PROBLEM 9 - 1

Computation of Net Income

The following are changes in all the account balances of MONACO COMPANY during the year
ended December 31, 2023, except for retained earnings.
Increase/(Decrease)
Cash…………………………………………………………………P395,000
Accounts receivable (net)…………………………………………….948,000
Inventory…………………………………………………………….(500,000)
Investments…………………………………….……………………(235,000)
Accounts payable……………………………………………………(255,000)
Bonds payable………………………………………………………..410,000
Common stock……………………………………………………….300,000
Additional paid in capital……………………………………………..20,000
There were no entries in the retained earnings account except for net income and a dividend
declaration, of P295,000 which was paid in the current years .
What is Monaco’s net income for the current year?

PROBLEM 9 - 2

Computation of Net Income

The following selected information pertains to ICELAND COMPANY:

Cash balance, January 1, 2023…………………………………………………..P 65,000
Accounts receivable, January 1, 2023……………………………………………..95,000
Collections from customers in 2023……………………………………………1,050,000
Capital account balance, January 1, 2023…………………………….…………..190,000
Total assets, January 1, 2023……..……………………………………………….375,000
Additional cash investment, July 1, 2023…………………………………………25,000
 Total assets, December 31, 2023………………………………………………….505,000
Cash balance, December 31, 2023………………………………………………..100,000
Accounts receivable, December 31, 2023………………………………………...180,000
Withdrawals made during 2023…………………………………………………….55,000
total liabilities, December’ 31, 2021………………………………………………205,000
How much net income should Iceland report on its income statement for the year ended
December 31, 2023?

PROBLEM 9 - 3

Discontinued Operation
Presented below are the condensed income statements of LATVIA CORPORATION for the
years ended December 31, 2023 and 2022:
2023 2022
Sales P30,000,000 P29,000,000
Cost of Goods Sold 20,100,000 19,800,000
Gross Income 9,900,000 9,600,000
Operating Expenses 4,050,000 3,900,000
Operating Income 5,850,000 5,700,000
Gain on Sale of Division 1,200,000 -----
Income Tax Expense (25%) Net Incomen P5,287,500 P4,275,000

On October 10, 2023, Latvia entered into an agreement to sell the assets of one of its segments
that can be clearly distinguished, operationally and for financial reporting purposes, from the rest
of the company. The segment was sold on December 31, 2023, for P10,500,000. The book value
of the segment's assets was P9,300,000. The segment's contribution to Latvia's operating income
before tax each year was as follows:

2023 P682,500 Loss

2022 487,500 Income
 Based on the above data, calculate the following:

1. Income from continuing operations in 2022

2. Income from continuing operations in 2023
3. Net income in 2022
4. Net income in 2023
5. Assume that by December 31, 2023, the segment had not yet been sold but was considered
held for sale. The fair value of the segment's assets on December 31 was P10,500,000.
The post-tax income (loss) from discontinued operations for 2023 should be
6. Assume that by December 31, 2023, the segment had not yet been sold but was considered
held for sale. The fair value of the segment's assets on December 31 was P7,500,000. The
post-tax loss from discontinued operations for 2023 should be

PROBLEM 9 - 4

Analysis of Different Income Statement Items and Other Related Accounts

On January 1 , 2023 IDAHU, INC. Issued P100,000, 10%, 10-year bonds when the market rate
of interest was 8%. Interest is payable on Juen 30 and December 31. The following financial
information is available
Sales P300,000
Cost of sales 180,000
Gross Income 120,000
Interest Expense ?
Depreciation expense (14,500)
Other expense (82,000)
Net Income ?
Dec. 31,2023 Jan. 1, 2023
Accounts Receivable P55,000 P48,000
Inventory 87,000 93,000
Accounts Payable 60,000 58,000
All purchases of inventory are on account. Other expenses are paid for in cash.
The following are the present value factors of P1.00 for 20 periods:
 4% 5%
PV of 1 0.4564 0.3769
PV of ordinary annuity of 1 13.5903 12.4622

1. What is the carrying value of the bonds on December 31, 2023?

A. 112,661 C. P100,000
B. 113, 592 D. 112,233

2. What is the interest expense for 2023?

A. P8,641 C. P9,069
B. P10,000 D. P4,544

3. How much was paid for inventory purchases?

A. P172,000 C. P184,000
B. P186,000 D. P174,000

4. What is Idahu’s net income for 2023?

A. P13,500 C. P23,000
B. P14,431 D. P14,859

5. How much was received from customers in 2023?

A. P283,000 C. P293,000
B. P245,000 D. P307,000

PROBLEM 9 - 5

Initial Franchise Fee

On January 1 , 2023 FINLAND CORP. Signed a contract to operate as a franchise of Mc Dodo,
for an initial franchise fee of P5,000,000. The amount of P2,000,000 was paid when the
agreement was signed, and the balance is payable in five annual payments of P600,000 each,
beginning January 1, 2024. The contract stipulates that payment is not refundable and that no
future services are to be rendered by the franchisor. Finland can borrow money at 12% for a loan
of this type and the present value of an ordinary annuity of 1 at 12% for five periods is 3.60478.

1. How much should Mc Dodo record as franchise fee revenue on January 1, 2023?
A. P4,162,868 C. P2,000,000
B. P5,000,000 D. P2,162,868

2. What entry would be made by Mc Dodo on January 1, 2023, if it has substantial future
services that remain to be performed?

PROBLEM 9 - 6

Gain on Sale of Bonds

AUSTRIA, INC. purchased bonds at a discount of P18,400. Subsequently, Austria sold these
bonds at a premium of P26,500. Bond discount amortization of P3,400 had been recorded during
the period that Austria held this bond invesment.

What amount should Austria, Inc report as gain on the sale of these bonds?
A. P11,500 C. P44,900
B. P41,500 D. P26,500

PROBLEM 9 - 7

Interest on Finance Lease Liability

On January 1, 2023, MOLDOVA, INC. entered into a 10-year noncancelable lease contract for
amachine stipulating annual payments of P40,000. The first payment was made on January
12023. This transaction was appropriately treated as a finance lease. The ten annual
paymentshave a present value of P270,000 at January 1, 2023, based on implicit interest rate of
10%.
What is the amount of interest expense for the year ended December 31, 2023?

PROBLEM 9 - 8

Dealer's Profit on Sales-type Lease

DENMARK CO. leased equipment to Nini Corp. on January 2, 2023, for an 8-year period
expiringDecember 31, 2030. Equal payments under the lease are P1,200,000 and are due on
January2of each year. The initial payment was made on January 2, 2023. The list selling price of
theequipment is P7,040,000 and its carrying value on Nini Corp.'s books is P5,600,000. The
leaseisproperly accounted for as a sales-type lease. The lease payments have a present value of
P6,600,000 at an imputed interest rate of 12%.
How much dealer's profit should be recognized by Denmark Co. In 2023?

PROBLEM 9 - 9

Directing Financing Lease

IRELAND CO., a lessor of office equipment, purchased a new equipment for
P1,000,000onDecember 31, 2022. The equipment was delivered the same day to Gilbert Co., the
lessee.
The following information relates to the lease transaction:
1. The leased asset has an estimated useful life of seven years, which is also the lease term.
2. At the expiration of the lease, the equipment will revert to Ireland, at which time it is
expected to have a residual value of P120,000 (none of which is guaranteed).
3. Ireland's implicit interest rate is 12%.
4. Gilbert's incremental borrowing rate is 14% at December 31, 2022.
5. Lease rentals consist of seven equal annual payments, the first of which was paid onDecember
31, 2022.
6. Ireland properly accounts for this lease as a direct financing lease and as a finance lease by
Gilbert. Both lessor and lessee are calendar year corporations and depreciate all property,
plant, and equipment on the straight-line basis.
The present value tables show the following present value factors:
Present value of 1 for seven periods at 12% 0.4523
Present value of 1 for seven periods at 14% 0.3996
Present value of an annuity due for seven periods at 12% 5.1114
Present value of an annuity due for seven periods at 14% 4.8887

1. How much is the annual lease payment?

2. How much unearned interest income should be recognized by Ireland at the inception of the
lease?
3. What is the amount of depreciation expense that Gilbert should record for 2023?
4. The amount of interest expense that should be recorded by Gilbert for 2023
PROBLEM 9 - 10

Interest Income on Investments in Bonds

On July 1, 2023, LITHUANIN CO. purchased Michael Co. ten-year, 8% bonds with a face
amount of P1,000,000 for P840,000. The bonds mature on June 30, 2028 and pay interest
semiannually on June 30 and December 31. For the six months ended December 31, 2023,
Lithuanian recorded bond discount amortization of P3,600 using the effective interest method.
What is the amount of interest income to be recognized for the year ended December 31, 2023,
from this long-term investment?

PROBLEM 9-11

Write-off of Plant
On January 3, 2020, NETHERLANDS CORP. purchased a patent for a new consumer product
for P450,000. At the time of purchase, the patent was valid for 13 years. However, the patent’s
useful life was estimated to be only 10 years due to the competitive nature of the product. On
December 31, 2023, the product was permanently withdrawn from the market under
governmental order because of a potential health hazard in the product.
What is the amount that should be charged against income during 2023, assuming amortization is
recorded at the end of each year?

PROBLEM 9-12

Advertising Expense
The balance of LUXEMBOURG COMPANY’s advertising expense account at December 31,
2023, was P264,000 before any necessary year-end adjustment relating to the following:
1. Included in the P264,000 is the P75,000 cost of product posters for a sales promotional
campaign in January 2024.
2. Radio advertisements broadcast during the December 2023 were billed to Luxembourg
on January 3, 2024. Luxembourg paid the P30,000 invoice on January 15, 2024.
What is the amount of advertising expense that should be reported by Luxembourg in its
December 31, 2024, income statement?
PROBLEM 9-13

Basis and Diluted Earning Per Share: Bond Conversion

Basic and Diluted Earnings Per Share- Bond Conversion
The following information was obtained from the statement of the financial position of
NORWAY, INC. on Dec 31, 2023.

6% convertible 10-year bonds at par P2,000,000

Ordinary Share Capital, P20 par, 110,000 shares 2,200,000
Issued and outstanding
Retained Earnings 950,000

Each P1,000 Bond ca be converted into 40 ordinary shares. On September 30,2024, the bonds
were all converted into ordinary shares. Norway reported net income of P600,000 in 2024. The
income tax rate is 30%.
1. What is Norway’s basic earnings per share for 2024?
2. What is Norway’s diluted earnings per share for 2024?

PROBLEM 9-14

Basic Earning Per Share

Presented below is the shareholder’s equity section of the comparative statements of financial
position of POLAND COMPANY on December 31,2023 and 2022.
Dec 31, 2023 Dec 31,2022
12% Preference shares, P100 Par P 165,000 P 135,000

Share premium – preference 26,800 18,400

Ordinary Shares, P10 par* 821,200 799,200

Share premium – ordinary 128,600 117,600

Share premium – treasury shares 3,600 1,600

Retained earnings 942,400 729,920

Total shareholder’s equity P2,087,600 P1,864,720

*Par value after June 1, 2023, stock split.

Poland had 32,500 ordinary shares outstanding at December 31,2023.

The following shareholder’s equity transaction were recorder in 2022 and 2023

2022

May 1 Sold 4,500 ordinary shares for P24 par value P20.
June 30 Sold 350 preference shares for P124, Par value P100
Aug 1 Issued an 8% share dividend on ordinary shares. The market value was P30 per
share.
Sept 1 Declared cash dividends of 12% on preferences shares and P3 on ordinary shares
Dec 31 Net Income for the year is P632,400

2023
Jan. 31 Sold 1,100 ordinary shares for P30
May 1 Sold 300 preference shares for P128
June 1 Issued a 2-for-1 split of ordinary shares. The par value of ordinary shares was reduced
to P10 per share.
Sept.1 Purchased 500 ordinary shares for P18 to be held as treasury shares
Oct 1 Declared cash dividends of 12% on preference shares and P4 per share on outstanding
ordinary shares.
Nov 1 Sold 500 treasury shares for P22.

1.What is Poland’s basic earnings per share for 2022?

2. What is Poland’s net income for 2023?
3. What is Poland’s basic earnings per share for 2023?
PROBLEM 9 - 15

Basic and Diluted Earning Per Share: Share Options

The following information was obtained from the audited financial statements of CALIFORNIA,
INC. for the year ended December 31,2023:

Operating Income P 3,500,000

Selling, administrative, and other operating expenses 1,800,000
Finance cost 250,000
10% nonconvertible bonds 2,500,000
Income tax rate 30%

Additional data:
a. There were 35,000 ordinary shares outstanding throughout the year.
b. On January 1,2023, there were options outstanding to purchase 20,000 ordinary shares at P30
per share. The average market price during the year was P40 per share.
1. What is California’s basic earnings per share for 2023?
2. What is California’s diluted earnings per shares for 2023?