INTERMEDIATE

ACCOUNTING 2
(Practical Financial Accounting)

Prepared by: BSA- 2A (A.Y 2023- 2024)

 CHAPTER 1
PREMUIM LIABILITY

Problem 1-1
In an effort to increase sales, Mill Company inaugurated a sales promotional campaign on June
30. The entity placed a coupon redeemable for a premium in each package of cereal sold.
Each Premium cost P20 and five coupons must be presented by a customer to receive a premium.
The entity estimated that only 60% of the coupons issued would be redeemed. For the six months
ended December 31, the following information is available:
Packages of cereal sold 160,000
Premium purchased 12,000
Coupons redeemed 40,000
1. What amount should be reported as premium expense for the current year?
2. What amount should be reported as estimated premium liability on December 31?

Solution: Refer to Problem 1- 1 (Page 1)

Problem 1-2
During the current year, Day Company sold 500,000 boxes of cake mix under a new sales
promotional program.
Each box contained one coupon, which entitled the customer to a baking pan upon remittance of
P40.
The entity paid P50 per pan and P5 for handling and shipping and estimated that 80% of the
coupons would be redeemed, even though only 300,000 coupons had been processed during the
year.
1. What amount should be reported as premium expense for the current year?
2. What amount should be reported as liability for unredeemed coupons at year-end?

Solution: Refer to Problem 1- 2 (Page 2)

Problem 1-3
Baker Company sold consumer products packaged in boxes. The entity offered an unbreakable
glass in exchange for two box tops and P50 as a promotion during the current year. The cost of
the glass was P200.
The entity estimated at the end of the year that it would be probable that 50% of the box tops will
be redeemed.
The entity sold 100,000 boxes of the product during the current year and 40,000 box tops were
redeemed during the year.
1. What amount should be reported as premium expense for the current year?
2. What amount should be reported as estimated premium liability at year-end?

Solution: Refer to Problem 1- 3 (Page 3)

Problem 1-4
Charlene Company includes one coupon in each box of laundry soap it sells. A towel is offered
as a premium to customers who send in10 coupons and a remittance of P10.
Distribution cost of premium is P5. Experience indicated that only 30% of the coupons will be
redeemed.
2023 2024
Boxes of soap sold 2,000,000 2,500,000
Number of towels purchased at P50 each 50,000 80,000
Coupons redeemed 400,000 700,000
1. What amount should be reported as premium expense for 2023?
2. What amount should be reported as estimated premium liability on December 31, 2023?
3. What amount should be reported as premium expense for 2024?
4. What amount should be reported as estimated premium liability on December 31, 2024?

Solution: Refer to Problem 1- 4 (Page 5)

Problem 1-5
Love Company included one coupon in each package sold. A premium is offered to customers
who send in 10 coupons.
2023 2024
Number of packages sold 500,000 800,000
Number of premiums purchased at P40 each 30,000 60,000
Number of premiums distributed 20,000 50,000
Number of premiums to be distributed next period 5,000 3,000
1. What amount should be reported as premium expense for 2023?
2. What amount should be reported as estimated premium liability on December 31, 2023?
3. What amount should be reported as premium expense for 2024?
4. What amount should be reported as estimated premium liability on December 31, 2024?

Solution: Refer to Problem 1- 5 (Page 7)

Problem 1-6
Choco Company, a high street chain, is offering a promotion whereby a customer who purchases
three boxes of chocolates at P200 per box in a single transactions receives a coupon for one free
box of chocolates if the customer fills out a request form and mails it before a set expiration date.
It is expected that 75% of the coupons will be redeemed.
During 2023, the entity sold 30,000 boxes of chocolates at P200 per box or P6, 000,000. During
2024, the entity delivered 6,000 additional free boxes of chocolates to the customers.
1. What amount should be reported as stand-alone selling price of the free product coupons?
2. What amount of the transaction price should be allocated to the free product coupons?
3. What amount should be reported as sales revenue in 2023?
4. What amount should be reported as sales revenue from the delivery of free products in
2024?

Solution: Refer to Problem 1- 6 (Page 9)

Problem 1-7
Victoria Company sells bedsheets for P3, 000 per set. There is a promotion wherein if a customer
buys 4 sets in a single transaction, the customer receives a coupon for one additional set for free.
It is expected that 80% of the coupons will be redeemed. During 2023, the entity sold 1,000 sets
at P3, 000 per set or P3, 000,000. During 2024, the entity delivered 75 free additional sets.
1. What amount should be reported as sales for 2023?
2. What amount should be reported as deferred revenue from coupons on December 31,
2024?

Solution: Refer to Problem 1- 7 (Page 10)

Problem 1-8
Dress Company is a retailer that sells clothing. The entity has launched a promotional campaign
whereby if customers buy clothing with a single purchase of at least P4, 000, the entity shall
issue “30% discount coupons” on selected items. The coupons may be used for 3 months
following the campaign.
During the current ear, the entity sold clothing worth P5, 400,000 and issued 500 “30% discount
coupons”. The entity expected that 80% of the coupons will be redeemed and customers using
the coupons buy clothing at an average price of P5, 000.
1. What amount should be reported as stand-alone selling price of the discount coupons?
2. What amount of transaction price should be allocated to the discount coupons?
3. What amount should be recorded initially as sales revenue?
4. What amount should be recorded as sales revenue from the redemption of coupons?

Solution: Refer to Problem 1- 8 (Page 12)

Problem 1-9
Sydney Company is a retailer that sells clothing. The entity has launched a promotion campaign
wherein if customers buy clothing with a single purchase of at least P12, 000, the entity shall
issue “30% discount coupons” on selected items for 2 months following the campaign.
During the current ear, the entity sold clothing worth P3, 240,000 and had issued 100 “30%
discount coupons”. It is expected that 80% of the coupons will be redeemed and customers using
the coupons will buy clothing at an average price of P15, 000.
1. What amount should be reported initially as sales for current year?
2. What amount should be reported as sales from redemption of coupons?

Solution: Refer to Problem 1- 9 (Page 13)

Problem 1-10
Anton Company is a manufacturer and sells its product to retailers. Retailers sell the product to
its customer and for each product purchased by the customers, a rebate discount coupon of P50 is
given and may be used on future purchase of the same product. Retailers are reimbursed for the
discount by the manufacturer upon redemption of the coupons.
During the current year, the entity sold 30,000 products to the retailers at P150 each or P4,
500,000.
It is expected that 75% of the coupons will be redeemed. At year-end, the manufacturer paid the
retailers P500, 000 as reimbursement.
1. What amount should be reported as stand-alone selling price of the rebate coupons?
2. What amount of the transaction price should be allocated to the rebate coupons?
3. What amount should be reported as sales revenue for current year?
4. What amount should be reported as rebate liability at year-end?

Solution: Refer to Problem 1- 10 (Page 15)

Problem 1-11
Isabel Company is a manufacturer of deodorant and sells its product through local retailers. The
deodorant costs P64 to the retailer. Retailers sell the product to its customer and for each product
purchased by the customer, a rebate coupon of P20 discount is given and may be used on future
purchase of the same product. Retailer are reimbursed for the discount by the manufacturer when
customers redeem their coupons.
During the year, the entity sold 100,000 deodorants to local retailers at P64 each or P6, 400,000.
The entity expected that 80% of the rebate coupons issued will be redeemed. At the year end, the
entity paid the retailers P500, 000 as reimbursement.
1. What amount should be reported as sales for the current year?
2. What amount should be reported as rebate liability at year-end?

Solution: Refer to Problem 1- 11 (Page 16)

Problem 1-12
During the current year, Alexa Company sold gift certificates worth P8, 000,000 to customers in
exchange for future delivery of its product. The certificates will not be redeemed. The
nonredemption of gift certificates is known as “breakage”. During the year, the entity redeemed
gifts certificates worth P5, 100,000.
Expected value of breakage (8,000,000 x 15%) 1,200,000
Expected value of certificates to be redeemed (8,000,000 x 85%) 6,800,000

1. What amount should be recognized as breakage revenue from gift certificates for current
year?
2. What amount should be reported as deferred revenue from gift certificates at year-end?
 Solution: Refer to Problem 1- 12 (Page 17)

Problem 1-13
Cobb Department Store sells gift certificates redeemable only when merchandise is purchased.
These gift certificates have no expiration date.
Unearned revenue, January 1,650,000
Gift certificates sold 2,250,000
Gift certificates redeemed 1,950,000
Breakage revenue 100,000

1. What amount should be reported as unearned revenue at year-end?

Solution: Refer to Problem 1- 1 3(Page 18)

Problem 1-14
Regale Department Store sells gift certificates redeemable for store merchandise and with no
expiration date.
Unearned revenue on January 1,750,000
Sales of gift certificates during the current year 2,500,000
Redemptions of prior year sales 250,000
Redemption of current year sales 1,750,000

1. What amount should be reported as unearned revenue at year-end?

Solution: Refer to Problem 1- 14 (Page 18)

Problem 1-15
Arianne Company, a grocery retailer, operates a customer loyalty program. The entity grants
program members loyalty points when they spend a specified amount on groceries
Program members can redeem the points for further groceries. The points have no expiry date.
During 2023, the sales amounted to P7, 000,000 based on stand-alone selling price.
During 2023, the entity granted 10,000 points. But management expected that only 80% points
will be redeemed.
The stand- alone selling price of each loyalty point is P100.
On December 31, 2023, 4,800 points have been redeemed.
In 2024, management t revised its expectations and now expected that 90% or 9,000 points will
be redeemed altogether.
During 2024, the entity redeemed 2,400 points.

1. What amount should be reported as sales revenue including the revenue earned from
points for 2023?
2. What amount should be reported as revenue earned from loyalty points for 2024?

Solution: Refer to Problem 1- 15 (Page 20)

Problem 1-16
Alyanna Company operates a customer loyalty program. The entity grants program members
loyalty points when they spend a specified amount on purchases.
Program members can redeem the points for further purchases. The points have no expiry date.
During 2023, the customer earned 60,000 points. Management expects that 100% of these points
will be redeemed. The stand-alone selling price of each loyalty point is P20.
The sales during 2023 amounted to P6, 800,000 based on stand-alone selling price.
On December 31, 2023, 28,800 points have been redeemed in exchange for purchases.
In 2024, the management revised expectations and now expected 90% of the points to be
redeemed.
In 2024, the entity redeemed 9,000 points.

1. What amount of the transaction price should be allocated to the points?

2. What amount should be reported as revenue earned from loyalty points for 2023?
3. What amount should be reported as revenue earned from loyalty points for 2024?

Solution: Refer to Problem 1- 16 (Page 22)

Problem 1-17
Erika Company operates a customer loyalty program. The entity grants loyalty points for goods
purchased. The loyalty points can be used by customers in exchange for goods of the entity. The
points have no expiry date.
During 2023, the entity issued 50,000 award credits and expected that 80% of these award
credits shall be redeemed. The total stand-alone selling price of the award credits granted is
reliably measured at P1, 000,000.
In 2023, the entity sold good to customer for a total consideration of P7, 000,000 based on stand-
alone selling price.
The award credits redeemed and the total award credits expected to be redeem each year are:
Redeemed Expected to be redeemed
2023 15,000 80%
2024 7,950 85%
2025 2,550 85%
2026 15,000 90%

1. What amount should be reported as revenue from points for 2023?

2. What amount should be reported as revenue from points for 2024?
3. What amount should be reported as revenue from points for 2025?
4. What amount should be reported as revenue from points from 2026?

Solution: Refer to Problem 1- 17 (Page 24)

 CHAPTER 2
WARRANTY LIABILITY

Problem 2-1
Mill Company sells washing machines that carry a three-year warranty against manufacturer's
defects,
Based on the entity's experience, warranty costs are estimated at P300 per machine.
During the current year, the entity sold 2.400 washing machines and paid warranty costs of P170,
000.

1. What amount should be reported as warranty expense for the current year?
2. What amount should be reported as warranty liability at year-end?

Solutions are provided at Problem 2-1

Problem 2-2

Bold Company estimated the annual warranty expense at 2% of annual net sales. The net sales
for the current year amounted to P4, 000, 000.
At the beginning of current year, the warranty liability was P60, 000 and the warranty payments
during the current year totaled P50.000.

1. What amount should be reported as warranty expense for the current year?
2. What amount should be reported as warranty liability at year-end?

Solutions are provided at Problem 2-2

Problem 2-3

Bass Company manufactures high-end home electronic systems. The entity provides a one-year
warranty for all products sold.

The entity estimated that the warranty cost is P200 per unit sold and reported a liability for
estimated warranty cost of P650, 000 at the beginning of the year.

During the current year, the entity sold 5,000 units for a total of P9, 000,000 and paid warranty
claims of P750, 000 on current and prior year sales.

1. What amount should be reported as warranty liability at year-end?

 Solutions are provided at Problem 2-3

Problem 2-4
Villa Company estimated annual warranty expense at 8% of net sales. The following data related
to the current year:

Warranty liability:
Before adjustment 100,000 debit
After adjustment 540,000 credit

1. What amount should be reported as net sales for the current year?

Solutions are provided at Problem 2-4

Problem 2-5

In 2023, Dubious Company began selling new line of products that carry a two-year warranty
against defects.

Based upon past experience with other products, the warranty costs as a percentage of peso sales
entity estimated

First year of warranty 2%

Second year of warranty 5%

2023 2024
Sales 5,000,000 7,000,000
Actual warranty cost 100,000 300,000

1. What amount should be reported as warranty expense for 2023?

2. What amount should be reported as warranty liability on December 31, 2023?
3. What amount should be reported as warranty expense for 2024?
4. What amount should be reported as warranty liability on December 31, 2024?

Solutions are provided at Problem 2-5

Problem 2-6
During 2023. Namnama Company introduced a new product carrying a two-year warranty
against defects.
The estimated warranty costs related to peso sales are 4% within 12 months following sale and
6% in the second 12 months following sale.

The entity reported sales of P5, 000,000 for 2023 and P6, 000,000 for 2024.

The actual expenditures incurred amounted to P150, 000 for 2023 and P550.000 for 2024.

1. What amount should be reported as warranty expense for 20237

2. What amount should be reported as estimated warranty liability on December 31, 2023?
3. What amount should be reported as warranty expense for 2024?
4. What amount should be reported as estimated warranty liability on December 31, 2024?

Solutions are provided at Problem 2-6

Problem 2-7

Cyprus Company started business in 2023 and sold printers with a three-year warranty. The
entity estimated its warranty cost as a percentage of peso sales.

Based on past experience, it is estimated that 3% will be repaired during the first year of
warranty, 5% will be repaired during the second year of warranty and 10% will be repaired in the
third year.

In 2023 and 2024, the entity was able to sell 7,500 units and 10,000 units, respectively at P4, 000
per unit.

The entity incurred actual repair cost of P800, 000 and P2, 400,000 in 2023 and 2024,
respectively. Sales and repairs occurred evenly throughout the period.

1. What amount was recorded as warranty liability on December 31, 2024?

2. What amount should be reported as adjusted warranty liability on December 31, 2024?
3. What amount should be reported as adjusted warranty expense for 2024?

Solutions are provided at Problem 2-7

Problem 2-8

Toyo Company owned a car dealership used for servicing cars under warranty. The entity sold
500 cars during the year.

The entity’s experience with warranty claims is that 60% of all cars sold in a year have zero
defect, 25% of all cars sold in a year have normal defect, and 15% of all cars sold in a year have
significant defect.
The cost of rectifying a “normal defect” in a car is P10, 000. The cost of rectifying a “significant
defect” in a car is P30, 000.

1. What amount should be reported as warranty liability at year-end?

Solutions are provided at Problem 2-8

Problem 2-9

Chatom Company sold electrical goods covered by a one-year warranty for any defects. Of the
sales of P70, 000,000 for the year, the entity estimated that 3% will have major defect, 5% will
have minor defect and 92% will have no defect.

The cost of repairs would be P5, 000,000 if all the products sold had major defect and P3,
000,000 if all had minor defect.

1. What amount should be recognized as a warranty liability?

Solutions are provided at Problem 2-9

Problem 2- 10

Electro Company grants warranties at the time of sale to purchasers of its product. The entity
undertakes to make good, by repair or replacement, manufacturing defects that become apparent
within one year from the date of sale.

Sales of P5, 000,000 were made evenly throughout 2023. The expenditures for warranty repairs
and replacements for the products sold in 2023 are expected to be made 50% in 2023 and 50% in
2024.

The 2024 outflows of economic benefits related to the warranty will take place on December 31,
2024.

The entity estimated that 75% of products sold require no warranty repairs, 15% of products sold
require minor repairs costing P100, 000 and 10% of products sold require major repairs costing
P400, 000.

An appropriate risk adjustment factor to reflect the uncertainties in the cash flow estimates is an
increment of 6% to the probability weighted expected cash flows.

The appropriate discount factor for cash flows expected to occur on December 31, 2024 is 0.94.

1. What amount should be reported as warranty expense for 2023?

2. What amount should be reported as warranty liability on December 31, 2023?
 Solutions are provided at Problem 2-10

CHAPTER 3
DEFERRED REVENUE

Problem 3-1
Greene Company sells office equipment service contracts agreeing to service equipment for a
two-year period. Cash receipts from contract are credited to unearned contract revenue.
Service contract costs are charged to service contract expense as incurred. Revenue from service
contracts is recognized as earned over the lives of the contracts. Additional information for the
current year:
Unearned contract revenue at January 1 600, 000
Cash receipts from service contracts sold 980, 000
Service contract revenue recognized 860, 000
Service contract expense 520, 000

1. What amount should be reported as unearned contract revenue on December 31?

Solution: Refer to Problem 3-1 (Page 39)

Problem 3-2
Ryan Company sells major household appliance service contracts for cash. The service contracts
are for a one-year, two-year, or three-year period.
Cash receipts from contracts are credited to unearned contract revenue. The unearned contract
revenue had a balance of P720, 000 on December 31, 2023 before year-end adjustment.
Service contract costs are charged as incurred to the service contract expense account which had
a balance of P180, 000 on December 31, 2023.
Outstanding service contracts on December 31, 2023 expire:
During 2024 150, 000
During 2025 225, 000
During 2026 100, 000
 1. What amount should be reported as unearned contract revenue on December 31, 2023?

Solution: Refer to Problem 3-2 (Page 40)

Problem 3-3
Dunne Company sells equipment service contracts that cover a two-year period. The sale price of
each contract is P600.
The past experience is that. Of the total pesos spent for repairs on service contracts. 40% is
incurred evenly during the first contract year and 60% evenly during the second contract year.
The entity sold 1,000 contracts evenly throughout 2023.
1 What amount should be reported as contract revenue for 2023?
2 What amount should be reported as deferred contract revenue on December 31, 2023?
3 What amount should be reported as contract revenue for 2024?
4 What amount should be reported as contract revenue for 2025?

Solution: Refer to Problem 3-3 (Page 41-42)

Problem 3-4
Cobb Company sells appliance service contracts agreeing to repair appliances for a two-year
period.
The past experience is that. Of the total amount spent for repairs on service contracts. 40% is
incurred evenly during the first contract year and 60% evenly during the second contract year.
Receipts from service contract sales are P500, 000 for 2023 and P600, 000 for 2024.
Receipts from contracts are credited to unearned contract revenue. All sales are made evenly
during the year.
1. What amount should be reported as contract revenue for 2023?
2. What amount should be reported as unearned contract revenue on December 31, 2023?
3. What amount should be reported as contract revenue for 2024?
4. What amount should be reported as unearned contract revenue on December 31, 2024?

Solution: Refer to Problem 3-4 (Page 43)

Problem 3-5
Hart Company sells subscriptions to a specialized directory that is published semiannually and
shipped to subscribers on April 15 and October 15.
Subscriptions received after the March 31 and September 30 cut-off dates are held for the next
publication.
Cash from subscribers is received evenly during the current year and is credited to deferred
subscription revenue.
Deferred subscription revenue – January 1 1,500,000
Cash receipts from subscribers during the current year 7,200,000

1. What amount should be reported as deferred subscription revenue on December 31?

2. What amount should be reported as subscription revenue for the current year?

Solution: Refer to Problem 3-5 (Page 45)

Problem 3-6
Annette Video Company sells 1 - and 2-year subscriptions for the video-of-the-month business.
Subscriptions are collected in advance and credited to sales.
2023 2024
Sales 420,000 500,000
Less Cancelations 20,000 30,000
Net Sales 400,000 470,000
Subscription expirations:
2023 120,000
2024 155,000 130,000
2025 125,000 200,000
2026 140,000
400,000 470,000

1. On December 31, 2024, what amount should be reported as unearned subscription

revenue?
2. What amount should be reported as subscription revenue for 2024?

Solution: Refer to Problem 3-6 (Page 46)

Problem 3-7
Weaver Company sells magazine subscriptions for a 1-year, 2-year or 3-year period. Cash
receipts from subscribers are credited to magazine subscriptions collected in advance and this
account had a balance of P1, 700,000 on January 1.
Cash receipts from subscribers during current year 2,100,000
Subscribers revenue credited on December 31 1,500,000

1. What amount should be reported as the balance for subscriptions collected in advance on
December 31?

Solution: Refer to Problem 3-7 (Page 47)

Problem 3-8
Kent Company sells magazine subscriptions for one-year, two-year or three-year period. Cash
receipts from subscribers are credited to subscription collected in advance and this account had a
balance of P2, 400,000 on December 31, 2023 before year-end adjustment. Outstanding
subscriptions on December 31, 2023 expire:
During 2024 600,000
During 2025 900,000
During 2026 400,000

1. On December 31, 2023. What amount should be reported as subscription collected in

advance?

Solution: Refer to Problem 3-8 (Page 47)

Problem 3-9

Black Company required advance payments with special orders for machinery constructed to
customer specifications. These advances are nonrefundable.

Advances from customers – beginning 1,180,000

Advances received with orders during the year 1,840,000
Advances applied with orders shipped during the year 1,640,000
Advances applicable to orders canceled 500,000

1. What amount should be reported as advances from customers at year-end?

 Solution: Refer to Problem 3-9 (Page 48)

Problem 3-10

Diversified Company sells perishable electronic products that are shipped in reusable containers.
Customers pay a deposit for each container. The deposit is equal to the container cost. Customers
receive a refund when the containers is returned. During the current year, deposits collected on
containers shipped amounted to P700, 000. Deposits are forfeited if containers are not returned in
18months.

Containers held by customers at the beginning of the year totaled P330, 000. During the current
year, an amount of P410, 000 was refunded and deposits of P25, 000 were forfeited.

1. What amount should be reported as liability for refundable deposit at year-end?

Solution: Refer to Problem 3-10 (Page 48)

Problem 3-11

Marr Company sells its product in reusable containers. The customer is charged a deposit for
each container delivered and receives a refund for each container returned within two-years after
the year of delivery.

The entity accounts’ for the containers not returned within the time limit as being retired by sale
at the deposit amount. The entity provided the following information for 2023:

Container deposits on January 1, 2023 from deliveries in:

2021 150,000
2022 430,000 580,000

Deposits for containers delivered in 2023 780,000

Deposits for containers returned in 2023 from deliveries in:

2021 90,000
2022 250,000
2023 286,000
626,000

1. On December 31, 2023, what amount should be reported as liability for deposits?

Solution: Refer to Problem 3-11 (Page 49)

Problem 3-12

Montessori Company offered three payment plans on twelve-month contracts.

The entity provide the following information on the three plans and the number of children
enrolled in each plan from September 1, 2023 through August 31, 2024 contract year:

Initial Payment Monthly fee Number of

Per child per child children

#1 50,000 - 15
#2 200,000 3,000 12
#3 - 5,000 9

The entity received P990, 000 of initial payments on September 1, 2023, and P324, 000 of
monthly fees during the period September 1 through December 31, 2023.

1. On December 31, 2023, what amount should be reported as deferred revenue?

Solution: Refer to Problem 3-12 (Page 50)

 CHAPTER 4
ACCRUED LIABILITIES
BONUS COMPUTATION

Problem 4-1
Kemp Company must determine the December 31, 2024, accruals for the following expenses:

*A P500,000 advertising bill was received January 7, 2025, comprising cost of P35,000 for
advertisements in December 2006 issues, and P15,000 for advertisements in January 2006 issues
of the newspaper. A store lease, effective December 2024 issues, and P150, 000 for
advertisement in January 2025 issues of the newspaper.
*A one-year lease, effective December 16, 2024, calls for a fixed rent of P120,000 per month,
payable one month from the effective date and monthly thereafter.
*The entity has real property subject to real property tax. The city’s fiscal year runs July 1 to
June 30 and the tax assessment at 3% of real property on hand is payable on June 30, 2025.
The entity estimated that the real property tax will amount to P600, 000 for the city’s fiscal year
ending June 30, 2025.
1. On December 31, 2024, what amount should be reported as accrued expenses?

Solution: Refer to Problem 4-1 (Page 51)

Problem 4-2
Chester Company reported the following payroll for the month of January:

Total wages 500,000

Income tax withheld 60,000

All wages paid were subject to SSS. The SSS tax rates were 7% each for employee and
employer. Chester remits payroll taxes on the 15th of the following month.

1. In the financial statements for the month ended January 31, what amount should be
reported respectively as total payroll tax liability and payroll tax expense?

Solution: Refer to Problem 4-2 (Page 52)

Problem 4-3
Miyuki Company Miyuki Company operates a retail store. All items are sold subject to a 12%
value added tax, which the entity collects and records as sales revenue.
The entity files quarterly sales tax returns when due by the twentieth day following the end of the
sales quarter.

However, in accordance with state requirements, the entity remits value added tax collected by
the twentieth day of the month following any month such collections exceed P50, 000.

The entity takes these payments as credits on the quarterly sales tax return. The value added
taxes paid by the entity are charged against sales revenue.

Following is a monthly summary appearing in the first quarter sales revenue account:

Debit Credit
January -
560,000
February 60,000
392,000
March -
448,000

1. What amount should be reported as value added taxes payable on March 31?

Solution: Refer to Problem 4-3 (Page 53)

Problem 4-4

Kent Realty Company maintains an escrow amount and pays real estate taxes for the mortgage
customers. Escrow funds are kept in interest bearing accounts. Interest, less a10% service fee, is
credited to the mortgagee’s account and used to reduce future escrow payments.

Escrow account liability – January 1 700,000

Escrow payments received during the year 1,580,000
Real estate taxes paid during the year 1,720,000
Interest on escrow funds 50,000

1. What amount should be reported as escrow account liability at year-end?

Solution: Refer to Problem 4-4 (Page 54)

Problem 4-5
On the first day of each month, Bell Company receives from Carr Company an escrow deposit of
P250, 000 for real estate taxes. Bell Company recorded P250, 000 in an escrow account.
The real estate tax for the current year is P2, 800,000 payable in equal installments on the first
day of each calendar quarter. On January 1, the balance in the escrow account was P300, 000.
1. What amount should be reported as escrow liability on September 30?
Solution: Refer to Problem 4-5 (Page 54)

Problem 4-6
On July 1, 2023, the Quezon City government issued realty tax assessment for the fiscal year
ended June 30, 2024. On September 1, 2023, Zuma Company purchased a land in Quezon City.
The purchase price was reduced by a credit for accrued realty taxes.
The entity does not record the entire year’s real estate tax obligation but instead records tax
expenses at the end of each month by adjusting prepaid real estate or real estate taxes payable as
appropriate.
On November 1, 2023, the entity paid the first the first of two equal installments of P600, 000 for
realty taxes.
1. What amount of the payment should be recorded as a debit to real estate taxes payable?

Solution: Refer to Problem 4-6 (Page 55)

Problem 4-7
Nature Company had an agreement to pay the sales manager a bonus of 10% of the entity’s
income. The income for the year before bonus and tax was P4, 400, 00. The income tax rate is
25%.
Determine the bonus under each of the following independent assumptions:

1. Bonus is a certain percent of the income before bonus and before tax.
2. Bonus is a certain percent of income after bonus but before tax.
3. Bonus is a certain percent of income after bonus but after tax.
4. Bonus is a certain percent of income after tax but before bonus.

Solution: Refer to Problem 4-7 (Page 56- 57)

Problem 4-8
Christian Company had a bonus agreement which provided that the general manager shall
receive an annual bonus of 10% of the net income after bonus and after tax. The income tax rate
is 25%. The general manager received P300, 000 for the current year as bonus.
1. What amount should be reported as income before bonus and before tax?

Solution: Refer to Problem 4-8 (Page 58)

Problem 4-9
After three profitable years, Cairo Company decided to offer a bonus to the branch manager of
25% of income over P5, 000,000 earned by the branch.

The income for the branch was P8, 000,000 before tax and before bonus for the current year. The
bonus is computed on income in excess of P5, 000,000 after deducting the bonus but before
deducting tax. The income tax rate is 25%.

1. What amount should be reported as bonus of the branch manager for the current year?

Solution: Refer to Problem 4-9 (Page 58)

Problem 4-10

Tobruk Company had an agreement to pay its sales manager a bonus of 5% of the income. The
income for the current year before bonus and before tax is P5, 250,000. The income tax rate is
25%.

1. What amount should be reported as bonus based on income after bonus but before tax?
2. What amount should be reported as bonus based on income after bonus and after tax?

Solution: Refer to Problem 4-10 (Page 59)

 CHAPTER 5
PROVISION AND CONTINGENT LIABILITY

Problem 5- 1
During the current year, Odyssey Company is the defendant in a patent infringement lawsuit. The
entity's lawyers believe there is a 30% chance that the court will dismiss the case and the entity
will incur no outflow of economic benefits.
However, if the court rules in favor of the claimant, the lawyers believe that there is a 20%
chance that the entity will be required to pay damages of P200,000 and an 80% chance that the
entity will be required to pay damages of P100,000. Other outcomes are unlikely.
The court is expected to rule in late December of next year. There is no indication that the
claimant will settle out of court.
A 7% risk adjustment factor to the probability-weighted expected cash flows is considered
appropriate to reflect the uncertainties in the cash flow estimates.
An appropriate discount rate is 5% per year. The present value of 1 at 5% for one period is 0.95.

1. What amount should be reported as provision at current year-end?

Solution: Refer to Problem 5- 1 (Page 60)

Problem 5- 2
During the current year, Libya Company is the defendant in a breach of patent lawsuit. The
lawyers believe there is an 80% chance that the court will not dismiss the case and the entity will
incur outflow of benefits.
If the court rules in favor of the claimant, the lawyers believe that there is a 60% chance that the
entity will be required to pay damages of P2,000,000 and a 40% chance that the entity will be
required to pay damages of P1,000,000. Other amounts of damages are unlikely.
The court is expected to rule in late December next year. There is no indication that the claimant
will settle out of court.
A 7% risk adjustment factor to the cash flows is considered appropriate to reflect the
uncertainties in the cash flow estimates.
An appropriate discount rate is 10% per year. The present value of 1 at 10% for one period is
0.91.
 1. What amount should be reported as provision at current year-end?

Solution: Refer to Problem 5- 2 (Page 61)

Problem 5- 3
During the current year. Manfred Company guaranteed a supplier's P500.000 loan from a bank.
In October, the entity was notified that the supplier had defaulted on the loan and filed for
bankruptcy protection. Counsel believed that the entity would probably have to pay P250, 000
under the guarantee.
As a result of the supplier's bankruptcy, the entity entered into a contract in December to retool
its machines so that the entity could accept parts from other suppliers. Retooling costs are
estimated to be P300.000.
1. What amount should be reported as liability at current year-end?

Solution: Refer to Problem 5- 3 (Page 62)

Problem 5- 4
On February 5, 2024, an employee filed a P2, 000,000 lawsuit against Steel Company for
damages suffered when the Steel Company's plant exploded on December 29, 2023. The legal
counsel believed the entity would probably lose the lawsuit and estimated the loss to be P500,
000. The employee offered to settle the lawsuit out of court for P900, 000 but the entity did not
agree to the settlement.
1. On December 31, 2023, what amount should be reported as liability from lawsuit?

Solution: Refer to Problem 5- 4 (Page 62)

Problem 5- 5
During the current year, Beal Company became involved in a tax dispute with the BIR. On
December 31 the tax advisor believed that an unfavorable outcome was probable and a
reasonable estimate of additional taxes was P500, 000.
After the current year financial statements were issued, the entity received and accepted a BIR
settlement offer of P550, 000.
1. What amount of accrued liability should be reported on December 31?

Solution: Refer to Problem 5- 5 (Page 63)

Problem 5- 6
Newton Company is involved in litigation regarding a faulty product sold in a prior year. The
entity has consulted with an attorney and determined that it is possible that the entity may lose
the case.
The attorney estimated that there is a 40% chance of losing. If this is the case, the attorney
estimated that the amount of any payment would be P5, 000,000.
1. What is the required journal entry as a result of this litigation?

Solution: Refer to Problem 5- 6 (Page 63)

Problem 5-7
On November 5. 2023, a Dunn Company truck was in an accident with an auto driven by Bell.
Dunn Company received notice on January 15, 2024 of a lawsuit for P700, 000 damages for
personal injuries suffered by Bell.
The entity's counsel believed it is probable that Bell will be awarded an estimated amount in the
range between P200, 000 and P450, 000, and no amount is a better estimate of potential liability
than any other amount because each point in the range is as likely as any other.
The 2023 financial statements were issued on March 1, 2024.
1. What amount of loss should be accrued on December 31, 2023?

Solution: Refer to Problem 5- 7 (Page 64)

Problem 5- 8
Winter Company is being sued for illness caused to local residents as a result of negligence on
the entity's part in permitting the local residents to be exposed to highly toxic chemicals from its
plant. The entity's lawyer stated that it is probable that the entity would lose 6,000,000. However,
the lawyer estimated that the most probable cost is P3, 600,000
1. What amount should be accrued and disclosed?

Solution: Refer to Problem 5- 8 (Page 64)

Problem 5- 9
On November 25, 2023, an explosion occurred at a Rex Company plant causing extensive
property damage to area buildings. By March 10. 2024, claims had been asserted against the
entity.
The management and counsel concluded that it is probable that the entity would be responsible
for damages and that P3, 500,000 is a reasonable estimate of the liability.
Rex Company's P10, 000,000 comprehensive public liability policy has a P500, 000 deductible
clause. The financial statements were issued on March 31, 2024.
1. What amount of loss from lawsuit should be reported for 2023?
2. What amount of liability from lawsuit should be reported on December 31, 2023?

Solution: Refer to Problem 5- 9 (Page 65)

Problem 5- 10
In May 2024, Caso Company filed suit against Wayne Company seeking P1, 900,000 damages
for patent infringement. A court verdict in November 2024 awarded Caso P1, 500,000 in
damages, but Wayne Company's appeal is not expected to be decided before 2025.
Caso Company's counsel believed it is probable that Caso Company will be successful against
Wayne Company for an estimated amount in the range between P800, 000 and P1, 100,000, with
P1, 000,000 considered the most likely amount.
1. What amount should Caso Company record as income from the lawsuit for the year
ended December 31, 2024?

Solution: Refer to Problem 5- 10 (Page 66)

Problem 5- 11
During 2024, Smith Company filed suit against West Company seeking damages for patent
infringement. On December 31, 2024, Smith Company's legal counsel believed that it was
probable that Smith Company would be successful against West Company for an estimated
amount of P 1,500,000.
On March 1, 2025, Smith Company was awarded P1, 000,000 and received full payment
thereof. The 2024 financial statements were issued February 1, 2025.
1. How should the award be reported on December 31, 2024?

Solution: Refer to Problem 5- 11 (Page 66)

Problem 5- 12
Tone Company is the defendant in a lawsuit filed by Witt Company in 2023 disputing the
validity of copyright held by Tone Company.
On December 31, 2023. Tone Company determined that Witt Company would probably be
successful against Tone Company for an estimated amount of P2, 000,000.
Appropriately, a P2, 000,000 loss was accrued by a charge to income for the year ended
December 31, 2023.
On December 31, 2024, Tone Company and Witt Company agreed to a settlement providing for
cash payment of P1, 250,000 by Tone Company to Witt Company and transfer of Tone
Company's copyright to Witt Company.
The carrying amount of the copyright on Tone Company's accounting records was P250, 000 on
December 31, 2024.
1. What would be the effect of the settlement on Tone Company's income before tax in
2024?

Solution: Refer to Problem 5- 12 (Page 67)

Problem 13
Toy Company provided the following facts regarding pending litigation at year-end:
*The entity is defending against a first lawsuit and believed there is a 51% chance it will lose in
court. The entity estimated that damages will be P1, 000,000.
*The entity is defending against a second lawsuit for which management believed it is virtually
certain to lose in court. If it loses the lawsuit, management estimated that damages will fall
somewhere in the range of P3,000,000 to P5,000,000 with each amount in that range equally
likely to occur.
*The entity is defending against a third lawsuit but the probable and relevant loss will only occur
far into the future. The present values of the endpoints of the range are P1.500, 000 and
P2,500,000. The management believed the effects of time value of money on these amounts are
material.
*The entity is defending against a fourth lawsuit and believed there is only a 25% chance it will
lose in court. If the entity loses, management believed damages will fall somewhere in the range
of P3, 000,000 to P4, 000,000 with each amount in the range equally likely to occur.
1. What amount should be reported as accrued liability at year-end?

Solution: Refer to Problem 5- 13 (Page 68)

Problem 5- 14
Bourne Company provided the following selected transactions related to contingencies. The
fiscal year ends on December 31, 2023 and financial statements are issued on March 31, 2024.
*Bourne Company is involved in a lawsuit resulting from a dispute with a customer over a 2023
transaction. On December 31, 2023, the legal counsel advised that it was probable that Bourne
Company would lose P3, 000,000 in an unfavorable outcome.
On February 15, 2024, judgment was rendered against Bourne Company in the amount of
P4, 000,000 plus interest P500, 000. Bourne Company does not plan to appeal the judgment.
*Bourne Company is the defendant in a lawsuit filed in January 2024 in which Accord Company
seeks P5, 000,000 as an adjustment to the purchase price related to the sale of Bourne Company's
hardwood division in 2023. The lawsuit alleged that Bourne Company misrepresented the
division's assets and liabilities.
Legal counsel advised that it is reasonably possible that Bourne Company could lose P2, 000,000
but that it is extremely unlikely it could lose the P5, 000,000 asked for.
*On March 1, 2024, the provincial government is in the process of investigating the possibility
of environmental violation at one of Bourne Company's sites but has not proposed a penalty
assessment. Management believed an assessment is reasonably possible up to P4.000, 000.
1. What total amount should be reported as accrued liability on December 31, 2023?

Solution: Refer to Problem 5- 14 (Page 69)

Problem 5- 15
Western Company provided the following selected transactions related to contingencies. The
fiscal year ends on December 31.2023. Financial statements are issued on April 1, 2024.
*In December 2023. Western Company became aware of an engineering flaw in a product that
poses a potential risk of injury. As a result, a product recall appears inevitable. This move would
likely cost the entity P1.500, 000.
*In November, 2023, the City of Manila filed suit against Western Company asking civil
penalties and injuctive relief for violations of clean water laws. Western Company reached a
settlement with the city government to pay P4.200.000 in penalties on February 15, 2024.
* Western Company is the plaintiff in a P4, 000,000 lawsuit filed against a customer for costs
and lost profit from contract rejected in 2023.
The lawsuit is in final appeal and attorney advised that it is virtually probable that Western
Company will be awarded P3, 000,000.
1. What amount should be reported as accrued liability on December 31, 2023?
2. What amount should be reported as gain from lawsuit in 2023?

Solution: Refer to Problem 5- 15 (Page 70)

3.
 CHAPTER 6
NOTE PAYABLE
REFINANCING AND FAIR VALUE OPTION

Problem 6-1
On September 1, 2023, Pine Company issued a note payable to National Bank in the amount of
P1, 800,000, bearing interest at 12%, and payable in three equal annual principal payments of
P600, 000. On this date, the bank's prime rate was 11%. The first interest and principal payment
was made on September 1, 2024.
On December 31, 2024, what amount should be reported as accrued interest payable?
Solution: Refer to Problem 6- 1 (Page 71)

Problem 6-2
Mann Company reported on June 30, 2024 a 10% note payable in the amount of P3, 600,000.
The note is dated October 1, 2022 and is payable in three equal annual payments of P1, 200,000
plus interest. The first interest and principal payment was made on October 1, 2023.
On June 30, 2024, what amount should be reported as accrued interest payable?
Solution: Refer to Problem 6-2 (Page 72)

Problem 6-3
At year-end, Roth Company issued a P1, 000,000 face amount note payable to Wake Company in
exchange for services rendered to Roth Company.
The note, made at usual trade terms, is due in nine months and bears interest, payable at maturity,
at the annual rate of 3%.
The market interest rate is 8%. The compound interest factor of 1 due in nine months at 8%
is .944.
At what amount should the note payable be reported at year-end?
Solution: Refer to Problem 6- 3 (Page 72)
Problem 6-4
Loob Company had the following loans at 12% interest payable at maturity. The entity repaid
each loan on schedules maturity date.
Date Amount Maturity Date Term
11/1/2023 500,000 10/31/2024 1 year
2/1/2024 1,500,000 7/31/2024 6 months
5/1/2024 3,000,000 1/31/2025 9 months

The entity recorded interest expense when the loans are repaid. As a result, interest expense of
P150, 000 was recorded in 2024.
1. What amount should be reported as interest expense for 2024?
2. If no correction is made, by what amount would interest expense for 2024 be understated?

Solution: Refer to Problem 6- 4 (Page 73)

Problem 6-5
On December 31, 2023, Bart Company purchased a machine from Helix Company in exchange
for a non interest bearing note requiring eight payments of P200, 000.
The first payment was made on December 31, 2023 and the others are due annually on
December 31.
At date of issuance, the prevailing rate of interest for this type of note was 11%. The PV of an
ordinary annuity of 1 at 11% for 8 periods is 5.146. And the PV of an annuity of 1 in advance at
11% for 8 periods is 5.712.
1. On December 31, 2023, what is the carrying amount of the note payable?
2. What amount should be reported as interest expense for 2024?
Solution: Refer to Problem 6-5 (Page 74)

Problem 6-6
At the beginning of current year, Pares Company borrowed P3, 600,000 from a major customer
evidenced by a non interest bearing note due in three years. The entity agreed to supply the
customer's inventory needs for the loan period at lower than market price.
At the 12% imputed interest rate for this type of loan, the present value of the note is P2, 550,000
at the beginning of current year.
What amount of interest expense should be reported for current year?
Solution: Refer to Problem 6- 6 (Page 75)

Problem 6-7
On March 1, 2023, Alpha Company borrowed P1, 000,000 and signed a 2-year note bearing
interest at 12% per annum compounded annually. Interest is payable in full at maturity on
February 28, 2025.
What amount should be reported as accrued interest payable on December 31, 2024?
Solution: Refer to Problem 6- 7 (Page 75)

Problem 6-8
On September 30, 2024, World Company borrowed P1, 000,000 on a 9% note payable. The
entity paid the first of four quarterly payments of P264, 200 when due on December 31, 2024
1. What amount should be reported as interest expense for 2024?
2. On December 31, 2024, what is the carrying amount of the note payable?
Solution: Refer to Problem 6- 8 (Page 76)

Problem 6-9
On January 1, 2024, Solemn Company sold land to Glory Company. There was no established
market price for the land.
Glory Company gave Solemn Company a P2, 400,000 non-interest bearing note payable in three
equal annual installments of P800, 000 with the first payment due December 31, 2024.
The note has no ready market. The prevailing rate of interest for a note of this type is 10%. The
present value of a P2, 400,000 note payable in three equal annual installments of P800, 000 at a
10% rate of interest is P1, 989,600.
What is the carrying amount of the note payable on December 31, 2024?
Solution: Refer to Problem 6-9 (Page 77)
Problem 6-10
Jason Company offered a contest in which the winner would receive P1, 000,000 payable over
twenty years.
On December 31, 2024, Jason Company announced the winner of the contest and signed a note
payable to the winner for P1, 000,000 payable in P50, 000 installments every January 31.
On December 31, 2024, Jason Company purchased an annuity for P418, 250 to provide the
P950, 000 prize remaining after the first P50, 000 installment which was paid on January 31,
2025.
1. On December 31, 2024, what amount should be reported as note payable-contest winner, net
of current portion?
2. What amount should be reported as contest prize expense for 2024?
Solution: Refer to Problem 6- 10 (Page 78)

Problem 6-11
Achilles Company reported the following liability balances on December 31, 2023:
12% note payable issued on March 1, 2022, maturing on
March 1, 2024 5,000,000
10% note payable issued on October 1, 2022, maturing
October 1, 2024 3,000,000
The 2023 financial statements were issued on March 31, 2024.
On January 31, 2024, the entire P5, 000,000 balance of the 12% note payable was refinanced
through issuance of a long-term obligation payable lump sum.
On December 31, 2023, the entity has the right to defer settlement of the 10% note payable for at
least twelve months after December 31, 2023.
What amount of the notes payable should be classified as current on December 31, 2023?
Solution: Refer to Problem 6- 11 (Page 79)

Problem 6-12
Dean Company had a P2, 000,000 note payable due June 30, 2025. On December 31, 2024, the
entity signed an agreement to borrow up to P2, 000,000 to refinance the note payable on a long-
term basis.
The financing agreement called for borrowing not to exceed 80% of the value of the collateral
the entity was providing. On December 31, 2024, the value of the collateral was P1, 500,000.
On December 31, 2024, what amount of the note payable should be reported as current liability?
Solution: Refer to Problem 6- 12 (Page 80)

Problem 6-13
On December 31, 2024, Largo Company had a P750, 000 note payable due July 31, 2025. The
entity planned to refinance the note by issuing long-term bonds.
Because the entity temporarily had excess cash, it prepaid P250, 000 of the note on January 15,
2025. In February 2025, the entity completed a P1, 500,000 bond offering. On March 31, 2025,
the entity issued the 2024 financial statements.
What amount of the note payable should be included in current liabilities on December 31, 2024?
Solution: Refer to Problem 6- 13 (Page 80)

Problem 6-14
On January 1, 2024, Justine Company borrowed P2, 000,000 on a 10%, five-year note payable.
On December 31, 2024, the fair value of the note is determined to be P1, 900,000 based on
market and interest factors.
The entity has elected the fair value option for reporting the financial liability.
1. What amount should be reported as interest expense for 2024?
2. What is the carrying amount of the note payable on December 31, 2024?
3. What amount should be reported as gain or loss in 2024 as a result of the fair value option?
3. Prepare journal entries.

Solution: Refer to Problem 6- 14 (Page 82)

Problem 6-15
On January 1, 2024, Jonathan Company borrowed P500, 000 8%, interest-bearing note due in
four years. The present value of the note on January 1, 2024 was P367, 500.
The entity has elected the fair value option for reporting the financial liability. On December 31,
2024, the fair value of the note is P408, 150.
1. What is the carrying amount of the note payable on December 31, 2024?
2. What amount should be reported as interest expense for 2024?
3. What amount should be reported as net gain from change in fair value in 2024?
4. At what amount should the discount on note payable be presented on December 31, 2024?
Solution: Refer to Problem 6- 15 (Page 84)
 CHAPTER 7
DEBT RESTRUCTURE

Problem 7- 1
Hull Company is indebted to Apex under a P5, 000,000, 12%, three-year note dated December
31, 2017. Because of Hull’s financial difficulties developing in 2019, Hull Company owed
accrued interest of P600, 000 on the note on December 31, 2019.
Under a debt restructuring on December 31, 2019, Apex Company agreed to settle the note and
accrued interest for a tract of land having a fair value of P4, 500,000. The carrying amount of the
land is P3, 600,000.
1. What amount of pretax gain on extinguishment should Hull Company, report as
component of income from continuing operations in 2019?
Solution: Refer to Problem 7- 1 (Page 85)

Problem 7- 2
Versatile Company, after having experienced financial Difficulties in the current year, negotiated
with a major creditor and arrived at an agreement to restructure a note payable at year-end. The
was owned creditor principal of 3,600,000 and interest of P400,000 but agreed to accept
equipment with fair value P700,000 and note receivable from a Versatile Company’s customer
with carrying amount of P2,700,000. The equipment had an original cost of P900.000 and
accumulated depreciation of P300.000.
1. What amount should be recognized as gain from debt extinguishment for the current year?

Solution: Refer to Problem 7- 2 (Page 86)

Problem 7-3
Knob Company transferred real estate to Mene Company pursuant to a debt restructuring in full
liquidation of Knob’s liability to Mene:
Carrying amount of liability liquidated 1,500,000
Carrying amount of real estate transferred 1,000,000
Fair value of real estate transferred 900,000

1. Under USA GAAP, what amount should be reported as gain or loss on restructuring?
Solution: Refer to Problem 7- 3 (Page 86)

Problem 7- 4
Ace Company entered into a troubled debt restructuring agreement with National Bank.
The bank agreed to accept land with a carrying amount of P800, 000 and a fair value of P1,
000,000 in exchange for a note payable with a carrying amount of P1, 500,000.

1. Under IFRS, what amount should be reported as a gain on extinguishment of debt?

Solution: Refer to Problem 7- 4 (Page 87)

Problem 7- 5
During 2024, Mann Company experienced financial difficulties and is likely to default on a P5,
000,000, 15% three-year note dated January 1, 2022, payable to Summit Bank.
On December 31, 2024, the bank agreed to settle the note and unpaid interest of P750, 000 for
2019 for P4, 100,000 cash payable on January 31, 2025.
1. What amount should be reported as gain from extinguishment of debt in 2019?

Solution: Refer to Problem 7- 5 (Page 76)

Problem 7- 6
Seal Company is experiencing financial difficulty and is negotiating debt restructuring with its
creditor to relieve its financial stress. Seal has a P2, 500,000 note payable to United Bank.
The bank accepted an equity interest in Seal Company in the form of 200,000 ordinary shares.
Quoted at P12 per share. The par value is P10 per share.
The fair value of the note payable on the date of restructuring is P2, 200,000,
1. What amount should be recognized as gain from debt extinguishment as a result of the equity
swap?
2. What amount should be recognized as share premium from the issuance of the shares?
3. If the shares have no fair value, what amount should be recognized as gain on extinguishment?
Solution: Refer to Problem 7- 6 (Page 89)
Problem 7- 7
At year-end, Sunshine Company showed the following data with respect to a matured obligation:
Note payable 5,000,000
Accrued interest payable 200,000
The entity is threatened with a court suit if it could not pay a maturing debt. Accordingly, the
entity entered into an agreement with the creditor for the issuance of share capital in full
settlement of the note payable.
The agreement provided for the issue of 35,000 shares with par value of P100.The share is
currently quoted at P130. The fair value of the note payable on the date of restructuring is P4,
700,000.
1. What amount should be recognized as gain from extinguishment of debt?
2. If the shares do not have fair value, what amount should be recognized as gain from
extinguishment of debt?
Solution: Refer to Problem 7- 7(Page 90)

Problem 7- 8
Quest Company is threatened with bankruptcy due to its inability to meet interest
payments and fund requirements to retire P6,000,000 note payable with accrued interest
payable of P600,000.
The entity has entered into an agreement with the creditor to exchange equity instruments
for the liability.
The terms of the exchange are 300,000 ordinary shares with P5 par value and P10 market value,
and 25,000 preference shares with P10 par value and P60 market value.
1. What amount should be reported as gain on the extinguishment of the note payable?
2. What amount should be reported as total share premium from the issuance of the
preference and ordinary shares?
Solution: Refer to Problem 7- 8 (Page 91)

Problem 7- 9
Sunset Company had bonds payable with face amount of P5, 000,000 and a carrying amount of
P4, 800,000. In addition, unpaid interest on the bonds was accrued in the amount of P250, 000.
The creditor had agreed to the settlement of the bonds payable in exchange for 50,000 shares of
P50 par value.
The shares have no reliable measure of fair value. However, the bonds are quoted at P3, 500,000

1. What amount should be reported as gain on the extinguishment of the bonds payable?
2. What amount should be recorded as share premium from the issuance of the shares?
Solution: Refer to Problem 7- 9 (Page 92)

Problem 7- 10
Due to extreme financial difficulties, Armada Company had negotiated a restructuring of a 10%
P5, 000,000 note payable due on December 31, 2023. The unpaid interest on the note on such
date is P500, 000.
The creditor had agreed to reduce the face value to P4,000,000, forgive the unpaid
interest, reduce the interest rate to 8% and extend the due date three years from December 31,
2023. The entity paid P200, 000as arrangement fee to the creditor.
The PV of 1 at 10% for three periods is 0.75 and the PV of an ordinary annuity of 1 at 10% for
three periods is 2.49.
1. What amount should be reported as gain on extinguishment of debt in 2023?
2. What is the discount or premium on the new note payable on December 31, 2023?
3. What amount should be reported as interest expense for 2024?
4. What is the carrying amount of note payable on December 31, 2024?
Solution: Refer to Problem 7- 10 (Page 94- 95)

Problem 7- 11
Granada Company had an overdue 10% note payable to First Bank atP8, 000,000 and accrued
interest of P800, 000
As a result of a restructuring agreement on January 1, 2023, First Bank agreed to the following
provisions:
The principal obligation is reduced to P6, 000,000.
The accrued interest of P800, 000 is forgiven.
The date of maturity is extended to December 31, 2026.
Annual interest of 12% is to be paid for 4 years every December 31.
The present value of 1 at 10% for 4 periods is 0.683 and the present value of an ordinary annuity
of1 at 10% for 4 periods is 3.17

1. What amount should be reported as present value of the new note payable on January 1, 2023?
2. What amount should be reported as gain on extinguishment of debt to be recognized for 2023?
3. What amount should be reported as interest expense to be recognized for 2023?
Solution: Refer to Problem 7- 11 (Page 97)

Problem 7-12
Due to adverse economic circumstances and poor management, Ukraine Company had
negotiated a restructuring of its 8%, P6, 000,000 note payable to second bank due on December
31, 2023. There was no accrued interest on the note
The bank has reduced the principal obligation from P6, 000,000 to P5, 000,000 and extended the
maturity to three years on December 31, 2026. However, the new interest rate is 12%, payable
annually every December 31.
The entity paid P120, 000 to the creditor as an arrangement fee. The new effective rate is 9%
after considering the arrangement fee.
The present value of 1 at 8% for three periods is 0.79 and the present value of an ordinary
annuity of 1 at 8% for three periods is 2.58.

1. What amount should be reported as gain on modification for 2023?

2. What is the discount or premium on the new note payable on December 31, 2023?
3. What amount should be reported as interest expense for 2024?
4. What is the carrying amount of the note payable on December 31,
Solution: Refer to Problem 7-12 (Page 99- 100)
 CHAPTER 8
BONDS PAYABLE
FAIR VALUE OPTION

Problem 8-1 (AICPA Adapted)

Blue Company reported the following long-term debt on December 31, 2024:
12% registered debentures, callable in 2025, due in 2026 3, 500, 000
11% collateral trust bonds, convertible into Ordinary
Shares beginning in 2025, due in 2026 3, 000, 000

10% subordinated debentures, P500, 000 maturing

Annually beginning in 2025 1, 500, 000

1. What total amount should be reported as term bonds?

2. What total amount should be reported as serial bonds?

Solution: Refer to Problem 8- 1 (Page101)

Problem 8-2 (AICPA Adapted)

Hancock Company reported the following noncurrent liabilities on December 31.2023:
9% registered bonds, P250.000 maturing annually
beginning in 2024 2,750,000
11% convertible bonds, callable in 2024, due 2025 1,250,000
12% guaranty security bonds, due 2025 2,500,000
10% commodity backed bonds, P500, 000
maturing annually beginning in 2024 2,000,000
1. What total amount of serial bonds should be reported?
2. What total amount should be reported as term bonds?

Solution: Refer to Problem 8- 2 (Page102)

Problem 8-3 (AICPA Adapted)

Zola Company had the following long-term debt:
Bonds maturing in installments, secured by machinery 1,000,000
Bonds maturing on a single date, secured by realty 1,800,000
Collateral trust bonds 2,000,000

1. What total amount should be reported as debenture bonds?

Solution: Refer to Problem 8-3 (Page102)

Problem 8-4 (AICPA Adapted)

On October 1, 2023, Shane Company issued at 110 plus accrued interest of 12%, 5, 000 bonds,
P1, 000 face amount. The bonds are dated January 1, 2023 and mature January 1, 2028.
Interest is payable semiannually on January 1 and July 1. The entity paid bond issue cost of
P200, 000
1. What is the net cash received from the bond issuance?

Solution: Refer to Problem 8-41(Page103)

Problem 8-5 (AICPA Adapted)

On April 1, 2023, Greg Company issued at 99 plus accrued interest, 4,000 of 8% P1, 000 face
amount bonds. The bonds are dated January 1, 2023, mature on January 1, 2033, and pay interest
on January 1 and July 1. The entity paid bond issue cost of P140, 000.
1. From the bond issuance, what is the net cash received?

Solution: Refer to Problem 8- 5 (Page 103)

Problem 8-6 (AICPA Adapted)
On June 30, 2024, Huff Company issued at 99, five thousand bonds of 8%, P1, 000 face amount.
The bonds were issued through an underwriter to whom the entity paid bond issue cost of P425,
000.
On June 30, 2024, what amount should be reported as bond liability?
Solution: Refer to Problem 8- 6 (Page104)
Problem 8-7 (AICPA Adapted)
On July 1, 2024, Carr Company issued at 104, five thousand bonds of 10% P1, 000 face amount.
The bonds were issued through an underwriter to whom the entity paid bond issue cost of P125,
000.
On July 1, 2024, what amount should be reported as bond liability?
Solution: Refer to Problem 8- 7 (Page104)

Problem 8-8 (AICPA Adapted)

During the current year. Cain Company incurred the following costs in connection with the
issuance of bonds:
Promotion cost 2,000,000
Printing and engraving 150,000
Legal fees 800,000
Fees paid to independent accountants for registration 100,000
Commissions paid to underwriter 900,000
1. What amount should be recorded as bond issue costs to be amortized over the term of the
bonds?

Solution: Refer to Problem 8- 8 (Page105)

Problem 8-9 (IAA)

Aye Company is authorized to issue P5, 000,000 of 6%, 10-year bonds dated July 1, 2024 with
interest payments on June 30 and December 31.
When the bonds are issued on November 1, 2024, the entity received cash of P5, 150,000
including accrued interest.
1. What amount should be recorded as discount or premium on bonds payable?

Solution: Refer to Problem 8- 9 (Page105)

Problem 8-10 (AICPA Adapted)

 On January 31, 2024, Beau Company issued P3, 000,000 maturity value, 12% bonds for P3,
000,000 cash. The bonds are dated December 31, 2023 and mature on December 31, 2033.
Interest is payable semiannually on June 30 and December 31.
1. What amount of accrued interest payable should be reported on September 30, 2024?

Solution: Refer to Problem 8- 10 (Page106)

Problem 8-11 (AICPA Adapted)

On November 1, 2024, Mason Company issued P8, 000,000 of 10-year, 8% term bonds dated
October 1, 2023.
The bonds were sold to yield 10% with total proceeds of P7, 000,000 plus accrued interest.
Interest is paid every April 1 and October 1.
1. What amount should be reported as accrued interest payable on December 31, 2024?

Solution: Refer to Problem 8- 11 (Page106)

Problem 8-12 (AICPA Adapted)

On January 1, 2024, Ezekiel Company received the fair value of P1, 077,200 for 12% bonds
with face amount of P 1,000.000. The bonds were sold to yield 10%. Interest is payable
semiannually every January 1 and July 1.
The entity has elected the fair value option for measuring the financial liability.
On December 31, 2024, the fair value of the bonds is determined to be P.1, 064.600 due to
market and interest factors.
1. What is the carrying amount of the bonds payable on January 1, 2024?
2. What amount should be reported as interest expense for 2024?
3. What amount should be reported as gain or loss from change in fair value of the bonds for
2024?
4. What is the carrying amount of the bonds payable on December 31, 2024?

Solution: Refer to Problem 8- 12 (Page108)

 CHAPTER 9
EFFECTIVE INTEREST METHOD
MARKET PRICE OF BONDS

Problem 9-1 (AICPA Adapted)

On January 1. 2023, Carrow Company issued 10% bonds in the face amount of P5,000,000 that
mature on December 31, 2032. The bonds were issued for P4, 430,000 to yield 12%, resulting in
bond discount of P570, 000. The entity used the interest method of amortizing bond discount.
Interest is payable on June 30 and December 31.
1. What amount should be reported as interest expense for 2023?

Solution: Refer to Problem 9- 1 (Page109)

Problem 9-2 (AICPA Adapted)

On January 1, 2024, West Company issued 9% bonds in the face amount of P5, 000,000 which
mature on January 1, 2034. The bonds were issued for P4, 695,000 to yield 10%. Interest is
payable annually on December 31. The entity used the interest method of amortizing bond
discount.
1. What amount should be reported as interest expense for 2024?
2. On December 31, 2024, what is the carrying amount of the bonds payable?

Solution: Refer to Problem 9- 2 (Page 110)

Problem 9-3 (AICPA Adapted)

On January 1, 2024, Wolf Company issued 10% bonds in the face amount of P5, 000,000, which
mature on January 1, 2034. The bonds were issued for P5, 675,000 to yield 8% resulting in bond
premium of P675, 000. The entity used the interest method of amortizing bond premium. Interest
is payable annually on December 31.
1. What amount should be reported as interest expense for 2024?
2. What is the carrying amount of bonds payable on December 31, 2024?

Solution: Refer to Problem 9- 3 (Page 111)

Problem 9-4 (AICPA Adapted)

 On January 1, 2024, Ward Company issued 9% bonds in face amount of P4, 000,000 which
mature on January 1, 2034. The bonds were issued for P3, 756,000 to yield 10%, resulting in
bond discount of P244, 000. The entity used the interest method of amortizing bond discount.
Interest is payable annually on December 31.
1. On December 31, 2024, what amount should be reported as discount on bonds payable?
2. What is the carrying amount of bonds payable on December 31, 2024?

Solution: Refer to Problem 9- 4 (Page 112)

Problem 9-5 (AICPA Adapted)

Webb Company had outstanding a 7%, 10-year bonds payable with face amount of P5, 000,000.
The bonds were originally sold to yield 6% annual interest. The entity used the effective interest
method to amortize premium on bonds payable. On January 1, 2024, the carrying amount of the
bonds payable was P5, 250,000.
1. What amount of premium on bonds payable should be reported on December 31, 2024?
2. What is the carrying amount of the bonds payable on December 31, 2024?

Solution: Refer to Problem 9- 5 (Page 113)

Problem 9-6 (IFRS)

At the beginning of current year, Luyang Company issued 3-year bonds with face amount of P5,
000,000 at 98. Additionally, the entity paid bond issue cost of P140, 000.
The nominal rate is 10% and the effective rate is 12% after considering the bond issue cost. The
interest is payable annually on December 31.
The entity used the effective interest method in amortizing bond discount and issue cost.
1. What is the carrying amount of the bonds payable on December 31?

Solution: Refer to Problem 9- 6 (Page 114)

Problem 9-7 (IFRS)

(IFRS) At the beginning of current year, Masbate Company issued 5-year bonds with face
amount of P5, 000,000 at 110. The entity paid bond issue cost of P80, 000 on same date.
The stated interest rate on the bonds is 8% payable annually every December 31. The bonds are
issued to yield 6% per annum after considering the bond issue cost. The entity used the effective
interest method of amortization.
1. What is the carrying amount of the bonds payable on December 31?
Solution: Refer to Problem 9- 7 (Page 115)

Problem 9-8 (IFRS)

At the beginning of current year, Bontoc Company issued P5, 000,000, 8% serial bonds, to be
repaid in the amount of P1.000, 000 each year. Interest is payable annually on December 31. The
bonds were issued to yield 10% a year.
The bond proceeds were P4, 757,000 based on the present value at January 1 of five annual
payments. The entity amortized the bond discount by the interest method.
1. What is the carrying amount of the bonds payable on December 31?
Solution: Refer to Problem 9- 8 (Page 116)

Problem 9-9 (AICPA Adapted)

On January 1, 2024, Dome Company issued P4, 000.000, 8% serial bonds, to be repaid in the
amount of P800, 000 each year. Interest is payable annually on December 31. The bonds were
issued to yield 10% a year. The entity amortized the bond discount by the interest method. The
bond proceeds totaled P3, 805,600 based on the present value on January 1, 2024 of five annual
payments.
Due date Principal Interest PV on 1/1/2024
12/31/2024 800, 000 320, 000 1, 018, 000
12/31/2025 800, 000 256, 000 872, 200
12/31/2026 800, 000 192, 000 745, 000
12/31/2027 800, 000 128, 000 633, 800
12/31/2028 800, 000 64, 000 536, 600

1. On December 31. 2024, what is the carrying amount of the bonds payable?

Solution: Refer to Problem 9-9 (Page 117)

Problem 9-10 (IAA)

On January 1, 2024, Moon Company reported 9% bonds payable of P4.000.000 less unamortized
discount of P320, 000.
Further examination revealed that these bonds were issued to yield 10%. The amortization of the
bond discount was recorded using the effective interest method.
Interest was paid on January 1 and July 1 of each year. On July 1, 2024, the entity retired the
bonds at 103 before maturity.
1. What amount should be recognized as loss on retirement of bonds payable on July 1,
2024?

Solution: Refer to Problem 9- 10 (Page 118)

Problem 9-11 (AICPA Adapted)

On January 1, 2023, Angel Company issued 5-year 5,000 bonds with face amount of P1, 000 per
bond for P5, 380,000 to yield 10%. Interest of 12% is payable annually every December 31. On
June 30, 2024, the entity retired 2,000 bonds at 96 plus accrued interest. The entity used the
interest method.
1. What amount should be recognized as gain or loss on bond retirement on June 30, 2024?
2. What is the carrying amount of the remaining bonds payable on December 31, 2024?

Solution: Refer to Problem 9- 11 (Page 119)

Problem 9-12 (AICPA Adapted)

At the beginning of the current year, Colt Company issued ten-year bonds with a face amount of
P5, 000,000 and a stated interest rate of 8% payable annually at every year-end. The bonds were
priced to yield 10%.
PV of 1 for 10 periods at 10% 0.3855
PV of an ordinary annuity of 1 for 10 periods at 10% 6.145

1. What is the issue price of the bonds?

Solution: Refer to Problem 9- 12 (Page 120)

Problem 9-13 (IAA)

White Company issued P2, 000,000 face value of 10-year bonds on January 1. The bonds pay
interest on January 1 and July 1 and had a stated rate of 10%. The market rate of interest is 8%.
PV of 1 at 4% for 20 periods .46
PV of an ordinary annuity of 1 at 4% for 20 periods 13.59
1. What is the issue price of the bonds?

Solution: Refer to Problem 9- 13 (Page 120)

Problem 9-14 (AICPA Adapted)

At the beginning of the current year, Margaret Company issued 10- year bonds with face amount
of P5, 000, 000 and stated interest of 6%. The 6% interest is payable annually every December
31. The bonds are issued to yield 9%. The present value of 1 to 10 periods is 0.558 at 6% and
0.422 at 9%. The present value of an ordinary annuity of 1 for 10 periods is 7.36 at 6% and 6.418
at 9%.
1. What is the issue price of the bonds payable?
Solution: Refer to Problem 9- 14 (Page 121)

Problem 9-15 (IAA)

On January 1, 2023, Surigao Company issued bonds payable with face amount of P4, 000,000
and stated interest of 12%. The interest is payable semiannually on June 30 and December 31.
The bonds mature every December 31 at the rate of P2, 000,000 per year for 2 years.
The prevailing market rate for the bonds payable is 8%. The present value of 1 at 4% is 0.96 for
one period, 0.92 for two periods, 0.90 for three periods and 0.85 for four periods.

1. What is the issue price of bonds payable?

Solution: Refer to Problem 9- 15 (Page 121)

 CHAPTER 10
COMPOUND FINANCIAL INSTRUMENT

Problem 10-1
At year-end. Fort Company issued 5,000 8%, 10-year bonds. P1, 000 face amount with
detachable share warrants at 110.
Each bond carried a detachable warrant for ten ordinary shares of For Company at a specified
option price of P25 per share. The par value of the ordinary share is P20.
Immediately after issuance, the market value of the bonds without the warrants was P5.400, 000
and the market value of the warrants was P600, 000.
1. What is the carrying amount of bonds payable at year-end?
Solution: Refer to Problem 10- 1(Page 122- 123)

Problem 10-2
At the beginning of the current year, Moses Company issued P5, 000,000 face amount, 5-year
bonds at 109.
Each P1, 000 bond was issued with 10 detachable share warrants, each of which entitled the
bondholder to purchase one ordinary share of P100 par value at 120. Immediately after issuance,
the market value of each warrant was P5.
The stated interest rate on the bonds is 11% payable annually every December 31. 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.
1. What is the initial carrying amount of the bonds payable?
2. What amount should be recorded initially as a discount or premium on bonds
payable?
3. What amount should be reported as equity component arising from the issuance of
bonds payable?
4. What amount should be recorded as share premium if all the warrants are exercised?
Solution: Refer to Problem 10- 2 (Page 124- 125)
Problem 10-3
At the beginning of the current year, Case Company issued P5, 000, 0000 of 12% nonconvertible
5-year bonds at 103.
In addition, each P1,000,000 bond was issued with 30 detachable share warrants, each of which
entitled the bondholder to purchase, for P50, one ordinary share of Case Company, par value
P25.
The quoted market value of each warrant was P4. The market value of the bonds ex-warrants at
the time of issuance is 95.
1. What is the carrying amount of the bonds payable?
2. What amount of the proceeds from the bond issue should be recognized as an
increase in shareholders' equity?
3. What amount should be credited to share premium if all the share warrants are
exercised?
Solution: Refer to Problem 10- 3 (Page 126)

Problem 10-4
Moriones Company issued P5, 00,000 face amount 12% convertible bonds at 110 at the
beginning of current year. The bonds pay interest semiannually on January 1 and July 1.
It is estimated that the bonds would sell only at 103 without the conversion feature. Each P1,
000,000 bond is convertible into 10 ordinary shares with 100 par value.
1. What amount should be reported as an increase in shareholders' equity arising from
the original issuance of the convertible bonds payable?
Solution: Refer to Problem 10- 4 (Page 127)

Problem 10-5
At the beginning of the current year, Susan Company issued 5,000 convertible bonds payable.
The bonds have a three-year term and are issued at 110 with a face amount 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.
When the bonds are issued, the prevailing market interest rate for a similar debt instrument
without conversion option is 9%.
The present value of 1 at 9% for 3 periods is .77 and the present value of an ordinary annuity of 1
at 9% for 3 periods is 2.53.
1. What amount should be reported as equity component of the original issuance of the
convertible bonds payable?
Solution: Refer to Problem 10- 5 (Page 128)

Problem 10-6
Spare Company had outstanding share capital with par value of P50, 000,000 and 12%
convertible bonds payable in the face amount of P10, 000,000. Interest payment dates of the
bond issue are June 30 and December 31. The conversion clause in the bond indenture entitled
the bondholders to receive 40 shares of P20 par value in exchange for each P1, 000 bond.
The holders of bonds with face amount of P5, 000,000 exercised the conversion privilege at the
end of year. The market price of the bonds on that date was P1, 100 per bond and the market
price of the shares was P30.
The discount on bonds payable was P500, 000 and the share premium from conversion privilege
had a balance of P2, 000,000 at the date of conversion.
1 What amount of share premium should be recognized by reason of the conversion of
bonds payable into share capital?
Solution: Refer to Problem 10- 6 (Page 129)

Problem 10-7
Clay Company had P600, 000 convertible 8% bonds payable outstanding on June 30. Each P1,
000 bond was convertible into ordinary shares of P50 par value. On July 1, the interest was paid
to bondholders, and the bonds were converted into ordinary shares, which had a fair value of P75
per share.
The premium on bonds payable was P12, 000 at the date of conversion. No equity component
was recognized when the bonds were originally issued.
1. What amount should be recorded as an increase in share premium as result of
the bond conversion?
Solution: Refer to Problem 10- 7 (Page 130)

Problem 10-8
After recording interest and amortization. Andi Company converted P5, 000,000 of 12%
convertible bonds into 50,000 shares of P50 par value. On the conversion date, the carrying
amount of the bonds payable was P6, 000,000, the market value of the bonds P6, 500.000 and the
share was publicly trading at 150.
The entity incurred P200, 000 in connection with the bond conversion. When the bonds were
originally issued, the equity component was recorded at P2, 000,000.
1. What amount of share premium should be recorded as a result of the bond conversion?
Solution: Refer to Problem 10- 8 (Page 130)

Problem 10-9
At year-end, Cey Company had outstanding 10%, 5,000,000 face amount convertible bonds
payable maturing in three years.
Interest is payable on June 30 and December 31. Each P1, 000 bonds is convertible into 50
shares of P10 par value.
At the date of conversion, the premium on bonds payable was P300, 000. No equity component
was recognized when the bonds were originally issued.
At year-end, 2,000 bonds were converted when Cey Company's share had a market price of P24.
The entity incurred P20, 000 in connection with the conversion.

1. What amount should be recorded as share premium from the issuance of shares as a result
of the bond conversion?
Solution: Refer to Problem 10- 89(Page 131)

Problem 10-10
On. January 1, 2024, Arlene Company issued convertible bonds with a face amount of P5,
000,000 for P6, 000,000.
The bonds are convertible into 50,000 shares with P100 par value. The bonds have a5-year life
with 10% stated interest rate payable annually every December 31.
The fair value of the convertible bonds without conversion option is computed at P5, 399,300 on
January 1, 2024.
On December 31, 2026, the convertible bonds were not converted but fully paid for P5, 550,000.
On such date, the fair value of the bonds without conversion privileges P5, 400,000 and the
carrying amount is P5, 178,300.
1. What is the carrying amount of the bonds payable on January 1, 2024?
2. What amount should be recorded as premium on bonds payable on January 1, 2024?
3. What amount should be recorded as equity component arising from issuance of bonds payable
on January 1, 2024?
4. What amount should be recorded as loss on the extinguishment of the convertible bonds
payable on December 31, 2026?
Solution: Refer to Problem 10- 10 (Page 133)
)

CHAPTER 11
LESSEE ACCOUNTING

Problem 11-1 (IFRS)

At the beginning of current year, Lessee Company leased a machinery with the following
information:

Annual rental payable at the end of each year 1,000,000

Residual value guarantee 500,000
Payment to lessor as lease bonus 300,000
Cost of dismantling and restoring the asset as required
By contract at present value 390,000
Annual executory cost paid by lessee 50,000
Lease term 4 years
Useful life of machinery 8 years
Implicit interest rate 10%
Present value of an ordinary annuity of 1 at 10% for 4 periods 3.17
Present value of 1 at 10% for 4 periods 0.68

1. What is the initial lease liability?

2. What is the cost of right use asset?
3. What is the depreciation for current year?
4. What is the lease liability at year-end?
Solution: Refer to Problem 11- 1 (Page 134- 136)

Problem 11-2 (IFRS)

At the beginning of current year, Panorama Company leased a building from a lessor with the
following pertinent information:
Annual rental payable at the end of each year 1,000,000
Initial direct cost paid 400,000
Lease incentive received 100,000
Lease hold improvement 200,000
Purchase option that is reasonably certain to be exercised 500,000
Lease term 5 years
Useful life of building 8 years
Implicit interest rate 10%
PV of an ordinary annuity of 1 for 5 periods at 10% 3.79
Present value of 1 for 5 periods at 10% 0.62

1. What amount should be recognized initially as cost of the right of use asset?
2. What amount should be recognized as depreciation of right of use asset for current year? .
3. What amount should be recognized as interest expense for current year?
4. What amount should be reported as lease liability at year –end?
Solution: Refer to Problem 11- 2 (Page 138

Problem 11-3 (AICPA Adapted)

At the beginning of current year, Ashe Company entered into a ten-year no cancelable lease
requiring year-end payments of P1, 000,000. Ashe Company's incremental borrowing rate is
12%, while the lessor's implicit interest rate, known to Ashe Company, and is 10%. Present value
factors for an ordinary annuity for ten periods are 6.145 at 10%, and 5.650 at 12%.
On same date, Ashe Company paid initial direct cost of P200.000 in negotiating and securing the
leasing arrangement. Ownership of the property remains with the lessor at expiration of the lease.
There is no purchase option. The leased property has an estimated economic life of 12 years.

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

2. What amount should be recognized as annual depreciation of the right of use asset?
Solution: Refer to Problem 11- 3 (Page 139)

Problem 11-4 (AICPA Adapted)

Robbin Company leased a machine with remaining useful life of 14 years from Ready Leasing
Company. The lease required 10 annual payments of P1, 000,000 beginning immediately.
The lease specified an interest rate of 12% and a purchase option of P1, 000,000 at the end of the
tenth year. The lessee is reasonably certain to exercise the purchase option.
Present value of an annuity due (in advance)
Of 1 at 12% for 10 periods 6.328
Present value of 1 at 12% for 10 periods 0.322

1. What amount should be recorded initially as cost of the right of use asset?
2. What amount should be reported as annual depreciation of the right of use asset?
Solution: Refer to Problem 11- 4 (Page 140)

Problem 11-5 (AICPA Adapted)

At the beginning of current year, Day Company leased a new machine from Parr Company with
the following pertinent information:
Lease term 5 years
Annual rental payable at beginning of each year 500,000
8 Useful life of machine 8 years
Implicit interest rate in lease 12%
Present value of an annuity of 1 in advance for 5 periods at 12% 4.04
Present value of an ordinary annuity of 1 for 5 periods at 12% s 3.60

The lease is not renewable and the machine shall revert to Pair Company at the termination of
the lease. The cost of the machine on Parr Company's accounting records is P3, 755,000.

a. At the beginning of the lease term, what amount should be recorded as cost of
right of use asset?

b. What amount should be reported as depreciation of the right of use asset for the
current year?

Solution: Refer to Problem 11- 5 (Page 141)

Problem 11-6 (AICPA Adapted)

At the beginning of current year, Nori Mining Company entered into a 5-year lease for drilling
equipment. The entity account for the acquisition at the present value of lease payments of P2,
400,000 which included a P100, 000 purchase option. At the end of the lease, the entity is certain
to exercise the purchase option.
The entity estimated that the equipment's fair value will be P200, 000 at the end of the 8-year
life
1 .What amount should be recognized as depreciation expense on the right of use asset for the
current year?
Solution: Refer to Problem 11- 6 (Page 142)

Problem 11-7 (AICPA Adapted)

At the beginning of current year, Cola Company signed an 8-year no cancelable lease for a new
machine requiring P750, 000 annual payment at the beginning of each year. The machine had a
useful life of 12 years with residual value of P300, 000.
Aggregate lease payments have a present value of P5, 400,000 based on an appropriate interest
rate. Title passes to Cola Company at the lease expiration date. The straight line method of
depreciation is used for all plant assets.

1. What amount should be recognized as depreciation of the right of use asset for the current
year?
Solution: Refer to Problem 11- 7 (Page 142)

Problem 11-8 (AICPA Adapted)

At the beginning of current year, Kosovo Company entered into a 10-year lease for an
equipment.
The entity accounted for the acquisition at the present value of lease payment of P4, 900,000
which included a P200, 000 residual value guarantee.
At the end of the lease, the asset shall revert back to the lessor.
It is estimated that the asset's fair value at the end of the 12-year useful life will be P100, 000.
The entity regularly used the straight line depreciation on similar equipment.

1. What amount should be recognized as depreciation expense of the right of use asset for
the current year?
Solution: Refer to Problem 11- 8 (Page 143)
 CHAPTER 12
LEASE LIABILITY

Problem 12-1
On January 1, 2024, Babson Company leased two automobiles for executive use. The lease
required Babson to make five annual payments of P1, 300, 00 beginning January 1, 2024.
At the end of the lease term, December 31, 2028, the entity guaranteed the residual value of the
automobiles at P1, 000,000.
The interest rate implicit in the lease is 9%. Present value factors for the 9% rate implicit in the
lease are:
For an annuity due with 5 payments in advance 4.240
For an ordinary annuity with 5 payments 3.890
Present value of 1 for 5 periods 0.650

1. What amount should be reported as lease liability immediately after the first required
payment?
Solution: Refer to Problem 12- 1 (Page 144)

Problem 12-2
On December 31, 2024, Action Company signed a 7-year finance lease for an airplane. The
airplane’s fair value was P8, 415,000.
The entity made the first annual lease payment of P1, 530,000 on December 31, 2024.
The entity’s incremental borrowing rate was 12%, and the interest rate implicit in the lease,
which was known by Action Company was 9%. The rounded present value factors for an annuity
due are:
9% for 7 years 5.5
12% for 7 years 5.1

1. What amount should be reported as lease liability on December 31, 2024?

2. What amount should be reported as interest expense for 2025?
Solution: Refer to Problem 12- 2 (Page 145
Problem 12-3
Oak Company leased equipment for the entire nine-year useful life, agreeing to pay P500, 000 at
the start of the lease term on December 31, 2023 and P500, 000 annually on each December 31
for the next eight years.
The present value on December 31, 2023 of the nine lease payments over the lease turn using the
rate implicit in the lease which Oak Company knows to be 10% was P3, 165,000.
The December 31, 2023 present value of the lease payments using Oak Company incremental
borrowing rate of 12% was P2, 985,000. Oak Company made a timely second lease payment.

1. What amount should be reported as lease liability on December 31, 2024?

Solution: Refer to Problem 12- 3 (Page 146)

Problem 12-4
On December 31, 2023, Roe Company leased a machine from Colt Company for a five-year
period.
Equal annual payments under the lease are P1, 050,000 including P50, 000 annual executory cost
and are due on December 31 of each year.
The first payment was made on December 31, 2023 and the second payment was made on
December 31, 2024. The five lease payments are discounted at 10% over the lease term.
The present value of minimum lease payments at the inception of the lease and before the first
annual payment was P4, 170,000.

1. On December 31, 2024, what amount should be reported as lease liability?

Solution: Refer to Problem 12-3 (Page 147)

Problem 12-5
On December 31, 2023, Ames Company leased equipment for 10 years. The entity contacted to
pay P400, 000 annual rent on December 31, 2023, and on December 31 of each of the next nine
years.
The lease liability was recorded at P2, 700,000 on December 31, 2023, before the first payment.
The equipment’s useful life is 12 years, and the interest rate implicit in the lease is 10%. The
entity used the straight line method to depreciate all equipment.
In recording the December 31, 2024 payment, by what amount should the lease liability be
reduced?
1. What amount should be reported as interest expense for 2024?
Solution: Refer to Problem 11- 8 (Page 143)

Problem 12-6
On January 1, 2024, Day Company entered into a 10-year lease agreement with Ward Company
for industrial equipment. Annual lease payments of P1, 000,000 are payable at the end of each
year.
The lessor expected a 10% return on the lease which is the implicit rate in the lease. The
equipment is expected to have an estimated useful life of 10 years. In addition, a third party has
guaranteed to pay Ward Company a residual value of P500, 000 at the end of the lease.
Present value of an ordinary annuity of 1 at 10% for 10 periods 6.14
Present value of 1 at 10% for 10 periods 0.39

1. On December 31, 2024, what amount should be reported as principal lease liability?
2. What amount should be reported as interest expense for 2024?
Solution: Refer to Problem 12- 6 (Page 149)

Problem 12-7
On December 31, 2024, Rafferty Company leased equipment with annual lease payments of
P200, 000 due December 31 for 10 years.
The equipment’s useful life is 10 years and the interest rate implicit in the lease is 10%.
The lease obligation was recorded on December 31, 2024 at P1, 350,000 and the first lease
payment was made on that date.
 1. What amount should be included in current liabilities in relation to the lease on
December31, 2024?
Solution: Refer to Problem 12-7 (Page 150)

Problem 12-8
On January 1, 2023, Nun Company leased machinery from Chin Company for a 10-year period.
The useful life of the asset is 20 years. Equal annual payments under the lease are P200, 000 and
are due on January 1 of each year starting January 1, 2023.
The present value on January 1, 2023 of the lease payments over the lease term discounted at
implicit interest rate of 10% was P1, 352,000. The lease provided for a transfer of the title to the
lessee upon expiration of the lease term.

1. What amount should be reported as lease liability on December 31, 2023?

2. What amount of lease liability should be reported as noncurrent on December 31, 2023?
3. What amount should be reported as interest expense for 2023?

Solution: Refer to Problem 12-8 (Page 151)

Problem 12-9
At the current year-end, Mercedez Company purchased a machinery that it had been leasing
under a finance arrangement.
The right of use asset and lease liability were originally recorded as P2, 000,000.
At the time of the purchase, the accumulated depreciation on the right of use asset was P800, 000
and the remaining balance of the lease liability was P1, 300,000. The underlying asset was
purchased for P1, 440,000 cash.
1. What amount should be debited as cost of the machinery on the date of purchased?
Solution: Refer to Problem 12- 9(Page 152)

Problem 12-10
On January 1, 2023, Yemen Company leased an equipment for 6 years from another entity.
The entity recorded the right of use asset at P4, 800,000 which included a purchase option of
P100, 000. On this date, Yemen Company is reasonably certain to exercise the option.
The equipment had an eight-year useful life and fair value of P300, 000 at end of the useful life.
On January 1, 2029, the entity did not exercise the purchase option.

1. What amount should be recognized as loss on finance lease in 2029?

Solution: Refer to Problem 12- 10 (Page 153)