Liabilities_and_equity_alastoy_bsa_2.docx

PREMIUMS AND WARRANTY LIABILITY

1. In December 2016, Cucumber Company began including one coupon in each package of goodies that it sells and offering a pen in exchange for P30 and three coupons. The pens cost P60 each. Eventually, 70% of the coupons will be redeemed. During December, the entity sold 120,000 packaged of goodies and no coupons were redeemed. On December 31, 2016, what amount should be reported as estimated liability for coupons? a. 1,200,000 b. 840,000

c. 1,680,000 d. 2,400,000

Answer is b Solution: Coupons to be redeemed (70% x 120,000) Divide by Number of pens Multiply by net cost of pen (60-30) Estimated liability – December 31, 2015

84,000 3 28,000 30 840,000

2. At the beginning of the current year, Masigasig Company began marketing a bottled chocolate called ChocoMoTo. To help promote the product, the management is offering a special ChocoMoTo mug to each customer for every 10 marked bottle cops of ChocoMoTo. The entity estimated that out of the 250,000 bottles of ChocoMoTo sold during the year, only 80% of the marked bottle cops would be redeemed. During the year, the entity purchased 10,000 mugs at a total cost of P400,000 and already distributed 15,000 mugs to customers. What is the premium liability at year-end? a. 200,000 b. 800,000

c. 400,000 d. 600,000

Answer is a Solution: Mugs to be distributed (80% x 250,000 / 10)

20,000

Mugs already distributed Mugs outstanding Estimated liability at year-end (40 x 15,000)

15,000 5,000 200,000

3. Shark Company sells gift certificates redeemable only when merchandise is purchased. These gift certificates have no expiration date. Upon redemption or expiration, the entity recognizes unearned revenue as realized. Information for the current yeas is as follows: Unearned revenue, January 1, 2016 Gift certificates sold Gift certificates redeemed Gift certificates expected not to be redeemed Cost of goods sold

550,000 1,250,000 750,000 50,000 50%

On December 31, 2016, what amount should be reported as unearned revenue? a. 1,000,000 b. 500,000

c. 1,050,000 d. 550,000

Answer is a Solution: Unearned revenue – January 1, 2016 Add: Gift certificates sold Total Less: Gift certificates redeemed Gift certificates expected not to be redeemed Unearned revenue – December 31, 2016

550,000 1,250,000 1,800,000 750,000 50,000

800,000 1,000,000

4. On July 1, 2016, Xilam Company began offering a new product for sale under one-year warranty. Of the 60,000 units in inventory on July 1, 2015, 40,000 had been sold by September 30, 2016. Based on its experience with similar products, the entity estimated that the average warranty cost per unit sold would be P90. Actual warranty costs incurred from Jul 1 through September 31, 2016 amounted to P800,000. On September 31, 2016, what is the estimated warranty liability? a. 2,600,000 b. 1,800,000 Answer is c

c. 2,800,000 d. 4,400,000

Solution: Warranty expense (40,000 x 90) Actual warranty cost Warranty liability – September 31, 2016

3,600,000 ( 800,000) 2,800,000

5. Mayday Company introduced a new product that carried a 2-year warranty against defects. The estimated warranty cost related to sales is 4% in the year of sale and 5% in the year after sale. Sales are P3,800,000 for 2016 and P 4,500,000 for 2017. Actual warranty expenditures are P150,000 for 2016 and P400,000 for 2017. What amount should be reported as estimated warranty liability on December 31, 2017? a. 377,000 b. 197,000

c. 192,000 d. 0

Answer is b Solution: Warranty expense: 2016 (9% x 3,800,000)

342,000

2017 (9% x 4,500,000)

405,000

747,000

Actual warranty expenditures 2016

150,000

2017

400,000

Warranty liability – December 31, 2017

550,000 197,000

6. During 2016, Yamashita Co. introduced a new line of machines that carry a three-year warranty against manufacturer’s defects. Based on industry experience, warranty costs are estimated at 2% of sales in the first year of sale, 3% in the year after sale, and 4% in the second year after sale. Sales and actual warranty expenditures for the first three-year period were as follows: Sales

Actual Warranty Expenditures

2016

P 600,000

P 4,000

2017

1,200,000

35,000

2018

1,600,000

120,000

P3,400,000

P159,000

What amount should Yamashita report as a liability at December 31, 2018? a. 0 b. 24,000

c. 147,000 d. 112,000

Answer is c Solution:

Warranty expense: 2016 (9% x 600,000)

54,000

2016 (9% x 1,200,000)

108,000

2017 (9% x 1,600,000)

144,000

306,000

Actual warranty expenditures 2016

4,000

2016

35,000

2017

120,000

Warranty liability – December 31, 2018

159,000 147,000

7. Delfin Co. includes one coupon in each bag of dog food it sells. In return for eight coupons, customers receive a leash. The leashes cost Delfin P3 each. Delfin estimates that 40 percent of the coupons will be redeemed. Data for 2016 and 2017 are as follows: Bags of dog food sold Leashes purchased Coupons redeemed

2016 500,000 18,000 120,000

What is the premium liability at December 31, 2017? a. 16,875

c. 33,750

2017 600,000 22,000 150,000

b. 31,875

d. 63,750

Answer is d Solution: Coupons to be redeemed – 2016 (40% x 500,000) 200,000 Less: Coupons redeemed – 2016 120,000 Balance 80,000 Add: Coupons to be redeemed – 2017 (40% x 600,000) 240,000 Balance 320,000 Less: Coupons redeemed – 2017 150,000 Total 170,000 Premiums to be distributed (170,000/8) 21,250 Premium liability – December 31, 2017 (21,250 x P3) 63,750 8. Similac Company offered a cash rebate of P8 on each P20 package of batteries sold during the current year. Historically, 10% of customers mail in the rebate form. During the year, 8,500,000 packages of batteries are sold, and 420,000 P8 rebates are mailed to customers. What amount of rebate expense and liability for rebates should be reported respectively at year-end? a. 6,800,000 and 3,440,000 b. 6,800,000 and 6,800,000 c. 3,440,000 and 3,360,000 d. 3,440,000 and 3,440,000 Answer is d Solution: Rebate expense (8,500,000 x 10% x 8) Rebates redeemed (420,000 x 8) Liability for rebates at year-end

6,800,000 (3,360,000) 3,440,000

9. Diego Company sells its only line product at average selling price of P500 per unit. To promote its sales, a gift item is offered to customers on the return of 5 empty containers as proof of purchase, plus remittance of P50. The cost of gift item is P150/pc., and it is estimated that 80% of the proof of purchase will be

redeemed. For the current year, Diego Company’s total sales for the product amounted to P6,000,000, of which actual containers redeemed were 7,600. How much of the estimated liability for premium payable should be reported in its current year’s end balance sheet? a. 20,000 b. 40,000

c. 60,000 d. 240,000

Answer is b Solution: Containers to be redeemed (6,000,000 / 500 x 80%) Less: Containers redeemed Balance Gift items to be distributed (2,000 / 5) Estimated Premium Liability – year end (400 x 100)

9,600 7,600 2,000 400 40,000

10. At December 31, 2016, Dora Company had 1,000 gift certificates outstanding, which had been sold to customers during 2016 for P75. Dora operates on a gross margin of 60%. How much revenue pertaining to the 1,000 outstanding gift certificates should be deferred at December 31, 2016? a. P0 b. P45,000

c. P30,000 d. P75,000

Answer is d Solution: Unearned revenue ( 1,000 x 75)

75,000

DEFERRED REVENUE

1. Malan Depot sells gift certificates redeemable only when product is purchased. These gift certificates have no expiration date. Upon redemption or expiration, the entity recognizes the unearned revenue as realized. Information for the current year is as follows: Unearned revenue, Jan. 1, 2013 Gift certificates sold Gift certificates redeemed

675,000 2,250,000 1, 950,000

Gift certificates expected not to be redeemed 100,000 Cost of goods sold 60 percent On December 31, 2013, what amount should be reported as unearned revenue? a. 595,000 b. 485,000

c. 875,000 d. 975,000

Answer is c Solution: Unearned Revenue, January 1, 2013 Add: Gift certificates sold Total Less: Gift Cert. Redeemed Gift Cert. expected not to be redeemed Unearned Revenue – December 31, 2013

675,000 2,250,000 2,925,000 1,950,000 100,000

2,050,000 875,000

2. Stilt Corporation sells subscriptions to a directory that is published semiannually and shippd 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 year and is credited to deferred revenue from subscriptions. Data relating to current year are as follows: Deferred Revenue from subscriptions, January 1, 2010 Cash receipts from subscribers

1,500,000 7,200,000

On December 31, 2010, what amount should be reported as deferred revenue from subscriptions? a. 1,800,000 b. 3,300,000

c. 3,600,000 d. 5,400,000

Answer is a Solution: Monthly Subscriptions (7,200,000/12) Subscriptions after September 30 October November December

600,000 600,000 600,000 600,000

Total Unearned Subscription revenue – 12/31/10

1,800,000

3. In November and December 2009, Freud Company, a magazine publisher, received P7,200,000 for 1,000 3-year subscriptions at P2400 per year, starting with the January 2010 issue. The entity elected to include the entire P7,200,000 in the 2010 income tax return What amount should be reported in the income statement for subscriptions revenue for 2009? a. P7,200,000 b. P2,400,000

c. P 400,000 d. P 0

Answer is d Solution: The subscriptions revenue should be reported for accounting purposes annually at P2,400,000 for 2010, 2011 and 2012. So the answer is 0.

4. Ikaw lang sapat na Company sells magazine subscriptions for one year, two year or three year period. Cash receipts from subscribers are credited to magazine subscriptions collected in advance, and this account had a balance of P 2,400,000 on December 31, 2012 expire as follows : During 2013 During 2014 During 2015

650,000 830,000 470,000

On December 31, 2012, what amount should be reported as magazine subscriptions collected in advance? a. P 500,000 b. P 1,200,000

c. P 1,900,000 d. P 2,400,000

Answer is c Solution: 2013 2014 2015 Total

650,000 830,000 470,000 1,900,000

5. Ibakana Company offers three payment plans on its twelve-month contracts. Information on the three plans and the number of children enrolled in each plan for the September 1, 2015 through August 31, 2016 contract year is as follows: Initial payment per child

Monthly fee per child

Number of children

60,000 30,000

4,200 5,500

15 12 9

#1 #2 #3

The entity received P990,000 of initial payments on September 1, 2015, and P324,000 of monthly fees during the period September 1 through December 31, 2015.

On December 31, 2015, what amount should be reported as deferred revenue?

a. 330,000 b. 438,000

c. 660,000 d. 990,000

Answer is c Solution: Plan #1 Plan #2

(50,000 x 15) (20,000 x 12)

750,000 240,000

Total initial payments

990,000

Deferred revenue – December 31, 2015 (990,000 x 8/12)

660,000

Plan #2 Plan #3

(3,000 x 12 x 4) (5,000 x 9 x 4)

Total monthly fees – already earned

144,000 180,000 324,000

6. Umasa Company sells office equipment service contracts agreeing to service equipment for a two-year period. Cash receipts from contracts are credited to unearned service contract revenue and 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 is as follows: Unearned service contract revenue at January 1 Cash receipts from service contracts sold Service contract revenue recognized Service contract expense

520,000 980,000 860,000 520,000

What amount should be reported as unearned service contract revenue on December 31? a. 380,000 b. 400,000

c. 410,000 d. 640,000

Answer is d Solution: Unearned revenue – January 1 Cash receipts from service contracts sold

520,000 980,000

Total Less: Service contract revenue recognized Unearned service contract revenue – December 31

1,500,000 860,000 720,000

7. Sinoka Video Company sells 1- and 2-year subscriptions for its video-of-themonth business. Subscriptions are collected in advance and credited to sales. An analysis of the recorded sales activity revealed the following:

Sales Less cancelations Net sales Subscription expirations:

2015 420,000 20,000 400,000

2016 500,000 30,000 470,000

2015 2016 2017 2018

120,000 155,000 125,000 400,000

130,000 200,000 140,000 470,000

On December 31, 2016, what amount should be reported as unearned subscription revenue? a. 495,000 b. 470,000

c. 465,000 d. 340,000

Answer is c Solution: Subscriptions received in 2015 that will expire in 2017 Subscriptions received in 2016 that will expire in 2017 Subscriptions received in 2016 that will expire in 2018

125,000 200,000 140,000

Unearned subscription revenue – December 31, 2016

465,000

8. Saunalang 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 servicer 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 2015.

What amount should be reported as deferred service revenue on December 31, 2015? a. 540,000 b. 480,000

c. 360,000 d. 300,000

Answer is b Solution: First contract year Second contract year

(40% x 600,000) (60% x 600,000)

240,000 360,000

Total contracts sold in 2015

600,000

Since the contracts are sold evenly, one-half of the 40% is earned in 2015 and one-half will be earned in 2016. One-half of the 60% will be earned in 2016 and one-half will be earned in 2017.

Thus, the deferred service contract revenue on December 31, 2015 is computed as follows:

Total contracts sold (1,000 x 600) Less: Contracts earned in 2015 (240,000 x ½)

600,000 120,000

Deferred service revenue – December 31, 2015

480,000

9. Nasaktan Company requires advance payments with special orders for machinery constructed to customer specification. These advances are nonrefundable. Information for the current year is as follows:

Advances from customers – January 1 Advances received with orders Advances applied to orders shipped Advances applicable to orders cancelled

1,180,000 1,840,000 1,640,000 500,000

What amount should be reported as current liability for advances from customers at year-end? a. 1,480,000 b. 1,380,000

c. d.

880,000 0

Answer is c Solution: Advances from customers – January 1 Add: Advances received with orders

1,180,000 1,840,000

Total

3,020,000

Less: Advances applied to orders shipped Advances applicable to orders cancelled Advances from customers – December 31

1,640,000 500,000 2,140,000 880,000

10. Ditokalang Company records stamp service revenue and provides for the cost of redemptions in the year stamps are sold to licenses. The past experience indicates that only 80% of the stamps sold to licenses would be redeemed. The liability for stamp redemptions was P6,000,000 on January 1, 2015. Additional information for the current year is s follows: Stamp service revenue from stamps sold to licenses Cost of redemption of stamps sold prior to 1/1/2015

5,000,000 2,750,000

If all the stamps sold in 2015 were presented for redemption in 2016, the redemption cost would be P2,250,000. What amount should be reported as liability for stamps redemptions on December 31, 2015? a. 7,250,000 b. 5,500,000

c. 5,050,00 d. 3,250,000

Answer is c Solution: Liability for stamp redemptions – January 1, 2015 Add: Estimated cost of redemptions for stamps sold In 2015 (80% x 2,250,000)

6,000,000

Total Less: Cost of redemption in 2015 Liability for stamp redemptions – December 31, 2015

7,800,000 2,750,000 5,050,000

1,800,000

PROVISION AND CONTINGENT LIABILITY

1. In June 2016, the Hiloma Company began producing and selling a new line of dishwasher. By the end of the year, it has sold 120,000 to various dealers for 150,000 each. The product was sold under a 1-year warranty, and the company estimates warranty costs to be P750 per dishwasher. Hiloma had paid out P30 Million in warranty expenses as of December 31, 2016, which is also the amount shown as warranty expense in its income statement for the current year.

What amount of warranty expense should be shown on Hiloma’s income statement for the year ended December 31, 2016? a. P30,000,000 b. P0

c. P60,000,000 d. P90,000,000

Answer is d Solution: Warranty Expense (P750 x 120,000)

P90,000,000

2. In May 2015, Cherry Company relocated an employee from the Manila head office to a branch in Cebu City. At the end of reporting period on June 30, 2015, the costs are estimated at P350,000 analyzed as follows:

Cost for shipping goods Airfare Temporary accommodation cost for May and June Temporary accommodation cost for July and August Reimbursement for lease break cost paid in July (lease was terminated in May) Reimbursement for cost of living increases for the period May 1, 2015 to May 1, 2016 Total

50,000 15,000 60,000 80,000 20,000 150,000 350,000

What amount should be recognized as provision for relocation costs on June 30, 2015? a. 145,000 b. 225,000

c. 295,000 d. 170,000

Answer is d Solution: Cost for shipping goods Airfare Temporary accommodation cost for May and June Reimbursement for lease break cost

50,000 15,000 60,000 20,000

Reimbursement for cost of living increases for May and June (120,000x 2/12) Total

25,000 170,000

3. On November 25, 2014, an explosion occurred at a Tom Company plant causing extensive property damage to area buildings. By March 10, 2015, 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 P2,500,000 is a reasonable estimate of the liability. Tom’s P10,000,000 comprehensive public liability policy has a P500,000 deductible clause. What should be reported in the December 31, 2014 financial statements, issued on March 25, 2015, in relation to this item?

a. An accrued liability of P500,000 b. A disclosure indicating the probable loss of P2,500,000 c. A footnote disclosure indicating the probable loss of P500,000 d. An accrued liability of P2,500,000

Answer is a Solution: The accrued amount is P500,000 only because it is the extent of liability of Tom under the comprehensive insurance policy.

4. Caso Company is the defendant in a lawsuit filed by Smith Company in 2015 disputing the validity of copyright held by Caso. On December 31, 2015, Caso determined that Smith would probably be successful against Caso for estimated amount of P500,000. Appropriately, a P500,000 loss was accrued by a charge to income for the year ended December 31, 2015. On December 31, 2016, Caso and Smith agreed to a settlement providing cash payment of P350,000 by Caso to Smith, and transfer of Caso’s copyright to Smith. The carrying amount of the copyright on Caso’s accounting records was P70,000 on December 31, 2016. What would be the effect of the settlement on Caso’s income before tax in 2016? a. 80,000 decrease

c. 80,000 increase

b. 70,000 decrease

d. 150,000 increase

Answer is c Solution: Accrued liability on December 31, 2015 Cash settlement on December 31, 2016 Carrying amount of copyright transferred Gain on settlement in 2016

500,000 (350,000) ( 70,000) 80,000

5. During 2014, Steel Company became involved in a tax dispute with the BIR. On December 31, 2014, the tax advisor believed that an unfavourable outcome was probable and a reasonable estimate of additional taxes was P300,000. After the 2014 financial statements were issued, the entity received and accepted a BIR settlement offer of P400,000. What amount of accrued liability should have been reported on December 31, 2014? a. 300,000 b. 400,000

c. 500,000 d. 0

Answer is a Solution: The reasonable estimate of P300,000 is recorded. The accepted BIR offer is not recorded because it was made after the statements are issued. In 2015, when the BIR settlement offer of P400,000 is accepted, an additional liability of P100,000 will be recognized.

6. Orlando Company decided on November 1, 2015 to restructure the entity’s operations as follows: Factory A would be closed down and put on the market for sale.

Employees working in Factory A would be retrenched on November 30, 2015, and would be paid their accumulated entitlements plus six months’ wages. Some employees working in Factory A would be transferred to Factory B, which would continue operating. On December 31, 2015, the following transactions and events had occurred: The retrenched employees have left and their accumulated entitlements have been paid. However, an amount of P1,200,000, representing a portion of the six months’ wages for the retrenched employees, has still not been paid. Costs of P300,000 are expected to be incurred in transferring the remaining employees to their new work in Factory B. The transfer is planned for January 15, 2016. One employee, Juan Cruz, remains in order to complete administrative tasks relating to the closure of Factory A and the transfer of employees to Factory B. Juan Cruz is expected to stay until January 31, 2016. His salary for January will be P50,000 and his retrenchment package will be P180,000, all of which will be paid on the day he leaves. Juan Cruz, would spend 70% of his time administering the closure of Factory A, 20% on administering the transfer of employees to Factory B, and the remaining 10% on general administration. What total amount should be recognized as restructuring provision on December 31, 2015?

a. 1,500,000 b. 1,430,000

c. 1,425,000 d. 1,415,000

Answer is d Solution: Unpaid wages of retrenched employees Retrenchment package of Juan Cruz Salary for administering closure of Factory A (70% x P50,000)

1,200,000 180,000 35,000

Total restructuring provision

1,415,000

7. Regal Company has several contingent liabilities on December 31, 2014. The auditor obtained the following brief description of each liability. In May 2014, Regal Company became involved in litigation. In December 2014, the court assessed a judgment for P1,000,000 against Regal. The entity is appealing the amount of the judgment. The entity’s attorneys believed it is probable that they can reduce the assessment on appeal by 50%. In July 2014, Pasig City brought action against Regal Company for polluting the Pasig River with its waste products. It is probable that Pasig City will be successful but the amount of damages Regal might have to pay should not exceed P800,000.

What total amount should be accrued as provision on December 31, 2014? a. 800,000 b. 1,800,000

c. 1,300,000 d. 1,000,000

Answer is c Solution: Assessment on appeal Environmental Cost Total provision

(50% x 1,000,000)

500,000 800,000 1,300,000

8. On November 1, 2014, Tower Company was awarded a judgment of P1,200,000 in connection with a lawsuit. The decision is being appealed by the defendant and it is expected that the appeal process will be completed by the end of 2015. The attorney believed that it is highly probable that an award will be upheld on appeal but that the judgment may be reduce by 25%. What amount should be reported as a receivable on December 31, 2014?

a. 300,000 b. 1,200,000

c. d.

900,000 0

Answer is d Solution:

The contingent asset is only disclosed when probable and measurable. The asset and related gain are recognized only when realized.

9. During 2015, South Company filed suit against North Company seeking damages for patent infringement. On December 31, 2015, South’s legal counsel believed that it was probable that South would be successful against North for an estimated amount of P2,000,000. In March 2016, South was awarded P1,300,000 and received full payment thereof. In South’s 2015 financial statements issued February 2016, how should this award be reported?

a. As a receivable and deferred revenue of P1,300,000 b. As a receivable and revenue of P1,300,000 c. As a disclosure of a contingent asset of P2,000,000 d. As a disclosure of a contingent asset of P1,300,000

Answer is c Solution: The contingent asset is disclosed only. Since the case is settle in March 2016 after the issuance of the 2015 financial statements in February 2016, the estimated amount of P2,000,000 shall be disclosed.

10. During 2015, Iriga Company is the defendant a breach of patent lawsuit. The lawyers believe there is an 70% chance that the court will not dismiss the case and the entity will incur outflow of benefits. If the court rules in favour of the claimant, the lawyers believe that there is a 60% chance that the entity will be required to pay damages of P1,000,000 and a 40% chance that the entity will be required to pay damages of P500,000. Other amounts of damages are unlikely. The court is expected to rule in late December 2016. There is no indication that the claimant will settle out of court. A 8% risk adjustment factor to the cash flows is considered appropriate to reflect the uncertainties in the cash flow estimates. An appropriate discount rate is 12% per year. What is the measurement of the provision on December 31, 2015? a. 865,080 b. 605,556

c. 801,000 d. 560,700

Answer is b Solution: Weighted probabilities: 60% x 1,000,000 x 70% 60% x 500,000 x 70%

420,000 210,000

Expected cash flows Multiply by risk adjustment factor (100% + 8%) Adjusted cash flows Multiply by PV of 1 at 12% for one period Present value of cash flows

630,000 1.08 680,400 .89 605,556

11. On January 1, 2014, Ranger Company owned a machine with cost of P2,500,000. The accumulated depreciation was P1,500,000 estimated residual value was P150,000 and fair value was P3,500,000. On January 3, 2014, this machine was

irreparably damaged by Dean Company and became worthless. In October 2014, a court awarded damages of P3,500,000 against Dean in favour of Ranger. On December 31, 2014, the final outcome of this case was awaiting appeal and was therefore uncertain. However, in the opinion of Ranger’s attorney, Dean’s appeal would be denied. On December 31, 2014, what amount of gain should be accrued? a. 150,000 b. 350,000

c. 250,000 d. 0

Answer is d Solution: The contingent asset and related contingent gain are only disclosed because the case is still under appeal by the defendant.

BONDS PAYABLE and EFFECTIVE INTEREST METHOD

1. Diosa Company issued 5,000, 10-year 10% P1000 bonds on January 1, 2016 at 103 to yield 9%. Interest is payable every June 30 and December 31. On June 30, 2016, how much is the amortized premium? a) 150,000 b) 36,500

c) 18,250 d) 65,000

Answer is c Solution: Interest Paid (5,000,000 x 10% x 6/12) Interest Expense (5,150,000 x 9% x 6/12) Amortized Discount

P250,000 (231,750) P 18,250

2. On May 1, 2016, Mabuhay Company issued 1,000, P2000 face value 6% bonds dated January 1, 2016 with interest payments June 30 and December 31. The

entity received cash of P2,150,000 plus accrued interest. What is the discount or premium from the issuance of bonds? a) b) c) d)

110,000 premium 150,000 discount 110,000 discount 150,000 premium

Answer is a Solution: Cash Received Accrued Interest (2,000,000 x 6% x 4/12) Carrying amount of Bonds Face Value of Bonds Premium on Bonds

P2,150,000 ( 40,000) P2,110,000 (2,000,000) P 110,000

3. On June 1, 2015, Love Ko To Company issued three thousands, P2000 face value 10% five-year bonds for P5,568,000. The bonds were issued to yield 12% interest. Interest is payable semi-annually on December 1 and June 1. Using the effective interest method, what should be the bond interest expense on June 1, 2016? a) 334,080 b) 560,208

c) 336,125 d) 280,104

Answer is a Solution: First Interest Payment (June 1,2015 to December 1, 2015) Interest expense (5,568,000 x 12% x 6/12) Interest paid (6,000,000 x 10% x 6/12) Discount amortization Carrying amount as June 1, 2015 Carrying amount as of December 1, 2015

Second Interest Payment

P334,080 (300,000) P 34,080 5,568,000 P5,602,080

(December 1, 2015 to June 1, 2016) Interest expense (5,602,080 x12% x6/12) Interest expense related to second interest payment yet already recognized on December 2015 (336,125 x 1/6) Interest expense on June 1, 2016

P336,125

( 56,021) P280,104

4. Umasa Company issued on January 1, 2015 a one thousand, P5000 face value 8% five-year bonds at 105 and paid bond issue costs of 60,000 to yield 7%. Interest is payable annually every December 31. What is the carrying amount of the bonds on December 31, 2015? a) 5,190,000 b) 5,153,300

c) 5,226,700 d) 5,226,700

Answer is b Solution: Bonds payable at issue price (5,000,000 x 105%) Bond issue costs Carrying amount of bonds, January 1, 2015

P5,250,000 (60,000) P 5,190,000

Interest paid (5,000,000 x 8%) Interest expense (5,190,000 x 7%) Premium Amortization

P400,000 (363,300) P 36,700

Carrying amount Premium amortization Carrying amount, December 31, 2015

P5,190,000 (36,700) P5,153,300

5. Face Value of bonds Nominal rate Effective rate Date of issue

4,000,000 12% 14% January 1,2016

The bonds mature on every December 31 of each year at the rate of 1,000,000 for 4 years. The interest is payable annually on December 31.

The present value of 1 at 14% is as follows: One period Two periods Three periods Four periods

.8772 .7695 .6750 .5921

What is the present value of the bonds on January 1, 2016? a) 3,844,928 b) 3,299,528

c) 2,652,608 d) 4,000,000

Answer is a Solution: (a) Date 12-31-16 12-31-17 12-31-18 12-31-19

Principal Payment 1,000,000 1,000,000 1,000,000 1,000,000

Interest Payment 480,000 360,000 240,000 120,000

Total Payment 1,480,000 1,360,000 1,240,000 1,120,000

(b)

(axb) PV Present Factor Value 0.8772 1,298,256 0.7695 1,046,520 0.6749 837,000 0.5921 663,152 3,844,928

6. On July 1, 2015, an entity issued bonds with face amount of 7,000,000 and 10% interest rate for 7,703,000. The bonds are sold to yield 8%. Interest is payable annually. The entity paid bond issue costs of 150,000. On December 31, 2015, the fair value of the bonds is determined to be 7,650,000. The entity elects the fair value option of measuring the bonds payable. What is the carrying amount of the bonds payable on December 31,2015 and the gain or loss in the change of fair value, respectively. a) b) c) d)

7,650,000 and 97,000 gain 7,650,000 and 97,000 loss 7,457,240 and 95,760 gain 7,457,240 and 95,760 loss

Answer is b Solution:

Carrying amount of bonds—January 1, 2015 (7,703,000-150,000) Carrying amount of bonds—December 31, 2015 Increase in fair value of bonds payable—loss

P7,553,000 (7,650,000) (P 97,000)

7. On December 31, 2015 the Niloko Company retired its P5,000,000 face value, 10% bonds. The entity paid a total cash of P5,500,000 including the accrued interest of P400,000. The entity incurred a loss of 150,000 in the retirement of the said bonds. What is the unamortized premium or discount of the retired bonds? a) 350,000 premium b) 250,000 premium

c) 100,000 discount d) 50,000 discount

Answer is d Solution: Total cash paid Accrued interest Retirement price Loss on retirement Carrying amount of bonds

P5,500,000 (400,000) P5,100,000 (150,000) P4,950,000

Face value of bonds Carrying amount of bonds Unamortized discount

P5,000,000 ( 4,950,000) (P 50,000)

8. The entity retired its bond with a face value of P5,000,000 and an unamortized premium of 150,000. The bonds is retired at 105 and paid the accrued interest of 200,000. What is the gain or loss in the retirement of bonds? a) 300,000 loss b) 300,000 gain

Answer is c Solution:

c) 100,000 loss d) 100,000 gain

Retirement price (5,000,000 x 105%) Carrying amount of bonds (5,000,000+150,000) Loss on retirement of bonds

P5,250,000 (5,150,000) P 100,000

. 9. On December 31, 2015 the Nanloko Company retired its P8,000,000 face value, 10% bonds. The entity paid a total cash of P8,500,000 including the accrued interest of P400,000. The entity incurred a gain of 150,000 in the retirement of the said bonds. What is the unamortized premium or discount of the retired bonds? a) 250,000 discount b) 250,000 premium

c) 50,000 discount d) 50,000 premium

Answer is b Solution: Total cash paid Accrued interest Retirement price Gain on retirement Carrying amount of bonds

P8,500,000 (400,000) P8,100,000 150,000 P8,250,000

Carrying amount of bonds Face value of bonds Unamortized premium

P 8,250,000 (P 8,000,000) P 250,000

10. The Makakamove-on Company retired its bond with a carrying amount of P4,850,000 at a price that would gain P200,000. The entity also paid the accrued of P200,000. How much is the total cash paid by the entity? a) 4,850,000 b) 5,250,000

c) 5,050,000 d) 4,650,000

Answer is a Solution: Carrying amount of bonds

P4,850,000

Gain on retirement of bonds Retirement price Accrued interest Total cash paid

(200,000) P4,650,000 200,000 P4,850,000

COMPOUND FINANCIAL INSTRUMENT

1. ABC Company issued 6,000 of 12%, 12-year, P1,000 face value bonds with detachable share warrants at 120. Each bond has a detachable warrant for ten ordinary shares of ABC Company at a specified option price of P20 per share. The par value of the ordinary share is P15. Immediately after the issuance, the market value of bonds ex warrants was P6,500,000 and the market value of thewarrants was P800,000. Q1: What is the carrying amount of bonds payable at year end? a. 6,000,000 b. 6,500,000

c. 6,900,000 d. 7,200,000

Q2: The issuance of the bonds payable with share warrants will show which of the following? a. A credit to Cash 7,200,000 b. A credit to Bonds Payable 6,500,000 c. A debit to Discount on bonds payable 500,000 d. A credit to Share warrants outstanding 700,000

Answer is b,d Solution: a. Issue price of bonds payable – equal to market value ex-warrants 6,500,000 b. Cash Bonds Payable Premiums on bonds payable Share warrants outstanding

7,200,000 6,000,000 500,000 700,000

2. On December 31, 2015, Divergent Company had outstanding 10%, P2,000,000 face amount convertible bonds payable maturing on December 31, 2020. Interst is payable on June 30 an December 31. Each P1,000 bond is convertible into 50

shares of P15 par value. On December 31, 2015, the unamortized premium on bonds payable was P70,000. On December 31, 2015, 400 bonds were converted when Divergent’s share had a market price of P25. The entity incurred P6,000 in connection with the conversion. No equity component was recognized when the bonds were originally issued. Q1: What is the share premium from the issuance of shares as a result of the bond conversion on December 21,2015? a. 108,000 b. 114,000

c. 120,000 d. 130,000

Q2: The carrying amount of converted bonds payable is equal to ______. a. 300,000 b. 414,000

c. 1,035,000 d. 2,070,000

Answer is a,b Solution: Bonds Payable Premium on bonds payable Carrying amount

2,000,000 70,000 2,070,000

Carrying amount converted (400/2,000 x 2,070,000 Par value of shares issued (400 x 50 x P15) Share premium Conversion Expenses Net share premium

414,000 (300,000) 114,000 (6,000) 108,000

Carrying amount converted (400/2,000 x 2,070,000)

414,000

3. Lychee Corporation issued P7,000,000 face value, 5-year bonds at 110 on December 31, 2015. Each P1,000 bond was issued with 25 detachable share warrants, each of which entitled the bondholder to purchase one ordinary share of P5 par value at P15. Immediately after issuance, the market value of each warrant is P7. The stated interest on the bonds is 9% payable annually every December 31. However, the prevailing market rate of interest for similar bonds without warrant is 11%. Q1: On December 31, 2015, what amount should be recorded as discount or premium on bonds payable? a. 359,000

c. 539,000

b. 395,000

d. 593,000

Q2: The amount allocated to equity is ____________. a. 1,239,000 b. 1,329,000

c. 3,129,000 d. 3,192,000

Answer is c,a Solution: PV of principal (7,000,000 x 0.59) PV of interest payments (630,000 x 3.70) TOTAL PRESENT VALUE OF BONDS PAYABLE

4,130,000 2,331,000 6,461,000

Bonds payable PV of bonds payable Discount on bonds payable

7,000,000 6,461,000 539,000

Issue price of bonds with warrants (7,000,000 x 110%) PV of bonds payable Residual amount allocated to warrants

7,700,000 (6,461,000) 1,239,000

4. Anneth Company issued 8,000 convertible bonds at the beginning of the current year. The bonds had a five-year term with a nominal rate of interest of 5%, and were issued at par with a face value of P1,000 per bond. Interest is payable annually on December 31. Each bond is convertible into 40 ordinary shares with a par value of P10. The market rate of interest on similar nonconvertible bond is 9%. At the issuance date, the amount of P325,000 was credited to share premium from conversion privilege. The bonds were not converted and instead, the entity paid off the convertible bondholders as maturity. Q1: What amount should be recorded as gain or loss on the full payment of the convertible bonds at maturity? a. 8,000,000 loss b. 325,000 loss

c. 325,000 gain d. 0

Q2: Which of the following is false in recording the issuance of the convertible bonds? a. A credit to Cash 8,000,000 b. A credit to Bonds Payable 7,675,000 c. A debit to Discount on bonds payable 325,000

d. A credit to Share warrants outstanding 325,000 Answer is d,c Solution: There is no gain or loss since the bonds were not converted and instead, the entity paid off the convertible bondholders as maturity.

Cash Discount on bonds payable Bonds payable Share Premium - conversion privilege

8,000,000 325,000 8,000,000 325,000

9-10) Fajardo Company had outstanding share capital with par value of P100,000,000 and a 9% convertible bond payable in the face amount of P20,000,000. 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 20 shares of P20 par value in exchange for each P1,000 bond. On June 30, 2015, the holders of P5,000,000 face value bonds exercised the conversion privilege. The market price of the bonds on that date was P1,100 per bond and the market price of the share was P30. The total unamortized bond discount at the date of conversion was P900,000. The share premium from conversion privilege has a balance of P3,000,000 on June 30, 2015. Q1: What amount of share premium should be recognized by reason of the conversion of bonds payable into share capital? a. 3,525,000 b. 2,775,000

c. 1,750,000 d. 1,525,000

Q2: The total consideration is equal to ____________.

a. 3,525,000 b. 2,775,000

c. 1,750,000 d. 1,525,000

Answer is d,a Solution: Bonds Payable Discount on bonds payable Carrying amount

20,000,000 (900,000) 11,100,000

Carrying amount converted (5/20 x 11,100,000) Applicable share premium from conversion privilege (5/20 x 3,000,000) Total consideration Par value of shares issued (5,000 x 20 x 20) Carrying amount converted (5/20 x 11,100,000) Applicable share premium from conversion privilege (5/20 x 3,000,000) Total consideration

2,775,000 750,000 3,525,000 (2,000,000) 2,775,000 750,000 3,525,000

NOTE PAYABLE 1. U-en-I Company had 1,500,000 note payable due on June 30,2016. Under the existing loan facility, the entity had the discretion to refinance or roll over the note payable for at least twelve months after the end of reporting period. On December 31,2015, what amount of the note payable should be reported as noncurrent liability? a. 1,500,000 b. 1,800,000

c. 2,250,000 d. 0

Answer is a Solution: The entire amount is classified as non-current liability. PAS 1, paragraph 73, provides that if an entity has the discretion to refinance or roll over an obligation for at least twelve months after the end of reporting period, it shall classify the obligation as noncurrent, even if it would otherwise be due within a shorter period.

2. Fred Company reported the following liabilities on December 31,2015: Accounts Payable Short-term borrowings Mortgage payable, current portion P100,000 Note payable, due June 30, 2016

600,000 300,000 2,000,000 900,000

The P900,000 note payable was refinanced with a 5-year loan on January 15, 2016 with the first principal payment due January 15, 2017. The financial statements were issued February 28, 2016.

What amount should be reported as current liabilities on December 31, 2015? a) 900,000 b) 1,900,000

c. 1,000,000 d. 700,000

Answer is b Solution: Accounts Payable Short-term borrowings Mortgage payable- current portion Note payable Total current liabilities

600,000 300,000 100,000 900,000 1,900,000

3. On January 1, 2015, Anne Company sold land to Guring Company. There was no establish market price for the land. Guring gave Anne a P3,000,000 noninterest bearing note payable in three equal annual installments of P1,000,000 with the first payment due December 31, 2015. The note has no ready market. The prevailing rate of interest for a note of this type is 12%. The present value of a P3,000,000 note payable in three equal annual installments of P1,000,000 at 12% rate of interest is P2,401,830. What is the carrying amount of the note payable on December 31, 2015? a) 2,401,830 b) 1,401,830

c. 1,690,050 d. 3,000,000

Answer is c Solution: Note Payable Present Value Discount on note payable - January 1, 2015 Amortization or interest expense (12% × 2,401,830) Discount on note payable - December 31, 2015

3,000,000 (2,401,830) 598,170 288,220 309,950

Note payable - January 1, 2015 Annual payment on December 31, 2015 Note payable - December 31, 2015 Discount on note payable - December 31, 2015 Carrying amount - December 31, 2015

3,000,000 1,000,000 2,000,000 309,950 1,690,050

4. On March 1, 2015, Puring Company borrowed P500,000 and signed a 2-year note bearing interest at 8% per annum compounded annually. Interest is payable in full at maturity on February 28, 2017. What amount should be reported as accrued interest payable on December 31, 2016? a) 33,333

c. 76,000

b) 40,000

d. 80,000

Answer is c Solution: Accrued interest from March 1, 2015 to February 28, 2016 (500,000 × 8%) Accrued interest from March 1 to December 31, 2016 (500,000 + 40,000 × 8% × 10/12) Accrued interest payable - December 31, 2016

40,000 36,000 76,000

5. On July 1, 2015, Arman Company obtained a P1,000,000, 180-day bank loan at an annual rate of 10%. The loan agreement requires Arman to maintain a P200,000 compensating balance in its checking account. Arman would otherwise maintain a balance of only P100,000 in this account. The checking account earns interest at an annual rate of 5%. What is the effective interest rate on the borrowing? a) 10% b) 10.67%

c. 11.33% d. 10.56%

Answer is d Solution: Interest expense (1,000,000 × 10% × 180/360) Interest income on compensating balance in excess of the normal checking account balance (100,000 × 5% × 180/360) Net interest expense

50,000

Net proceeds of loan (1,000,000 - 100,000) Effective amount (900,000 × 180/360) Effective interest rate (47,500/450,000)

900,000 450,000 10.56%

(2,500) 47,500

6. On January 1, 2015, Jinky Company signed a P200,000 noninterest bearing note at a discount rate of 11%. The entity elected the fair value option for reporting the note payable. On December 31, 2015, the credit rating and risk factors indicated that the rate of interest applicable to its borrowings was 10%. The present value factors at 11% and 9% are as follows: PV factor 11%, 3 periods .731 PV factor 11%, 2 periods .812 PV factor 11%, 1 period .901

PV factor 10%, 3 periods .751 PV factor 10%, 2 periods .826 PV factor 10%, 1 period .909

Q1: What is the initial carrying amount of the note payable on January 1, 2015? a) 146,200 b) 150,200

c. 162,400 d. 165,200

Q2: What is the carrying amount of the note payable on December 31, 2015? a) 165,200 b) 162,400

c. 181,800 d. 150,200

Answer is a,a Solution: a. Fair value of note - January 1, 2015 (200,000 × .731) 146,200 b. Fair value of note - December 31, 2015 (200,000 × .826) 165,200

7. On July 1, 2015, Daniel Company borrowed P2,000,000 on a 11% five-year note payable. On December 31, 2015, the fair value of the note is determined to be P1,950,000 based on market and interest factors. The entity has elected the fair value option for reporting the financial liability. Q1: What amount should be reported as interest expense for 2015? a) 220,000 b) 214,500

c. 110,000 d. 107,250

Q2: What is the carrying amount of the note payable on December 31, 2015? a) 2,000,000 b) 1,950,000

c. 1,000,000 d. 1,780,000

Q3: What is the gain or loss to be recognized in 2015 as a result of the fair value option? a) 150,000 gain b) 150,000 loss

c. 75,000 gain d. 0

Answer is c,b,a Solution a. Interest expense for 2015 (2,000,000 × 11% × 6/12)

110,000

b. Carrying amount equal to fair value

1,950,000

c. Note Payable - July 1, 2015 Fair value - December 31, 2015 Decrease in fair value of note payable - gain

2,000,000 1,950,000 150,000

DEBT RESTRUCTURE

1. Balleta Company has the following three loans payable scheduled to be repaid in February next year. The Balleta’s accounting year ends on December 31. The company intends to repay loan 1 for P100,000 when it comes due in February. In the following October, the company intends to get a new loan for P80,000 from the same bank. The company intends to refinance loan 2 for P150,000 when it is due in February. The refinancing agreement, for P180,000 will be signed in April after the financial statements for this year have been authorized issue. The company intends to refinance loan 3 for P200,000 before it comes due in February. The actual refinancing, for 175,000 took place in January, before the financial statements for this year have been authorized for issue. As of December 31 of the year, what are the total current and non-current liabilities to be reported? a. P100,000;P25,000 b. P250,000;P175,000

c. P450,000;0 d. P125,000;P350,000

Answer is c Solution: Loan 1

P100,000

Loan 2 Loan 3 Total current liabilities

150,000 200,000 P450,000

No non-current liabilities Under PAS 1: Presentation of Financial Statements, an entity classifies its financial Liabilities as current when they are due to be settled within 12 months after the end of the reporting period, even if: a. The original term was for a period longer than 12 months; and b. An agreement to refinance, or to reschedule payments, on a long-term basis is completed after the end of the reporting period and before the financial statements are authorized for issued. PAS 1 further provides that if the refinancing on a long-term basis occurs between the end of the reporting period and the date the financial statements are authorized for issue, such events qualifies or disclosure as non-adjusting event in accordance with PAS 10.

2. Caramel Company has arranged with its bank to refinance its short-term loan when it becomes due in 3 months. The new loan will have a term of 5 years. The following items are based on the financial statements of Caramel: Current Assets Short-Term Loan Payable Total Liabilities Current Ratio Debt-to-Equity Ratio

P750,000 600,000 3,000,000 1.5 1.5

What are the total current, shareholders’ equity and non-current liabilities? a. b. c. d.

P500,000; P2,000,000; P2,500,000 P2,500,000; P500,000; P2,000,000 P2,000,000; P2,500,000; P500,000 P500,000; P2,500,000; P2,000,000

Answer is b Solution: a. Current Ratio

=

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

1.5 Current Liabilities

= =

=

b. Debt-to-equity ratio

1.5

Total Equity

=

=

= =

c. Total Liabilities Less: Current Liabilities Non-current Liabilities

𝑃750,000 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 𝑃750,000 1.5

P500,000

𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 𝑇𝑜𝑡𝑎𝑙 𝐸𝑞𝑢𝑖𝑡𝑦

𝑃3,000,000 𝑇𝑜𝑡𝑎𝑙 𝐸𝑞𝑢𝑖𝑡𝑦

𝑃3,000,000 1.5

P2,000,000

P3,000,000 500,000 P2,500,000

3. Al Rey Co. owes P1,998,000 to Lomi Corp. The debt is a 10-year, 11% note. Because Al Rey Co. is in financial trouble, Lomi Corp. agrees to accept land and cancel the entire debt. The land has a book value of P800,000 and fair market value of P1,200,000. What entry should be made by Al Rey Co. for the restructure?

a. Gain on restructuring of debt Land Note Payable

1,998,000 800,000 1,198,000

b. Notes Payable Land

1,998,000 800,000

Gain on restructuring of debt

1,198,000

c. Note Payable Gain on restructuring of debt Land

800,000 1,198,000 1,998,000

d. Notes Payable Land Gain on restructuring of debt

1,198,000 800,000 1,998,000

`

Notes Payable 1,998,000 Land 800,000 Gain on restructuring of debt 1,198,000

`

Answer is b Solution:

Total liability Book value of land Gain in debt restructuring

P1,998,000 800,000 P1,198,000

4. Canela Co. is having financial difficulty and therefore has asked Enriquez Bank to restructure its 3 million note outstanding. The present note has 3 years remaining and pays a current rate of interest of 12%. The note was issued at its face value. Enriquez Bank agrees to accept land in exchange for extinguishing its claim on this note. The land has a book value of P2,000,000 and a fair value of P2,500,000. Enriquez Bank agrees to reduce the principal balance due to P2,000,000 and interest to 10%.

Present value of 1 for 3 periods Present value of an ordinary annuity Of 1 for 3 periods Q1: What is the gain on debt restructuring? a. P1,096,074

c. P480,366

12%

10%

0.71178

0.75132

2.40183

2.48685

b. P1,903,926

d. P1,423,560

Q2: Discount on note payable c. P480,366 d. P903,926

c. P96,074 d. P48,532

Answer is a,c Solution:

Present value principal (P2,000,000 x 0.71178)

P1,423,560

Present value of interest payments (P2,000,000 x 10%= P200,000 x 2.40183) Total

480,366 P1,903,926

a. Note payable – old Present value of restructured liability Gain on debt restructuring

P3,000,000 1,903,926 P1,096,074

b. Face value of note payable – new Present value of restructured liability Discount on note payable

P2,000,000 1,903,926 P 96,074

5. At year-end, Yohannah Company showed the following data with respect to its matured obligation: Note Payable Accrued interest payable

6,000,000 750,000

The entity is threatened with a court suit it could not pay 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 40,000 shares with par value of P100. The share is currently quoted at P120. The fair value of the note payable on the date of restructuring is P4,700,000

Q1: Under the “equity swap”, what amount should be recognized as gain from extinguishment of debt? a. 450,000 b. 1,000,000

c. 950,000 d. 800,000

Q2: What is the share Premium? a. 450,000 b. 1,000,000

c. 950,000 d. 800,000

Answer is a,d Solution: Note Payable Accrued Interest Payable Total carrying amount of liability Fair value of shares (40,000 x 120) Gain on extinguishment of debt

6,000,000 750,000 5,250,000 4,800,000 450,000

Fair value of shares Par Value of shares (40,000 x 100) Share Premium

4,800,000 4,000,000 800,000

6. Due to extreme financial difficulties, Restine Co. had negotiated a restructuring of a 10% P5,000,000 note payable due on December 31, 2015. 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, 2015. The PV of 1 at 10% for 3 periods is 0.75 and the PV of an ordinary annuity of 1 at 10% for 3 periods is 2.49 Q1: What is the gain on extinguishment of debt in 2015? a. 1,703,000 b. 1,203,000

c. 2,000,000 d. 540,000

Q2: What is the interest expense for 2016? a. 320,000 b. 379,680 Answer is a,b

c. 400,000 d. 500,000

Solution: PV of principal (4,000,000 x .75) PV annual interest payments (320,000 x 2.49) Total present value of new liability

3,000,000 796,800 3,796,800

Note payable – old Accrued interest payable Total old liability Present value of new liability Gain on extinguishment

5,000,000 500,000 5,500,000 3,796,000 1,703,200

Interest expense for 2016 (10% x 3,796,800) Interest paid (8% x 4,000,000) Amortization of discount

379,680 320,000 59,680

7. Kengel Co. had bonds payable with face value 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. Q1: What is the gain on the extinguishment of the bonds payable? a. 1,500,000 b. 1,300,000

c. 1,550,000 d. 0

Q2: What is the share premium from the issuance of the shares? a. 2,300,000 b. 1,300,000

c. 1,000,000 d. 0

Answer is c,c Solution: Carrying amount of bonds payable Accrued interest on bonds payable Total Fair value of bonds payable

4,800,000 250,000 5,050,000 (3,500,000)

Gain on extinguishment of bonds payable

1,550,000

Fair value of bonds payable

3,500,000

Par Value of shares (50,000 x 50)-/ 2,500,000 Share premium

1,000,000

OPERATING LEASE

1. On December 1, 2015, Rain Company leased office space for five years at a monthly rental of P300,000. On the same date, the entity paid the lessor the following amounts: Bonus to obtain Lease First month’s rent Last month’s rent Security deposit refundable at lease expiration Installation of new walls and offices

150,000 300,000 300,000 700,000 2,400,000

What total amount of the expenses relating to utilization of the office space should be reported for 2015? a.) 342,500 b.) 810,500

c.) 555,000 d.) 425,000

Answer is a Solution: Amortization of Lease Bonus (150,000 / 5 x 1/12) Rent for December Depreciation of leasehold improvement (2,400,000 / 5 x 1/12)

2,500 300,000

Total December 2015 Expenses

342,500

40,000

2. As an inducement to enter a lease, McDough Company, a lessor, granted SpaFry Company, a lessee, nine months of free rent under a six year operating lease. The lease was effective on July 1, 2015 and provided for monthly rental of P100,000 to begin April 1, 2016.

In the income statement for the year ended June 30, 2016, what amount should be reported as rent expense? a.) 1,050,000 b.) 300,000

c.) d.)

900,000 255,000

Answer is a Solution: Total Rent Expense (100,000 x 63 remaining months)

6,300,000

Average annual rent expense, July 1, 2015 to June 30, 2016 (6.300,000 / 6)

1,050,000

3. On July 1, 2015, Walton Company leased office premises for a three-year period at an annual rental of P360,000 payable on July 1 each year. The first rent payment was made July 1, 2015. Additionally on July 1, 2015, the entity paid P240,000 as a lease bonus to obtain a three-year lease instead of the lessor’s usual term of six years. On December 31, 2015, what amount should be reported as prepaid rent? a.) 240,000 b.) 380,000

c.) 220,000 d.) 180,000

Answer is d Solution: Rent payment on July 1, 2015 (360,000 x 6/12) Lease Bonus (240,000 x 30/36)

180,000 200,000

Prepaid Rent – December 31, 2015

380,000

4. On July 1, 2015, Gold Company leased a delivery truck from Marr Company under a 3-year operating lease. Total rent for the term of the lease will be P360,000, payable as follows: 12 months at 6,000 = 12 months at 6,500 = 12 months at 17,500 =

P 72, 000 78,000 210,000

All payments were made when due. On June 30, 2017, what amount should be reported as accrued rent receivable? a.) 90,000 b.) 120,000

c.) 210,000 d.) 0

Answer is a Solution: Average annual rent revenue (360,000 / 3) Rent revenue from July 1, 2015 to June 30, 2017 (120,000 x 2) Less: Rentals received: First 12 months Second 12 months Rent Receivable – June 30, 2017

120,000

240,000 72,000 78,000 150,000 90,000

5. B.I. Company leased a new machine to H.I. Company on January 1, 2015. The lease expires on January 1, 2020. The Annual rental is P900,000. Additionally, on January 1, 2015, H.I. Company paid P 500,000 to B.I. Company as a lease bonus and P250,000 as a security deposit to be refunded upon expiration of the lease. What amount of rental revenue should be reported for 2015? a.)

900,000

c.) 1,250,000

b.) 1,000,000

d.) 1,400,000

Answer is b Solution: Annual Rental Amortization of lease bonus (500,000 / 5) Total Rental Revenue

900,000 100,000 1,000,000

6. Babe Company owns and manages apartment complex. On signing a lease, each tenant must pay the first and last month’s rent and a P50,000 refundable security deposit. The security deposits are rarely refunded in total, because cleaning costs of P15,000 per apartment are almost always deducted. About 30% of the time, the tenants are also charged for damages to the apartment which typically cost P10,000 to repair. If one-year lease is signed on a P90,000 per month apartment, what amount should be reported as refundable security deposit? a.) b.)

35,000 50,000

c.) 32,000 d.) 140,000

Answer is b Solution: Refundable Security Deposit

50,000

7. Dutch Company leased equipment to Ender Company on July 1, 2015 for a oneyear period expiring June 30, 2016 for P45,000 a month. On July 1, 2016, Dutch leased this piece of equipment to Foil Company for a three-year period expiring June 30, 2019 for P60,000 a month. The original cost of the equipment was P4,200,000. The equipment which has been continually on lease since July 1, 2011 is being depreciated on a straight line basis over an eight-year period with no residual value. Both the lease to Ender and the lease to Foil are appropriately recorded as operating lease.

What is the amount of net rental income that would be reported by Dutch Company for the year ended December 31, 2016? a.) 350,000 b.) 610,000

c.) 110,000 d.) 105,000

Answer is d Solution: Rent income – Ender (45,000 x 6) Rent income – Foil (60,000 x 6)

270,000 360,000

Total rent income for 2016 Depreciation (4,200,000 / 8) Net rental income for 2016

630,000 525,000 105,000

8. Cain Company, lessor, leased an equipment under an operating lease. The lease term is 5 years and the lease payments are made in advance on January 1 of each year as shown in the following schedule: January 1, 2015 January 1, 2016 January 1, 2017 January 1, 2018 January 1, 2019

1,200,000 1,150,000 1,500,000 1,650,000 1,900,000

On December 31, 2016, what amount should be recognized as rent receivable? a.) 1,210,000 b.) 610,000

c.) d.)

410,000 0

Answer is b Solution: Average annual rental (7,400,000 / 5)

1,480,000

Rent Income for 2015 and 2016 (1, 480,000 x 2) Rent Received for 2015 and 2016 (1,200,000 + 1,150,000) Rent Receivable – December 31, 2016

2,960,000 2,350,000 610,000

9. Jaguar Company leased office premises to Fox Company for a five-year term beginning January 1, 2015. Under the terms of the operating lease, rent for the first years is P900,000 and rent for years 2 through 5 is P1,300,000 per annum. However, as an inducement to enter the lease, Jaguar granted Fox the first six months of the lease rent-free. What amount should Jaguar report as rental income for 2015? a.) 1,300,000 b.) 1,130,000

c.) d.)

900,000 450,000

Answer is b Solution: First Year (900,000 x 6/12) Second Year Third Year Fourth Year Fifth Year Total rental revenue

450,000 1,300,000 1,300,000 1,300,000 1,300,000 5,650,000

Average annual rental revenue (5,650,000 / 5)

1,130,000

10. As an incentive to enter a four-year operating lease for a warehouse, Silent Hill Company received an upfront cash of P90,000 upon signing an agreement at the beginning of current year. The annual rental is P1,122,500. What amount should be recognized as lease expense for the current year? a.) 1,122,500 b.) 1,100,000 Answer is b

c.) 1,032,500 d.) 0

Solution: Annual Rental Amorization of upfront cash received (60,000 / 4) Lease expense for current year

1,122,500 ( 22,500) 1,100,000

FINANCE LEASE – LESSEE

1. Gandalf Company leased a machine from Harry Leasing Company. The lease qualifies as a finance lease and requires 10 annual payments of P200,000 beginning immediately. The lease specifies an interest rate of 11% and a purchase option of P200,000 at the end of the tenth year, even though the machine’s estimated value on that date is 300,000. Present Value of an annuity due (in advance) of 1 at 11% for 10 periods. Present value of 1 at 11% for 10 periods.

6.537 0.352

What amount should be recorded as lease liability at the beginning of the lease term? a.) 1,307,400 b.) 1,377,800

c.) 1,321,500 d.) 1,397,200

Answer is b Solution: Present value of rentals (200,000 x 6.537) Present value of bargain purchase option (200,000 x .352) Total lease liability – beginning of lease term

1,307,400 70,400 1,377,800

2. At the beginning of current year, Nick Company signed an eight-year noncancelable lease for a new machine, requiring P150,000 annual payments at

the beginning of each year. The machine has a useful life of 12 years with no residual value. Title passes to the lessee at the lease expiration date. Cole uses straight line depreciation for all of the plant assets. Aggregate lease payments have a present value of P1,080,000 based on an appropriate rate of interest. What amount should be recorded as depreciation expense of the leased machine for the current year? a.) 150,000 b.) 135,000

c.) d.)

90,000 0

Answer is c Solution: Depreciation for current year (1,080,000 / 12)

90,000

3. Ziggurat Company is a lessee under a finance lease. The asset is recorded at P5,300,000 and has an economic life of 8 years. The lease term is 5 years. The asset is expected to have a fair value of P1,300,000 at the end of 5 years and a fair value of P300,000 at the end of 8 years. The lease agreement provides for the transfer of title of the asset to the lesee at the end of the lease term. What amount of depreciation expense should be recorded for the first year of the lease? a.) 925,000 b.) 800,000

c.) 625,000 d.) 500,000

Answer is c Solution: Cost Residual Value after 8 years Depreciable Amount Annual Depreciation (5,000,000 / 8)

5,300,000 ( 300,000) 5,000,000 625,000

4. On January 1, 2015, Plow Company entered into a ten-year noncancelable lease requiring year-end payments of P1,000,000. Plow’s incremental borrowing rate is 12%, while the lessor’s implicit interest rate, known to Plow, 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, Plow 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 bargain purchase option. The leased property has an estimated economic life of 12 years. What amount should be capitalized initially as cost of the leased property? a.) 5,850,000 b.) 5,650,000

c.) 6,145,000 d.) 6,345,000

Answer is d Solution: Present value of rentals (1,000,000 x 6.145) Initial Direct Cost Total Cost of Property

6,145,000 200,000 6,345,000

5. Loop Company leased a warehouse with adjoining land for a period of 15 years. The fair values of the leasehold interests in the land and the warehouse are P3,000,000 and P1,500,000 respectively. The land has an indefinite economic life whereas the warehouse has a useful life of 15 years. Title to the land is not expected to pass at the end of the lease. At what amount should the asset in relation to finance lease be recognized in the financial statements of the lessee? a.) 4,500,000 b.) 3,000,000

Answer is c Solution:

c.) 1,500,000 d.) 0

The warehouse lease is a finance lease and therefore the leasehold interest of P1,500,000 is recognized as an asset. 6. Asylum Company leased a machine with a fair value of P2,450,000 for a period of 5 years under a finance lease. The initial direct costs included in negotiating the lease amounted to P22,500. The present value of the minimum lease payments discounted at the rate implicit in the lease is P2,384,000. At what amount should the machine be recognized initially in the financial statement? a.) 2,450,000 b.) 2,406,500

c.)2,562,500 d.)2,384,000

Answer is b Solution: Present value of minimum lease payments Initial Direct Costs Total Initial cost of machine

2,384,000 22,500 2,406,500

7. Je-Barbie Company entered into a nine-year finance lease on a warehouse on December 31, 2015. Lease payment of P620,000 which includes real estate taxes and other executory cost of P20,000, are due annually, beginning on December 31, 2016 and every December 31 thereafter. The interest rate implicit in the lease is 9%. The rounded present value of an ordinary annuity of 1 for nine years at 9% is 5.6. What amount should be reported as lease liability on December 31, 2015? a.) 3,360,000 b.) 3,000,000

Answer is a Solution:

c.) 3,472,000 d.) 3,584,000

Lease Liability (600,000 x 5.6)

3,360,000

8. At the beginning of current year, Forever Company leased a van with a fair value of P 2,400,000 under a finance lease. The lease term is 6 years and the present value of the minimum lease payments is P 2,340,000. The useful life of the van was estimated at 8 years with no residual value. The entity used straight line depreciation. What is the depreciation charge on the van for the current year? a.) 400,000 b.) 390,000

c.) 300,000 d.) 292,500

Answer is b Solution: Annual Depreciation (2,340,000 / 6 years)

390,000

9. Lava Company has leased an asset on a finance lease. The present value of the minimum lease payments is P986,000 and the fair value of the asset is P1,000,000. The asset has a useful life of 5 years and the lease is for a period of 4 years, after which the asset can be acquired for a near zero cost, which is substantially below the expected value of the asset at that date. The asset is depreciated on a straight line basis. What is the amount of the annual depreciation expense? a.) 197,200 b.) 200,000

c.) 246,500 d.) 250,000

Answer is a Solution: Annual depreciation (986,000 / 5 years)

197,200

10. Tambak Company leased a land and building for 20 years, the useful life of the building, with effect from January 1, 2015. At that date, the fair value of the leasehold interest was P10,000,000 and of which 8,000,000 are attributable to the building. Annual rentals of P900,000 are payable in advance on January 1. What amount should be recognized as an operating lease expense for 2015? a.) 900,000 b.) 200,000

c.) 180,000 d.) 0

Answer is c Solution: Leasehold interest Attributable to building Attributable to land

10,000,000 8,000,000 2,000,000

Operating lease expense (2,000,000/10,000,000 x 900,000)

180,000

DIRECT FINANCING LEASE – LESSOR

1. On December 31, 2015, Bentong Company, a lessor, sold a machinery that it had been leasing under a direct financing lease. On January 1, 2015 after receipt of the lease payment for the year, the following account balances were associated with the lease: Gross lease receivable Unearned interest income Present value of lease receivable

5,540,000 1,000,000 4,540,000

The interest rate implicit in the lease is 10%. On December 31, 2015, Bentong Company sold the leased machinery to the lessee for P3,150,000 cash. What is the loss on sale of machinery that should be recognized on December 31, 2015? a.) 1,700,000

c.) 2,150,000

b.) 1,754,000

d.) 1,390,000

Answer is b Solution: Interest income for 2015 (10% x 4,540,000) Sale Price Carrying amount of lease receivable Lease receivable Unearned interest income (1,000,000 – 454,000) Loss on sale of machinery

454,000 3,150,000 5,450,000 ( 546,000)

4,904,000 1,754,000

2. DU30 Company entered into a finance lease on January 1, 2015. A third party guaranteed the residual value of the asset under the lease estimated to be P220,000 on January 1, 2020, the end of the lease term. Annual lease payments are P200,000 dues each December 31, beginning December 31, 2015. The last payment is due December 31, 2019. The remaining useful life of the asset was six years at the commencement of the lease. Both the lessor and lessee used 10% as the interest rate. The PV of 1 at 10% for 5 periods is .62, and the PV of an ordinary annuity of 1 at 10% for 5 periods is 3.79. What is the lease receivable of the lessor and lease liability of the lessee at the commencement of the lease? Lease Receivable a.) 894,400 b.) 758,000 c.) 894,400 d.) 758,000 Answer is c

Lease Liability 894,400 758,000 758,000 894,000

Solution:

Lessor Present value of rentals Guaranteed residual value Lease receivable

(200,000 x 3.79) (220,000 x .62)

758,000 136,400 894,400

Lessee Lease Liability (200,000 x 3;79)

758,000

3. Kaleidoscope Company had an asset costing P3,912,500. The asset is leased on January 1, 2015 to another entity. Five annual lease payments are due each January 1, beginning January 1, 2015. The lessee guaranteed P1,000,000 residual value of the asset as of the end of the lease term on December 31, 2019. The implicit interest rate is 8%. The PV of 1 at 8% for 5 periods is .68, and the PV of an annuity of 1 in advance at 8% for periods is 4.31. What is the annual lease payment? a.) 680,000 b.) 907,773

c.) 675,754 d.) 750,000

Answer is d Solution:

Cost of asset PV of guaranteed residual value (1,000,000 x .68) Net investment to be recovered from rentals Divide by PV of an annuity of 1 in advance at 8% for 5 periods Annual lease payment

3,912,500 ( 680,000) 3,232,500 4.31 750,000

4. Peregrine Company decided to enter the leasing business. The entity acquired a specialized packaging machine for P4,600,000. On January 1, 2015, the entity

leased the machine for a period of six years, after which title to the machine is transferred to the lessee. The six annual lease payments are due each January 1 and the first payment was made on January 1, 2015. The residual value of the machine is P500,000. The lease terms are arranged so that a return of 12% is earned by Irene Company. The present value of 1 at 12% for six periods is 0.51, and the present value of an annuity in advance of 1 at 12% for six periods is 4.60. What is the annual lease rental payable in advance required to yield the desired return? a.) 1,000,000 b.) 891,304

c.) 745,000 d.) 1,255,000

Answer is a Solution:

Cost of asset Divide by PV of an annuity in advance of 1 at 12% for six periods Annual Lease Payment

4,600,000 4.60 1,000,000

5. On January 1, 2015, Abram Company signed a ten-year noncancelable lease agreement to lease a storage building from Lot Company. The agreement required equal rental payments at the end of each year. The fair value of the building on January 1, 2015 is P3,871,350. However, the carrying amount to Lot Company is P3,568,000. The building has an estimated economic life of 10 years with no residual value. At the termination of the lease, the title to the building will be transferred to Abram Company. The incremental borrowing rate of Abram Company is 12% per year. Lot Company set the annual rental to insure a 10% rate of return. The implicit rate of

the lessor is known by the lessee. The annual total lease payment included P20,000 of executor costs related to taxes on the property. Round off present value factor to three decimal places. Q1: What is the minimum annual lease payment? a.) 580,635 b.) 630,000

c.) 600,000 d.) 589,400

Q2: What is the total annual lease payment? a.) 680,635 b.) 650,000

c.) 620,000 d.) 619,400

Answer is b,b Solution:

a. Fair Value Divide by PV of an ordinary annuity of 1 at 10% for ten periods Minimum annual lease payment

3,871,350

b. Minimum annual lease payment Executory costs: Total annual lease payment

630,000 20,000 650,000

6.145 630,000

6. On January 1, 2015, B.I. Company, acting as a lessor, leased an equipment for ten years at an annual rental of P800,000, payable by H.I. Company, the lessee, at the beginning of each year under a direct financing lease. The equipment had a cost of P5,600,000 with an estimated life of 12 years and no residual value. The implicit rate is 9%. What amount of interest income should be reported in 2015? a.) 800,000 b.) 560,000

c.) 432,000 d.) 610,000

Answer is c Solution: Present of rentals equal to the cost of asset Advance payment on January 1, 2015 Lease Receivable – January 1, 2015 Interest income for 2015 (4,800,000 x 9%)

5,600,000 800,000 4,800,000 432,000

7. Cassandra Company acquired a specialized packaging machine for P5,000,000 cash and leased it for a period of six years, after which the machine is to be returned to Cassandra Company. The unguaranteed residual value of the machine is P450,000. The lease terms are arranged so that a return of 12% is earned by Cassandra. The PV of 1 at 12% for six periods is .51, and the PV of an annuity in advance of 1 at 12% for six periods is 4.60. What is the annual lease payment payable in advance required to yield the desired return? a.) 680,000 b.) 800,000

c.) 852,174 d.) 732,000

Answer is b Solution: Cost of asset PV of unguaranteed residual value (450,000 x .51) Net investment to be recovered from rentals Divide by PV of an annuity in advance of 1 at 12% Annual rental payable in advance

3,909,500 ( 229,500) 3,680,000 4.60 800,000

8. Camia Company is in the business of leasing new sophisticated equipment. As lessor, the entity expects a 12% return. At the end of the lease term, the equipment will revert to Camia Company. On January 1, 2015 an equipment is leased to another entity under a direct

financing lease. Cost of equipment to Camia Residual value – unguaranteed Annual rental payable in advance Useful life and lease term Implicit interest rate First lease payment

5,500,000 400,000 959,500 8 years 12% January 1, 2015

Q1: What is the unearned interest income on January 1, 2015? a.) 1,616,500 b.) 2,176,000

c.) 1,776,000 d.) 2,576,000

Q2: What is the interest income for 2015? a.) 322,000 b.) 544.860

c.) 660,000 d.) 496,860

Answer is b,b Solution: a. Gross rentals (959,500 x 8) Residual Value Gross Investment 8,076,000 Net investment – equal to the cost of the equipment Unearned interest income – January 1, 2015 b. Present value of rentals equal to the cost of the equipment First Payment on January 1, 2015 Lease Receivable Interest Income for 2015 (4,540,000 x 12%)

7,676,000 400,000

5,500,000 2,576,000

5,500,000 959,500 4,540,500 544,860

SALES TYPE LEASE – LESSOR

1. Dolce Amore Company leased equipment to Faye Company on January 1, 2016. The lease is for an eight-year period expiring December 31, 2023. The first of eight equal annual payments of P900,000 was made on January 1, 2016. The entity had purchased the equipment on December 29, 2015 for P4,800,000. The lease is appropriately accounted for as sales type lease. The present value on January 1, 2016 of all rent payments over the lease term discounted at a 10% interest rate was P5,280,000. Q1: What is the gross profit on sale for 2016? a.) 1,920,000 b.) 2,400,000

c.) d.)

480,000 240,000

Q2: What amount of interest revenue should be recorded in 2016? a.) b.)

462,000 480,000

c.) d.)

438,000 391,800

Answer is c,c Solution: Present value of rentals – sales revenue Cost of sales Gross profit on sale

5,280,000 4,800,000 480,000

Present Value – January 1, 2016 First Payment on January 1, 2016 Lease Receivable – January 1, 2016 Second payment on January 1, 2017 Interest for 2016 (10% x 4,380,000) Lease Receivable – January 1, 2017

5,280,000 900,000 4,380,000 900,000 (438,000)

462,000 3,918,000

2. COOLang Company adopted the policy of leasing as the primary method of selling its products. The entity’s main product is a small helicopter that is very popular among politicians and entity managers. COOLang Company constructed such a helicopter for LAOS Company at a cost of P8,500,000.

The terms of the lease provided for annual advance payments of P2,500,000 to be paid over 10 years with the ownership transferring to the lessee at the end of the leased period. It is estimated that the helicopter will have a residual value of P1,600,000 at that date. The lease payments began January 1, 2016, COOLang Company incurred initial direct cost of P500,000 in financing the lease agreement with LAOS. The sale price of the helicopter is P14,875,000. Financing the construction was at a 14% rate. The present value of an annuity due of 1 at 14% for 10 periods is 5.95. Q1: What is the gross profit on sale that should be recognized by COOLang Company? a.) 5,875,000 b.) 6,375,000

c.) 4,275,000 d.) 4,775,000

Q2: What is the unearned interest income on January 1, 2016? a.) 10,125,000 b.) 11,725,000

c.) 9,625,000 d.) 8,525,000

Q3: What is the interest income for 2016? a.) 2,082,500 b.) 1,732,500

c.) 2,306,500 d.) 1,956,500

Answer is a,a,b Solution:

Sale Price Cost of good sold Initial direct cost Gross profit on sale

14,875,000 ( 8,500,000) ( 500,000) 5,875,000

Gross rentals (2,500,000 x 10) Present value of rentals – equal to sale price Unearned Interest Income – January 1, 2016

25,000,000 14,875,000 10,125,000

Present value of rentals Advance rental payments on January 1, 2016 Lease Receivable – January 1, 2016

14,875,000 2,500,000 12,375,000

Interest Income for 2016 ( 12,375,000 x 14%)

1,732,500

3. HunterXHunter Company used leases as a method of selling products. In 2016, the entity completed construction of a passenger ferry. On January 1, 2016, the ferry was leased to the OnePunch-Ferry Line on a contract specifying that ownership of the ferry will transfer to the lessee at the end of the lease period. Annual lease payments do not include executor costs. Original cost of the ferry Fair value of ferry at lease date Lease payments payable in advance Estimated residual value Implicit interest rate Date of first lease payment Lease term Present value of an annuity due of 1 at 10% for 20 periods Present value of 1 at 12% for 20 periods

8,000,000 12,555,000 1,500,000 2,000,000 12% January 1, 2016 20 years

Q1: What is the unearned interest income on January 1, 2016? a.) 17,445,000 c.) 19,445,000 b.) 19,245,000 d.) 22,000,000

Q2: What is the gross profit on sale for 2016? a.) 6,555,000 c.) 4,755,000 b.) 4,555,000 d.) 4,355,000

Q3: What is the interest income for 2016?

8.37 0.10

a,) 1,506,600 b.) 1,524,600

c.) 1,326,600 d.) 1,350,600

Answer is a,b,c Solution: Gross rentals (1,500,000 x 20) PV of fair value of asset (1,500,000 x 8.37) Unearned interest income – January 1, 2016

30,000,000 12,555,000 17,445,000

Fair value of asset – sales revenue Cost of goods sold Gross profit on sale

12,555,000 8,000,000 4,555,000

PV of rentals equal to the fair value of asset Payment on January 1, 2016 – all applicable to principal Lease receivable – January 1, 2016

12,555,000 1,500,000 11,055,000

Interest income for 2016 (11,055,000 x 12%)

1,326,600

4. TenTen Company is a car dealer. On January 1, 2016, the entity entered into a finance lease with a customer under which the customer would pay P200,000 on January 1 each year for 5 years, commencing in 2016. The cost of the car is P1,200,000 and the cash selling price was P1,500,000. The entity paid legal fees of P100,000 to a law firm in connection with the arrangement of lease. What amount of gross profit on sale should be recognized for 2016? a.) 200,000 b.) 180,000

c.) 80,000 d.) 0

Answer is b Solution: Sales revenue Cost of goods sold Legal fees – initial direct cost Gross profit on sale

1,500,000 ( 1, 200,000) ( 100,000) 200,000

5. PotPot Company used leases as a means of marketing its products. On January 1, 2016, PotPot leased an equipment to Pess Company for P500,000 per year for 10 years, payable on December 31 of each year. The cost of the equipment is P2,000,000 and the fair value is P3,072,500 on January 1, 2016 using an implicit rate of 10%. The fair value of the equipment approximated the present value of rentals. At the expiration of the lease, title to the equipment passes to Pess Company. What is the interest income for 2016? a.) 200,000 b.) 192,750

c.) 307,250 d.) 257,250

Answer is c Solution: Interest income for 2016 (10% x 3,072,500)

307,250

SALES AND LEASEBACK 1. Reddit Company sold an item of plant and machinery on January 1, 2015 for P5,200,000 which is equal to fair value. The carrying amount of the asset was P3,500,000. The entity leased the item back on that date for remaining useful life of 5 years. Lease payments are P1,540,000 on January 1 each year. Q1: What is the gain on disposal to be recognized for 2015? a.) 400,000 b.) 340,000

c.) 700,000 d.) 0

Q2: What is the total finance charge over the lease term? a.) 2,500,000 b.) 1,700,000

c.) d.)

700,000 0

Answer is b,a Solution: Sale Price Carrying Amount Deferred Gain – January 1, 2015

5,200,000 (3,500,000) 1,700,000

Realized gain on disposal for 2015 (1,700,000 / 5)

340,000

Gross rentals (1,540,000 x 5) Present value of rentals equal to fair value of asset Total finance charge

7,700,000 5,200,000 2,500,000

2. On January 1, 2015, Senyora Company sold equipment to an unaffiliated entity for P5,700,000. The equipment had a carrying amount of P4,500,000 and a remaining life of five years. On the same date, the entity leased back the equipment at P1,350,000 per year payable in advance for a 5-year period. The lessor’s implicit interest rate in the lease is 10%. The entity used the double declining balance method of depreciation. What is the unearned income on the sale and leaseback on December 31, 2015? a.) 1,200,000 b.) 960,000

c.) d.)

720,000 0

Answer is c Solution: Unearned income – January 1, 2015 (5,700,000 – 4,500,000) Realized in 2015 (40% x 1,200,000) Unearned income – December 31, 2015

1,200,000 ( 480,000) 720,000

3. On June 30, 2015, KangKong Company sold equipment for P4,650,000. The equipment had a carrying amount of P4,050,000 and a remaining useful life of

10 years. That same day, the entity leased back the equipment at P45,000 per month for 5 years with no option to renew the lease or repurchase the equipment. What amount should be reported as rent expense for 2015? a.) 540,000 b.) 600,000

c.) 270,000 d.) 300,000

Answer is c Solution: Rent Expense – July to December 2015 (45,000 x 6)

270,000

4. On June 30, 2015, Master Shifu Company sold an equipment for P4,500,000. The equipment had a carrying amount of P3,900,000 and a remaining life of 10 years. That same day, the entity leased back the equipment at P12,000 per month for 2 years with no option to renew the lease or repurchase the equipment. The present value of the lease payments using the appropriate interest rate was P258,650 on June 30, 2015 What is the rent expense for the year ended December 31, 2015? a.) 70,000 b.) 72,000

c.) 54,000 d.) 64,000

Answer is b Solution: Rent Expense – July to December 2015 (12,000 x 6) 72,000

5. On January 1, 2015, Pedro Penduko Company sold a machine and immediately leased it back at an annual rental that was determined to be sufficiently lower than market rent. The following data relate to the sale and leaseback transaction: Sale price below fair value Fair value of machine Carrying amount of machine Remaining life of machine Lease term

5,000,000 7,500,000 6,500,000 10 years 2 years

What total amount of loss should be recognized in the income statement for 2015? a.) 1,500,000 b.) 1,000,000

c.) d.)

750,000 500,000

Answer is c Solution:

Sale Price Carrying amount of machine Deferred Loss on sale and leaseback

5,000,000 6,500,000 (1,500,000)

Amortization of deferred loss for 2015 (1,500,000 / 2 years)

750,000

6. On December 31, 2015, Star Apple Company sold a machine with 12-year useful life to another entity and simultaneously leased It back for one year. Sale Price Carrying Amount Present value of reasonable lease rentals (P30,000 for 12 months @ 12%) What revenue from the sale should be reported in 2015? a.) 341,000

c.) 41,000

3,600,000 3,300,000 341,000

b.) 300,000

d.)

0

Answer is b Solution: Sale Price Carrying amount Gain on sale and leaseback

3,600,000 3,300,000 300,000

7. On December 31, 2015, The Flash Company sold land with a cost of P4,500,000 to The Arrow Company for P5,700,000 when the land’s fair value was P5,450,000. The Flash Company immediately entered into a cancelable lease agreement to use the land for 2 years at an annual rental of P40,000. Q1: What amount of profit should The Flash record on the sale of land for 2015? a.) 950,000 b.) 1,800,000

c.) d.)

650,000 725,000

Q2: What amount should be recognized as deferred gain on December 31, 2015? a.) 800,000 c.) 250,000 b.) 650,000 d.) 400,000

Answer is a,c Solution: a. Fair Value of Land Cost of Land Outright gain in 2015

5,450,000 4,500,000 950,000

b. Sale Price Fair Value of Land Deferred Gain – December 31, 2015

5,700,000 5,450,000 250,000

8. On December 31, 2015, Cornetto Company sold an equipment with remaining life of 12 years for P3,600,000. The entity immediately leased the equipment back for 3 years at annual rental of P60,000. The carrying amount of the equipment was P3,500,000 and the fair value was P3,300,000 What amount should be recognized as deferred gain on sale and leaseback on December 31, 2015? a.) 800,000 b.) 500,000

c.) 300,000 d.) 0

Answer is c Solution: Sale Price Fair Value of equipment Deferred gain – December 31, 2015

3,600,000 3,300,000 300,000

SALES AND LEASEBACK (LESSOR AND LESSEE) 1. Nutmeg Company leased equipment from Acorn Company on July 1, 2012 for an 11- year period. Equal payments under the lease are P 750,000 and are due on July 1 of each year. The first payment was made on July 1, 2012. The interest rate contemplated by Nutmeg Company and Acorn Company is 12%. The cash selling price of the equipment is P 3,225,000 and the cost of the equipment on Acorn’s Company accounting records is P 3,000,000. The lease is appropriately recorded as a sales type lease. What amount of profit on sale and interest revenue should be recognized for the year ended December 21, 2015? a b c d

Profit on Sale 1, 987,650 1, 987,750 1, 987,650 1, 987,680

Interest Revenue 87,650 148, 500 225, 000 2, 475, 000

Present Value of an Annuity of 1 in advance 12% for 11 periods 6.6502 Answer is b

Solution: Profit

(Selling Price vs. Carrying Amount)

Selling Price: 750,000 X 6 .6502

=

P4,987,650

Carrying Amount: (3,000,000) P1, 987,650

Profit on Sale Interest Revenue Cash Selling Price:

3,225, 000 Advance Payment Interest Revenue

P 2, 475, 000 x 12%x 6/12 =

750, 000 148, 500

2. Hitachi Company, a dealer in machinery and equipment, leased equipment to Konoha Company on July 1, 2014. The lease is appropriately accounted for as a sale By Hitachi Company and as a purchase by Konoha Compnay. The lease term and its useful life is ten years expiring on June 30, 2024. The first payment of the ten annual payments was made on July 1,2014. Hitachi had purchased the equipment for P 1, 337,500 on July 1, 201, and established a list selling price of P 1, 687,500 on the equipment. The present value on July 2, 2015 of the rent payments over the lease term discounted at 12% was P 1, 582, 500. What amount of profit on sale and interest revenue should be recorded for the year ended on December 31, 2014, respectively?

a. b. c. d.

Profit on Sale 245, 000 245, 000 245, 000 245, 000

Answer is b Solution:

Interest Revenue 337, 500 79, 950 82, 500 250, 000

Present Value of Rentals Cost of Equipment Profit on Sale

1, 582, 500 1, 337, 500 245, 000

Present Value- July 1, 2014 Less: Advance Payment on July 1, 2014

1, 582, 500 250, 000

Lease Receivable

1, 332, 500

Interest Income (7/1/14-6/30/15)

159, 900

Interest Income x 6/ 12

79, 950

3. Tuwan Company adopted the policy of leasing as the primary method of selling its products. The entity’s main product is a small helicopter. Tuwan Company constructed such product to Divergent Company at a cost of P 8, 500, 000. The term of the lease provided for annual payment of P 2, 500, 000 in advance over ten years with the ownership transferring to the lessee at the end of the lease period. It is estimated that the product will have a residual value of P 1, 600, 000 at that date. The lease payment began January 1, 2016. Tuwan Company incurred initial direct cost of P 500, 000 in financing the lease agreement with Divergent. The sale price of the product is P 14, 875, 000. Financing the construction was at 14% for ten periods is 5.95. Q1: What is the gross profit on sale that should be recognized by Tuwan Company? a. 875, 000. b. 5, 875, 000 c. 4. 8, 520, 000. d. 8, 560, 000 Q2: What is the unearned interest income on January 1, 2016? a. 375, 000 b. 600, 000 c. 10, 125, 000 d. 875, 000.

Q3: What is the interest income for 2016? a. 1, 732,000 b. 14, 875, 000 c. 875, 000. d. 12, 375, 000

Answer is b,c,a Solution: Question 1 Sales Price Cost of Goods Sold Initial Direct Cost

14, 875, 000 8, 500, 000 500, 000

Gross Profit on Sale

5, 875, 000

Question 2 Gross rentals Present value of rentals Unearned Interest Income

25, 000, 000 14, 875, 000 10, 125, 000

Question 3 Present Value of rentals Advance Rental Payment Lease Receivable Interest Income

14, 875, 000 2, 500, 000 12, 375, 000 1, 732,000

4. Forever Company sold machinery on January 1, 2016 at the fair value of P 2,900, 000 when the carrying amount was P 2,200, 000. Forever Company leased the asset back on that date for the remaining useful life of five years. Lease payments are 650, 000 on January 1 each year.

Q1: What amount of gain on disposal should be recognized on the 2016 income statement? a. b. c. d.

200, 000 250, 000 150, 000 390, 000

Q2: What is the total finance charge over the lease term? a. b. c. d.

2,900, 000 200, 000 750, 000 350, 000

Answer is c,d Solution: : Question 1 Fair Value Carrying Amount

P 2,900, 000

2,200, 000 750, 000 /5 150, 000

Profit on Sale Question 2 Gross Investment (650, 000 x 5) Net Investment

3, 250, 000 2, 900, 000

Total Finance Charge

350, 000

5. EJ Company sold a machine to Malasa Company and simultaneously leased it back for one year: The entity provided the following information at this date: Sale price Carrying Amount Present Value of reasonable rent rentals (P 30,000 for 12 months at 12%) Estimated remaining useful Life

460, 000 390, 000 341, 000 12 years

In the income statement for 201, what amount should be reported as gain from the sale of the machine? A B

60, 000 49, 000

C D

70, 000 79, 000

Solution: Sale Price Carrying Amount Gain from Sale

460, 000 390, 000 70, 000

6. On December 31, 2015 Roselle Company sold an equipment with useful life with useful life of ten years and simultaneously leased back the equipment for two years. Sale Price above fair value Fair Value of equipment on date of sale Carrying Amount

8,500, 000 6,900, 000 5, 000, 000

What amount of gain should be reported in 2015? A B C D

900, 000 1, 900, 000 1, 600, 000 160, 000

Solution: 6,900, 000 Fair Value of Equipment Carrying Amount

5, 000, 000

Outright Gain

1, 900, 000

7. On December 31, 2015 Laxus Company sold land with a cost of P 2, 750, 000 to Mira Jane Company for P 2, 300, 000 when the land’s fair value was P 3, 000, 000. Laxus Company immediately entered into a cancelable lease agreement to use the land for two years at an annual rental of P 20,000. What amount of profit should Laxus Company record on the sale of land for 2015? A 900, 000 B 350, 000 C 600, 000 D 250, 000

Solution: Fair Value of Equipment

3,000, 000

Carrying Amount

2, 750, 000

Outright Gain

250, 000

INCOME TAX

1. Maine Company reported in the income statement for the year ended December 31, 2015 pretax income of P1,500,000.

Rent income Depreciation Premiums on officers’ life insurance Income tax rate

Tax Return 80,000 290,000

Accounting Record 150,000 250,000 100,000 30%

What is the current provision for income tax for 2015? a. 471,000 b. 447,000

c. 513,000 d. 417,000

Answer is b Solution: Pretax accounting income Premium on officers’ life insurance – non-deductible

1,500,000 100,000

Accounting income subject to tax Rent income – temporary difference Depreciation – temporary difference Taxable income

1,600,000 ( 70,000) ( 40,000) 1,490,000

Current provision for income tax (1.490,000 x 30%)

447,000

2. During the current year, Diane Company reported accounting income of P10,000,000 before income tax. The entity revealed the following information for the current year: Interest income on government bonds Depreciation claimed on tax return in excess of depreciation per book Warranty expense on the accrual basis Actual warranty payment Income from instalment sale reported for tax Purposes in excess of income recognized per book Income tax rate

800,000 1,400,000 700,000 400,000 300,000 30%

What is the current tax liability at year-end? a. 2,310,000 b. 2,940,000

c. 2,070,000 d.2,520,000

Answer is d Solution: Accounting income Interest income on government bonds Depreciation claimed on tax return in excess of depreciation per book Warranty expense on the accrual basis warranty payment from instalment sale reported for tax Purposes in excess of income recognized per book Taxable income

Current tax liability (30% x 8,400,000)

10,000,000 (800,000) (1,400,000) 700,000 (400,000) 300,000 8,400,000

2,520,000

The current tax liability is equal to the current tax expense because there is no income tax payment during the year.

3. Fabs Company is determining the amount of the pretax accounting income for the current year by making adjustment to taxable income from the income tax return. The tax return showed taxable income of P5,000,000 on which a tax liability of P1,300,000 has been recognized. The entity provided the following items that may be required to determine pretax accounting income form the amount of taxable income: 

Accelerated depreciation for income tax purposes was P600,000. Straight line financial depreciation on these assets is P500,000.



Goodwill impairment loss of P400,000 was not included as a deduction in the tax return but may be deducted in the income statement.



Interest income on treasury bills was not included in the tax return. During the year, P700,000 was received on these investments.

What is the pretax accounting income for the current year? a. 5,400,000 b. 5,200,000

c. 5,100,000 d. 5,300,000

Answer is a Solution: Taxable income Excess tax depreciation (600,000 – 500,000) Goodwill impairment loss Interest income on treasury bills Pretax accounting income

5,000,000 100,000 ( 400,000) 700,000 5,400,000

The pretax accounting income is the accounting income per book and not the accounting income subject to tax. The accounting income subject to tax is equal to P5,000,000 plus P100,000 or P5,100,000. The permanent differences are excluded.

4. Shaw Company prepared the following reconciliation of the financial income and taxable income for 2016: Pretax financial income Permanent difference Temporary difference capitalized interest for book and expensed for tax Taxable income

7,000,000 ( 600,000) ( 300,000) 6,100,000

Cumulative temporary differences amounted to P400,000 and P600,000, respectively on December 31, 2015 and December 31, 2016.

What amount should be reported as deferred tax liability on December 31, 2016? a. 90,000 b. 180,000

c. 120,000 d. 0

Answer is b Solution: Deferred tax liability – 12/31/2016 (600,000 x 30%)

180,000

The permanent difference has no deferred tax consequence.

5. On January 1, 2015, Dell Company purchased a machine for P1,500,000. This machine has a 5-year useful life, a residual value of P300,000 and is depreciated using the straight line method for financial statement purposes. For tax purposes, depreciation was P600,000 for 2015 and P500,000 for 2016. The 2016 income before tax and depreciation was P3,000,000 and the tax rate was 30%. The entity made estimated tax payment of P300,000 during 2016.

Q1: What is the income tax payable on December 31, 2016? a. 250,000 b. 280,000

c. 480,000 d. 450,000

Q2: What is the total income tax expense that is reported in the 2016 income statement? a. 540,000 b. 480,000

c. 450,000 d. 528,000

Answer is d,d Solution: Income tax before tax and depreciation Tax depreciation for 2016 Taxable income

3,000,000 ( 500,000) 2,500,000

Current tax expense (30% x 2,500,000) Payment during 2016

750,000 ( 300,000)

Income tax payable – December 31, 2016

Income before tax and depreciation Financial depreciation (1,500,000 – 300,000 / 5) Accounting Income

450,000

3,000,000 ( 240,000) 1,760,000

Total income tax expense (30% x 1,760,000)

528,000

6. On January 1, 2014, Shane Company has spent P700,000 in developing a new product. This cost meets the definition of an intangible asset. The tax law allows this cost to be deducted for tax purposes when paid. Thus, the entity has recognized this amount as expense in 2014 for tax purposes. On December 31, 2014, the intangible asset is deemed impaired by P60,000. What is the tax base for the intangible asset on December 31, 2014? a. 60,000 b. 700,000

c. 640,000 d. 0

Answer is d Solution: The carrying amount of the intangible asset is P700,000 less the impairment loss of P60,000 or P640,000 but the tax base is zero because the total amount is expensed in the current year for tax purposes.

7. Paris Company has one temporary difference at the end of 2014 that will reverse and cause taxable amounts of P1,500,000 in 2015, P1,700,000 in 2016 and P1,700,000 in 2017. The entity has also a deductible temporary difference of P2,000,000. The pretax accounting income for 2014 is P6,500,000 and the tax rate is 30%. There are no deferred taxes at the beginning of 2014.

Q1: What is the current tax expense for 2014? a. 3,240,000 b. 1,080,000

c. 2,040,000 d. 2,640,000

Q2: What is the net deferred tax expense for 2014? a. 1,620,000 b, 1,480,000

c. 870,000 d. 1,000,000

Answer is b,c Solution: Accounting income Future taxable amount (1,500,000 + 1,700,000 + 1,700,000) Future deductible amount Taxable income Current tax expense (30% x 3,600,000)

Increase in deferred tax liability

(30% x 4,900,000)

6,500,000 (4,900,000) 2,000,000 3,600,000 1,080,000

1,470,000

Increase in deferred tax asset

(30% x 2,000,000)

( 600,000)

Net deferred tax expense

870,000

8. At year-end, Alas Company has revalued a property and has recognized the increase in the revaluation in the financial statements. The carrying amount of the property was P10,000,000 and the revalued amount was P14,000,000. However, the tax base of the property was only P8,000,000. The income tax rate is 30%. What is the deferred tax asset or liability at year-end? a. 1,200,000 asset b. 1,800,000 asset

c. 1,200,000 liability d. 1,800,000 liability

Answer is d Solution: Future taxable amount (14,000,000 – 8,000,000)

6,000,000

Deferred tax liaibilty (30% x 6,000,000)

1,800,000

SHAREHOLDERS’ EQUITY AND RETAINED EARNINGS 1. Legit company had sufficient retained earnings as 2015 as a basis for dividends but was temporarily short of cash. The entirt declared a dividend of P1,000,000 on April 1,2015, issued promissory notes to the shareholders lieu of cash. The noted, which were dated April 1,2015,had a maturity date of march 31,2016 and a 10% interest rate. How should the scrip dividend and related interest be accounted for? a. Retained Earnings Notes Payable Interest Expense Accrued Interest Payable

1,000,000 1,000,000 75,000 75,000

b. Accrued Interest Payable Interest Expense Notes Payable Retained Earnings

75,000 75,000 1,000,000 1,000,000

c. Accrued Interest Payable Retained Earnings Interest Expense Notes Payable

75,000

d. Notes Payable Interest Expense Retained Earnings Accrued Interest Payable

1,000,000 1,000,000 75,000 75,000

75,000 1,000,000 1,000,000

Answer is a Solution: Retained Earnings Notes Payable

1,000,000 1,000,000

Interest Expense(1,000,000 x10% x9/12) Accrued Interest Payable

75,000 75,000

2. At the beginning of the current year Mr. Crabs company declared a 10℅ stock dividend. The Market Price of the entity's 30,000 oustanding shares of P20 par value was P90 per share on the date. The stock dividend was distributed on July 1 when the market price was P100 per share. What amount should be credited to share premium for stock dividend? a. 270,000 b. 210,000

c. 60,000 d. 330,000

Answer is b Solution: Market Value on date of declaration ( 10%x 30,000= 3,000 shares x90) Par value of shares issued as dividends(3,000 x 20)

270,000 60,000 210,000

3. Wews Company declared a 5% stock dividend on 100,000 issued and outstanding shares of P20 par value, which had a fair value of P50 per share before the stock dividends wad declared. The stock dividend was distributed 60 days after.the declaration date.

What is the increase in current liabilities as a result of the stock dividend declaration? a. 150,000 b. 50,000

c. 100,000 d. 0

Answer is d Solution: Retained Earnings(5,000x 50) Stock dividend payable(5,000 x20) Share Premium

250,000 100,000 150,000

4. The directors of parokya ni edgar company whose P50 par value share capital is currently selling at P60 per share have decided to issue a stock dividend. The selling price is not expected to be affected by the stock dividend. The entity which has an authorization for 1,000,000 shares, had issued 500,000 shares, of which 100,000 shares are now held as treasury. In order to capitalize P2,400,000 of retained earnings, what percentage should be declared as a stock dividend by the directors? a. 8% b. 9%

c. 10% d. 11%

Answer is c Solution: Shares to be issued as dividend (P2,400,000/P60) 40,000 Outstanding Shares (500,000-100,000) 400,000 Percentage of Stock Dividend (40,000/400,000) 10% 5. Kenneth Company Provided the following information on January 1, Share Capital, 250,000 shares authorized: 100,000 shares issued and outstanding Share Premium Retained Earnings

3,000,000 4,000,000 8,000,000

The entity declared a 10% dividends on April 1, 2015 when the market value of the share was P70. The stock dividend was issued on July 1,2015 when the

market value of the share was P100. The share has a par value of P30. The entity sustained a net loss of P1,200,000 for 2015. What amount should be reported as retained earnings on December 31,2015? a. 6,100,000 b. 1,200,000

c. 8,000,000 d. 700,000

Answer is a Solution: Retained Earnings -Jan. 1 , 2015 Stock dividend declared April 1,2015 Net loss Retained Earnings - Dec. 31,2015

8,000,000 ( 700,000) ( 1,200,000) 6,100,000

6. Angela Company issued 1,000 shares with P5 par to Ken as compensation for 1,000 hrs of legal services performed. Ken usually bills P160 per hour of the services. On that date of issuance, the share was trading on a public exchange at P140. By what amount should the share premium account increase as a result of the transaction? a. 135,000 b. 140,000

c. 22,400 d. 160,000

Answer is a Solution: Share Premium (P140,000 fair value- P5,000 par) 135,000

7. At the beginning of the current year, Jane Company a closely- held entity, issued 6% bonds with a maturity value of P6,000,000, together with 10,000 ordinary shares of P50 of par value, for a combined cash amount of P11,000,000. If the bonds were issued separately, they would have sold for P4,000,000 on an 8% yield to maturity basis. What amount should be reported for share premium on the issuance of the ordinary shares? a. 7,000,000 b. 11,000,000

c. 6,500,000 d. 600,000

Answer is c Solution: Cash Received Less: Market value of bonds Residual Amount Less: Par Value Share Premium

11,000,000 4,000,000 7,000,000 500,000 6,500,000

8. During the current year, Bev Company received a donation of 2,000 shares with P50 par value from a shareholder. On that date, the sharr market value was P350. The shares were originally issued for P250 per share. What is the decrease in shareholders equity as a result of the donation? a. 100,000 b. 500,000

c. 87,500 d. 0

Answer is d Solution: Donated shares not retired are recorded by means of a memorandum only and therefore do not affect the total shareholders equity.

9. During the current year, James company declared a 1 for 5 reverse share split when the market valur of share was P100. Prior to the split, the entity had 100,000 shares of P10 par value issued and outstanding. After the split, what is the par value of the share? a. P100 b. P20

c. P50 d. P90

Answer is c Solution: New Par Value(10 x 5)

P50

10. Beck Company issued 200,000 ordinary share when it began operations in 2014 and issued an additional 100,000 shares in 2015. Thr entity also issued preference shares convertible into 100,000 ordinary shares. In 2015, the entity purchased 75,000 ordinary shares to be held in treasury. On December 31,2015 , how many ordinary shares were outstanding? a. 300,000 b. 100,000

c. 225,000 d. 75,000

Answer is c Solution: Total ordinary shares issued (200,000 + 100,000) Treasury shares Ordinary Shares Outstanding

300,000 ( 75,000) 225,000

SHARE BASED COMPENSATION 1. On January 1,2015, Lynx Company granted Chrome,the president, compensatory share options to buy 15,000 ordinary shares of P10 par value. The options call for a price of P30 per share and are exercisable in 3years following on the grant date. Chrome exercised the options on December 31,2015. The market price of the share was P60 on January 1,2015, and P70 on December 31,2015. The fair value of the share option id P60 o the grant date. What is the net increase in the shareholders equity as a result of the grant and exercise of the options? a. 150,000 b. 300,000

c. 450,000 d. 600,000

Answer is c Solution: Cash (15,000 x 30) Share options outstanding Ordinary share capital (15,000 x 10) Share premium

450,000 750,000 150,000 1,050,000

2. On January 1,2015, Rain company granted 50 shar options each to 200 employees, conditional upon the employee's remaining in the entity's employ

during thr vesting period. The share options vest at the end of a three-year period. On grant date, each share option has fair value of P30. The par value per share is P100 and the option price isP120. On December 31,2016, 20 employees have left and it is expected that on the basis of a weighted average probability, a further 15 employees will leave before the end of the three-year period. What is the compensation expense for 2016? a. 100,000 b. 247,500

c. 65,000 d. 300,000

Answer is c Solution: 2015 Fair value of share options (200 x 50 x 30) Compensation expense for 2015 (300,000/3) 2016 Number of employees Employees who left in 2016 Employees expected to leav Employees entitled to share options Fair value of share options (165 x 50 x30) Cumulative compensation expense for 2015 And 2016 (247,500/3 x 2) Compensation expense recognized in 2015 Compensation expense in 2016

300,000 100,000 200 (20) (15) 165 247,500 165,000 (100,000) 65,000

3. On June 30, 2015, Dale Company granted compensatory share options for 30,000 P20 per value ordianry shares to certain key employees. The market price of the share on that date was P36 and the option price was P30. The BlackScholes option pricing model measured the total compensation expense to be P5,400,00. The options are exercisable beginning January 1, 2018, provided the key employees are still in entity's employ at the time the options are exercised. The options expire on June 30,2019. On January 15, 2018, when the market price of the share was P42, all 30,000 options were exercised. What is the compensation expense for 2017? a. 2,160,000 b 2,700,000 Answer is a

c. 5,400,000 d. 0

Solution: (5,400,000/2.5 years) = 2,160,000

4. Reid company granted 20,000 share options to each of its 8 directors on January 1,2015. The options vest on january 1,2019. The fair value of each option on January 1,2015 isP60 and it is anticipated that all of the share options will vest on January1,2019. What amount should be reported as increase in expense and equity for the year ended December 31,2015? a. 2,400,000 b. 9,600,000

c. 2,500,000 d. 3,200,000

Answer is a Solution: Fair value of share options (20,000 x 8 x 60)

9,600,000

Compensation expense for 2015 (9,600,000/4) 2,400,000 5. Hitler company issued fully paid shares to 200 employees on December 31, 2015. Normally, shares issued to employees vest over a two-year period but these shares have been given as a bonus to the employees because of their exceptional performance during the year. The shares have a market value of P500,000 on December 31, 2015 and an average fair value of P600,000 for the year. What amount should be expensed for this share-based payment transaction? a. 600,000 b. 500,000

c. 300,000 d. 250,000

Answer is b Solution:

FAIR VALUE of share options December 31,2015

500,000

6. Santa company granted 150 share appreciation rights to each of the 800 employees in January 2015. The entity estimated that 85% of the awards will vest on December 31,2017. The fair value of each share appreciation right on december 31,2015 is P15.

What is the accrued liability on december 31,2015? a. 1,530,000 b. 510,000

c. 150,000 d. 10,200

Answer is b Solution: Total compensation (150 x 800 x 15 x 85%) Accrued compensation (1,530,000/3)

1,530,000 510,000

7. On January 1,2015, drusty company granted Lox,the president, 25,000 share appreciatiob rights for past services. These rights are exercisable immediately and expire on January 1,201. On exercise, Lox is entitled to receive cash in excess of the market price on the exercise date over the market price on the grant date. Lox did not exercise any of the rights during 2015. The market price of drusty's share was P60 on January 1,2015 and P80 on December 31,2015. As a result of the appreciation rights, what amount should be recognized as compensation expense for 2015? a. 0 b. 150,000

c. 250,000 d. 500,000

Answer is d Solution Market price dec - jan (80-60)

P20

Compensation for 2015 (25,000 x 20)

500,000

8. Valix company has granted share options to employees with a fair value of 7,500,000. The options vest in four years. The Monte Carlo model was used to value the options. On January 1,2015, which is the date of the grant, the estimated employees leaving the entity during the vesting period is 15% What is the compensation expense for 2015? a. 1,593,750 b. 1,953,750

c. 1,395.570 d. 1,593,705

Answer is a Solution (7,500,000 x 85% / 4)

1,593,750

9. On January 1,2015 Lexy Company granted share options to each of the 350 employees working in the sales department. The share options vest at the end of a three year period provided that the employees remain in the entity's employ and provided the volume of sales will increase by more than 10% per year. The fair value of each share option on grant date is P50. If the sales increase by more than 10%, each employee will receive 150 share options. If the sales increased by more than 15% each employee will receive 300 share options. On December 31,2015 the sales increased by more than 10% but not more than 15% and no employees left. On December 31,2015 the sales increased by more than 15% and no employees have left. What amount should be recognized as compensation expense for 2016? a. 2,625,000 b. 875,000

c. 5,250,000 d. 3,500,000

Answer is a Solution 2015 Fair Value of share options (350 x 150 x 50) Compensation expense 2015 (2,625,000/3)

2,625,000 875,000

2016 Fair value of share options (350 x 300 x 50) Cumulative compensation expense (5,250,000/3 x2) Compensation expensed recognized in 2015 Compensation expense 2016

5,250,000 3,500,000 (875,000) 2,625,000

10. LOL company granted 18,000 share appreciation rights which entitled key employees to receive cash equal to the difference between P30 and the market price of the share on the date each right is exercised. The service

period is 2015 to 2017 and the rights are exercisable in 2018. The market price of the share was P38 and P42 on December 31,2015 and 2016, respectively. What amount should be reported as liability under the share appreciation rights on December 31,2016? a.0 b. 144,000

c. 72,000 d. 216,000

Answer is b Solution Fair value of share appreciation right (42-30)

12

Accrued compensation december 31,2016 (18,000 x 12 = 216,000/3 x2)

144,000