PROBLEM NO. 1 - Heats Corporation Requirement no. 1 Notes payable: Arising from purchase of goods Arising from bank loans, on which marketable securities valued at P600,000 have pledged as security, due Dec. 31, 2005 Arising from advances by officers, due June 30, 2005 Employees’ income tax withheld Advances received from customers on purchase orders Containers’ deposit Accounts payable arising from purchase of goods (P170,000 + P30,000) Customers' account with credit balance Cash dividends payable Current portion of serial bonds (P50,000 x 2) Overdraft with Allied Bank Est. damages to be paid as a result of unsatisfactory performance on a contract Est. expenses on meeting guarantee for service requirements on mechandise sold Estimated premiums payable Deferred revenue Accrued interest on bonds payable Provision - deficiency income tax assessment TOTAL CURRENT LIABILITIES 500,000 50,000 20,000 64,000 50,000 200,000 40,000 80,000 100,000 90,000 160,000 120,000 75,000 87,000 360,000 200,000 2,500,000 A Convertible bonds, due January 31, 2007 Noncurrent portion of serial bonds (P2,000,000 - P100,000) TOTAL NONCURRENT LIABILITIES 1,000,000 1,900,000 2,900,000 B 5,400,000 C TOTAL LIABILITIES (Requirement no. 2) 304,000 PROBLEM NO. 3 - Pistons Company Item no. 2 Item no. 6 Item no. 8 Item no.10 Item no.11 Item no.12 Item no.19 Insurance expense (P24,000/12 x 1/2) Prepaid insurance 1,000 Prepaid dues and subscription Dues and subscription exp 5,000 Vouchers payable Inventory 1,000 5,000 111,500 111,500 Legal and professional expense Vouchers payable 46,000 Medical expense Vouchers payable 25,000 Inventory Vouchers payable 55,000 Machinery and equipment Vouchers payable 46,000 25,000 55,000 254,000 254,000 PROBLEM NO. 2 - Sonic Corporation 1 Accounts payable per general ledger Debit balances in suppliers' accounts Goods in transit on 12/31/05, FOB shipping point Unrecorded purchase return Adjusted accounts payable Accrued janitorial expenses (P144,000 x 2/3) Accrued utilities (P67,200 x 15/30) Total 2 Accrued salaries and wages Income taxes withheld SSS contributions payable Philhealth contributions Total 3 Since the outcome is only possible, the matter will only be disclosed. 4 5,440,000 240,000 192,000 (160,000) 5,712,000 96,000 33,600 5,841,600 D 776,000 56,000 64,000 16,000 912,000 - D A B = 10% (P9,600,000 - B - T) T = 30% (P9,600,000 - B) T = P2,880,000 - .3B B = 10% [P9,600,000 - B - (P2,880,000 - .3B)] B = 10% (P9,600,000 - B - P2,880,000 + .3B) B = 10% (P6,720,000 - .7B) B = P672,000 - .07B 1.07B = P672,000 B = P628,000 (rounded off) D 5 Principal amount due, 10/1/06 Accrued interest payable (P1,600,000 x 18% x 3/12) Total 800,000 72,000 872,000 D 6 Estimated liability on purchase commitment [320,000 x (P5 - P4.40)] 192,000 D 7 Deferred tax assets and liabilities should not be presented as current 8 Warranty payable, 12/31/04 Add warranty expense accrued during 2005 Total Less payments during 2005 Warranty payable, 12/31/05 9 Estimated coupons to be redeemed (160,000 x 60%) Less coupons redeemed Coupons outstanding Divide by exchange rate Premiums to be issued Multiply by net premium cost (P100+P20-P30) Estimated liability for coupons, 12/31/05 10 Advances against accounts receivable assigned are generally classified as borrowing and treated as current liabilities. - D 416,000 1,504,000 1,920,000 1,408,000 512,000 D 96,000 64,000 32,000 5 6,400 90 576,000 D 1,280,000 D PROBLEM NO. 4 - Rockets Company Requirement no. 1 1) Discount on bonds payable (P10,000,000 - P9,500,000) Bonds payable To correct the original entry on issuance of 10,000 bonds Retained earnings (P500,000 x 14/102) Interest expense (P500,000 x 12/102) Discount on bonds payable To record discount amortization for the prior and current years 2) Bonds payable (P2,100,000 - P2,000,000) Premium on bonds payable To recognize premium on bonds payable Premium on bonds payable (P100,000 x 6/82) Interest expense To record premium amortization for the year 500,000 500,000 68,627 58,824 127,451 100,000 100,000 7,317 7,317 3) Retained earnings (P10,000,000 x 12% x 2/12) Interest expense To correct interest exp pertaining to year 2004 200,000 4) Interest expense (P12,000,000 x 12% x 2/12) Accrued interest payable To record accrual of interest 240,000 200,000 240,000 Requirement no. 2 a) Bonds payable (P10,000,000 + P2,000,000) 12,000,000 b) Bond discount (P500,000 x 76/102) 372,549 c) Bond premium (P100,000 x 76/82) 92,683 d) Accrued interest (P12,000,000 x 12% x 2/12) e) Interest expense P10,000,000 x 12% P2,000,000 x 12% x 6/12 Bond discount amortization (P500,000 x 12/102) Bond premium amortization (P100,000 x 6/82) 240,000 1,200,000 120,000 58,824 (7,317) 1,371,506 PROBLEM NO. 5 - Wizards Company Computation of amortization rate Period covered From To Bond year 1st 2nd 3rd 4th 5th 6th 10.02.03 10.01.04 10.01.05 10.01.06 10.01.07 10.01.08 09.30.04 09.30.05 09.30.06 09.30.07 09.30.08 09.30.09 Amount Outstanding Percent to total 5,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 20,000,000 25% 25% 20% 15% 10% 5% 100% Computation of amortization amount 2003 2004 2005 2006 2007 2008 2009 October to December (P100,000 x 25% x 3/12) January to September (P100,000 x 25% X 9/12) October to December (P100,000 x 25% x 3/12) January to September (P100,000 x 25% X 9/12) October to December (P100,000 x 20% x 3/12) January to September (P100,000 x 20% X 9/12) October to December (P100,000 x 15% x 3/12) January to September (P100,000 x 15% X 9/12) October to December (P100,000 x 10% x 3/12) January to September (P100,000 x 10% X 9/12) October to December (P100,000 x 5% x 3/12) January to September (P100,000 x 5% X 9/12) 6,250 18,750 6,250 18,750 5,000 15,000 3,750 11,250 2,500 7,500 1,250 25,000 23,750 18,750 13,750 8,750 3,750 100,000 Requirement no. 1 a) Bonds payable (P5,000,000 - P1,000,000) b) Bond discount Original amount Amortization : Prior years (2003 and 2004) Current year (2005) c) Accrued interest (P4,000,000 x 5% x 3/12) e) Interest expense P4,000,000 x 5% P1,000,000 x 5% x 9/12 Bond discount amortization (see letter b above) 4,000,000 100,000 31,250 23,750 55,000 45,000 50,000 200,000 37,500 23,750 261,250 Requirement no. 2 1) 2) 3) 4) Discount on bonds payable Bond payable 100,000 100,000 Retained earnings Bond interest expense Discount on bonds payable 31,250 23,750 Accrued interest payable Bond interest expense 62,500 Bond interest expense Accrued interest payable 50,000 55,000 62,500 50,000 PROBLEM NO. 6 - Suns, Inc. Question No. 1 - B Total proceeds Less liability component: Present value of the principal (P2,000,000 x 0.6830) Present value of the interest [(P2,000,000 x 8% x 3.1699) Equity component Int. exp. Jan. 1, 2004 Dec. 31. 2004 Dec. 31. 2005 Dec. 31. 2006 Dec. 31. 2007 187,318 190,050 193,055 196,361 Int. exp. Int. paid 160,000 160,000 160,000 160,000 Int. paid 2,000,000 1,366,000 507,184 Amort. 27,318 30,050 33,055 36,361 126,785 Amort. Jan. 1, 2004 Dec. 31. 2004 Dec. 31. 2005 187,318 190,050 160,000 160,000 27,318 30,050 Dec. 31. 2006 Dec. 31. 2007 48,264 49,090 40,000 40,000 8,264 9,090 74,723 Question no. 2 - D Carrying value, 1/1/04 (see no. 1) Add discount amortization for 2004: Effective interest (P1,873,184 x 10%) Nominal interest (P2,000,000 x 8%) Carrying value, 12/31/04 CV 1,873,184 1,900,502 1,930,553 1,963,608 1,999,969 CV 1,873,184 1,900,502 1,930,553 965,276 482,638 490,902 499,992 1,873,184 187,318 160,000 Question no. 3 - D Effective interest (P1,900,502 x 10%) Question no. 4 - A Bonds Payable Discount on bonds payable (P1,000,000 - P965,276) Common stock APIC Question no. 5 - C Reacquisiton price (P500,000 x 110%) Carrying value of bonds reacquired (P1,930,553 x 1/4) Loss on bond reacquisition 27,318 1,900,502 190,050 1,000,000 34,724 600,000 365,276 Carrying value of bonds converted (P1,930,553* x 1/2) Par value of common stock received (P1,000,000/P1,000 x 10 x P100) Amount to be credited to APIC Carrying value, 12/31/04 (see no. 2) Add discount amortization for 2005: Effective interest (P1,900,502 x 10%) Nominal interest (P2,000,000 x 8%) Carrying value, 12/31/05 1,873,184 126,816 965,276 600,000 365,276 1,900,502 190,050 160,000 30,050 1,930,553 550,000 482,638 67,362 * PROBLEM NO. 7 - Ginebra Corporation Question No. 1 - B Liability under capital lease Balance, 1/1/05 Less principal payment on 12/31/05: Total payment Applicable to interest (P430,000 x 14%) Balance, 12/31/05 430,000 100,000 60,200 Question No. 2 - D 15% Note payable, bank Balance, 12/31/05 (P5,600,000 - P1,400,000) Less installment due on April 1, 2006 Liability under capital lease Balance, 1/1/05 Less principal payment on 12/31/05: Total payment 100,000 Applicable to interest (P430,000 x 14%) 60,200 Balance, 12/31/05 Less principal payment due on 12/31/06: Total payment 100,000 Applicable to interest (P390,200 x 14%) 54,628 10% bonds payable due 7/1/2014 Carrying value, 7/1/05 Add discount amortization: Effective interest (1,774,000 x 12% x 6/12) 106,440 Nominal interest (2,000,000 x 10% x 6/12) 100,000 Deferred income tax liability Balance, 1/1/05 Provision for deferred income tax (P312,500 x 32%) Total noncurrent liabilities, 12/31/05 39,800 390,200 4,200,000 1,400,000 430,000 39,800 390,200 45,372 Question No. 5 - C Note payable, bank (P5,600,000 x 12% x 3/12) (P4,200,000 x 12% x 9/12) Liability under capital lease (see no. 1) Bonds payable Nominal (P2,000,000 x 10% x 6/12) Discount amortization (see no. 2) Total interest expense for 2005 6,440 700,000 100,000 PROBLEM NO. 8 CBBCD ACBBB AADCB ADCAA 378,000 100,000 478,000 168,000 378,000 100,000 6,440 344,828 1,774,000 Question No. 3 - A Note payable, bank - due 4/1/06 Capital lease liability - principal payment due on 12/31/06 (see no. 1) Current portion of long-term liabilities, 12/31/05 Question No. 4 - D Note payable, bank (P4,200,000 x 12% x 9/12) Bonds payable (P2,000,000 x 10% x 6/12) Accrued interest payable, 12/31/05 2,800,000 546,000 60,200 106,440 712,640 1,780,440 800,000 5,725,268 1,400,000 45,372 1,445,372