annual rental payable in advance 959,500
1. What is the total financial revenue over the lease term? Useful life and lease term 8 years
A. 6,340,000 Implicit interest rate 12%
B. 7,340,000 First lease payment January 1, 2021
C. 8,020,000
D. 8,340,000 1. What is the gross investment in the lease?
2. What is gross profit on sale for 2021? A. 5,500,000
A. 3,660,000 B. 5,900,000
B. 3,980,000 C. 7,676,000
C. 7,340,000 D. 8,076,000
D. 8,020,000 2. What amount should be reported as unearned interest
3. What is the interest income for 2021? income on January 1, 2021?
A. 1,279,200 A. 1,776,000
B. 1,317,600 B. 2,176,000
C. 1,519,200 C. 2,576,000
D. 1,557,600 D. 2,976,000
3. What amount of interest income should be recognized for
5. Jawhead Company leased equipment to another entity on January 2021?
1, 2021. The lease is for an eight-year period expiring December A. 322,000
31, 2028. The first of eight equal annual payments of P900,000 was B. 496,860
made on January 1, 2021. Jawhead Company had purchased the C. 544,860
equipment on December 29, 2020 for P4,800,000. The lease is D. 660,000
appropriately accounted for as a sales type lease by Jawhead 4. What amount is the current portion of lease receivable as of
Company. The present value on January 1, 2021 of all rent December 31, 2021?
payments over the lease term discounted at a 10% interest rate was 5. What amount is the noncurrent portion of lease receivable as
P5,280,000. What amount of interest revenue should be recorded of December 31, 2021?
in 2022?
A. 391,800 2. Wanwan Company leases a computer equipment under a direct
B. 438,000 financing lease. The equipment has no residual value at the end of
C. 480,000 the lease and the lease does not contain bargain purchase option.
D. 490,000 The entity wishes to earn 8% interest on a 5-year lease of
equipment with a cost of P3,234,000. The present value of an
6. On December 31, 2021, Yin Company, a lessor, actually sold a annuity due of 1 at 8% for 5 years is 4. 312.
machinery that it had been releasing under a sales type lease. On 1. What total amount of interest revenue should be recognized
January 1, 2021 after receipt of the lease payment for the year, the over the lease term?
following account balances were associated with the lease: A. 516,000
B. 750,000
Gross lease receivable P5,850,000 C. 1,293,600
Unearned interest income 1,000,000 D. 1,394,500

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 REVIEW MATERIALS ON PROFESSIONAL STUDY ON AUDITING
2. What amount should be reported as interest revenue for the periods is 4.60. What is the annual lease rental payable in advance
current year? required to yield the desired return?
A. 103,200 A. 383,333
B. 198,720
B. 460,000
C. 258,720
D. 646,800 C. 477,826
D. 500,000
3. At the beginning of current year, Miya Company, as lessor leased
an equipment for ten years at an annual rental of P1,200,000, Problem 27 Sales and Leaseback
payable by Caster Company, the lessee, at the beginning of each
1. On December 31, 2021, Akai Company sold a machine to Alice
year. The lease is appropriately accounted for as finance lease. The Company and simultaneously leased it back for one year. The entity
equipment had a cost of P8,400,000 with an estimated life of 12 provided the following information at this date:
years and no residual value. The straight line depreciation is used.
The implicit rate is 9%. What amount of interest income should be Sale price P360,000
reported in the income statement for the current year? Carrying amount 330,000
Present value of reasonable lease rentals
A. 360,000
(P30,000 for 12 months @12%) 341,000
B. 500,000 Estimated remaining useful life 12 years
C. 648,000
D. 756,000 In the income statement for 2021, what amount should be reported
4. Hayabusa Company is in the business of leasing new sophisticated as gain on right transferred of the machine?
equipment. The lessor expects a 12% return on net investment. All A. 0
leases are classified as direct financing lease. At the end of the B. 4,100
C. 30,000
lease term, the equipment will revert to the lessor. At the beginning
D. 34,100
of current year an equipment is leased to a lessee with the following
information: 2. On December 31, 2021, Alpha Company sold equipment to Alucard
Company and simultaneously leased it back for 3 years. The
Cost of equipment to the lessor P5,000,000 leaseback is appropriately considered a low value lease.
Residual value – unguaranteed 600,000
Annual rental payable at the beginning of each year 900,000 Sale price 480,000
Carrying amount 360,000
Initial direct cost incurred by the lessor 250,000
Estimated remaining economic life 5 years
Useful life and lease term 8 years
Implicit interest rate 12% What amount should be reported as gain on right transferred of
equipment for 2021?
1. What is the gross investment in the lease? A. 0
A. 5,000,000 B. 40,000
C. 60,000
B. 5,250,000
D. 120,000
C. 7,200,000
D. 7,800,000 3. At the beginning of current year, an entity sold an equipment with
2. What is the net investment in the lease? remaining life of 10 years and immediately leased it back for 4 years
A. 4,400,000 at the prevailing market rental.
B. 4,650,000
C. 5,000,000 Sale price at fair value P6,000,000
Carrying amount of equipment 4,500,000
D. 5,250,000
Annual rental payable at the end of each year 800,000
3. What is the total interest income over the lease term? Implicit interest rate 10%
A. 1,500,000 Present value of an ordinary annuity of
B. 1,950,000 1 at 10% for 4 periods 3.17
C. 2,550,000
D. 3,150,000 1. What is the initial lease liability?
4. What is the interest income for the current year? A. 0
B. 2,536,000
A. 450,000
C. 3,000,000
B. 522,000 D. 3,200,000
C. 594,000 2. What is the cost of right of use asset?
D. 630,000 A. 0
5. Yin Company decided to enter the leasing business. The entity B. 1,902,000
acquired a specialized packaging machine for P2,300,000. On C. 2,536,000
D. 2,598,000
January 1, 2021, the entity leased the machine under a direct
3. What is the gain on right transferred?
financing lease for a period of six years, after which title to the A. 0
machine is transferred to the lessee. The six annual lease B. 634,000
payments are due each January 1 and the first payment was made C. 750,000
on January 1, 2021. The residual value of the machine is P200,000. D. 866,000
The lease terms are arranged so that a return of 12% is earned by 4. What is the annual depreciation of the lessee?
Yin Company. The present value pf 1 at 12% for six periods is 0.51, A. 190,200
B. 253,600
and the present value of an annuity in advance of 1 at 12% for six
C. 475,500
D. 634,000

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 REVIEW MATERIALS ON PROFESSIONAL STUDY ON AUDITING
Fair value of building 20,000,000
4. At the beginning of current year, Balmond Company sold a Carrying amount of building 24,000,000
machine and immediately leased it back. Annual rental payable at the end of each year 1,000,000
Implicit interest rate 12%
Sale price at fair value P5,000,000 Present value of an ordinary annuity of
Carrying amount of machine 6,000,000 1 at 12% for 5 periods 3.60
Annual rental payable at the end of each year 500,000
Lease term 5 years 1. What is the initial lease liability?
Remaining life of machine 20 years A. 0
Implicit interest rate 6% B. 3,600,000
PV of an ordinary annuity of 1 at 6% for 5 periods 4.21 C. 4,000,000
D. 4,800,000
1. What is the cost of right of use asset? 2. What is the cost of right of use asset?
A. 1,500,000 A. 3,000,000
B. 2,105,000 B. 4,320,000
C. 2,526,000 C. 5,760,000
D. 2,895,000 D. 6,720,000
2. What is the loss on right transferred to the buyer-lessor? 3. What is the loss on right transferred?
A. 0 A. 2,880,000
B. 500,000 B. 4,000,000
C. 505,200 C. 5,760,000
D. 579,000 D. 6,720,000
3. What is the lease liability at year-end? 4. What is the interest expense of the seller-lessee for the
A. 1,605,000 current year?
B. 1,731,300 A. 120,000
C. 2,105,000 B. 432,000
D. 2,177,560 C. 576,000
4. What is the net annual rental income of the buyer-lessor? D. 672,000
a. 200,000 5. What is the net annual rent income of the buyer-lessor?
b. 250,000 A. 100,000
c. 373,700 B. 200,000
d. 500,000 C. 300,000
D. 400,000
5. At the beginning of current year, Argus Company sold a
building and immediately leased it back. The following data Problem 28 Current and Deferred Income Tax Liability
pertain to the sale and leaseback transaction:
Gary Corporation’s income statement for the year ended December 31,
Sale price at above fair value 9,000,000 2021 shows pretax book income of P400,000. The following items for
Fair value of building 8,000,000 2021 are treated differently on the tax return and on the books.
Carrying amount of building 7,200,000
Annual rental payable at the end of each year 600,000 Per tax return Per books
Remaining life of building 20 years Royalty income P20,000 P40,000
Lease term 4 years Depreciation income 125,000 100,000
Implicit interest rate 12% Amortization of goodwill none -
Present value of an ordinary annuity of
1 at 12% for 4 periods 3.037 Tax rate is 40%.

1. What is the initial lease liability? 1. Of Gary’s total income tax expense, how much should be reported
A. 1,000,000 as current portion of income taxes in Gary’s 2021 income
B. 1,200,000 statements?
C. 1,822,200 A. P142,000
D. 2,400,000 B. P148,000
2. What is the cost of right of use asset? C. P160,000
A. 411,100 D. P166,000
B. 739,980 2. Of Gary’s total income tax expense, how much should be reported
C. 822,200 as deferred income taxes in Gary’s 2021 income statement?
D. 1,639,980 A. P8,000
3. What is the gain on right transferred to buyer-lessor? B. P10,000
A. 400,000 C. P12,000
B. 717,780 D. P18,000
C. 720,000
D. 800,000 Problem 29 Accounting for Income Tax
4. What is the annual rental income of the buyer-lessor?
A. 270,728 1. In 2020, an entity reported in accounting income gross profit on
B. 300,000 installment sale of P1,000,000 but not in taxable income. The
C. 329,272 temporary differences is expected to be reported in taxable income
D. 600,000 equally in 2021 and 2022. The income tax rate is 30%.
2020 2021 2022
6. At the beginning of current year, Bane Company sold a Accounting income 4,000,000 5,000,000 7,000,000
building with remaining useful life of 30 years and immediately Taxable income 3,000,000 5,500,000 7,500,000
leased it back for 5 years.
a. The current tax expense in 2020 is:
Sale price at below fair value P18,000,000 b. The deferred tax liability in 2020 is:
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 REVIEW MATERIALS ON PROFESSIONAL STUDY ON AUDITING
c. The deferred income tax expense in 2020 is: Considering the technical feasibility of the product, this cost was
d. The net deferred tax expense in 2020 is: capitalized and amortized over 5 years for accounting purposes
e. The total income tax expense in 2020 is: using the straight line method.
f. The net income in 2020 is:
g. The current tax expense in 2021 is: Computer software cost P5,000,000
h. The deferred tax liability in 2021 is: Amortization for 2020 (5,000,000 / 5 yrs.) (1,000,000)
i. The total income tax expense in 2021 is: Carrying amount, 12/31/2020 4,000,000
j. The net income in 2021 is:
k. The current tax expense in 2022 is: The computer software cost has a zero tax base because the total
l. The deferred tax liability in 2022 is: amount was expensed in 2020 for tax purposes.
m. The total income tax expense in 2022 is:
n. The net income in 2022 is: The building was acquired on January 1, 2020 for P50,000,000 and
depreciated using the straight line at 5% for accounting purposes
2. In 2020, an entity received an advanced rental payment of and 10% for tax purposes.
P600,000 which was subject to tax but not reported in accounting
income until 2021. The income tax rate is 30%. The income On December 2021, the statement of financial position accounts
statement and tax return showed the following: have the same basis for accounting and tax purposes, except the
following:
2020 2021
Accounting income 5,000,000 7,000,000 Carrying Amount Tax base Difference
Taxable income 5,600,000 6,400,000 Computer software 3,000,000 0 3,000,000
Building 45,000,000 40,000,000 5,000,000
Solve the following questions below: Accrued liability –
a. The current tax expense in 2020 is: health care 2,000,000 0 2,000,000
b. The deferred tax asset in 2020 is:
c. The deferred income tax benefit in 2020 is: In January 1, 2021, Johnson Company entered into an agreement
d. The net deferred tax benefit in 2020 is: with the employees to provide health care benefits. The cost of such
e. The total income tax expense in 2020 is: plan for 2021 is P2,000,000. This amount was accrued as expense
f. The net income in 2020 is: in 2021 for accounting purposes. However, health care benefits are
g. The current tax expense in 2021 is: deductible for tax purposes only when actually paid.
h. The deferred tax asset in 2021 is:
i. The total income tax expense in 2021 is: The pretax accounting income for 2020 and 2021 are P10,000,000
j. The net income in 2021 is: and P15,000,000, respectively. The income tax rate is 30%.

3. An entity reported the following for the year ended December 31, Solve the following questions below:
2020. a. The deferred tax liability in 2020 is:
b. The current tax expense in 2020 is:
Accounting income per book P6,000,000 c. The income tax expense in 2020 is:
Nondeductible expenses 500,000 d. The net income in 2020 is:
Nontaxable revenue 300,000 e. The deferred tax liability in 2021 is:
Doubtful accounts 200,000 f. The deferred tax asset in 2021 is:
Estimated warranty cost that had been g. The current tax expense in 2021 is:
recognized as expense in 2020 when the h. The income tax expense in 2021 is:
product sales were made but is i. The net deferred income tax benefit in 2021 is:
deductible for tax purposes when paid 400,000 j. The net income in 2021 is:
Accounting depreciation 600,000
Tax depreciation 800,000 5. Barats Company reported pretax financial income of P6,200,000 for
Gross income on installment sale included in the current year. Included in other income was P200,000 of interest
accounting income but taxable only in 2021 100,000 revenue from government bonds held by the entity. The income
Income tax rate 30% statement also included depreciation expense of P500,000 for a
machine costing P3,000,000. The income tax return reported
Solve the following questions below: P600,000 as depreciation on the machine. The enacted tax rate is
a. The current tax expense in 2020 is: 30% for the current year and future years. What is the current tax
b. The deferred tax asset in 2020 is: expense for the current year?
c. The deferred income tax benefit in 2020 is: A. 1,770,000
d. The deferred tax liability in 2020 is: B. 1,800,000
e. The deferred income tax expense in 2020 is: C. 1,830,000
f. The net deferred tax benefit in 2020 is: D. 1,860,000
g. The total income tax expense in 2020 is:
h. The net income in 2020 is: 6. Baxia Company began operations at the beginning of current year.
At the end of the first year of operations, the entity reported
4. On December 31, 2020, the accounts of Johnson Company have P6,000,000 income before income tax in the income statement but
the same basis for accounting and tax purposes, except: only P5,100,000 taxable income in the tax return. Analysis of the
P900,000 difference revealed that P500,000 was a permanent
Carrying Amount Tax base Difference difference and P400,000 was a temporary tax liability difference
Computer software 4,000,000 0 4,000,000 related to a current asset. The enacted tax rate for the current year
Building 47,500,000 45,000,000 2,500,000 and future years is 30%. What is the total income tax expense to
be reported in the income statement for the current year?
In January 2020, Johnson Company incurred cost of P5,000,000 A. 1,530,000
for the development of a computer software product. B. 1,650,000
C. 1,800,000
D. 1,950,000

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 REVIEW MATERIALS ON PROFESSIONAL STUDY ON AUDITING
7. Beatrix Corporation’s income statement for the year ended A. 0
December 31, 2021 shows pretax book income of P400,000. The B. 45,000
following items for 2021 are treated differently on the tax return and C. 50,000
on the books. D. 60,000

Per tax return Per books 11. Dyrroth Company reported in the income statement for the
Royalty income P20,000 P40,000 current year pretax income of P1,000,000. The following items
Depreciation expense 125,000 100,000 are treated differently in the tax return and in the accounting
Amortization of goodwill none - records:

Tax rate is 40%. Tax return Accounting record

Rent income 70,000 120,000
1. Of Beatrix’s total income tax expense, how much should be Depreciation 280,000 220,000
reported as current portion of income taxes in Beatrix’s 2021 Premium on officers’
income statements? life insurance 90,000
A. P142,000
B. P148,000 The tax rate is 30%. The entity is the beneficiary of the officer’s
C. P160,000 life insurance policies. What is the total tax expense for the
D. P166,000 current year?
3. Of Beatrix’s total income tax expense, how much should be A. 294,000
reported as deferred income taxes in Beatrix’s 2021 income B. 300,000
statement? C. 327,000
A. P8,000 D. 360,000
B. P10,000
C. P12,000 12. Edith Company reported P900,000 income before provision
D. P18,000 for income tax during the current year.

8. Belerick Company reported in the income statement for the

To compute the provision for income tax, the following data
current year pretax income of P400,000. The following year
items are treated differently in the tax return and on the book. are provided:

Tax return Per book Rent received in advance 150,000

Royalty income 20,000 40,000 Interest income on time deposit 200,000
Depreciation expense 125,000 100,000 Depreciation deducted for income tax purposes
Payment of a penalty none 15,000 in excess of depreciation for financial
statement purposes 100,000
The enacted tax rate for current year is 30% and 25% for all
future years. What amount should be reported as current Estimated tax payment in the current year 125,000
portion of income tax expense in the income statement for the Income tax rate 30%
current year?
A. 92,500 What amount of current tax liability should be reported at year-
B. 102,000 end?
C. 111,000 A. 100,000
D. 115,500
B. 125,000
9. Benedetta Company reported pretax income of P800,000 for C. 210,000
the current year. In the computation of income taxes, the D. 225,000
following data were considered:
13. Esmeralda Company has cumulative taxable temporary
Nontaxable gain P350,000 differences on December 31, 2021 and December 31, 2020 of
Depreciation deducted for tax purposes
P1,350,000 and P960,000 respectively. The tax rate enacted
in excess of depreciation for book purposes 50,000
Estimated tax payments during current year 70,000 for 2021 is 40% while the tax rate enacted for future years is
Enacted tax rate 30% 30%. Taxable income for 2021 is P2,400,000 and there are no
permanent differences. What is the financial income for 2021?
What amount should be reported as current tax liability at year A. 1,050,000
end? B. 2,010,000
A. 50,000 C. 2,790,000
B. 65,000
D. 3,750,000
C. 120,000
D. 135,000
14. Estes Company reported the following tax effects of temporary
10. Diggie Company reported pretax accounting income of differences on December 31, 2021:
P200,000 and taxable income of P150,000 for the current
year. The difference is due to the following:

Interest income on saving deposit P70,000

Premium expense on keyman life insurance (20,000)
Total 50,000

The income tax rate is 30%. What amount should be reported

as current provision for income tax expense in the income
statement for the current year?
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 REVIEW MATERIALS ON PROFESSIONAL STUDY ON AUDITING
Deferred tax Related asset reporting purposes, and when installment payments are
asset (Liability) classification received for tax purposes.
Accelerated tax
depreciation (75,000) Noncurrent In 2020, the entity recognized gross profit of P6,000,000 for
financial reporting purposes and P1,500,000 for tax purposes.
The amounts of gross profit expected to be recognized for tax
Additional cost in
purposes in 2021 and 2022 are P2,500,000 and P2,000,000,
inventory for tax purposes 25,000 Current
respectively.
(50,000)
The entity guaranteed the copy machines for two years.
The entity anticipated that P10,000 of the deferred tax liability
will reverse in 2022. On December 31, 2021, what amount Warranty costs are recognized on the accrual basis for
should be reported as noncurrent deferred tax liability? financial reporting purposes and when paid for tax purposes.
Warranty costs accrued in 2020 is P2,500,000 but only
A. 40,000
P500,000 of warranty cost is paid in 2020. It is expected that
B. 50,000 in 2021 and 2022, P1,000,000 and P1,000,000, respectively,
C. 65,000 of warranty cost will be paid.
D. 75,000
In addition during 2020, P500,000 interest, net of 20% final
15. In the December 31, 2021 statement of financial position, income tax, was received and earned.
Silvanna Company had income tax payable of P260,000 and
Insurance premium of P100,000 on life insurance policy that
a deferred tax asset of P400,000. The entity had reported a
covered the life of entity’s president was paid. The entity is the
deferred tax asset of P300,000 on January 1, 2021. No beneficiary for this policy.
estimated tax payments were made during 2021. On
December 31, 2021, the entity determined that it was probable Pretax accounting income in 2020 was P2,000,000. Any 2020
that the deferred tax asset would be realized. In the income operating loss will be carried forward to 2021. The tax rate is
statement for 2021, what amount should be reported as total 30%.
income tax expense? 1. What is the accounting income subject to tax?
A. 1,500,000
A. 150,000 B. 1,600,000
B. 160,000 C. 2,000,000
C. 170,000 D. 2,100,000
D. 260,000 2. What is the deferred tax asset on December 31, 2020?
A. 270,000
16. Beatrix Company reported in the income statement for the first B. 480,000
C. 600,000
year of operations pretax income of P6,000,000. In addition,
D. 870,000
the following differences existed between the tax return and 3. What is the deferred tax liability on December 31, 2020?
accounting record: A. 1,320,000
Accounting B. 1,350,000
Tax return record C. 1,500,000
Uncollectible accounts D. 1,800,000
expense 2,200,000 2,500,000 4. What is the current tax expense for the current year?
Depreciation expense 8,600,000 5,700,000 A. 0
Tax exempt interest B. 180,000
C. 600,000
revenue - 500,000
D. 750,000
5. What is the total tax expense for the current year?
The current year tax rate is 30% and the enacted rate for future A. 0
year is 40%. What amount should be reported as deferred tax B. 480,000
expense for the current year? C. 600,000
A. 780,000 D. 630,000
B. 1,040,000
C. 1,240,000 19. Zilong Company reported the following assets and liabilities at
D. 1,480,000 year-end:
17. Floryn Company has one temporary differences at the end of Carrying
2020 that will reverse and cause taxable amounts of
amount Tax base
P1,100,000 in 2021, P1,200,000 in 2022 and P1,200,000 in
Land 10,000,000 7,000,000
2023. The entity has also a deductible temporary difference of
P1,500,000. The pretax accounting income for 2020 is Machinery and equipment 5,000,000 4,000,000
P6,000,000 ant the tax rate is 30%. There are no deferred Inventory 2,500,000 4,000,000
taxes at the beginning of 2020. What is the net deferred tax Accounts receivable 2,000,000 3,000,000
expense for 2020? Liabilities 6,000,000 5,500,000
A. 450,000
B. 600,000 The entity had made a provision for inventory obsolescence of
C. 1,050,000 P1,500,000. Further, an impairment loss against accounts
D. 1,200,000 receivable of P1,000,000 has been made. The tax rate is 30%.
1. What amount should be reported as deferred tax liability?
18. Yin Company started to manufacture in 2020 copy machines A. 1,050,000
that are sold on the installment basis. Yin Company B. 1,200,000
recognizes revenue when equipment is sold for financial C. 1,350,000
D. 4,000,000
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 REVIEW MATERIALS ON PROFESSIONAL STUDY ON AUDITING
2. What amount should be reported as deferred tax asset?
A. 450,000
B. 600,000
C. 750,000
D. 900,000
3. What amount should be recognized as net deferred tax
expense?
A. 300,000
B. 750,000
C. 1,500,000
D. 2,500,000

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Compiled by: Generoso Ermoso Jr. Audit of Liabilities