PRACTICAL FINANCIAL ACCOUNTING

A. The accountant of Jag Company is in the process of finalizing its financial reports. A review of the
company’s selected accounts and relevant data reveal the following as of June 30, 2023, the end of
its fiscal year.

Mortgage Note Payable 1,500,000 Sales 9,675,000

Bank Notes Payable 300,000 Withholding Tax Payable 120,000
Accounts Payable 270,000 SSS Premiums Payable 18,250
Share Dividends Payable 200,000 Philhealth Premiums Payable 8,400

Supplemental information:

a. On August 1, 2023, Jag Company issued a new 3-year mortgage note for P2,000,000, with the
intention of using the proceeds in payment of the mortgage note payable of P1,500,000 that is
due on August 20, 2023. There was no unpaid interest as of June 30, 2023.

b. The bank notes are payable in semi-annual installments of P50,000 on February 1 and August 1
of each year. The interest rate of the note is 12% based on the outstanding balance and payable
together with the principal due. Accrued interest as of June 30, 2023 has not yet been taken up
in the books.

c. Accounts payable included an invoice from a supplier in the amount of P65,000. No receiving
report has been submitted to the accounting office relating to this purchase. A review of the
documents indicated that the goods were shipped by the supplier under the terms FOB
destination and the goods were received on July 3, 2023.

d. The company has some newly hired casual daily wage employees who are paid weekly every
Friday. Average weekly payroll of these employees amounts to P15,000 and the last wage
payment was Friday, June 26, 2023. No adjustment was made for accrued wages.

e. On April 1, 2023, a suit was filed by a dismissed employee against the company. The
company’s lawyer believes it is reasonably possible that the suit will result in a loss to the
company ranging from P500,000 to P1,000,000.

f. The sales account included sales for the month of June 2023 of P3,640,000, which is inclusive
of the 12% value-added tax (VAT). The company makes monthly remittance of VAT to the
Bureau of Internal Revenue on the 20th day of the following month.

g. The total income tax due for fiscal year ended June 30, 2023 amounted to P586,500. Quarterly
remittances to the BIR during the fiscal year for income taxes totaled P345,000. The balance
due as of June 30, 2023 has not yet been taken up in the books. (Ignore the tax effect on profit
of the adjustments based on the foregoing data).

(1) How much is the total current liabilities at June 30, 2023?
a. P2,804,150
b. P2,604,150
c. P2,589,150
d. P1,104,150
 Mortgage note payable P1,500,000
Bank notes payable (50,000 x 2) 100,000
Accrued interest on notes payable (300,000 x 12% x 5/12) 15,000
Accounts payable (270,000 – 65,000) 205,000
Accrued wages payable (15,000 x 2/5) 6,000
VAT payable (3,640,000/1.12 = 3,250,000; 3,250,000 x 12%) 390,000
Withholding tax payable 120,000
SSS premiums payable 18,250
Philhealth premiums payable 8,400
Income tax payable (586,500 – 345,000) 241,500
Total current liabilities P2,604,150

The requirement is total current liabilities, composed of both financial and non-financial
liabilities. Because the mortgage note payable is due on August 20, 2023, it is reported
as current. If refinancing is made at or before June 30, 2023, the liability is classified as
non-current.

B. FB Company is preparing its December 31, 2023 statement of financial position. The following
items may be reported as either current or non-current liability:

• On December 15, 2023, FB Company declared a cash dividend of P2.50 per share to
shareholders of record on December 31. The dividend is payable on January 15, 2024. FB
had issued 800,000 ordinary shares, of which 50,000 shares are held in the treasury. On this
same date, FB declared a 10% bonus issue to shareholders of record on December 31, 2023.
The dividend will be distributed on January 31, 2024. FB Company’s ordinary share has a par
value of P10 and a market value per share of P28.

• At December 31, 2023, bonds payable of P10 million are outstanding. The bonds were issued
on September 30, 2023 and mature in annual installments of P2.5 million starting September
30, 2024. Interest of 12% on the outstanding balance is payable annually every anniversary
date of the bond.

• At December 31, 2022, customer advances were P2 million. During 2023, FB Company
collected P4 million of customer advances and advances of P2.5 million were earned.

• At December 31, 2023, retained earnings appropriated for future inventory losses is P1.5
million.

(2) How much of the foregoing should be reported as current liabilities at December 31, 2023?
a. P10,275,000
b. P9,675,000
c. P8,175,000
d. P6,300,000

Cash dividends payable (2.50 x 750,000 shares) P1,875,000

Current portion of bonds payable 2,500,000
Accrued interest on bonds (10M x 12% x 3/12) 300,000
Customer advances (2.0M + 4.0M – 2.5M) 3,500,000
Current liabilities, December 31, 2023 P8,175,000
G. On July 1, 2023, Eagle Company issued 600 of its 10%, P1,000 bonds at 99 plus accrued interest.
The bonds are dated April 1, 2017 and mature on April 1, 2027. Interest is payable semi-annually
on April 1 and October 1.

(9) What amount did Eagle Company receive from the bond issuance?
a. P579,000
b. P594,000
c. P600,000
d. P609,000

Issue price (600,000 x .99) P594,000

Accrued interest (600,000 x 10% x 3/12) 15,000
Cash received from bond issuance P609,000

The total amount received upon issue of bonds shall include any accrued interest on the
bonds from the most recent interest date to the date of transaction (issuance).

H. On January 1, 2023, Mall Company issued P2,000,000 of 10-year, 8% bonds at par. The bonds,
dated January 1, 2023, pay interest semi-annually on January 1 and July 1. Bond issue costs incurred
was P250,000.

(10) What is the bond carrying amount at January 2, 2023?

a. P2,250,000
b. P2,000,000
c. P1,910,000
d. P1,750,000

Issue price at par P2,000,000

Bond issue costs incurred (250,000)
Bond carrying amount at January 2, 2023 P1,750,000

I. On July 1, 2023, Twin Head Corporation issued P5 million of its 10%, 7-year bonds with one
detachable warrant attached to each P1,000 bond. Each warrant provides for the right to purchase
20 shares of P15 par value ordinary for P20 each. The market value of the ordinary share was P25
each at July 1, 2023. At that time, the bonds without the warrants are selling at 97. The compound
financial instrument was sold at 104.

(11) What is the bond issue price allocated to the debt?

a. P5,200,000
b. P5,000,000
c. P4,850,000
d. P350,000

Bond price (5.0M x .97) P4,850,000

Bonds with warrants is a compound financial instrument whose issue price whose be
allocated between the debt (bond) and the equity (warrants). The allocation is made
using the residual approach where the fair value of the debt is taken first and any
residual amount of the issue price is the amount assigned to the equity component.
 (12) Assuming that all warrants are exercised and recorded in the accounts, how much is the amount
credited to share premium?
a. P850,000
b. P530,000
c. P500,000
d. P350,000

Value of warrants (5,200,000 – 4,850,000) P350,000

Cash received upon exercise of warrants (5,000 x 20 x 20) 2,000,000
Total P2,350,000
Par value of shares issued (5,000 x 20 x 15) 1,500,000
Share premium P 850,000

When warrants are exercised, the excess of the sum of value assigned to the warrants
and the cash received upon exercise over the par value of the shares issued is recorded
as share premium.

J. On May 1, 2023, Vision Corporation issued P2,000,000, 20-year, 10% bonds for P2,120,000. Each
P1,000 bond had a detachable warrant eligible for the purchase of one share of Vision’s P50 par
ordinary share for P60. Immediately after the bonds were issued, Vision’s securities had the
following market values: 10% bonds without warrants – P1,040; Warrant – P20; Ordinary share,
P50 par – P56

(13) What amount should Vision Corporation credit to Premium on Bonds Payable?
a. P120,000
b. P80,000
c. P40,000
d. P0

Value allocated to bonds (2,000 x 1,040) P2,080,000

Bond face value 2,000,000
Premium on bonds payable P 80,000

K. On September 30, 2023, Belfast Company issued P5,000,000 face value, 5-year bonds at 102. Each
P1,000 bond was issued with 20 detachable share warrants, each of which entitled the bondholder to
purchase one share of P5 par ordinary share at P25. At time of issuance, there was no available
market value for the warrant.

The stated interest rate on the bonds is 11% payable annually every September 30. However, the
prevailing market rate of interest for similar bonds without warrants is 12%. 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. Belfast Company’s accounting year ends on December 31.

(14) On September 30, 2023, what amount should Belfast record as discount or premium on bonds
payable?
a. P170,000 discount
b. P400,000 discount
c. P170,000 premium
d. P400,000 premium
 (23) Under PAS 32, what amount of share premium should Bert Company record as a result of the
conversion?
a. P1,500,000
b. P1,350,000
c. P500,000
d. P350,000

Carrying amount of bonds converted P2,600,000

Paid in capital arising from conversion privilege 150,000
Total P2,750,000
Par value of ordinary shares issued (50,000 x 25) 1,250,000
Share premium resulting from bond conversion P1,500,000

O. On December 31, 2023, Uni Corporation had outstanding 8%, P5 million face value convertible
bonds maturing on December 31, 2026. Interest is payable annually on December 31. Each P1,000
bond is convertible into 60 shares of Uni Corporation’s P15 par value ordinary shares. The
unamortized premium balance on December 31, 2023 is P112,500. The paid in capital arising from
bond conversion privilege account has a balance of P80,000. On this date, an individual holding 500
of the bonds exercised the conversion privilege when the market value of Uni Corporation’s ordinary
share was P28.

(24) Under PAS 32, Uni Corporation’s entry to record the conversion should include a credit to share
premium of
a. P390,000
b. P242,500
c. P69,250
d. P61,250

Face value of bonds converted P500,000

Unamortized premium related to bonds converted (112,500 x 500/5,000) 11,250
Paid in capital arising from bond conversion privilege (80,000 x 500/5,000) 8,000
Total P519,250
Par value of ordinary shares issued (500 x 60 x 15) 450,000
Share premium P 69,250

P. On July 1, 2023, an interest date, P1,000,000 of Hill Company bonds were converted into 20,000 of
Hill Company’s ordinary shares, each having a par value of P40 and a market value of P55. There
is P40,000 unamortized discount on the bonds and P25,000 paid in capital arising from bond
conversion privilege.

(25) What amount of gain or loss should Hill Company recognize in 2023 as a result of the
conversion?
a. P300,000
b. P185,000
c. P160,000
d. P0

No gain or loss is recognized upon conversion of bonds.

Q. Liverpool Company issued 5,000 convertible bonds on January 1, 2023. The bonds have a three-
year term and are issued at 110 with a face value of P1,000 per bond. Interest is payable annually
in arrears at a nominal 6% interest rate. Each bond is convertible at any time up to maturity into 100
ordinary shares with par value of P5.00. When the bonds are issued, the prevailing market rate for
similar instrument without conversion option is 9%. The PV of 1 at 9% for 3 periods is 0.77 and the
PV of an ordinary annuity of 1 at 9% for 3 periods is 2.53.

(26) What is the equity component of the bonds issued on January 1, 2023?
a. P391,000
b. P891,000
c. P1,150,000
d. P1,650,000

Total issue price (5.0M x 1.1) P5,500,000

Issue price allocated to bonds
Present value of maturity value (5.0M x 0.77) 3,850,000
Present value of interest payments (5.0M x 6% x 2.53) 759,000 4,609,000
Equity component of the convertible bonds P 891,000

R. Tom Company issued P6,000,000, 11%, 10-year bonds on May 31, 2023 when the market interest
was 10%. The bonds are priced at 106 ¼. The bonds pay interest on May 31 and November 30.

(27) What is the adjusted carrying amount of the bond on December 31, 2023?
a. P6,351,938
b. P6,361,781
c. P6,363,750
d. P6,364,063

Bond carrying value, May 31, 2023 (6.0M x 1.0625) P6,375,000

Amortization of premium on November 30
Effective interest (6,375,000 x 5%) 318,750
Nominal interest (6.0M x 5.5%) 330,000 (11,250)
Carrying value, November 30 P6,363,750
Amortization of premium for December
Effective interest (6,363,750 x 5% x 1/6) 53,031
Nominal interest (6.0M x 5.5% x 1/6) 55,000 (1,969)
Carrying amount, December 31, 2023 P6,361,781

(28) What is the total interest expense for the year 2023?
a. P660,000
b. P385,000
c. P371,781
d. P330,000

Interest expense for the year 2023. See # 28 (318,750 + 53,031) P371,781
 Issue price on March 1, 2023 P1,963,000.00
Amortization of discount on September 1
Effective interest (see No. 38) 88,335.00
Nominal interest (2.0M x 8.5% x ½) 85,000.00 3,335.00
Carrying value, September 1 P1,966,335.00
Amortization of discount on December 31
Effective interest (1,966,335 x 9% x 4/12) 58,990.05
Nominal interest (2.0M x 8.5% x 4/12) 56,666.67 2,323.38
Carrying value, December 31 P1,968,658.38

AA. On December 31, 2022, Bell Company issued P2 million, 12% serial bonds to be repaid in the amount
of P500,000 each year. Interest is payable annually on December 31. The bonds were issued to
yield 10% a year. The bond proceeds were P2,083,000 based on the present values at December 31,
2022. Bell company amortizes the bond discount by the interest method.

(40) In its December 31, 2023 statement of financial position, at what amount should Bell Company
report the carrying value of the bonds?
a. P2,083,000
b. P2,051,300
c. P1,531,700
d. P1,551,300

Carrying value, December 31, 2022 P2,083,000

1st principal payment (500,000)
Amortization of premium
Effective interest (10% x 2,083,000) 208,300
Nominal interest (12% x 2.0M) 240,000 (31,700)
Carrying value, December 31, 2023 P1,551,300

(41)How much is the bond interest expense reported by Bell Company for the year ended December
31, 2023?
a. P271,300
b. P249,960
c. P240,000
d. P208,300

Bond interest expense for 2023 (10% x 2,083,000) P208,300

Nos. 42 to 47 are all problems about debt restructuring. Debt restructuring can be paralleled to that
of restructuring of notes receivable. Previously, the entity is the payee (receivable) of the note and
the maker/debtor is facing financial difficulties in paying its debt. The restructuring would mean a
loss from the payee because its receivable is reduced due to the financial constraints of the debtor but
from the viewpoint of the debtor (our cases), gain on debt restructuring is recognized. However,
from the viewpoint of the debtor, a concession may be agreed between the two parties and settlement
of the debt may be classified as asset swap (payment by exchanging assets other than cash), equity
sway (settlement by issuance of the entity’s shares of stock), or modification of terms.

BB. For each of the following independent situations, determine the gain on debt restructuring.

Case (i) Angelina Company has outstanding P950,000 note payable to Brad Finance Corporation.
Because of financial difficulties, Angelina Company negotiates with Brad Finance to exchange
inventory of machine parts to satisfy the debt. The cost of the machine parts inventory transferred
is carried in Angelina Company’s books at P610,000. The estimated sales price of these inventory
items is P835,000.

(42) Gain on debt restructuring is

a. P340,000
b. P225,000
c. P115,000
d. P0

Carrying value of debt restructured P950,000

Fair value/sales price of inventory transferred in settlement of debt 835,000
Gain on debt restructuring P115,000

Case (ii) Shiloh Company is unable to meet interest payments and fund requirements to retire its
P1,500,000 bonds payable. Accrued interest on the bonds amounted to P150,000. The bonds are
held by Easy Investments, Inc. In order to prevent bankruptcy, Shiloh Company entered into an
agreement with Easy Financing, Inc. to exchange equity securities for the debt. Shiloh Company is
issuing 20,000 shares of its P50 par value ordinary shares. The ordinary share is currently selling at
P65.

(43) Gain on debt restructuring is

a. P650,000
b. P350,000
c. P250,000
d. P0

Carrying value of debt restructured (1.5M + 150,000) P1,650,000

Fair value of ordinary shares issued in settlement (20,000 x 65) 1,300,000
Gain on debt restructuring P 350,000

Case (iii) Lancome Company is experiencing financial difficulties and a downward trend in its
operations. The firm is unable to service its debt and as a result, has missed payment of an annual
interest on its loan from Bank of Manila. The principal amount of the loan is P2,000,000 (which is
already due) with annual interest of 12% payable annually. Lancome management has negotiated a