Chapter 1 – Current Liabilities, Provisions and Contingencies Chapter 1 -­‐ Current Liabilities, Provisions and Contingencies 1-­‐1. 1-­‐2. 1-­‐3. 1-­‐4. The following shall result in the recognition of liabilities a, c, e, g, h, i, m, n, o Case 1 – None Case 2 – P800,000 Case 3 – P400,000 Case 4 – P350,000 Case 5 -­‐ P100,000 = (1M x 10%) + (200,000 x 30%) – 60,000 Case 6 -­‐ None (a)(1) Gross method Dec. 16 Purchases Freight in Accounts payable – Intel 66,000 1,400 67,400 19 Purchases Accounts payable – Celeron 72,000 72,000 26 Accounts payable – Intel 67,400 Purchase discounts (66,000 X 2%) 1,320 Cash 66,080 31 Accounts payable – Celeron 72,000 Purchase discounts (72,000 X 2%) 1,440 Cash 70,560 (a)(2) Net method Dec. 16 Purchases (66,000 X 98%) Freight in Accounts payable – Intel 64,680 1,400 66,080 19 Purchases (72,000 x 97%) Accounts payable – Celeron 69,840 69,840 26 Accounts payable – Intel Cash 66,080 66,080 31 Accounts payable – Celeron Purchase discounts lost (72,000 x 1%) Cash 69,840 720 70,560 (b) Adjusting entry at December 31 under the net method Dec. 31 Purchase discounts lost 720 Accounts payable – Celeron 720 Reported amount of accounts payable at December 31, 2015 P1,000,000 Adjustments: Unrecorded check written and issued on December 27 (350,000) Unrecorded purchases received on December 28, net (150,000 x 98%) 147,000 Goods purchased FOB shipping point still in transit and not yet recorded at year end 120,000 Debit balance in a supplier’s account netted in the balance 80,000 Correct amount of accounts payable at December 31, 2015 P 997,000 Page 1 Chapter 1 – Current Liabilities, Provisions and Contingencies 1-­‐5. 1-­‐6. Reported amount of accounts payable at December 31, 2015 P1,500,000 Adjustments: Goods purchased FOB shipping point lost in transit 240,000 Credit memo for goods returned to supplier not recorded at yearend (80,000) Correct amount of accounts payable at December 31, 2015 P1,660,000 2015 1-­‐7. 1-­‐8. (a) May 1 Automobile 3,600,000 Discount on notes payable 324,000 Notes payable 3,924,000/1.09 = 3,600,000 Dec. 31 Interest expense 216,000 Discount on notes payable 324,000 x 8/12 = 216,000 2016 Apr. 1 Interest Expense 108,000 Notes payable 3,924,000 Discount on notes payable Cash 324,000 – 216,000 = 108,000 (b) Notes payable Less discount on notes payable Net amount, December 31, 2015 3,924,000 216,000 108,000 3,924,000 P3,924,000 108,000 P3,816,000 (a) 2015 June 1 Cash 2,700,000 Discount on notes payable 300,000 Notes payable 3M x 10% = 300,000 3M – 300,000 = 2,700,000 Dec. 31 Interest expense Discount on notes payable 300,000 x 7/12 175,000 3,000,000 175,000 2016 May 31 Interest expense 125,000 Notes payable 3,000,000 Discount on notes payable 125,000 Cash 3,000,000 300,000 – 175,000 = 125,000 (b) Notes payable P3,000,000 Less discount on notes payable 125,000 Net amount, December 31, 2015 P2,875,000 (a) Market rate of interest is 5% Principal Stated interest (8M x 9%) Maturity value PV factor at 5% for 1 period Present value of note at May 1, 2015 Face value of note Premium on notes payable Page 2 P8,000,000 720,000 P8,720,000 0.9524 P8,304,928 8,000,000 P 304,928 Chapter 1 – Current Liabilities, Provisions and Contingencies 2015 May 1 Equipment Premium on notes payable Notes payable Dec. 31 Interest expense Premium on notes payable Interest payable 304,928 x 8/12 = 203,285 8M x 9% x 8/12 = 480,000 8,304,928 304,928 8,000,000 276,715 203,285 480,000 Apr. 30 Interest expense Premium on notes payable Interest payable Notes payable Cash 304,928 – 203,285 = 101,643 138,357 101,643 480,000 8,000,000 8,720,000 Notes payable Premium on notes payable Interest payable Carrying amount at December 31, 2015 (b) Market rate of interest is 12% Principal Stated interest (8M x 9%) Maturity value PV factor at 12% for 1 period Present value of note at May 1, 2015 Face value of note Discount on notes payable P8,000,000 101,643 480,000 P8,581,643
2016 2015 May 1 Equipment Discount on notes payable Notes payable Dec. 31 Interest expense Discount on notes payable Interest payable 213,912 x 8/12 = 142,608 8M x 9% x 8/12 = 480,000 P8,000,000 720,000 P8,720,000 0.8929 P7,786,088 8,000,000 P 213,912 7,786,088 213,912 8,000,000 622,608 142,608 480,000 Apr. 30 Interest expense Interest payable Notes payable Discount on notes payable Cash 213,912 – 142,608 = 71,304 311,304 480,000 8,000,000 71,304 8,720,000 Notes payable Discount on notes payable Interest payable Carrying amount at December 31, 2015 P8,000,000 (71,304) 480,000 P8,408,696
2016 Page 3 Chapter 1 – Current Liabilities, Provisions and Contingencies 1-­‐9. 1-­‐10. 1-­‐11. 1-­‐12. 1-­‐13. 1-­‐14. Case 1 Case 2 Case 3 Situation A Situation B Situation C Situation D Current P 120,000 P2,000,000 P6,000,000 P0 P6,000,000 P0 14% notes payable Current portion of 16% note payable Current notes payable at December 31, 2015 Noncurrent P2,880,000 P0 P0 P6,000,000 P0 P6,000,000 P2,500,000 1,600,000 P4,100,000 The entire amount of P2,000,000 is reported as current liability because as of December 31, 2015, the company has no unconditional right to defer settlement of the obligation for a period of at least 12 months. (a) Premium inventory Cash/Accounts payable 225,000 225,000 (b) Premium expense Cash Premium inventory 100,000 50,000 150,000 (c) Premium expense 300,000 Estimated liability for premiums outstanding (40% x 1M)/100 = 4,000 (4,000 – 1,000) x P100 (a) Estimated liability for premiums outstanding (300,000 x 30%)/20 = 4,500 premiums (4,500 – 4,000) x P28 P 14,000 (b) Premium expense for 2015 (4,500 premiums x P28 P126,000 (a) 300,000 Expected future redemption, beg Coupons redeemed during the year Coupons expected for future redemption, end Total coupons Number of coupons per premium Number of premiums Net cost of premium (120 – 50) Premium expense 2014 -­‐ 40,000 30,000 70,000 ÷ 5 14,000 x P70 P980,000 2015 (30,000) 90,000 80,000 140,000 ÷ 5 28,000 x P70 P1,960,000 Provision for premium claims outstanding at December 31, 2014 (30,000/5) x P70 at December 31, 2015 (80,000/5) x P70 P420,000 P1,120,000 (b) Page 4 Chapter 1 – Current Liabilities, Provisions and Contingencies 1-­‐15. 1-­‐16. 1-­‐17. 1-­‐18. (a) Allocation of original consideration received: Sales revenue (98% x P5,000,000) Liability for Customer Loyalty Awards (2% x P5,000,000) Revenue in 2014 as a result of redemption 100,000 x 25/90 Revenue in 2015 as a result of redemption Total accumulated revenue from redemption as of 12/31/15 (100,000 x 60/95) Less revenue earned in 2014 Revenue in 2015 as a result of redemption 2013 P 72,222 P 36,842 (b) Liability as of 12/31/14 (100,000 – 27,778) Liability as of 12/31/15 (100,000 – 63,158) Sale of product Accts. Receivable/Cash Sales Accrual of repairs Warranty Expense Warranty Liability Actual repairs Warranty Liability Cash/ AP, etc. P4,900,000 P 100,000 P 27,778 P 63,158 27,778 P 35,380 2014 2015 1,000,000 1,000,000 2,500,000 2,500,000 3,500,000 3,500,000 60,000 60,000 150,000 150,000 210,000 210,000 8,000 8,000 38,000 38,000 112,500 112,500 (a) Warranty Liability, January 1 Warranty expense (8% x 4,200,000)/(8% x 6,960,000) Actual repair costs incurred Warranty liability, December 31 (b) On 2014 sales (4,200,000 x 5% x ½) On 2015 sales [(1/2 of 3%) + 5%] x 6,960,000 Predicted warranty liability at December 31, 2015 Cash Unearned Revenue from Gift Certificates Outstanding Unearned Revenue from Gift Certificates Outstanding Sales 2014 P 0 336,000 (148,800) P187,200 2015 P187,200 556,800 (180,000) P564,000 P105,000 452,400 P557,400 2,000,000 1,280,000 2,000,000 1,280,000 Note: The gift certificates estimated to expire is recognized as revenue at the date of actual expiration. Page 5 Chapter 1 – Current Liabilities, Provisions and Contingencies 1-­‐19. Cash Unearned Revenue from Gift Certificates Outstanding Unearned Revenue from Gift Certificates Outstanding Sales Unearned Revenue from Gift Certificates Outstanding Revenue from Forfeited Gift Certificates 3,000,000 2,750,000 150,000 3,000,000 2,750,000 150,000 P250,000 200,000 (267,000) (18,000) P165,000 1-­‐20. Refundable Deposits, January 1, 2015 Deposits received during the year Deposits refunded during the year Deposits forfeited during the year (100,000 – 82,000) Refundable Deposits, December 31, 2015 1-­‐21. (a) 2014 2015 Cash 720,000 864,000 Unearned Service Contract Revenue 720,000 864,000 Cost of Service Contract 25,000 100,000 Cash, Accounts Payable, etc. 25,000 100,000 Unearned Service Contract Revenue 72,000 266,400 Service Contract Revenue 72,000 266,400 2014: 720,000 x 20% x ½=72,000 2015: 720,000 x 20% x ½=72,000 720,000 x 30% x ½=108,000 864,000 x 20% x ½=86,400 72,000+108,000+86,400=266,400 (b) 2014 2015 Unearned Service Contract Revenue, Jan. 1 -­‐-­‐-­‐-­‐-­‐ P648,000 Sale of contracts during the year P720,000 864,000 Service contracts earned during the year (72,000) (266,400) Unearned Service Contract Revenue, Dec. 31 P648,000 P1,245,600 Unearned Service Contract Revenue at December 31, 2015 may also be computed as: 720,000 x 65% (30% x ½) + 50% 468,000 864,000 x 90% (20% x ½) + 30% + 50%) 777,600 Total 1,245,600 (c) Revenue from service contracts Cost of service contracts Profit from service contracts Page 6 2014 P72,000 25,000 P47,000 2015 P266,400 100,000 P166,400 Chapter 1 – Current Liabilities, Provisions and Contingencies 1-­‐22. (a) (b) Subscriptions sold in 2012 and 2013 (5,000,000 + 4,500,000) Expired subscriptions in 2012 2013 (2,800,000 + 1,200,000) Unearned subscriptions, Jan. 1, 2014 2014 Cash Unearned Subscription Revenue (c) 2015 Cash Unearned Subscription Revenue Unearned Subscription Revenue Subscription Revenue 1,300,000 + 2,400,000 + 2,000,000 Unearned Subscription Revenue, January 1 Subscription received during the year Subscription revenue for the year Unearned Subscription Revenue, December 31 Unearned Subscription Revenue Subscription Revenue 1,200,000 + 2,000,000 + 1,800,000 P1,000,000 4,000,000 P9,500,000 5,000,000 P4,500,000 5,500,000 5,500,000 5,000,000 5,000,000 7,000,000 5,700,000 2014 P4,500,000 5,500,000 (5,000,000) P5,000,000 7,000,000 5,700,000 2015 P5,000,000 7,000,000 (5,700,000) P6,300,000 1-­‐23. (a) B = 8,000,000 x 8% = 640,000 (b) B = 8% (8000,000 – B) B = 640,000 -­‐ .08B B = 640,000/1.08 = 592,593 (c) (d) 1-­‐24. a. B = .08 (8,000,000 – T) T = .30 (8,000,000 – B) B = .08 {8,000,000 -­‐ .30 (8,000,000 – B)} B = .08 {8,000,000 – 2,400,000 + .30B} B = 448,000 + .024B B = 448,000/0.976 = 459,016 B = .08 {8,000,000 – B – T } T = .30 (8,000,000 – B) B = .08{8,000,000 – B -­‐ .30 (8,000,000 – B)} B = .08 {8,000,000 – B – 2,400,000 + .30B} B = 448,000 -­‐ .056B B = 448,000/1.056 = 424,242 Bonus to sales manager = .08 x 3,000,000 Bonus to each sales agent = .06 x 3,000,000 Page 7 = = 240,000 180,000 Chapter 1 – Current Liabilities, Provisions and Contingencies b. Total Bonus = .36 {3,000,000 – B – T) T = .30 {3,000,000 – B} B = .36 {3,000,000 – B -­‐ .30 (3,000,000 – B)} B = .36 {3,000,000 – B – 900,000 + .30B} B = 756,000 -­‐ .252B B = 756,000/1.252 B (Each): 603,834 / 3 = = 603,834 (total) 201,278 B = .32 {3,000,000 – B} B = 960,000 -­‐ .32B B = 960,000/1.32 B (Sales Manager): 727,273 x 12/32 B (Each Sales Agent): 727,273 x 10/32 = = = 727,273 (total) 272,727 227,273 c. 1-­‐25. B = .06 {9,000,000 – B – T} T = .30 (9,000,000 – B) B = .06 (9,000,000 – B -­‐ .30 (9,000,000 – B)} B = .06 {9,000,000 – B – 2,700,000 + .30B} B = 378,000 -­‐ .042B B = 378,000 / 1.042 = 362,764 T = .30 (9,000,000 – 362,764) T = 2,591,171 1-­‐26. Accounts payable Mortgage notes payable Current portion of bank notes payable Interest payable Liability for damages (600,000 + 900,000)/2 Value added tax payable Income tax payable SSS premiums payable (45,000 + 50,000) Philhealth contributions payable (22,000 + 28,000) Pag-­‐ibig contributions payable (18,000 + 20,000) Withholding tax payable Total current liabilities MULTIPLE CHOICE QUESTIONS Theory MC1 MC2 MC3 MC4 MC5 MC6 MC7 MC8 MC9 MC10 MC11 D B C B B A D C B C D MC12 MC13 MC14 MC15 MC16 MC17 MC18 MC19 MC20 MC21 MC22 B D B B A B A B C D D Page 8 P 270,000 1,300,000 100,000 7,500 750,000 288,000 315,000 95,000 50,000 38,000 120,000 P3,333,500 Chapter 1 – Current Liabilities, Provisions and Contingencies Problems MC23 D MC24 A MC25 D MC26 C MC27 MC28 MC29 MC30 MC31 MC32 MC33 MC34 MC35 Reported accounts payable Goods in transit shipped FOB shipping point Goods lost in transit shipped FOB shipping point Adjusted amount of accounts payable P540,000 30,000 15,000 P585,000 Proceeds = 100% -­‐ 10% = 90% ; Effective interest = 10%/90% = 11.11% P5,000,000, which is the reasonable estimate Given (Kindly note the typographical error in the textbook; amount should be P5,500,000 instead of P550,000) A Accrued salaries payable, December 31, 2014 Salaries expense during 2015 Salaries paid during 2015 Accrued salaries payable, December 31, 2015 D Contingent / Additional rent 6% x (4.5M – 2.5M) Electricity (8,500 x ½) Telephone bill for December Accrued liabilities, December 31, 2015 D Unearned service contract revenue, January 1 Cash receipts from service contracts sold during the year Service contract revenue recognized during the year Unearned service contract revenue, December 31 P1,080,000 1,920,000 (1,560,000) P1,440,000 C 2013 contracts: 1,400 x 1,500 = 2.1M x 67.5% 2014 contracts: 1,820 x 1,500 = 2.73M x 92.5% Unearned revenue from service contracts, December 31, 2014 P1,417,500 2,525,250 P3,942,750 C 2013 contracts: 2.1M x {½ x (15% + 35%)} 2014 contracts: 2.73M x (1/2 x 15%) Revenue from service contracts recognized in 2014 A Revenue from service contracts sold in 2014 realized in 2015: ½ x (15% + 35%) x 2.73 M A 2013 contracts: 2.1M x (50% x ½) 2014 contracts: 2.73M x {(1/2 x 35%) + 50%} 2015 contracts: 2.475M x {(1/2 x 15%) + 35% + 50%} Unearned revenue from service contracts, December 31, 2015 D Unearned/deferred revenue from gift certificates 1,000 x 750 B Accrued recurring biweekly salaries (1,125,000 x 3/10) Accrued overtime pay Accrued salaries, July 31 Page 9 P130,000 1,630,000 (1,560,000) P200,000 P120,000 4,250 2,500 P126,750 P525,000 204,750 P729,750 P682,500 P 525,000 1,842,750 2,289,375 P4,657,125 P750,000 P337,500 63,000 P400,500 Chapter 1 – Current Liabilities, Provisions and Contingencies MC36 MC37 MC38 MC39 MC40 MC41 MC42 MC43 MC44 MC45 MC46 MC47 MC48 B Estimated coupons to be redeemed (500,000 x 80%) Coupons already processed Estimated coupons/premiums outstanding Net cost per premium (50 + 5 – 40) Liability for unredeemed coupons 400,000 300,000 100,000 P15 P1,500,000 A Estimated total number of premiums (3M x 60%)/10 Premiums/prizes distributed Outstanding premiums Cost per premium (40,000/80,000) Estimated cost of potential prizes outstanding 180,000 42,000 138,000 P0.50 P69,000 A Estimated premiums to be distributed (400,000 x 70%)/5 Premiums already redeemed (100,000/5) Estimated outstanding premiums Cost per premium Estimated liability for premiums claims outstanding 56,000 20,000 36,000 P20 P720,000 B Estimated cost of redemption (720,000 x 50%) Amount disbursed as of December 31, 2015 Liability for unredeemed coupons P360,000 300,000 P 60,000 D Units sold Estimated warranty costs per unit Warranty expense for the year 24,000 P300 P7,200,000 C Total warranty expense for the year Warranty costs paid Estimated liability for warranty P7,200,000 1,700,000 P5,500,000 D Warranty expense (1.5M x 4%) C B = 0.45 {2,000,000 – B -­‐ .30 (2,000,000 – B}) P479,087 C Total B = 1% + 10% + 10% = 35% B = 0.35 {2,000,000 – B}; B = 518,519; B to Sales Manager = 518,519 x 15/35 B to Each Sales Agent = 518,519 x 10/35 P222,222 P148,148 B B = 0.10 {2,500,000 -­‐ .30 (2,500,000 – B)} P180,412 C Magazine subscriptions collected in advance (600,000 + 900,000 + 400,000) P1,900,000 A Balance of magazine subscriptions collected in advance before adjustment Correct/required balance, year end Subscriptions revenue for the year P2,400,000 1,900,000 P 500,000 D Cash payment Carrying amount of patent transferred Total consideration Amount previously accrued in 2014 Decrease in profit P3,800,000 2,000,000 P5,800,000 5,000,000 P 800,000 Page 10 P60,000 Chapter 1 – Current Liabilities, Provisions and Contingencies MC49 A Current liabilities consist of: Notes payable arising from purchases of goods Notes payable from loans from banks Employees’ income taxes payable Advances from customers on purchase orders Accounts payable arising from purchases of goods Customers’ accounts with credit balances Current portion of mortgage serial bonds (50,000 x 2) Bank overdraft Estimated liability for damages Estimated expenses for guarantee Accrued interest on bonds payable Total current liabilities Page 11 P472,000 200,000 9,600 64,000 380,000 26,000 100,000 50,000 24,000 48,000 57,500 P1,431,100 Chapter 2 -­‐ Non-­‐current Liabilities Chapter 2 – Noncurrent Liabilities 2-­‐1. Bond issue price Nominal interest for 2015 Interest expense (Effective interest) for 2015 Premium/discount amortization in 2015 Bond carrying value at December 31, 2015 Nominal interest for 2016 Interest expense for 2016 Premium/discount amortization in 2016 Bond carrying value at December 31, 2016 Date 06/30/15 12/31/15 06/30/16 12/31/16 2-­‐2. (b) 12% 4,632,025 250,000 277,922 27,922 4,659,947 500,000 560,970 60,970 4,720,917 Computations: At 8%: Issue price = (5,000,000 x 0.6756) + (250,000 x 8.1109) = 3,378,000 + 2,027,725 = 5,405,725 (a) 8% 5,405,725 250,000 216,229 33,771 5,371,954 500,000 428,351 71,649 5,300,305 At 12%: Date 06/30/13 12/31/13 06/30/14 12/31/14 (a) (b)
Interest Paid 250,000 250,000 250,000 Interest Expense 216,229 214,878 213,473 Premium Amortization 33,771 35,122 36,527 Bond Carrying Value 5,405,725 5,371,954 5,336,832 5,300,305 Issue price = (5,000,000 x 0.5584) + (250,000 x 7.3601) = 2,792,000 + 1,840,025 = 4,632,025 Interest Interest Discount Bond Paid Expense Amortization Carrying Value 4,632,025 250,000 277,922 27,922 4,659,947 250,000 279,597 29,597 4,689,544 250,000 281,373 31,373 4,720,917 Issue price Present value of face value (4,000,000 x 0.6756) Present value of interest payments (200,000 x 8.1109) Issue price Amortization Table Interest Interest Premium Date Paid Expense Amortization 3/01/15 -­‐ -­‐ -­‐ 8/31/15 200,000 172,983 27,017 2/28/16 200,000 171,903 28,097 8/31/16 200,000 170,779 29,221 2/28/17 200,000 169,610 30,390 Page 12
P2,702,400 1,622,180 P4,324,580 Bond Carrying Value 4,324,580 4,297,563 4,269,466 4,240,245 4,209,855 Chapter 2 -­‐ Non-­‐current Liabilities (c) 2015 Mar. 1 Aug. 31 Dec. 31 Cash Bonds payable Premium on bonds payable Interest expense Premium on bonds payable Cash Interest expense (171,903 x 4/6) Premium on bonds payable Interest payable (320,000 x 4/6) 2016 Interest expense (171,903 – 114,602) Prem. on bonds payable (28,097–18,731) Interest payable Cash 4,324,580 172,983 27,017 114,602 18,731 4,000,000 324,580 200,000 133,333 2-­‐3. Feb. 28 57,301 9,366 133,333 200,000 (a) 2015 Aug. 1 Cash 4,458,429 Discount on bonds payable 708,238 Interest payable Bonds payable 5M x 8% x 5/12 = 166,667 4,458,429 – 166,667 = 4,291,762 5,000,000 – 4,291,762 = 708,238 Dec. 31 Interest expense 178,823 Interest payable Discount on bonds payable 5M x 8% x 5/12 = 166,666 4,291,762 x 10% x 5/12 = 178,823 178,823 – 166,666 = 12,157 2016 Mar. 1 Dec. 31 Interest expense 71,529 Interest payable 333,333 Discount on bonds payable Cash 4,291,762 x 10% x 2/12 = 71,529 5M x 8% x 2/12 = 66,667 71,529 – 66,667 = 4,862 5M x 8% = 400,000 Interest expense 359,065 Discount on bonds payable Interest payable 4,291,762 + 12,157 + 4,862 = 4,308,781 4,308,781 x 10% x 10/12 = 359,065 5M x 8% x 10/12 = 333,333 359,065 – 333,333 = 25,732 Page 13
166,667 5,000,000 166,666 12,157 4,862 400,000 25,732 333,333 Chapter 2 -­‐ Non-­‐current Liabilities 2-­‐4. 2-­‐5. (b) 2015 2016 4,291,761 x 10% x 5/12 178,823 4,291,761 x 10% x 2/12 71,529 4,308,781 x 10% x 10/12 359,065 Interest expense for the year 178,823 430,594 (c) December 31, 2015 December 31, 2016 Bonds payable P5,000,000 P5,000,000 Less discount on bonds payable 696,081 665,487 Carrying amount P4,303,919 P4,334,513 OR COMPUTATIONS MAY BE MADE AFTER A PARTIAL TABLE OF AMORTIZATION IS COMPLETED AS FOLLOWS: August 1, 2015 4,291,762 March 1, 2016 250,353 233,333 17,020 4,308,782 March 1, 2017 430,878 400,000 30,878 4,339,659 Interest expense for 2015: Interest expense for 2016: 250,353 x 5/7 (250,353 x 2/7) + (430,878 x 10/12) Carrying amount, December 31, 2015: Carrying amount, December 31, 2016: 4,291,762 + (17,020 x 5/7) 4,308,782 + (30,878 x 10/12) Issue price of bonds and warrants (5,000,000 x 1.08) MV of bonds without warrants (5,000,000 x 1.02) Value assigned to warrants (a) (b) Cash Premium on bonds payable Bonds payable Share warrants outstanding Cash (5,000 x 2 x 140) Share warrants outstanding Ordinary shares capital (5,000 x 2 x 100) Share premium -­‐ ordinary (a) (b) Issue price of bonds with warrants (1,000,000 x 1.04) Bond price without warrants 1,000,000 x 0.3220 100,000 x 5.6502 Value of share warrants Interest expense for 2015 (887,020 x 12% x 10/12) (c) Bond carrying value, March 1, 2015 Amortization through December 31, 2015 887,020 x 12% x 10/12 1,000,000 x 12% x 10/12 Bond carrying value, December 31, 2015 Page 14
= 178,824 = 430,594 = 4,303,919 = 4,334,514 P5,400,000 5,100,000 P 300,000 5,400,000 1,400,000 300,000 100,000 5,000,000 300,000 1,000,000 700,000 322,000 565,020 1,040,000 887,020 152,980 88,702 88,702 83,333 887,020 5,369 892,389 Chapter 2 -­‐ Non-­‐current Liabilities 2-­‐6. (d) Cash (1,000 x 30 x 40) Share warrants outstanding Ordinary share capital (30,000 x 25) Share premium -­‐ ordinary (a) Issue price of convertible bonds Issue price of bonds without conversion privilege 2,000,000 x 0.5674 2M x 10% x 3.6048 Allocation to equity 1,200,000 152,980 750,000 602,980 1,134,800 720,960 2,000,000 1,855,760 144,240 (b) Amortization Table Interest Interest Premium Date Paid Expense Amortization 07/01/15 -­‐ -­‐ -­‐ 06/30/16 200,000 222,691 22,691 06/30/17 200,000 225,414 25,414 06/30/18 06/30/18 06/30/18 80,000 91,386 11,386 06/30/19 80,000 92,572 12,752 06/30/20 80,000 94,316* 14,316 *Adjusted; difference is due to rounding off. (c) 2015 2016 July 1 June 30 2017 June 30 Cash Discount on bonds payable Bonds payable PIC arising from bond conversion privilege Interest expense Discount on bonds payable Cash Bond Carrying Value 1,855,760 1,878,451 1,903,865 (1,142,319) 761,546 772,932 785,684 800,000 2,000,000 144,240 2,000,000 144,240 222,691 22,691 200,000 225,414 1,200,000 86,544 25,414 200,000 57,681 960,000 268,863 Interest expense Discount on bonds payable Cash Bonds payable PIC arising from conversion privilege Discount on bonds payable Ordinary share capital Share premium -­‐ ordinary Carrying value of bonds converted (1,903,865 x 120/200 Face value of bonds converted Discount on bonds payable cancelled Value of equity converted (144,240 x 120/200) Par value of ordinary shares issued (120 x 80 x 100) 1,142,319 1,200,000 57,681 86,544 960,000 Page 15
Chapter 2 -­‐ Non-­‐current Liabilities 2018 June 30 Interest expense Discount on bonds payable Cash 2019 2020 June 30 Interest expense Discount on bonds payable Cash June 30 Interest expense Discount on bonds payable Cash Bonds payable PIC arising from bond conversion privilege Cash PIC from unexercised bond conversion privilege (144,240 – 86,544) 91,386 11,386 80,000 92,752 12,752 80,000 94,316 14,316 80,000 800,000 57,696 800,000 57,696 2-­‐7. Refer to the following table for the amounts included in the journal entries. Interest Interest Discount Bond Date Paid Expense Amortization Carrying Value 01/02/15 4,620,820 12/31/15 400,000 462,082 62,082 4,682,902 12/31/16 400,000 468,290 68,290 4,751,192 12/31/17 400,000 475,119 75,119 4,826,311 12/31/17 (965,262) 12/31/17 3,861,049 12/31/18 320,000 386,105 66,105 3,927,154 12/31/18 (1,963,577) 12/31/18 1,963,578 12/31/19 160,000 196,422* 36,422* 2,000,000 * (a) Cash Discount on bonds payable Bonds payable PIC arising from bond conversion privilege (5M x .6209) + (400,000 x 3.7908) = 4,620,820 (5M x 1.04) – 4,620,820 = 579,180 5M – 4,620,820 = 379,180 Bonds payable PIC arising from bond conversion privilege Discount on bonds payable Ordinary share capital (200 x 40 x 100) Share Premium -­‐ ordinary 579,180 x 1/5 = 115,836 (b) (c) Adjusted due to rounding off Interest expense Cash Discount on bonds payable Interest expense Cash Discount on bonds payable Page 16
5,200,000 379,180 5,000,000 579,180 468,290 400,000 68,290 475,119 400,000 75,119 1,000,000 115,836 34,738 800,000 281,098 Chapter 2 -­‐ Non-­‐current Liabilities (d) Interest expense Cash Discount on bonds payable Bonds payable PIC arising from bond conversion privilege Discount on bonds payable Cash Gain on retirement of bonds PIC from unexercised bond conversion privilege Retirement price (2M x 1.01) Retirement price on account of liability (2,000,000 + 160,000) x .9009 Retirement price on account of equity Carrying value of bonds retired Face value Retirement price of bonds Gain on retirement of bonds Carrying value of equity cancelled (579,180 x 2/5) Retirement price on account of equity Gain on cancellation taken to equity Interest expense Cash Discount on bonds payable Bonds Payable Cash (e) 2-­‐8. 386,105 320,000 66,105 2,000,000 231,672 2,020,000 1,945,944 74,056 1,963,577 1,945,944 17,633 231,672 74,056 157,616 36,423 2,020,000 17,633 157,616 196,422 160,000 36,422 2,000,000 2,000,000 The following table may facilitate the computations required in this problem. Interest Interest Premium Bond Date Paid Expense Amortization Carrying Value 12/01/15 -­‐ -­‐ -­‐ 5,386,072 06/01/16 300,000 269,304 30,696 5,355,376 12/01/16 300,000 267,769 32,231 5,323,145 06/01/17 300,000 266,157 33,843 5,289,302 12/01/17 300,000 264,465 35,535 5,253,767 06/01/18 300,000 262,688 37,312 5,216,455 06/01/18 2,086,582 12/01/18 120,000 104,329 15,671 2,070,911 06/01/19 120,000 103,546 16,454 2,054,457 12/01/19 120,000 102,723 17,277 2,037,180 06/01/20 120,000 101,859 18,141 2,019,039 12/01/20 120,000 100,961* 19,039 2,000,000 (a) *Adjusted; difference is due to rounding off. Carrying value, December 1, 2016 (see, table) Amortization for one month (33,843 x 1/6) Carrying value, December 31, 2016 Page 17
5,323,145 5,640 5,317,505 Chapter 2 -­‐ Non-­‐current Liabilities (b) (c) (d) January 1-­‐June 1, 2016 (269,304 x 5/6) June 1-­‐December 1, 2016 December 1-­‐31, 2016 (266,157 x 1/6) Interest expense for the year 2016 Carrying value of bonds retired on June 1, 2018 5,216,455 x 3/5 Amortization through August 1, 2018 (23,506 x 2/6 x 3/5) Carrying value of bonds retired on August 1, 2018 Carrying value of bonds retired Redemption price (3M x 1.05) Loss on redemption of bonds 224,420 267,769 44,360 536,549 3,129,873 4,701 3,125,172 3,125,172 3,150,000 24,828 (e) (f) Carrying value of remaining bonds, December 1, 2018 Amortization through December 31, 2018 (16,454 x 1/6) Carrying value of remaining bonds, December 31, 2018 On bonds redeemed: 2018 January 1-­‐June 1, 2018 (262,688 x 3/5 x 5/6) 131,344 June 1-­‐August 1, 2018 (5,216,455 x 3/5 x 5% x 2/6) 52,165 On remaining bonds January 1-­‐June 1, 2018 (262,688 x 2/5 x 5/6) 67,563 June 1-­‐December 1, 2018 104,329 December 1-­‐31, 2018 (103,546 x 1/6) 17,258 January 1-­‐June 1, 2019 (103,546 x 5/6) June 1-­‐December 1, 2019 December 1-­‐31, 2019 (152,788 x 1/6) Interest expense 372,659 2,070,911 2,742 2,068,169 2019 86,288 102,723 16,977 205,988 2-­‐9. Date 01/02/15 12/31/15 12/31/16 12/31/17 12/31/18 12/31/18 12/31/19 12/31/20 Interest Paid -­‐ 1,200,000 1,200,000 1,200,000 1,200,000 720,000 720,000 Interest Expense -­‐ 1,014,730 999,908 983,901 966,613 568,765 556,666 Premium Amortization -­‐ 185,270 200,092 216,099 233,387 151,235 163,334 Bond Carrying Value 12,684,120 12,498,850 12,298,758 12,082,659 11,849,272 7,109,563 6,958,328 6,794,994 (a) Amortization of premium for 2015 (see table) (b) Carrying value of bonds on December 31, 2018 (see table) 11,849,272 (c) Carrying value of bonds called (11,849,272 x 4/10) Call price/retirement price (4,000,000 x 110%) Gain on retirement of bonds 4,739,709 4,400,000 339.709 (d) Interest expense for year 2019 (see table) 568,765 (e) Unamortized premium on bonds payable, Dec. 31, 2019 6,958,328 – 6,000,000 958,328 Page 18
185,270 Chapter 2 -­‐ Non-­‐current Liabilities 2-­‐10. Date 03/01/15 09/01/15 03/01/16 09/01/16 03/01/17 09/01/17 03/01/18 09/01/18 03/01/19 Nominal Interest 170,000 170,000 170,000 170,000 170,000 170,000 170,000 170,000 Effective Interest 176,670 176,970 177,284 177,612 177,954 178,312 178,686 179,077 Discount Amortization 6,670 6,970 7,284 7,612 7,954 8,312 8,686 9,077 Bond Carrying value 3,926,000 3,932,670 3,939,640 3,946,924 3,954,536 3,962,490 3,970,802 3,979,488 3,988,565 2-­‐11. (a) (b) (c) (d) (a) Interest expense recorded on September 1, 2015 Discount amortization recorded on September 1, 2015 Carrying amount of the bonds, September 1, 2016 Amortization through December 31, 2016 (7,612 x 4/6) Carrying amount of the bonds, December 31, 2016 Retirement price (4M x 1.01) Accrued interest (4,000,000 x 8.5% x 1/12) Amount of cash paid on September 30, 2018 Carrying value, September 1, 2018 (see table) Amortization through September 30, 2018 (9,077 x 1/6) Carrying value, September 30, 2018 Retirement price (4 M x 1.01) Loss on retirement of bonds Issue price of the bonds Principal Due Date Due 12/31/16 2,000,000 12/31/17 2,000,000 12/31/18 2,000,000 12/31/19 2,000,000 12/31/20 2,000,000 Selling price of bonds Interest Due 800,000 640,000 480,000 320,000 160,000 Amount Due 2,800,000 2,640,000 2,480,000 2,320,000 2,160,000 PV Factor 0.8929 0.7972 0.7118 0.6355 0.5674 176,670 6,670 3,946,924 5,075 3,951,999 4,040,000 28,333 4,068,333 3,979,488 1,513 3,981,001 4,040,000 58,999 Present Value 2,500,120 2,104,608 1,765,264 1,474,360 1,225,584 P9,069,936 (b) Due Date 12/31/15 12/31/16 12/31/17 12/31/18 12/31/17 12/31/18 Principal Due 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 Amortization Table Interest Effective Due Interest 800,000 1,088,392 640,000 882,999 480,000 672,159 320,000 455,218 160,000 231,296 *Adjusted; difference is due to rounding off. Page 19
Discount Amortization 288,392 242,999 192,159 135,218 71,296* Carrying Value, end P9,069,936 7,358,328 5,601,327 3,793,486 1,928,704 -­‐0-­‐ Chapter 2 -­‐ Non-­‐current Liabilities (c) Dec. 31 Interest expense Discount on bonds payable Cash 2016 Dec. 31 Bonds payable Cash Interest expense Discount on bonds payable Cash 2017 2-­‐12. (a) (b) 1,088,392 Bonds payable Cash Due Date 01/01/15 12/31/15 12/31/16 12/31/17 12/31/18 Principal Due 2,000,000 2,000,000 2,000,000 2,000,000 Interest Due 960,000 720,000 480,000 120,000 Amount Due 2,960,000 2,720,000 2,480,000 2,240,000 Amortization Table Interest Effective Due Interest 960,000 695,004 720,000 513,804 480,000 337,308 240,000 166,340* 2,000,000 882,999 2,000,000 242,999 640,000 2,000,000 Issue price of the bonds Principal Due Date Due 12/31/15 2,000,000 12/31/16 2,000,000 12/31/17 2,000,000 12/31/18 2,000,000 Selling price of bonds 288,392 800,000 PV Factor 0.9259 0.8573 0.7938 0.7350 2,000,000 Present Value 2,740,664 2,331,856 1,968,624 1,646,400 8,687,544 Premium Amortization 264,996 206,196 142,692 73,660 Carrying Value, end 8,687,544 6,422,548 4,216,352 2,073,660 -­‐0-­‐ *Adjusted; difference is due to rounding off. (c) 2015 2016 Jan. 1 Dec. 31 Dec. 31 Cash Bonds payable Premium on bonds payable Interest expense Premium on bonds payable Cash Bonds payable Cash Interest expense Premium on bonds payable Cash Bonds payable Cash Page 20
8,687,544 695,004 264,996 2,000,000 513,804 206,196 2,000,000 8,000,000 687,544 960,000 2,000,000 720,000 2,000,000 Chapter 2 -­‐ Non-­‐current Liabilities 2017 2018 Dec. 31 Dec. 31 2-­‐13. (a) Interest expense Premium on bonds payable Cash Bonds payable Cash 337,308 142,692 2,000,000 Interest expense Premium on bonds payable Cash Bonds payable Cash 166,340 73,660 2,000,000 480,000 2,000,000 240,000 2,000,000 6,949,800/9,000,000 = 0.7722 This present value factor for three periods is under the rate of 9% (Table II, Present Value of a Single Payment). Hence, effective interest for this transaction is 9%. (b) Date Amortization 04/01/15 03/31/16 9% x 6,949,800 = 625,482 03/31/17 9% x 7,575,282 = 681,775 03/31/18 9% x 8,257,057 = 742,943* *Adjusted; difference is due to rounding off. (c) (d) Interest expense for 2015 (625,482 x 9/12) Carrying value, April 1, 2015 Amortization through December 31, 2015 (625.482 x 9/12 Carrying value, December 31, 2015 2015 2016 Mar. 31 Dec. 31 Interest expense (625,482 – 469,112) Discount on notes payable Interest expense (681,775 x 9/12) Discount on notes payable Interest expense (681,775 – 511,331) Discount on notes payable Interest expense (742,943 x 9/12) Discount on notes payable Apr. 1 Dec. 31 2017 Mar. 31 Dec. 31 Land Discount on notes payable Notes payable Interest expense Discount on notes payable Page 21
Carrying Value of Note 6,949,800 7,575,282 8,257,057 9,000,000 469,112 6,949,800 469,112 7,418,912 6,949,800 2,050,200 469,112 9,000,000 469,112 156,370 511,331 170,444 557,207 156,370 511,331 170,444 557,207 Chapter 2 -­‐ Non-­‐current Liabilities 2018 Mar. 31 2-­‐14. (a) (b) (c) Interest expense (742,943 – 557,207) Discount on notes payable Notes payable Cash 6,949,800 x 9%= 625,482 625,482 x 8/12 625,482 x 4/12 6,949,800 x 1.09 = 7,575,282 7,575,282 x 9%= 681,775 681,775 x 8/12 681,775 x 4/12 7,575,282 x 1.09 = 8,257,057 8,257,057 x 9%= 743,135 743,135 x 8/12 Totals 185,736 9,000,000 2015 2016 416,988 _______ 416,988 185,736 9,000,000 2017 208,494 454,517 _______ 663,011 227,258 495,423 722,681 Notes payable Accrued interest (416,988 + 663,011) Total, December 31, 2016 6,949,800 1,079,999 8,029,799 Noncurrent liabilities: Notes payable Accrued interest (416,988 + 663,011) Total, December 31, 2016 Noncurrent liabilities: Notes payable Accrued interest Total, December 31, 2017 6,949,800 1,079,999 7,802,540 6,949,800 1,802,680 8,752,480 (d) 2015 Dec. 31 Interest expense Interest payable 2016 2017 2018 May 1 Dec. 31 Dec. 31 Land Notes payable 6,949,800 6,949,800 416,988 416,988 Interest expense Interest payable 663,011 663,011 Interest expense Interest payable 722,681 722,681 Apr. 30 Interest expense (adjusted) Interest payable Notes payable Cash Page 22
247,520 1,802,680 6,949,800 9,000,000 Chapter 2 -­‐ Non-­‐current Liabilities 2-­‐15. (a) Present value of note (800,000 x 3.2397) 2,591,760 (b) Date Principal Due Amortization 4/01/15 3/31/16 800,000 233,258 3/31/17 800,000 182,252 3/31/18 800,000 126,654 3/31/19 800,000 66,076* Carrying Value of Note 2,591,760 2,025,018 1,407,270 733,924 -­‐0-­‐ (c) *Adjusted; difference is due to rounding off. 2015 2016 Mar. 31 Dec. 31 Notes payable Interest expense Cash Discount on notes payable (233,258-­‐174,944) Interest expense (182,252 x 9/12) Discount on notes payable 2017 2018 2019 Apr. 1 Dec. 31 Mar. 31 Dec. 31 Mar. 31 Dec. 31 Mar. 31 Equipment Discount on notes payable Notes payable Interest expense (233,258 x 9/12) Discount on notes payable Notes payable Interest expense Cash Discount on notes payable (182,252-­‐136,689) Interest expense (126,654 x 9/12) Discount on notes payable Notes payable Interest expense Cash Discount on notes payable (126,654-­‐94,991) Interest expense (66,076 x 9/12) Discount on notes payable Notes payable Interest expense Cash Discount on notes payable (66,076-­‐49,557) Page 23
2,591,760 608,240 174,944 3,200,000 174,944 800,000 58,314 136,689 800,000 58,314 136,689 800,000 45,463 94,991 800,000 45,563 94,991 800,000 31,663 49,557 800,000 31,663 49,557 800,000 16,519 800,000 16,519 Chapter 2 -­‐ Non-­‐current Liabilities 2-­‐16. (a) Date Annual Payment 10/01/15 09/30/16 800,000 09/30/17 800,000 09/30/18 800,000 09/30/19 800,000 *Adjusted (b) 2015 2016 2017 2018 2019 Oct. 1 Dec. 31 Sept. 30 Dec. 31 Sept. 30 Dec. 31 Sept. 30 Dec. 31 Sept. 30 (c) Interest 233,258 182,252 126,654 66,076* Principal Payment Equipment Notes Payable Interest Expense (233,258 x 3/12) Interest Payable Interest Payable Interest Expense (233,258 – 58,315) Notes Payable Cash Interest Expense (182,252 x 3/12) Interest Payable Interest Payable Interest Expense (182,252 – 45,563) Notes Payable Cash Interest Expense (126,654 x 3/12) Interest Payable Interest Payable Interest Expense (126,654 – 31,663) Notes Payable Cash Interest Expense (66,076 x 3/12) Interest Payable Interest Payable Interest Expense (66,076 – 16,519) Notes Payable Cash Current portion at December 31, 2016 Notes Payable Interest Payable Noncurrent portion at December 31, 2016 Notes Payable Page 24
566,742 617,748 673,346 733,924 Carrying Value 2,591,760 2,025,018 1,407,270 733,924 -­‐0-­‐ 2,591,760 58,315 2,591,760 58,315 58,315 174,943 566,742 800,000 45,563 45,563 45,563 136,689 617,748 800,000 31,663 31,663 31,663 94,991 673,346 800,000 16,519 16,519 16,519 49,557 733,924 800,000 617,748 45,563 1,407,270 Chapter 2 -­‐ Non-­‐current Liabilities 2-­‐17. (a) Notes payable Interest payable Accumulated depreciation Equipment Gain on disposal of equipment Gain on debt restructuring 900,000 90,000 400,000 1,000,000 200,000 190,000 (b) Bonds payable Interest payable Ordinary share capital (300,000 x 25) Share premium – ordinary (300,000 x 3) Gain on debt restructuring (10,900,000 – 8,400,000 = 2,500,000) 10,000,000 900,000 7,500,000 900,000 2,500,000 (c) Notes payable Interest payable Restructured notes payable Gain on debt restructuring Present value of future payments at historical rate (10%) 8,000,000 x 0.8264 6,611,200 8,000,000 x 8% x 1.7355 1,110,720 Total 7,721,920 Carrying value of liability 11,000,000 Difference 3,278,080 3,278,080/11,000,000 = 30%, thus the restructuring qualifies as a derecognition of the old liability and creation of a new liability. The old liability shall be cancelled; the new liability shall be measured based on the discounted cash flow of the future payments based on the entity’s incremental borrowing rate considering its credit rating: Present value of future payments at incremental borrowing rate, considering its credit rating (12%): 8,000,000 x 0.7972 6,377,600 8,000,000 x 8% x 1.6901 1,081,664 Total 7,459,264 Carrying value of the old 11,000,000 Gain on debt restructuring 3,540,736 Notes payable Interest payable Restructured notes payable Deferred gain on debt restructuring 10,000,000 1,000,000 7,459,264 3,540,736 (d) Page 25
3,000,000 330,000 3,111,024 218,976 Chapter 2 -­‐ Non-­‐current Liabilities Present value of future payments 3,000,000 x 0.5935 1,780,500 3,000,000 x 12% x 3.6959 1,330,524 Total 3,111,024 Carrying value of liability 3,330,000 Difference 218,976 218,976/3,330,000 < 10% of 3,330,000. Thus, the debt restructuring does not qualify for derecognition of the old obligation. No gain shall be recognized and a new effective interest rate shall be computed. Alternatively, the restructuring may be recorded as: Notes payable Interest payable Premium on restructured notes payable Restructured notes payable Deferred gain on debt restructuring Page 26
3,000,000 330,000 111,024 3,000,000 218,976 Chapter 2 -­‐ Non-­‐current Liabilities MULTIPLE CHOICE QUESTIONS Theory MC1 D MC2 D MC3 D MC4 A MC5 A MC6 C MC7 D MC8 D MC9 C MC10 C MC11 C Problems MC23 D MC24 MC25 MC26 MC27 MC28 MC29 MC30 B A MC12 MC13 MC14 MC15 MC16 MC17 MC18 MC19 MC20 MC21 MC22 C B B D B D A A A A B Present value of maturity value 1.0M x 0.38554 Present value of interest payments 1.0M x 8% x 6.14457 Total issue price Present value of P1000 face value (1,000 x 0.31) Present value of interest (1,000 x 4% x 11.47)= 768.80 Issue price for each P1,000 bond P385,540 491,566 P877,106 P310.00 458.80 P768.80 Bond issue price (2.0M x 97%) Accrued interest (2.0M x 10% x 3/12) Net cash received from bond issuance P1,940,000 50,000 P1,990,000 B Amount allocated to bonds (2,000 x 1,040) Face value of bonds Premium on bonds payable on May 1, 2015 P2,080,000 2,000,000 P 80,000 B Retirement price (4.0M x 97%) Accrued interest (4.0M x 12% x 3/12) Total cash paid for the retirement of bonds P3,880,000 120,000 P4,000,000 C Redemption price (96% x 1.0M) Carrying amount of bonds retired (1.0M + 70,000) Gain on redemption of bonds A Accrued interest (1.0M x 12% x 1/12) B Issue price (1,000,000 x 1.02) – 50,000 Transaction costs Initial carrying amount on February 1, 2015 Page 27
P 960,000 1,070,000 P110,000 P10,000 P1,020,000 (50,000) P 970,000 Chapter 2 -­‐ Non-­‐current Liabilities MC31 D MC32 MC33 Carrying amount of bonds converted (1.0M – 30,000) Paid in capital from BCP cancelled due to conversion Total Total par of shares issued upon conversion (40,000 X 20) Expenses incurred in connection with conversion Increase in share premium D P0; No gain or loss is recognized upon conversion of bonds. C Interest expense from July 1 to December 31, 2015 1,032,880 x 10% x 6/12 MC34 A MC35 Carrying amount, July 1, 2015 Amortization of premium Nominal interest 1.0M x 6% P60,000 Effective interest 51,644 Carrying amount, December 31, 2015 P1,032,880 8,356 P1,024,524 A Carrying value, January 1, 2015 Amortization of discount (10% x 1,878,000) -­‐ (2,000,000 x 9%) Carrying value, December 31, 2015 P1,878,000 7,800 P1,885,800 MC36 P 970,000 50,000 P1,020,000 (800,000) (10,000) P 210,000 P51,644 B Effective interest (10M – 1,145,000) x 6% Nominal interest (10M x 5%) Increase in carrying amount representing amortization of discount P531,300 500,000 P 31,300 MC37 C MC38 Interest expense for 6 months ended December 31, 2015 5.0M x 1.136 x 8% x 6/12 P227,200 A Bond carrying value, June 30, 2014 Amortization of premium for six months (2,100,000 x 6%) – (2,000,000 x 7%) Bond carrying value, June 30, 2015 Face value Unamortized premium on bond, June 30, 2015 MC39 MC40 MC41 D January 1 – June 30 (1,032,880 x 5%) July 1 – December 31 1,032,880 – (60,000 – 51,644) = 1,024,524 x 5% Interest expense for the year D Carrying amount, December 31, 2015 Principal payment Amortization of discount Effective interest 1,902,800 x 10% 190,280 Nominal interest 2.0M x 8% 160,000 Carrying amount, December 31, 2016 B Interest expense for the year (2,400,000 x 12%) Page 28
P2,100,000 14,000 P2,086,000 2,000,000 P 86,000 P51,644 51,226 P102,870 P1,902,800 (400,000) 30,280 P1,533,080 P288,000 Chapter 2 -­‐ Non-­‐current Liabilities MC42 D MC43 MC44 MC45 MC46 Carrying value, December 31, 2015 (2.4M – 1.0M + 288,000) = P1,688,000 Principal payment Interest (1,688,000 x 12%) Amount applicable to principal due on December 31, 2016 B Discount balance, January 1, 2015 Amortization of discount in 2015 Discount balance, December 31, 2015 B Interest expense for 2015 (49,737 x 10%) Notes payable, January 1, 2015 Reduction in principal during 2015 (10,000 – 4,974) Notes payable, December 15, 2015 D Carrying amount of liability (5.0M + 500,000) Carrying value of real estate transferred Total amount recognized in profit (Includes P1.0M gain on restructuring and P1.5M gain on exchange) P5,500,000 3,000,000 P2,500,000 D Carrying value of liability (6M + 600,000) Present value of restructured debt (6M x 0.621) +(6000,000 x 12% x 3.791) Gain 144,480/6,600,000 is less than 10%; No gain is recognized P6,600,000 6,455,520 P 144,480 MC47 C MC48 Carrying value of liability (6M + 600,000) Present value of restructured debt (5M x .6209) + (5M x .12 x 3.7908) Gain P6,600,000 5,378,980 P1,221,020 B Carrying value of liability (8M + 640,000) Present value of restructured debt (6M x 0.8573) + (6M x 10% x 1.7833) Gain P8,640,000 6,213,780 P2,426,220 MC49 B Carrying value of liability (10M + 1M) Market value of shares issued (150,000 x 65) Gain on restructuring of debt Page 29
P1,000,000 202,560 P797,440 P600,000 288,000 P312,000 P4,974 P49,737 5,026 P44,711 P11,000,000 9,750,000 P 1,250,000 Chapter 3 – Shareholders’ Equity Chapter 3 – Shareholders’ Equity 3-­‐1. •
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3-­‐2. Cash (20,000 x 500) Ordinary share capital Legal expense/Professional fees Ordinary share capital (250 x 500) Share premium -­‐ ordinary Land Building Ordinary share capital (12,500 x 500) Share premium -­‐ ordinary Cash (6,500 x 550) Ordinary share capital (6,500 x 500) Share premium -­‐ ordinary Cash (20,000 x 550 x 25%) Subscription receivable – ordinary (11M x 75%) Subscribed ordinary share (20,000 x 500) Share premium – ordinary Cash Subscription receivable – ordinary 12,000 shares x 550 x 75% Subscribed ordinary share Ordinary share capital 12,000 shares x 500 10,000,000 150,000 5,000,000 3,000,000 3,575,000 2,750,000 8,250,000 4,950,000 6,000,000 10,000,000 125,000 25,000 6,250,000 1,750,000 3,250,000 325,000 10,000,000 1,000,000 4,950,000 6,000,000 2,000,000 60,000 1,960,000 18,000,000 1,500,000 500,000 60,000 700,000 1,260,000 2,500,000 10,000,000 2,000,000 3,500,000 a. b. c. Cash (10,000 x 200) Ordinary share capital (10,000 x 150) Share premium -­‐ ordinary Share premium-­‐ordinary Cash Land (3,500 x 560) Ordinary share capital (3,500 x 200) Share premium – ordinary Cash Preference share capital (5,000 x 500) Ordinary share capital (100,000 x 100) Share premium – preference Share premium – ordinary MV: Pref – 5,000 x 800=4M Ord – 100,000 x 120 = 12M Allocation: Pref: 18M x 4/16 = 4.5M Ord: 18M x 12/16 = 13.5M Page 30 Chapter 3 – Shareholders’ Equity d. e. 3-­‐3. 3-­‐4. Cash Subscription receivable Subscribed ordinary share Share premium – ordinary Land Cash Donated capital 150,000 450,000 5,000,000 500,000 100,000 40,000 4,960,000 Contributed capital 10% Preference share capital, cumulative and non-­‐participating, P100 par 30,000 shares authorized; 12,000 shares issued and outstanding P1,200,000 Ordinary share capital, P10 par, 100,000 shares authorized, 40,000 shares issued, 39,000 shares outstanding 400,000 Share premium – preference 300,000 Share premium –ordinary 140,000 Total contributed capital P2,040,000 Retained earnings Appropriated for treasury share P 18,000 Unappropriated 332,000 350,000 Treasury shares, 1,000 ordinary shares, at cost ( 18,000) Total shareholders’ equity P2,372,000 The total amount of P2,372,000 may also be obtained without necessarily preparing the shareholders’ equity in good format (if not required) as follows: Issue of 30,000 ordinary shares Issue of preference shares in exchange of equipment Subscriptions for 10,000 ordinary shares at 16 Purchase of 1,000 treasury shares at 18 Retained earnings Total shareholders’ equity, December 31, 2013 (a) (1) (2) (3) (4) Treasury shares Cash Cash Treasury shares Paid in capital from treasury share Cash Paid in capital from treasury shares Retained earnings Treasury shares Ordinary share capital Share premium – ordinary Retained earnings Treasury shares Page 31 140,000 60,000 65,000 4,000 1,000 10,000 3,000 1,000 P 380,000 1,500,000 160,000 (18,000) 350,000 P 2,372,000 140,000 56,000 4,000 70,000 14,000 Chapter 3 – Shareholders’ Equity (b) Total shareholders’ equity, December 31, 2014 (1) Purchase of treasury shares (10,000 x 14) (2) Sale of treasury shares (4,000 x 15) (3) Sale of treasury shares (5,000 x 13) Profit for the year Dividends declared Total shareholders’ equity, December 31, 2015 P2,200,000 (140,000) 60,000 65,000 280,000 (200,000) P2,265,000 The total shareholders’ equity may also be obtained by determining the balance of the shareholders’ equity accounts, as follows: Ordinary share capital, P10 par (99,000 shares issued and outstanding)P 990,000 Share premium -­‐ ordinary 297,000 Retained Earnings 978,000 Total shareholders’ equity P2,265,000
3-­‐5. (a) (b) 3-­‐6. 3-­‐7. (a) (b) (a) (b) (c) Preference share capital (4,000 x 20) 80,000 Share premium – preference (4,000 x 1.60) 6,400 PIC from retirement of preference shares 2,400 Cash (4,000 x 21) 84,000 Preference share capital (4,000 x 20) 80,000 Share premium – preference (4,000 x 1.60) 6,400 Retained earnings 17,600 Cash (4,000 x 26) 104,000 Average preference share premium per share: 160,000/100,000 shares = 1.60 Preference share capital (10,000 x 20) Share premium – preference (10,000 x 1.60) Retained earnings Ordinary share capital (10,000 x 30) Preference share capital (10,000 x 20) Share premium – preference (10,000 x 1.60) Ordinary share capital (5,000 x 30) Share premium – ordinary 200,000 16,000 84,000 200,000 16,000 300,000 150,000 66,000 Retained earnings (10,000 shares x P20) 200,000 Share dividends distributable 100,000 Share premium -­‐ ordinary 100,000 Share dividends distributable 100,000 Ordinary share capital 100,000 Retained earnings (30,000 x 10) 300,000 Share dividends distributable 300,000 Share dividends distributable 300,000 Ordinary share capital 300,000 Memo: Effected a 2 for 1 stock split on 100,000 shares P100 par previously issued and outstanding. Page 32 Chapter 3 – Shareholders’ Equity 3-­‐8. Capital structure: Number of shares outstanding Total par value (a) Preference share is non-­‐cumulative and non-­‐participating 2013 Current preference dividends (9% x 2,000,000 = 180,000; dividends declared were P150,000 only. Dividend per share 2014 Current preference dividends (9% x 2,000,000) Excess (240,000 – 180,000) Dividend per share 2015 Current preference dividends (9% x 2,000,000) Excess (540,000 – 180,000) Dividend per share (b) Preference share is cumulative and non-­‐participating. 2013 Current on preference is P180,000 Arrears, end (P180,000 – 150,000 = 30,000) Dividend per share Preference 20,000 P2,000,000 Ordinary 250,000 P2,500,000 Preference P 150,000 P7.50 Preference P 180,000 P9.00 Preference P 180,000 P9.00 Ordinary P0 P0 Ordinary P80,000 P0.32 Ordinary P360,000 P1.44 Preference P150,000 P7.50 Ordinary Preference P210,000 P10.50 Preference P180,000 P9.00 Ordinary P50,000 P0.20 Ordinary P360,000 P1.44 Preference P 150,000 P 7.50 Ordinary P0 P0 P0 P0 2014 Arrears, beginning P 30,000 Current year 180,000 Total P210,000 Excess to ordinary = 260,000 – 210,000 Dividend per share 2015 Current year Excess – to ordinary = 540,000 – 180,000 Dividend per share (c)
Preference share is cumulative and fully participating 2013 Current dividends: 9% x 2,000,000 = P180,000 Arrears, end = 180,000 – 150,000 = 30,000 Dividend per share Page 33 Chapter 3 – Shareholders’ Equity 2014 Arrears, beginning P 30,000 Current on preference 180,000 To ordinary: initial limit 9% x P2,500,000 = P225,000, but remaining is only Total dividends Dividend per share 2015 Current dividends: 9% x 2,000,000 9% x 2,500,000 Excess: P135,000 x 2.0/4.5 135,000 x 2.5/4.5 Total Dividend per share 3-­‐9. Capital structure: Number of shares outstanding Total par value Preference P 210,000 P210,000 P10.50 Preference P 180,000 60,000 P240,000 P12.00 Ordinary P50,000 P50,000 P 0.20 Ordinary P 225,000 75,000 P300,000 P1.20 Preference 20,000 P2,000,000 Ordinary 250,000 P2,500,000 Preference P 50,000 180,000 68,889 Ordinary P225,000 86,111 P311,111 P1.24 (a) Preference is participating up to 14% (Additional 5%) Arrears, January 1 Current dividends: 9% x P2,000,000 9% x P2,500,000 Excess divided by total par 155,000/4,500,000 = 3.44%, which is less than the limit of additional 5%; therefore full excess is prorated. P155,000 x 2M/4.5M P155,000 x 2.5M/4.5M Total Dividend per share P298,889 P14.94 (b) Preference is participating up to 12% (Additional 3%) Arrears, January 1 Current dividends: 9% x P2,000,000 9% x P2,500,000 Excess divided by total par 155,000/4,500,000 = 3.44%, which exceeds the additional limit of 3%; therefore, additional dividend to preference is limited to 3%; entire remainder goes to ordinary 3% x P2,000,000 P155,000 – 60,000 Total Dividend per share Page 34 Preference P 50,000 180,000 60,000 P290,000 P14.50 Ordinary P225,000 95,000 P320,000 P1.28 Chapter 3 – Shareholders’ Equity 3-­‐10. 3-­‐11. 3-­‐12. Retained earnings Share dividends distributable 50% x 100,000 x 10 = 500,000 500,000 500,000 Share dividends distributable Ordinary share capital Fractional share warrants outstanding Fractional share warrants outstanding Ordinary share capital (80% x 50,000) PIC from unexercised fractional share warrants 500,000 50,000 450,000 50,000 40,000 10,000 10,000 150,000 20,000 20,000 30,000 200,000 10,000 150,000 20,000 20,000 30,000 170,000 30,000 33,750 190,000 180,000 270,000 33,750 190,000 450,000 2015 Oct. 31 Financial assets at FV through profit or loss Unrealized gain on financial assets at FVPL 10,000 shares x (15 – 14) Retained earnings Property dividends payable 10,000 shares x 15 Financial assets at FV through profit or loss Unrealized gain on financial assets at FVPL 10,000 shares x (17 – 15) Retained earnings Property dividends payable 2016 Feb. 28 Retained earnings Property dividends payable Property dividends payable Financial assets at FV through profit or loss Gain on disposal of financial assets at FVPL 2015 Oct. 1 Depreciation expense Accumulated depreciation – equipment 450,000/10 x 9/12 Retained earnings Property dividends payable Assets held for distribution Accumulated depreciation – equipment Equipment Cost P450,000 Acc. Deprn 450,000/10 x 6 270,000 Carrying value P180,000 FV (amount is higher) P190,000 Page 35 Chapter 3 – Shareholders’ Equity Dec. 31 Impairment loss Assets held for distribution 180,000 – 160,000 = 20,000 Property dividends payable Retained earnings 190,000 – 160,000 = 30,000 decrease 2016 Jan. 31 Retained earnings Property dividends payable 175,000 – 160,000 = 15,000 increase Property dividends payable Assets held for distribution Gain on disposal of assets 20,000 30,000 15,000 175,000 20,000 30,000 15,000 160,000 15,000 3-­‐13. (a) (b) (c) (d) (e) Number of preference shares issued and outstanding Number of ordinary shares issued Number of ordinary shares outstanding (200,000 – 12,000) Cost of remaining treasury shares acquired by purchase Amount of total dividends (26,000 shares x P200 x 12%) + (188,000 x P1) Total shareholders’ equity, December 31, 2015 26,000 200,000 188,000 P400,000 P812,000 P16,294,000 Total shareholders’ equity 12/31/14 balances P16,500,000 2015 transactions: a) 4,000 x 280 (1,120,000) b) 8,000 x 80 (640,000) c) 2:1 share split d) 6,000 x 45 270,000 e) 4,000 x 46 f) 2,000 x 48 96,000 g) Dividends (812,000) h) Profit 2,000,000 12/31/15 balances P16,294,000 *P640,000 x 6,000/16,000 = 240,000 3-­‐14. (a) 2015 June 15 Sept. 30 Preference shares issued 30,000 (4,000) 26,000 Cash Ordinary share capital Share premium – ordinary Retained earnings (80,000 x 5% x 110) Share dividends distributable (4,000x100) Share premium – ordinary Page 36 Ordinary Treasury shares shares Number of issued Shares Cost 100,000 8,000 P640,000 100,000 8,000 (6,000) (240,000)* 4,000 (2,000) 200,000 12,000 P400,000 6,000,000 440,000 5,000,000 1,000,000 400,000 40,000 Chapter 3 – Shareholders’ Equity Nov. 10 Dec. 31 2016 Mar. 1 May 1 Aug. 10 Sept. 15 Oct. 31 Dec. 10 Share dividends distributable Ordinary share capital Income summary Retained earnings Treasury share (3,000 x 95) Cash Cash (1,500 x 120) Treasury share (1,500 x 95) Pain in capital from treasury shares Issued 82,500 rights to shareholders entitling holders to purchase 2 additional shares for P125 per share. Cash (15,000 x 2 x 125) Ordinary share capital (30,000 x 100) Share premium – ordinary Cash (40,000 x 2 x 125) Ordinary share capital (80,000 x 100) Share premium – ordinary Retained earnings Dividends payable (192,500 x 5) Dec. 20 Dec. 31 Ordinary share capital (1,000 x 100) Share premium – ordinary (1,000 x 10)* Paid in capital from treasury shares Treasury share *Share premium per share 300,000/30,000 = 10 Income summary Retained earnings 400,000 1,175,000 285,000 180,000 400,000 1,175,000 285,000 142,500 37,500 3,750,000 10,000,000 962,500 3,000,000 750,000 8,000,000 2,000,000 962,500 100,000 10,000 1,200,000 15,000 95,000 1,200,000 (b) Shareholders’ Equity Ordinary share capital, P100 par, 193,000 shares issued; 500 shares in the treasury Share premium -­‐ ordinary Paid in capital from treasury shares Retained earnings Treasury shares Total shareholders’ equity, December 31, 2016 Page 37 P19,300,000 4,080,000 52,500 1,422,500 (47,500) P24,807,500 Chapter 3 – Shareholders’ Equity 3-­‐15. (a) Total lump sum price is P147,000 (1,500 x 98), allocated as follows: Securities Preference Warrant Market value 90 10 Allocation 147,000 x 90/100 147,000 x 10/100 Allocated Price 132,300 14,700 Entry (b) Cash Preference share capital (1,500 x 30) Share premium – preference Share warrants outstanding Cash (600 x 40) Share warrants outstanding Ordinary share capital Share premium – ordinary 147,000 24,000 11,760 45,000 87,300 14,700 6,000 29,760 3-­‐16. (a) Value of each option Number of shares granted Total value assigned to share options Required service period Annual compensation expense (b) 2015 Jan. 1 Memo: Granted share options to selected senior employees for the purchase of 30,000 ordinary shares at P35 per share, from January 1, 2018 to December 31, 2019. Dec. 31 Compensation expense Share options outstanding 2018 Dec. 31 Share options outstanding (28,000 x 8) Cash (28,000 x 35) Ordinary share capital (28,000 x 20) Share premium -­‐ ordinary P8 x 30,000 P240,000 ÷ 3years P 80,000 80,000 80,000 2016 Dec. 31 2017 Dec. 31 3-­‐17. 80,000 80,000 80,000 80,000 224,000 980,000 560,000 644,000 2015 Jan. 2 Compensation expense Share options outstanding 30,000 x 8 x 1/3 Compensation expense Share options outstanding Dec. 31 Memo: granted 50,000 share options to certain officers for the purchase of the company’s P100 par ordinary shares at P280 per share. Compensation expense Share options outstanding (45,000 x 30) ÷ 3 years Page 38 450,000 450,000 Chapter 3 – Shareholders’ Equity 2016 June Dec. 31 2017 August 3-­‐18. Memo: 6,000 share options were cancelled. Compensation expense Share options outstanding (50,000-­‐6,000) x 30 x 2/3 = 880,000 880,000 – 450,000 = 430,000 430,000 430,000 Memo: 1,500 share options were cancelled. Dec. 31 Compensation expense 395,000 Share options outstanding Total accrued compensation expense (44,000 – 1,500) x 30 1,275,000 Less: previously accrued 880,000 Compensation expense-­‐2017 395,000 2018 Cash (42,500 x 280) Share options outstanding (42,500 x 30) Ordinary share capital (42,500 x 100) Share premium – ordinary 11,900,000 1,275,000 395,000 4,250,000 8,925,000 (a) Compensation expense 2015 Estimated options to vest 200 – 10 – 15 = 175 employees x 100 options) Fair value of option Estimated total fair value of options to vest Compensation expense for the year (560,000 x 1/3) 2016 Estimated options to vest 200 – 10 – 12 – 5 = 173 employees x 100 options) Fair value of option Estimated total fair value of options to vest Compensation expense for the years 2015 and 2016 553,600 x 2/3 = Compensation expense previously recognized Compensation expense for the year 2017 Number of options that vested (200 – 10 – 12 – 8) Fair value of option Total compensation expense (2015-­‐2017) Compensation expense previously recognized Compensation expense for the year 17,500 P32 P560,000 186,667 17,300 P32 P553,600 P369,067 186,667 P182,400 17,000 P32 P544,000 369,067 P174,933 (b) 2015 Jan. 1 Dec. 31 Granted 100 share options to each of its 200 employees to buy P100 par ordinary share at P220 per share. The options are exercisable starting January 1, 2011 provided that the employees are still in the service. Options expire on December 31, 2012. Compensation expense 186,667 Share options outstanding 186,667 Page 39 Chapter 3 – Shareholders’ Equity 2016 Dec. 31 2017 Dec. 31 2018 2019 Compensation expense Share options outstanding Compensation expense Share options outstanding Cash (140 x 100 x 220) Share options outstanding (14,000 x 32) Ordinary share capital (14,000 x 200) Share Premium -­‐ ordinary Cash (10 x 100 x 220) Share options outstanding (1,000 x 32) Ordinary share capital (1,000 x 200) Share premium – ordinary 182,400 174,933 3,080,000 448,000 220,000 32,000 182,400 174,933 2,800,000 728,000 200,000 52,000 64,000 64,000 3-­‐19. (a) 2015 Jan. 1 Dec. 31 2016 Dec. 31 2017 (b) 2015 Jan. 1 Dec. 31 2016 Dec. 31 2017 Dec. 31 Share options outstanding (20 x 100 x 32) PIC from forfeited share options Memo: Granted 10,000 share options for the purchase of P100 par ordinary shares at P120 per share. The options vest once the market price of ordinary shares reached P200, up to December 31, 2017. Options expire at the end of 2018. Compensation expense Share options outstanding (10,000 x 20) / 3 years Compensation expense Share options outstanding (10,000 x 20) -­‐ 66,667 Cash (10,000 x 120) Share options outstanding Ordinary share capital (10,000 x 100) Share premium-­‐ordinary 66,667 133,333 1,200,000 200,000 66,667 133,333 1,000,000 400,000 Memo: Granted 10,000 share options for the purchase of P100 par ordinary shares at P120 per share. The options vest once the market price of ordinary shares reached P200. Options expire at the end of 2018. Compensation expense Share options outstanding (10,000 x 20) / 3 years Compensation expense Share options outstanding Compensation expense Share options outstanding Page 40 66,667 66,667 66,666 66,667 66,667 66,666 Chapter 3 – Shareholders’ Equity 2018 (c) 3-­‐20. Cash (8,000 x 120) Share options outstanding (80% x 200,000) Ordinary share capital (8,000 x 100) Share premium-­‐ordinary Share options outstanding (20% x 200,000) PIC from forfeited share options 960,000 160,000 40,000 800,000 320,000 40,000 If the stock price reached P200 by June 2018, the same entries will be made for year 2015 through 2017, as given in (b) The recorded share options, however, will be cancelled at the end of 2018, as the options already expire. 2018 Dec. 31 (a) 2015 Jan. 1 Dec. 31 2016 Dec. 31 Share options outstanding PIC from forfeited share options 200,000 200,000 Granted 80 share options to each of 400 employees for the purchase of P100 par ordinary shares at P140 per share. Options shall vest in 2015 if earnings increase by 15% or at the end of 2016 if average annual earnings for 2015 and 2016 increased by an average of 12%. Compensation expense 352,000 Share options outstanding 352,000 400 x 80 x 22 = 704,000 704,000/2 = 352,000 Compensation expense 352,000 Share options outstanding 352,000 3-­‐21. 2017 (b) Cash (32,000 x 140) 4,480,000 Share options outstanding 704,000 Ordinary share capital (32,000 x 100) 3,200,000 Share premium – ordinary 1,984,000 The full amount of P704,000 is recognized as compensation expense since the options vest already in 2015. 2015 Jan. 1 Memo: Issued to its CEO share options for the purchase of ordinary shares at a strike price of P50. The options are exercisable beginning January 1, 2018 and expire on December 31, 2019. The number of share options will be based on the level of sales for 2017. Compensation expense 150,000 Share options outstanding 150,000 15,000 sh x 30 x 1/3 Compensation expense 150,000 Share Options Outstanding 150,000 15,000 sh x 30 x 2/3 300,000 Less: previously accrued 150,000 Compensation expense 150,000 Dec. 31 2016 Dec. 31 Page 41 Chapter 3 – Shareholders’ Equity 3-­‐22. 2017 Dec. 31 (a) 2015 Dec. 31 2016 Dec. 31 2017 Dec. 31 Compensation expense Share options outstanding 18,000 sh x 30 x 3/3 540,000 Less: previously accrued 300,000 Compensation expense 240,000 Compensation expense Share appreciation rights payable 10,000 x (140 – 120) x 1/3 Compensation expense Share appreciation rights payable 10,000 x (150 – 120) x 2/3 = 200,000 200,000 – 66,667 = 133,333 Compensation expense Share appreciation rights payable 10,000 x (165 – 120) = 450,000 450,000 –200,000 = 250,000 240,000 240,000 66,667 66,667 133,333 250,000 133,333 250,000 (b) (1) Assuming that the rights were exercised on January 1, 2018, when the market price is P165. 2018 Jan. 1 3-­‐23. Share appreciation rights payable Cash 450,000 450,000 (b) (2) Assuming that the rights were exercised on December 31, 2018, when the market price is P172. 2018 Dec. 31 Share appreciation rights payable Compensation expense 10,000 (172 – 165) Cash 10,000 x (172-­‐120) (a) Liability at December 31, 2015 December 31, 2016 December 31, 2017 Compensation expense Share appreciation rights payable 10,000 x 26.80 x 1/3 Compensation expense Share appreciation rights payable 10,000 x 31.20 x 2/3 = 208,000 208,000 – 89,333 = 118,667 Compensation expense Share appreciation rights payable 10,000 x 39.40 = 394,000 394,000 –208,000 = 186,000 Page 42 520,000 89,333 118,667 89,333 118,667 P 89,333 P208,000 P394,000 2015 Dec. 31 2016 Dec. 31 2017 Dec. 31 450,000 70,000 186,000 186,000 Chapter 3 – Shareholders’ Equity 3-­‐24. 2018 Share appreciation rights payable Compensation expense Cash 10,000 x (165-­‐120) 394,000 56,000 450,000 (a) (b) (c) 2015 Jan. 1 Fair value of the equity alternative 4,000 shares x 150 600,000 Fair value of debt component 3,600 shares x 158 568,800 Fair value of equity component 1/1/15 31,200 2015: 3,600 x 160=576,000; 576,000/3 192,000 31,200/3 10,400 Total compensation expense 202,400 2016: 3,600 x 165 x 2/3 = 396,000 396,000 – 192,000 204,000 31,200/3 10,400 Total compensation expense 214,400 2017: 3,600 x 168 = 604,800 604,800 – 396,000 208,800 31,200/3 10,400 Total compensation expense 219,200 2018: 2,700 x (172-­‐168) 10,800 Granted each of the four executives the right to choose either 1,000 ordinary shares or to receive cash payment equal to 900 shares, conditional upon the completion of three years of service. Dec. 31 31 2016 Dec. 31 2017 Dec. 31 Compensation expense Share options outstanding Share appreciation rights payable Compensation expense Share options outstanding Share appreciation rights payable Compensation expense Share options outstanding Share appreciation rights payable Share options outstanding Share appreciation rights payable Cash PIC from unexercised share options 31,200 / 4 = 7,800 604,800 / 4 =151,200 Compensation expense Share appreciation rights payable 900 x 3 x (172 – 168) 2018 Dec. 31 Page 43 202,400 214,400 219,200 7,800 151,200 10,400 192,000 10,400 204,000 10,400 208,800 151,200 7,800 10,800 10,800 Chapter 3 – Shareholders’ Equity 3-­‐25. Dec. 31 Share options outstanding Share appreciation rights payable Ordinary share capital (3,000 x 100) Share premium – ordinary 7,800 x 3 = 23,400 172 x 2,700 = 464,400 RE, January 1, 2015 2015 Transactions (1) Understated 2014 depreciation, net of tax 200,000 x 70% (2) Dividends On preference: 200,000 x P100 x 8% On ordinary: 300,000 x P5 (3) Retired preference shares at more than original issue price 10,000 (150 – 130) (4) Release of appropriation for plant expansion (5) Small bonus issue (45,000/300,000 = 15%) bonus 45,000 x P150 (6) Appropriation for bond redemption (7) Profit for the year Balance, December 31, 2015 Total retained earnings, (P2,000,000 unavailable for dividends) 3-­‐26. Retained earnings balance as of December 31, 2016 3,900,000 – 600,000 – 240,000 Total shareholders’ equity as of December 31, 2016 6,000,000 + 8,000,000 + 3,060,000 (a) Par value of preference share Dividends in arrears (6,000,000 x 9% x 3 yrs.) Excess to ordinary (17,060,000 – 7,620,000) Total equity Divide by the number of shares outstanding Book value per share (b) Liquidation value (60,000 shares x P105) Dividends in arrears (P6,000,000 x 9% x 3 yrs.) Excess to ordinary (17,060,000 – 7,920,000) Total equity Divide by the number of shares outstanding Book value per share 3-­‐27. Retained earnings Inventory Page 44 23,400 464,400 300,000 187,800 Appropriated P 4,000,000 Unappropriated P9,000,000 (140,000) (1,600,000) (1,500,000) (200,000) 4,000,000 (6,750,000) (2,000,000) 3,000,000 P3,810,000 P5,810,000 (4,000,000) 2,000,000 _____________ P2,000,000 P 3,060,000 P17,060,000 Preference P6,000,000 1,620,000 P7,620,000 60,000 P 127 Ordinary P9,440,000 P9,440,000 800,000 P 11.80 Preference P6,300,000 1,620,000 P7,920,000 60,000 P132 Ordinary P9,140,000 P9,140,000 800,000 P11.425 300,000 300,000 Chapter 3 – Shareholders’ Equity 3-­‐28. Theory MC1 MC2 MC3 MC4 MC5 MC6 MC7 MC8 MC9 MC10 MC11 MC12 Land Buildings Machinery and equipment Accum. depreciation – buildings Accum. depreciation – machinery & equipment Revaluation surplus 1,500,000 1,875,000 350,000 875,000 150,000 3,700,000 Revaluation surplus Retained earnings 2,300,000 2,300,000 Retained earnings Accumulated depreciation Current assets Building Ordinary share capital Ordinary share capital Share premium -­‐ ordinary Share premium -­‐ ordinary Retained earnings (a) 400,000 75,000 6,000,000 1,400,000 100,000 375,000 4,000,000 2,000,000 1,400,000 Skinny Red Company Statement of Financial Position Current Assets P 400,000 Liabilities P1,000,000 Land 1,500,000 Ordinary Share 4,000,000 Building 4,625,000 Share Premium 600,000 Accumulated Depreciation ( 925,000) ______________ Total P5,600,000 Total P5,600,000 MULTIPLE CHOICE QUESTIONS B C D D D C B B B C C C MC13 MC14 MC15 MC16 MC17 MC18 MC19 MC20 MC21 MC22 MC23 MC24 Page 45 A C C A A C E B B A C C Chapter 3 – Shareholders’ Equity Problems MC25 C Cost of treasury shares sold (3,000 x P36) Excess of reissue price over cost credited to share premium 3,000 x (50-­‐36) P108,000 P 42,000 MC26 C Preference share capital Ordinary share capital Subscribed ordinary share Total legal capital P230,000 525,000 5,000 P760,000 MC27 D Amount allocated to preference shares (480,000 x 110/120) Par value of preference shares (4,000 x P100) Share premium – preference P440,000 400,000 P 40,000 MC28 D MC29 D Outstanding shares, July 1 (60,000 – 5,000) Two-­‐for-­‐one share split Outstanding ordinary shares, December 31, 2015 55,000 x 2 110,000 MC30 D Issued ordinary shares, December 31, 2014 3-­‐for-­‐1 share split on November 1, 2015 Issued ordinary shares, December 31, 2015 125,000 x 3 375,000 MC31 C Issued ordinary shares Treasury shares (25,000 – 13,000) x 3 = 36,000; 36,000 + 5,000 Outstanding ordinary shares 375,000 (41,000) 334,000 MC32 B Large bonus issue (1:1 or 100%) 600,000 x P5 P3,000,000 MC33 B Number of preference shares, December 31, 2014 Additional issue during the year Preference shares reacquired and retired Number of preference shares, December 31, 2015 Par value per preference share Preference share capital, December 31, 2015 60,000 10,000 (2,000) 58,000 P20 P1,160,000 MC34 A Total number of ordinary shares issued (100,000 + 35,000) Par value per ordinary share Ordinary share capital, December 31, 2015 135,000 P70 P2,450,000 MC35 B Average amount of share premium – preference (400,000/50,000) Number of preference shares retired Decrease in share premium from retirement MC36 C Par value of ordinary share before share split 2-­‐for-­‐1 share split Par value or ordinary share after share split MC37 B Remaining treasury shares (5,000 x 2) – 5,000 Cost per share after share split (80/2) Total cost of remaining treasury shares MC38 B Fractional warrants issued (600 x 10) Fractional warrants exercised (6,000 x 60%) Fractional warrants expired (6,000 x 40%) P8.00 x 2,000 P16,000 P70 ÷ 2 P35 5,000 x 40 P200,000 Page 46 6,000 3,600 2,400 Chapter 3 – Shareholders’ Equity MC39 D Interest expense for 2015 (100,000 x 10% x 9/12) P7,500 MC40 C Issue price of bonds with warrants Issue price related to the bonds (2,000 x 1,040) Issue price recorded as part of equity (warrants) MC41 B Amount of retained earnings to be capitalized (bonus issue) Market value per share Number of shares Percentage of bonus issue (13,500/90,000) The answer could also be 21% computed as follows: 945,000/50 = 18,900; 18,900/90,000= 21% (Large dividend). However, this is not among the choices. P945,000 ÷ P70 13,500 15% MC42 D Preference dividends: 80,000 + (2M x 8%) Ordinary dividends (300,000 – 240,000) P240,000 P 60,000 MC43 D Total dividends for 2012 and 2015: (3,000,000 x 5% x 2 years) Dividends paid in 2015 Dividends in arrears, end of 2015 (Note disclosure) P300,000 (100,000) P200,000 MC44 B Number of shares issued (110,000 + 10,000) x 2 Number of shares in the treasury 5,000 – 1,000 = 4,000; 4,000 x 2 Number of shares outstanding MC45 A Arrears Current (400,000 x 12% Remainder 12,000 into 4:2 ratio Total dividends Dividend per share MC46 A Retained earnings balance, December 31, 2015 before closing 10% bonus issue (10,000 x 70) Net loss for the year Retained earnings balance, December 31, 2015 MC47 A Par value per share after 5-­‐for-­‐2 split (15 x 2) / 5 MC48 B Ordinary share dividend (25,000 x P40) Preference share dividend (10% x 2.5M) Total amount of dividends P1,000,000 250,000 P1,250,000 MC49 C Issue of shares (40,000 x 105) Purchase of its ordinary shares (600 x 110) Sale of treasury shares (400 x 95) Profit Dividends Total shareholders’ equity, December 31, 2015 P4,200,000 (66,000) 38,000 830,000 (200,000) P4,802,000 P2,120,000 2,080,000 P 40,000 220,000 8,000 212,000 Preference P24,000 48,000 8,000 P80,000 P20.00 Ordinary P24,000 4,000 P28,000 P1.40 P8,000,000 (700,000) (1,200,000 P6,100,000 P6.00 Page 47 Chapter 3 – Shareholders’ Equity MC50 C Total shareholders’ equity, December 31, 2014 4/30 Retirement of preference shares (1,000 x 25) 6/15 Purchase of treasury shares (2,000 x 85) 6/30 2-­‐for-­‐1 split 7/31 Reissue of treasury shares (800 x 50) 12/31 Profit for 2015 Total shareholders’ equity, December 31, 2015 P5,520,000 (25,000) (170,000) -­‐ 40,000 900,000 P6,265,000 MC51 D Number of remaining treasury shares (2,000 x 2) – 800 Cost per share (85/2) Cost of remaining treasury shares 3,200 P42.50 P136,000 MC52 A Fair value of the options (20,000 x P9) Compensation expense per year (180,000/ 2) Compensation expense for 2015 (half year) 90,000 x ½ P180,000 P 90,000 P 45,000 MC53 D Intrinsic value of options 3,000 x (50-­‐20) Compensation expense for 2015 (90,000 / 3 years) MC54 C Fair value of options expected to vest (4.5M x 95%) Compensation expense for 2015 (4,275,000/3 years) P4,275,000 P1,425,000 MC55 B Fair value of options expected to vest (4.5M x 94%) Compensation expense for 2015 and 2016 (4,230,000 x 2/3) Less amount recognized in 2015 Compensation expense for 2016 P4,230,000 P2,820,000 1,425,000 P1,395,000 MC56 B Number of options expected to vest (200 x 300) Share appreciation (24 -­‐ 20) Total liability for share appreciation Vesting period Amount recorded as liability for share appreciation rights 60,000 P4.00 P240,00 ÷ 2 years P120,000 MC57 D Number of options that vested (90% x 60,000) Share appreciation (27 – 20) Total Amount recognized in 2015 Compensation expense for 2016 54,000 P7.00 P378,000 120,000 P258,000 MC58 B Total shareholders’ equity Liquidation value of preference shares (140 x 5,000 shares) Equity related to ordinary shares Number of ordinary shares Book value per ordinary share MC59 B Book value per ordinary share (3,150,000/ 50,000) MC60 B Total shareholders’ equity Equity related to preference shares: Liquidation value (120 x 5,000 shares) Equity related to ordinary shares Number of ordinary shares Book value per ordinary share P90,000 P30,000 P3,600,000 700,000 P2,900,000 ÷ 50,000 P58.00 P63.00 Page 48 P3,150,000 600,000 P2,550,000 ÷ 50,000 P51.00 Chapter 3 – Shareholders’ Equity MC61 C MC62 C MC63 D Total shareholders’ equity (including P1M of retained earnings) Par value of preference shares (100 x 50,000) P5.0M Dividends in arrears * 1.0M Equity related to ordinary shares Book value per ordinary share (7,500,000/750,000 sh) *Cumulative dividend in arrears = 5M x 8% x 3 years = P1.2M but dividends are limited to the extent of RE balance of P1M. P13,500,000 6,000,000 P7,500,000 P10.00 Total shareholders’ equity (including P1M of retained earnings) Liquidation value of preference shares (106 x 50,000) P5.3M Dividends in arrears 1.0M Equity related to ordinary shares Book value per ordinary share (7,200,000/750,000 sh) P13,500,000 6,300,000 P7,200,000 P9.60 Original contributed capital (200,000 x 22) New par value of shares (200,000 x 15) Additional paid in capital Deficit to be eliminated Additional paid in capital after the quasi-­‐reorganization Page 49 P4,400,000 3,000,000 P1,400,000 950,000 P 450,000 Chapter 4 -­‐ Leases 4-­‐1. PROBLEMS (a) Lessor’s Books (Hope Manufacturing Co.) 2015 Jan. 1 1 1 Machinery for lease Cash Cash Rent revenue Unearned rent revenue 2 M/5 = 400,000 2 M x 30% = 600,000 Machinery for lease Cash Dec. 31 Depreciation expense Accumulated depreciation Machinery for lease (2.2 M – 200,000)/10 200,000 60,000 / 5 years 12,000 Total 212,000 2016 Jan. 1 Dec. 31 2,200,000 600,000 60,000 Cash Rent revenue 2,000,000 x 20% Depreciation expense Accumulated depreciation Machinery for lease 2,200,000 400,000 200,000 60,000 212,000 200,000 12,000 400,000 212,000 400,000 200,000 12,000 Lessee’s Books (Charity Co.) 2015 Jan. 1 2016 Jan. 1 Rent expense Prepaid rent Cash Rent expense Cash 400,000 200,000 400,000 600,000 400,00 (b) Statement of Comprehensive Income: (In profit or loss section) Rent revenue Depreciation expense Rent expense Statement of Financial Position Machinery for lease, net of accum. depreciation Unearned rent revenue Prepaid rent Hope 400,000 212,000 2,048,000 200,000 Charity 400,000 200,000 Chapter 4 – Leases 4-­‐2.
a. Rentals for 2015 and 2016 (360,000 x 4) Rentals for 2017 (432,000 x 2) Total rentals for three years Rent expense per year (2,304,000/3 years) Rent Expense for 2015 (768,000 x 8/12) P1,440,000 864,000 P2,304,000 P768,000 P512,000 b. Cumulative rent revenue for 2015 and 2016 2015 P512,000 2016 768,000 Cumulative collections (360,000 x 4) Unearned rent, December 31, 2016 Rent Receivable, December 31, 2016 P1,280,000 1,440,000 P 160,000 P -­‐0-­‐ 4-­‐3. a. Monthly rental payment No. of payments (60-­‐6 mos free) Total payments Rent expense for 2015 (540,000 x 4/60) or Monthly rental Less lease bonus (60,000/60 mos) Rent expense per month Rent expense for 2015 (9,000 x 4) Rent expense for 2016 (9,000 x 12) 10,000 x 54 540,000 36,000 10,000 (1,000) 9,000 36,000 108,000 (b) Faith Company 2015 Dec. 31 Rent expense Rent payable 9,000 x 4 = 36,000 2016 Dec. 31 Rent expense Rent payable Rent expense for 2016: 540,000 x 12/60 108,000 Payments in 2016 100,000 Increase in rent payable 8,000 2015 Mar. 1 -­‐ Dec. 1 36,000 Monthly entry Rent expense Cash 36,000 10,000 10,000 8,000 8,000 Love Corporation Dec. 31 Rent receivable Rent revenue Page 51 36,000 36,000 Chapter 4 – Leases 2014 Mar. 1 -­‐ Dec. 1 4-­‐4. 4-­‐5. Dec. 31 Rent receivable Rent revenue Year-­‐end adjusting entry 10,000 10,000 8,000 8,000 a. b. Fixed annual rental Additional rent 5% x (6M-­‐5M) Amortization of lease bonus (125,000/5 years) Rent expense for 2015 Prepaid rent expense (125,000 – 25,000) Security deposit, January 1, 2015 (150,000 x 0.62092) Add amortization for 2015 (10% x 93,138) Security deposit, December 31, 2015 960,000 50,000 25,000 1,035,000 100,000 P93,138 9,314 P102,452 a. Rent revenue (960,000 x 9/12) Depreciation expense 3,500,000/6 = 583,333; 583,333 x 9/12 Maintenance and other related costs Income before income tax for year 2015 Rent expense for 2015(960,000 x 9/12) 720,000 (437,500) (50,000) 232,500 720,000 Lessor’s Books 2015 Monthly entry Cash Rent revenue b. 4-­‐6. July 1 Oct. 1 1 Nov. 1 Dec. 1 31 31 Equipment for lease Cash Cash Rent revenue Cash Rent revenue Cash Rent revenue Cash Rent revenue Rent revenue Unearned rent revenue 54,000 x 33/36 = 49,500 Depreciation expense Accumulated depreciation (1,500,000 / 10) x 6/12 Page 52 1,500,000 54,000 30,000 30,000 30,000 49,500 75,000 1,500,000 54,000 30,000 30,000 30,000 49,500 75,000 Chapter 4 – Leases Lessee’s Books 2015 Rent expense Cash Rent expense Cash Rent expense Cash 54,000 30,000 30,000 54,000 30,000 30,000 Dec. 1 31 Rent expense Cash Prepaid rent Rent expense 30,000 49,500 30,000 49,500 Oct. 1 1 Nov. 1 4-­‐7. Present value of annual payments (260,000 x 4.2397) Present value of guaranteed residual value (200,000 x 0.6499) Total capitalized cost Amortization Table Total Annual Date Payment Interest Expense 01/01/15 -­‐ 01/01/15 260,000 -­‐ 01/01/16 260,000 87,507 01/01/17 260,000 71,983 01/01/18 260,000 55,061 01/01/19 260,000 36,617 12/31/19 200,000 16,530* *Adjusted; difference is due to rounding off. (b) (a) 2015 Jan. 1 1 Dec. 31 31 2016 1,102,322 129,980 1,232,302 Jan. 1 Dec. 31 31 Leased automobile Finance lease obligation Finance lease obligation Cash Interest expense Interest Payable Depreciation expense Accumulated depreciation (1,232,302-­‐200,000)/5 Finance lease obligation Interest payable Cash Interest expense Interest payable Depreciation expense Accumulated depreciation Page 53 Reduction in Principal -­‐ 260,000 172,493 188,017 204,939 223,383 183,470 Lease Obligation 1,232,302 972,302 799,809 611,792 406,853 183,470 -­‐ 1,232,302 260,000 87,507 206,460 172,493 87,507 71,983 206,460 1,232,302 260,000 87,507 206,460 260,000 71,983 206,460 Chapter 4 – Leases 4-­‐8. (c) Dec. 31 Accumulated depreciation (206,460 x 5 years) Interest expense Finance lease obligation Leased automobile *adjusted; balancing figure (d) Dec. 31 Loss on finance lease Accumulated depreciation Interest expense Finance lease obligation Leased automobile Cash (a) Capitalized cost of the leased asset (86,680 x 4.1699) Amortization Table Total Annual Date Payment Interest Expense 01/01/15 -­‐ 01/01/15 86,680 -­‐ 01/01/16 86,680 27,477 01/01/17 86,680 21,556 01/01/18 86,680 15,044 01/01/19 86,680 7,876* *Adjusted; difference is due to rounding off. (c) 1,032,300 16,532* 183,470 1,232,302 50,000 1,032,300 16,532 183,470 1,232,302 50,000 P361,447 (b) 2015 Jan. 1 1 Dec. 31 31 2016 Jan. 1 Dec. 31 31 Leased machine Finance lease obligation Finance Lease Obligation Cash Interest expense Interest payable Depreciation expense Accumulated depreciation 361,447/5 years Finance lease obligation Interest payable Cash Interest expense Interest payable Depreciation expense Accumulated depreciation Page 54 Reduction in Principal -­‐ 86,680 59,203 65,124 71,636 78,804 Lease Obligation 361,447 274,767 215,564 150,440 78,804 -­‐ 361,447 86,680 27,477 72,289 59,203 27,477 21,556 72,289 361,447 86,680 27,477 72,289 86,680 21,556 72,289 Chapter 4 – Leases 4-­‐9. (d) Statement of Financial Position Property, plant and equipment Leased machine Accumulated depreciation Current liabilities Interest payable Finance lease obligation Noncurrent liabilities Finance lease obligation Income Statement Interest expense Depreciation expense 2015 361,447 72,289 27,477 59,203 215,564 27,477 72,289 2016 361,447 144,578 21,556 65,124 150,440 21,556 72,289 (a) Lessor’s implicit interest rate 1,011,840/135,000 = 7.4951 PV of an annuity due for 12 periods From Table VI across 12 periods, 7.4951 is under 10% interest rate. (b) Total Annual Reduction in Date Payment Interest Expense Principal Lease Obligation 12/31/14 -­‐ -­‐ 1,011,840 12/31/14 135,000 -­‐ 135,000 876,840 12/31/15 135,000 87,684 47,316 829,524 12/31/16 135,000 82,952 52,048 777,476 (c) Depreciation expense for 2016 (1,011,840 – 40,000) / 15 years P64,789 4-­‐10. (d) 12/31/15 12/31/16 (e) (a) Leased equipment Finance lease obligation Finance lease obligation Cash Finance lease obligation Interest expense Cash Depreciation expense Accumulated depreciation (1,011,840 – 40,000) / 15 1,011,840 135,000 1,011,840 135,000 47,316 87,684 64,789 135,000 64,789 Lease obligation as of December 31, 2015: Current portion Noncurrent portion Present value of annual payments (150,000 x 4.0373) Present value of bargain purchase option (240,000 x 0.5674) Total capitalized cost of the asset Page 55 P 47,316 829,524 P605,595 136,176 P741,771 Chapter 4 – Leases (b) Total Annual Date Payment Interest Expense 01/01/15 -­‐ 01/01/15 150,000 -­‐ 01/01/16 150,000 71,013 01/01/17 150,000 61,534 01/01/18 150,000 50,918 01/01/19 150,000 39,028 12/31/19 240,000 25,736* *Adjusted; difference is due to rounding off. (c) (d) Reduction in Principal -­‐ 150,000 78,987 88,466 99,082 110,972 214,264 Lease Obligation 741,771 591,771 512,784 424,318 325,236 214,264 -­‐ Depreciation expense for 2015 (741,771 / 15 years) P49,451 2015 31 Jan. 1 Jan. 1 1 Dec. 31 2016 Leased machinery Finance lease obligation Finance lease obligation Cash Interest expense Interest payable 741,771 150,000 71,013 741,771 150,000 71,013 Depreciation expense Accumulated depreciation 49,451 49,451 Finance lease obligation Interest payable Cash 78,987 71,013 150,000 Interest expense Interest payable Depreciation expense Accumulated depreciation 61,534 49,451 61,534 49,451 Interest expense Finance lease obligation Accumulated depreciation (49,451 x 5 years) Machinery Leased machinery Cash 25,736 214,264 247,255 494,516 741,771 240,000 Interest expense Finance lease obligation Accumulated depreciation Loss on finance lease Leased machinery Carrying amount of leased asset (741,771 – 247,255) Bargain purchase option price Loss 25,736 214,264 247,255 254,516 741,771 Dec. 31 31 (e) Dec. 31 (f) Dec. 31 Page 56 P494,516 240,000 P254,516 Chapter 4 – Leases 4-­‐11. (a) (b) (c) Present value of minimum lease payments 700,000 x 6.3282 Annual depreciation (4,429,740/10) 2015 1 Dec. 31 31 31 Taxes and insurance expense Finance lease obligation Cash Interest expense Interest payable 447,569 x 6/12 (see table below) Depreciation expense-­‐Building Accum. Depreciation-­‐Building 4,429,740/10 = 442,974; 442,974 x ½ Prepaid taxes and insurance Taxes and insurance expense 2016 July 1 Building Finance lease obligation P4,429,740 P 442,974 4,429,740 4,429,740 50,000 700,000 223,784 221,487 25,000 750,000 223,784 221,487 25,000 July 1 Dec. 31 31 Taxes and insurance expense Interest payable Interest expense Finance lease obligation Cash Interest expense Interest payable 417,277 x 6/12 (see table below) Depreciation expense Accum. Depreciation-­‐building Date July 1, 2015 July 1, 2015 July 1, 2016 July 1, 2017 50,000 223,784 223,785 252,431 208,639 442,974 Amortization Table Periodic Applied to Payment Interest Principal P700,000 -­‐ P700,000 700,000 P447,569 252,431 700,000 417,277 282,723 Page 57 750,000 208,639 442,974 Balance of Principal P4,429,740 3,729,740 3,477,309 3,194,586 Chapter 4 – Leases 4-­‐12. a. 2015 Finance lease receivable Equipment for lease Unearned interest revenue Unearned interest revenue Cash 605,000 1,900 480,000 125,000 1,900 1 Cash Finance lease receivable 100,000 100,000 Dec. 31 Unearned interest revenue Interest revenue 38,190 x 5/12 (see table) 15,912 15,912 2016 Aug. 1 1 Aug. 1 Dec. 31 Cash Unearned interest revenue Finance lease receivable Interest revenue 38,190 x 7/12 = 22,278 (see table) Unearned interest revenue Interest revenue 32,009 x 5/12 (see table) Partial Amortization Table Periodic Date Payment Interest 08/01/15 -­‐ 08/01/15 100,000 -­‐ 08/01/16 100,000 38,190 08/01/17 100,000 32,009 4-­‐13. (b) 100,000 22,278 13,337 Reduction in Principal -­‐ 100,000 61,810 67,991 100,000 22,278 13,337 Balance of Principal 481,900 381,900 320,090 252,099 As of December 31, 2015: Total Current Non-­‐current Finance lease receivable P505,000 P100,000 P405,000 Unearned interest revenue 107,188 22,278 84,910 P397,812 P 77,722 P320,090 Current portion: Principal due in 2016 P 61,810 Accrued interest, 12/31/15 (38,190 x 5/12) 15,912 Total P 77,722 Annual Lease Payment: Fair value of asset PV of BPO = 40,000 x .6209 PV of periodic payment PV factor (Annuity due for 5 years at 10%) Periodic payment Page 58 P600,000 24,836 P575,164 ÷4.1699 P137,932 Chapter 4 – Leases Date Jan. 1, 2015 Jan. 1, 2015 Jan. 1, 2016 Jan. 1, 2017 Periodic Payment P137,932 137,932 137,932 Interest P46,207 37,034 2015 Depreciation (600,000 – 20,000) x 6/21 2016 Depreciation (580,000 x 5/21) (a) Reduction in Principal P137,932 91,725 100,898 = P165,714 = 138,095 Books of Chris Tucker 2015 Jan. 1 Leased equipment 600,000 Finance lease obligation 1 Finance lease obligation 137,932 Cash Dec. 31 Interest expense 46,207 Interest payable 31 Depreciation expense – Leased equipment 165,714 Accum. depr. – Leased equipment Balance of Principal P600,000 462,068 370,343 269,445 2016 Jan. 1 Finance lease obligation Interest payable Cash 91,725 46,207 Dec. 31 Interest expense 37,034 Interest payable Depreciation expense 138,095 Accum. depr.– Leased equipment 600,000 137,932 46,207 165,714 137,932 37,034 138,095 600,000 129,660 137,932 137,932 46,207 46,207 (b) Books of Jackie Chan 2015 Jan. 1 Finance lease receivable 729,660 Equipment for lease Unearned interest revenue 137,932 x 5 = 689,660 689,660 + 40,000 = 729,660 Cash Finance lease receivable Dec 31 Unearned interest revenue Interest revenue 2015 Jan. 1 Dec 31 Cash 137,932 Finance lease receivable Unearned interest revenue Interest revenue Page 59 37,034 137,932 37,034 Chapter 4 – Leases 4-­‐14. (a) (b) This is a direct finance lease. The cash price of the asset is the same as its carrying value; hence, there is no gross profit). The rate is approximately 8%. The PV factor is P539,730/80,000 = 6.7466; in line 9 (which is 8 annual payments of P80,000 + 1 payment for guaranteed residual value of same amount), the corresponding interest rate is 8%. (c) Partial amortization table Periodic Date Payment Interest April 1, 2015 April 1, 2015 80,000 April 1, 2016 80,000 36,778 April 1, 2017 80,000 33,321 Books of Ironman 2015 Dec. 31 Depreciation expense Accumulated depreciation (539,730-­‐80,000)/8 = 57,466/year 57,466 x 9/12 = 43,100 2016 Apr. 1 1 Dec. 31 Apr. 1 Dec. 31 31 Reduction in Principal 80,000 43,222 46,679 Equipment Finance lease obligation Finance lease obligation Cash Interest expense Interest payable 36,778 x 9/12 (see table) Interest expense (36,778-­‐27,584) Interest payable Finance lease obligation Cash Interest expense Interest payable 33,321 x 9/12 Depreciation expense Accumulated depreciation Balance of Principal P539,730 459,730 416,508 369,829 539,730 80,000 27,584 539,730 80,000 27,584 43,100 43,100 9,194 27,584 43,222 24,991 57,466 80,000 24,991 57,466 (d) Books of Ben Ten 2014 Apr. 1 Finance lease receivable Unearned interest revenue Equipment for lease 80,000 x 8 = 640,000; 640,000 + 80,000
Page 60 720,000 180,270 539,730 Chapter 4 – Leases Apr. 1 Dec. 31 Cash Finance lease receivable Unearned interest revenue Interest revenue 2016 80,000 27,584 80,000 27,584 Apr. 1 1 Dec. 31 Cash Finance lease receivable Unearned interest revenue Interest revenue Unearned interest revenue Interest revenue 33,321 x 9/12 80,000 9,194 24,991 80,000 9,194 24,991 (e)
(f)
4-­‐15. 4-­‐16. (a) (b) (c) (d) No difference in journal entries. To the lessor, under the direct finance lease, it does not matter whether the residual value is guaranteed or unguaranteed. Sales price Cost of machine Gross profit P1,011,840 784,500 P 227,340 Gross investment (135,000 x 12) Sales Total financial revenue over the lease term P1,620,000 1,011,840 P 608,160 Interest revenue for 2015 (1,011,840 – 135,000) x 10% x 6/12 P 43,842 Finance lease receivable (1,620,000 – 135,000) Less Unearned interest revenue (608,160 -­‐43,842) Net finance lease receivable, December 31, 2015 P1,485,000 564,318 P 920,682 (a) 2015 Apr. 1 The asset shall be recorded at P496,512 which is 80,000 x 6.2064. Depreciation for 2015 (496,512/8) x 9/12 = 46,548 1 Finance lease receivable 1,500,000 Cost of sales 893,350 Unearned interest revenue Sales Finished goods inventory 175,000 x 8 = 1.4M; 1.4M + 100,000 = 1.5M
940,000 – (100,000 x .4665) = 893,350
(175,00 x 5.8464) + (100,000 x .4665) = 1,073,620
1,500,000 - 1,073,620 = 426,380
Cash 175,000 Finance lease receivable Page 61 426,380 1,026,970 940,000 175,000 Chapter 4 – Leases Dec. 31 Unearned interest revenue Interest revenue 89,862 x 9/12 (see table) 2016 67,397 67,397 Jan. 1 Apr. 1 Interest revenue Unearned interest revenue Cash Unearned interest revenue Finance lease receivable Interest revenue 67,397 175,000 89,862 67,397 175,000 89,862 61,011 61,011 Dec. 31 Unearned interest revenue Interest revenue 81,348 x 9/12 (see table) Date April 1, 2015 April 1, 2015 April 1, 2016 April 1, 2017 Partial amortization table Periodic Payment Interest 175,000 175,000 89,862 175,000 81,348 Reduction in Principal 175,000 85,138 93,652 Balance of Principal P1,073,620 898,620 813,482 719,830 *April 1 transactions may also be presented as follows: 2015 Apr. 1 Finance lease receivable 1,400,000 Sales 1,026,970 Unearned interest revenue 373,030 1 Cost of sales 940,000 Finished goods inventory 940,000 1 Finance lease receivable 100,000 Cost of sales 46,650 Unearned interest revenue 53,350 (b) (i) Sales 1,026,970 Cost of Sales (940,000 – 46,650) 893,350 Gross profit on sales 133,620 (ii) Interest Revenue for 2015 (see journal entries) 67,397 (c) Sales (1,026,970 + 46,650) 1,073,620 Cost of sales (cost of the asset) 940,000 4-­‐17. a. This is a manufacturer’s or dealer’s lease, because FV exceeds CV. The difference represents gross profit, which characterizes a dealer’s or manufacturer’s lease. b. Present value of MLP = 850,365 x 4.60478 (Adjusted) P3,915,747 Present value of residual value = 166,300 x .50663 84,253 Total present value P4,000,000 Page 62 Chapter 4 – Leases c. Carrying value of leased asset Gross Profit Lease arrangement cost Interest income (377,756 x 3/12) see table Total income in 2015 Amortization Table Periodic Date Payment Interest Oct. 1, 2015 Oct. 1, 2015 850,365 Oct. 1, 2016 850,365 377,956 Oct. 1, 2017 850,365 321,267 3,200,000 P 800,000 ( 85,000) 94,439 P 809,439 Reduction in Principal 850,365 472,409 529,098 Balance of Principal 4,000,000 3,149,635 2,677,226 2,148,490 Books of Ruby (Lessor) 2015 Oct. 1 Finance lease receivable (850,365 x 6) + 166,300 5,268,490 Cost of goods sold (3,200,000 – 84,253) 3,115,747 Inventory Sales Unearned interest revenue 1 Selling expense 85,000 Cash 1 Cash 850,365 Finance lease receivable Dec. 31 Unearned interest revenue 94,489 Interest revenue 377,956 x 3/12 2016 Oct. 1 Dec 31 d.
2015 3,200,000 3,915,747 1,268,490 85,000 850,365 94,489 Cash Unearned interest revenue Finance lease receivable Interest revenue 377,956 – 94,489 = 283,467 850,365 283,467 850,365 283,467 Unearned interest revenue Interest revenue 321,267 x 3/12 80,317 80,317 Date Oct. 1, 2015 Oct. 1, 2015 Oct. 1, 2016 Oct. 1, 2017 Amortization Table for Emerald (Lessee) Periodic Reduction in Payment Interest Principal 850,365 850,365 850,365 367,846 482,519 850,365 309,944 540,421 Oct. 1 Leased equipment Finance lease obligation Page 63 3,915,747 Balance of Principal 3,915,747 3,065,382 2,582,863 2,042,442 3,915,747 Chapter 4 – Leases Oct. 1 Finance lease obligation 850,365 Cash Dec. 31 Interest expense 91,962 Interest payable 367,846 x 3/12 (see table) 31 Depreciation expense 163,156 Accumulated depreciation 3,915,747/6 = 652,625; 652,625 x 3/12 850,365 91,962 163,156 2016 Oct. 1 Interest payable 91,962 Interest expense (367,846 – 91,962) 275,884 Finance lease obligation 482,519 Cash 850,365 Dec.31 Interest expense 77,846 Interest payable 77,846 309,944 x 3/12 Depreciation expense 652,625 Accumulated depreciation 652,625 4-­‐18. (a) Sales = (99,046 x 3.1699) + (80,000 x.6830) P368,606 (b) Sales P368,606 Cost of equipment sold (300,000) Selling expense (15,000) Interest income (368,606 x 10%) 36,861 Total profit from lease P 90,467 (c) Depreciation expense recorded by Western (368,606 – 80,000) / 4 P 72,152 4-­‐19. (a) PV of Minimum Lease Payments: PV of Periodic Payments (1,328,622 x 8.1078) P10,772,200 PV of GRV (2,000,000 x .6139) 1,227,800 Total PV P12,000,000 Cost of audio equipment (9,000,000) Commission and other lease costs (100,000) Interest revenue (533,569 + 493,816) 1,027,385 Profit for 2015 P 3,927,385 Periodic Reduction in Balance of Date Payment Interest Principal Principal 1/1/2015 12,000,000 1/1/2015 1,328,622 -­‐-­‐-­‐ 1,328,622 10,671,378 7/1/2015 1,328,622 533,569 795,053 9,876,325 1/1/2016 1,328,622 493,816 834,806 9,041,519 7/1/2016 1,328,622 452,076 876,546 8,164,973 1/1/2017 1,328,622 408,249 920,373 7,244,600 (b) Interest Expense for 2015 (533,569 + 493,816 P1,027,385 Page 64 Chapter 4 – Leases 4-­‐20. 4-­‐21. (c ) Carrying value of equipment Cost Accumulated depreciation (12,000,000 – 2,000,000) x 2/5 Carrying value, December 31, 2015 (d) Interest revenue for 2016 (452,076 + 408,249) (e) Current Assets: Finance Lease Receivable, net (834,806 + 876,546) Interest Receivable Non-­‐current Assets Finance Lease Receivable, net (a) (b) (c) (d) (e) Selling price of the machinery (150,000 x 4.0373) Deferred gain on January 1, 2015 (605,595 – 411,750) Depreciation expense for 2015 (605,595 / 5 years) Interest expense for 2015 (605,595 – 150,000) x 12% Gain on sale-­‐leaseback for 2015 (193,845 / 5 years) P12,000,000 (4,000,000) P 8,000,000 P860,325 P1,711,352 493,816 P8,164,973 P605,595 P193,845 P121,119 P 54,671 P 38,769 (a) 2015 July 1 Dec. 31 Rent expense Cash Prepaid rent Rent expense July 1 Cash Accumulated depreciation Equipment Gain on sale leaseback 540,000 350,000 800,000 90,000 80,000 40,000 80,000 40,000 (b) 2014 1 Dec. 31 Rent expense Cash Prepaid rent Rent expense 31 Unearned profit on sale leaseback Profit on sale leaseback (40,000/4) x 6/12 July 1 Cash Accumulated depreciation Equipment Gain on sale leaseback Unearned profit on sale leaseback Page 65 540,000 350,000 800,000 50,000 40,000 80,000 40,000 80,000 40,000 5,000 5,000 Chapter 4 – Leases (c) 2014 (d) 2015 July 1 1 Dec. 31 July 1 1 Dec. 31 31 Cash Accumulated depreciation Loss on sale leaseback Equipment Rent expense Cash Prepaid rent Rent expense 400,000 350,000 50,000 80,000 40,000 800,000 80,000 40,000 Cash Accumulated depreciation Deferred loss on sale leaseback Equipment Rent expense Cash Prepaid rent Rent expense Rent expense/Loss on sale leaseback Deferred loss on sale leaseback 100,000/4 = 25,000; 25,000 x 6/12 Page 66 350,000 350,000 100,000 80,000 40,000 12,500 800,000 80,000 40,000 12,500 Chapter 4 – Leases MULTIPLE CHOICE QUESTIONS Theory MC1 C MC2 D MC3 C MC4 B MC5 B MC6 C MC7 D MC8 D Problems MC26 C MC9 MC10 MC11 MC12 MC13 MC14 MC15 MC16 C C D D B A C C MC17 MC18 MC19 MC20 MC21 MC22 MC23 MC24 MC25 Annual rental Lease bonus amortized over five years (500,000/5) Rental revenue for 2015 MC27 C Rental for first year (six months free) Rental for 2nd to 5th year (125,000 x 4) Total rental for five years Rent revenue for 2015 (540,000/5) MC28 D This is an operating lease; thus, there is no interest expense involved. MC29 D Accrued rent from July 1 to December 31 (240,000 x 6/12) P120,000 MC30 C Total rental payments for three years Lease term Rent revenue for fiscal year ended June 30, 2016 P3,600,000 ÷ 3 P1,200,000 MC31 B Accumulated rent revenue up to June 30, 2017 (1.2M x 2) Accumulated payments up to June 30, 2017 (600,000 + 900,000) Rent receivable, June 30, 2017 P2,400,000 1,500,000 P 900,000 MC32 B Capitalized cost of leased asset (500,000 x 4.61) P2,305,000 MC33 D Lease liability, December 31, 2015 1st payment on December 31, 2015 2nd payment on December 31, 2016 500,000 Amount applicable to interest (12% x 1,805,000) 216,600 Lease liability, December 31, 2016 P2,305,000 (500,000) (283,400) P1,521,600 MC34 A Depreciation expense (2,305,000/6 years) P 384,167 MC35 B Lease liability, December 31, 2015, after 1st payment 1,350,000 – 200,000 Current portion (payable on December 31, 2016) 200,000 – (10% x 1,150,000) P1,150,000 P 85,000 MC36 B Capitalized leased asset on May 1, 2015 (400,000 x 5.95) P2,380,000 Page 67 A A D C C A A C D P 900,000 100,000 P1,000,000 P 40,000 500,000 P540,000 P108,000 Chapter 4 – Leases MC37 D Depreciation is based on the economic life of the asset (2,400,000 – 200,000) / 8 years MC38 D Present value of annual rentals (1,742,174 x 3.48685) Present value of guaranteed residual value (1.2M x 0.68301) Capitalized cost of the machine MC39 C Depreciation is based on the lease term (6,894,311 – 1,200,000) / 4 MC40 A Present value of annual rentals (1,742,174 x 3.48685) MC41 D Depreciation is based on the lease term 6,074,699 / 4 MC42 D Cost of leased asset Accumulated depreciation (6,245,250 – 80,000) / 6 = 1,027,575 1,027,575 x 4 years Carrying value, end of lease term Bargain option price Loss from failure to exercise the purchase option MC43 A Gross lease receivable (100,000 x 6) P600,000 MC44 D Net investment in the lease after 1st payment (100,000 x 4.8) Interest revenue for the year 2015 (380,000x 10% x 5/12) P380,000 P 15,833 MC45 C Selling price Cost of equipment Profit on sale P3,520,000 2,800,000 P720,000 MC46 A Net investment in the lease after 1st payment (3,520,000– 600,000) Interest revenue for year 2015 (2,920,000 x 10% x 6/12) P2,920,000 P146,000 MC47 B Gross profit on sale (400,000 – 300,000) Costs to consummate lease contract Interest revenue (400,000 x 10%) Profit, inclusive of interest for year 2015 P100,000 (15,000) 40,000 P125,000 MC48 D Net investment in the lease, January 1, 2015 Reduction in net investment for 2015 Annual rental, excluding executory costs P108,951 Interest expense (400,000 x 10%) 40,000 Net investment in the lease, December 31, 2015 P400,000 68,951 P331,049 MC49 A Gross investment in the lease 75,000* x 5 *Annual payment 323,400/5 = 75,000 Cost/fair value of asset Total interest revenue Page 68 P275,000 P6,074,699 819,612 P6,894,311 P1,423,578 P6,074,699 P1,518,675 P6,245,450 4,110,300 P2,135,150 250,000 P1,885,150 P375,000 323,400 P 51,600 Chapter 4 – Leases MC50 D Present value of lease payments (30,000 x 3.1699) 95,097 Present value of guaranteed residual value (5,000 x .683) 3,415 Capitalized cost of asset /Liability, Jan. 1, 2014 98,512 Interest expense for 2014 (98,512 x 10%) 9,851 Liability balance, December 31, 2014 95,097 – (30,000 – 9,851) P78,363 Interest expense/payable, December 31, 2015 (78,363 x 10%) P7,836 MC51 C Depreciation is based on the lease term (98,512 – 5,000) / 4 MC52 D Minimum lease payments for the remaining two years (30,000 x 2) Guaranteed residual value Total MC53 A Initial direct costs increase the net investment in lease recorded by the lessor. The terms of the lease already indicated that the residual value is guaranteed; hence, it could not be taken as the reason for the variance. However, if the residual value is unguaranteed, then it could be considered as a reason for the variance. MC54 A This excess over the limited hours should be accrued by the end of 2016, even if payment would be made at January 1, 2017. MC55 B Deferred gain, January 1, 2015 (550,000 – 450,000) Gain recognized in 2015 (100,000/5 Deferred gain, December 31, 2015 MC56 A Deferred gain (4.8M – 3.6M) MC57 B Revenue on sale leaseback 1.2M/12 = 100,000; 100,000 x 6/12 P50,000 MC58 B Unearned gain, January 1, 2015 (150,000 – 100,000) Recognized gain in 2015 (50,000/10 years) Unearned gain, December 31, 2015 P50,000 5,000 P45,000 MC59 B Excess of fair value over carrying value (710,000 – 650,000) Excess of sales price over fair value 800,000 – 710,000 = 90,000; 90,000 / 12 = 7,500; 7,500 x 9/12 Gain from sale leaseback P60,000 5,625 P65,625 MC60 D If selling price is at fair value, full amount of gain is recognized immediately (800,000 -­‐ 650,000) MC61 B Additional information, lease term is 12 years out of total life of 25 years. Deferred loss (650,000 – 470,000) Amortized loss in 2015 (180,000/12 = 15,000; 15,000 x 9/12 Deferred loss, December 31, 2015 Page 69 P23,378 P60,000 5,000 P65,000 P100,000 20,000 P80,000 P1,200,000 P150,000 P180,000 11,250 P168,750 Chapter 5 - Income Taxes
Chapter 5 – Income Taxes 5-­‐1. 5-­‐2. PROBLEMS 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. C D B B D D C A A C C B D (a) a. b. c. d. e. f. g. Permanent difference – Non-­‐taxable revenue Permanent difference – Non-­‐deductible expense Neither a permanent nor a temporary difference Temporary difference – Taxable temporary difference Temporary difference – Taxable temporary difference Temporary difference – Deductible temporary difference Temporary difference – Deductible temporary difference (b) Pretax financial income Add Nondeductible expenses (b) Less Nontaxable income (a) Financial income subject to tax Add Future deductible amounts (f and g) Less Future taxable amounts (d and e) Taxable income P10,000,000 400,000 (2,000,000) P 8,400,000 1,150,000 (2,500,000) P7,050,000 (c) Income tax payable (7,050,000 x 30%) Deferred tax asset (1,150,000 x 30%) Deferred tax liability ( 2,500,000 x 30%) P2,115,000 P 345,000 P 750,000 (d) Income tax expense – Current Income tax payable 2,115,000 2,115,000 Income tax expense – Deferred Deferred tax liability 750,000 750,000 Deferred tax asset Income tax expense – Deferred 345,000 345,000 2,115,000 405,000 345,000 2,115,000 750,000 or one compound entry may be made as follows: Income tax expense – Current Income tax expense – Deferred Deferred tax asset Income tax payable Deferred tax liability Page 70 Chapter 5 - Income Taxes
5-­‐3. 5-­‐4. 5-­‐5. 5-­‐6. 5-­‐7. (e) Income tax expense: Current Deferred (750,000 – 345,000) Total income tax expense P2,115,000 405,000 P2,520,000 (Luzon Corporation) (a) Pretax financial income P3,000,000 Future taxable amount (1,800,000) Taxable income P1,200,000 Income tax expense -­‐ current (30% x 1.2M) P 360,000 Deferred tax liability, December 31, 2015 (30% x 1.8M) P 540,000 (b) Income tax expense – Current Income tax expense – Deferred Income tax payable Deferred tax liability 360,000 540,000 360,000 540,000 (a) Pre tax financial income P2,000,000 Future deductible amount 1,550,000 Taxable income P3,550,000 Income tax expense -­‐ current (30% x 3,550,000) P1,065,000 Deferred tax asset, December 31, 2015 (30% x 1,550,000) P 465,000 (b) Income tax expense-­‐Current 1,065,000 Deferred tax asset 465,000 Income tax payable 1,065,000 Income tax benefit-­‐Deferred 465,000 Income tax expense – Current 1,560,000 Deferred tax asset 600,000 Deferred tax liability 185,000 Income tax expense – Deferred (Benefit) 415,000 Income tax payable 1,560,000 30% x 5,200,000 = 1,560,000 30% x 2,000,000 = 600,000 (30% x 500,000) + (35% x 100,000) = 185,000 Income tax expense – Current (30% x 2,000,000) Income tax expense – Deferred (267,000 – 72,000) Income tax expense – Total Deferred tax asset (30% x 240,000) Deferred tax liability 30% x (530,000 + 360,000) Income tax payable Taxable income Future deductible amount: Book depreciation in excess of tax depreciation Nontaxable income: Interest on government securities Pretax financial income Page 71 P 600,000 195,000 P 795,000 P 72,000 P 267,000 P 600,000 P12,000,000 (430,000) 450,000 P12,020,000 Chapter 5 - Income Taxes
5-­‐8. (a) 5-­‐9. Schedule of reversal of the temporary differences 2016 140,000 x 32% 2017 320,000 x 34% 2018 240,000 x 36% Total (b) Pretax financial income Add nondeductible expenses Less nontaxable revenues Financial income subject to tax Future taxable amounts Taxable income Tax rate Income tax payable Deferred tax liability (see above) P2,200,000 400,000 (140,000) P2,460,000 (700,000) P1,760,000 x 30 % P 528,000 P 240,000 Income tax expense – Current Income tax payable 528,000 528,000 Income tax expense – Deferred Deferred tax liability 240,000 240,000 (c) Income from continuing operations before income taxes P2,200,000 Income tax expense Current P528,000 Deferred 240,000 768,000 Profit P1,432,000 (a) 2015 2016 2017 2018 P 44,800 108,800 86,400 P240,000 Straight Line 500,000 500,000 500,000 500,000 December 31, 2015 December 31, 2016 December 31, 2017 December 31, 2018 SYD 800,000 600,000 400,000 200,000 Carrying Amount 1,500,000 1,000,000 500,000 0 Difference (300,000) (100,000) 100,000 300,000 Tax Base 1,200,000 600,000 200,000 0 Difference 300,000 400,000 300,000 0 2015 2016 2017 2018 Taxable income 800,000 890,000 1,200,000 1,500,000 Future taxable amount 300,000 100,000 Additional taxable amount (reversal) ( 100,000) (300,000) Pretax accounting profit 1,100,000 990,000 1,100,000 1,200,000 (b) Deferred tax liability at the end of each year is as follows: 2015 300,000 x 30% P 90,000 2016 400,000 x 30% 120,000 2017 300,000 x 30% 90,000 2018 0 0 Page 72 Chapter 5 - Income Taxes
(c) Journal entries to record income taxes and deferred income taxes December 31, 2015 Income tax expense (30% x 800,000) 240,000 Income tax payable 240,000 Income tax Expense-­‐Deferred Deferred tax liability December 31, 2016 Income tax expense – current Income tax payable 30% x 890,000 Income tax expense – deferred Deferred tax liability 120,000 – 90,000 = 30,000 December 31, 2017 Income tax expense – current Income tax payable 30% x 1.2M 5-­‐10. 90,000 90,000 267,000 267,000 30,000 30,000 360,000 360,000 Deferred tax liability 30,000 Income tax expense -­‐ deferred (benefit) 30,000 90,000 – 120,000 = 30,000 decrease December 31, 2018 Income tax expense – current 450,000 Income tax payable 450,000 30% x 1.5M Deferred tax liability 90,000 Income tax expense-­‐Deferred (Benefit) 90,000 0 – 90,000 = 90,000 Decrease (d) Income tax expense Current Deferred (Benefit) Total income tax expense (e) Income before income tax Less income tax expense see (d) Profit (a) 2015 P 240,000 90,000 P 330,000 2016 P 267,000 30,000 P 297,000 2017 P 360,000 ( 30,000) P 330,000 2018 P 450,000 (90,000) P 360,000 2015 P1,100,000 330,000 P 770,000 2016 P 990,000 297,000 P 693,000 2017 P1,100,000 330,000 P 770,000 2018 P1,200,000 360,000 P 840,000 Carrying amount of inventories > Tax Base P 100,000 Carrying amount of building & equipment > Tax Base 1,800,000 Future taxable amount, December 31, 2015 P 1,900,000 Page 73 Chapter 5 - Income Taxes
Carrying amount of accounts receivable < Tax Base Carrying amount of warranty > Tax Base Carrying amount of unearned rent > Tax Base Future deductible amount, December 31, 2015 (b) Income tax payable (5,000,000 X 30%) Deferred tax asset (1,500,000 x 30%) Deferred tax liability (1,900,000 x 30%) (c) 5-­‐11. 5-­‐12. P 200,000 800,000 500,000 P 1,500,000 P1,500,000 P 450,000 P 570,000 Income tax expense-­‐current Income tax payable 1,500,000 1,500,000 Income tax expense-­‐deferred Deferred tax asset 450,000 – 525,000 75,000 75,000 Deferred tax liability 830,000 Income tax benefit-­‐deferred 570,000 – 1,400,000 (a) Income tax expense – current Income tax payable 30% x 3.0M 900,000 900,000 Deferred tax asset Income tax expense – deferred Deferred tax liability 30% x 800,000 = 240,000 240,000 – 150,000 = 90,000 30% x 1.5M = 450,000 450,000 – 300,000 = 150,000 90,000 60,000 150,000 (b) 1. Current income tax Deferred income tax Total income tax expense P 900,000 60,000 P 960,000 2. Taxable income Future taxable amount 1.5M – (300,000/30%) Future deductible amount 800,000 – (150,000/30%) Accounting profit subject to tax P3,000,000 500,000 (300,000) P3,200,000 3. Accounting profit subject to tax Non-­‐taxable revenue Non-­‐deductible expense Accounting profit before income tax P3,200,000 200,000 (600,000) P2,800,000 Tax rate = 180,000/600,000 = 30% Income tax expense – current Income tax payable 30% x 1,000,000 830,000 300,000 Page 74 300,000 Chapter 5 - Income Taxes
Deferred tax asset Income tax benefit – deferred DTA, end (30% x 800,000) 240,000 DTA, beginning 180,000 Increase 60,000 5-­‐13. 5-­‐14. 60,000 (a) (b) (c) 60,000 Deferred tax liability, December 31, 2015 2.0M x 30% Income tax expense Current Deferred (decrease in DTLiability) Total income tax expense Income tax expense – current Income tax payable 3.0M x 30% Deferred tax liability Income tax expense – deferred DTL, beg 640,000 DTL, end revised due to change in tax rate 600,000 Decrease in DTL 40,000 P600,000 P900,000 (40,000) P860,000 900,000 40,000 900,000 40,000 (a) Income tax expense – current 3.0M x 30% Previous payment in 2015 Income tax payable, December 31, 2015 Income tax expense – current Income tax payable (900,000 – 500,000) 400,000 400,000 (c) Deferred tax liability Deferred tax asset DTL, Dec. 31, 2015 (400,000 x 30%) DTL, Jan. 1, 2015 Decrease in DTL DTA, Dec. 31, 2015 (200,000 x 30%) DTA, Jan. 1, 2015 Decrease in DTA Total income tax expense Current Deferred Total income tax expense 30,000 120,000 150,000 30,000 60,000 90,000 30,000 30,000 P900,000 -­‐0-­‐ P900,000 Pretax profit Income tax expense Profit P2,800,000 900,000 P1,900,000 (b) Page 75 P900,000 500,000 P400,000 Chapter 5 - Income Taxes
5-­‐13 (a) Income tax expense – current Deferred tax asset Income tax payable 600,000 100,000 700,000 (b) Income tax expense – current Income tax payable 700,000 700,000 MULTIPLE CHOICE QUESTIONS Theory MC1 C MC2 A MC3 A MC4 A MC5 C Problems MC21 B MC6 MC7 MC8 MC9 MC10 D C D C C MC11 MC12 MC13 MC14 MC15 D C A D C MC16 MC17 MC18 MC19 MC20 C D B B D MC22 B Excess of Book Value > Tax Basis of Equipment P800,000 MC23 B 2016 -­‐ 2018 (1.0M + 500,000 + 500,000) x 30% 2019 – 1.0M x 35% Deferred income tax asset, December 31, 2015 P600,000 350,000 P950,000 MC24 D Current income tax expense (10.0M x 30%) P3,000,000 MC25 C 2016 (12M + 1M) x 30% 2017 (20M – 3M) x 35% Income tax expense – deferred P3,900,000 5,950,000 P2,050,000 MC26 B Deferred tax asset (700,000 x 30%) + (1.4M x 35%) Deferred tax liability (500,000 x 30%) + (1.0M x 35%) Net deferred tax asset (all noncurrent) P700,000 (500,000) P200,000 MC27 C Excess of taxable income over income per books (1.2M – 750,000) Tax rate in 2016 Net deferred tax asset P450,000 x 35% P157,500 MC28 B Income tax payable, end of 2015 (1.5M x 30%) P450,000 MC29 D Deferred tax asset (6.0M x 30%) P1,800,000 MC30 C Deferred tax liability (9.0M x 30%) – all non-­‐current P2,700,000 MC31 D Excess of tax depreciation over book depreciation (42,000/30%) Depreciation expense per books Depreciation expense per tax return Future taxable amount (3.6M x 6/12) Income tax rate after 2015 Deferred tax asset Page 76 P1,800,000 35% P630,000 P140,000 600,000 P740,000 Chapter 5 - Income Taxes
MC32 C Excess of tax depreciation over book depreciation(250,000-­‐100,000) Enacted tax rate Increase in deferred income tax liability P150,000 x 30% P 45,000 MC33 D Pretax financial income Non-­‐taxable life insurance proceeds Warranty expense accrued but not yet paid Goodwill impairment loss Taxable income Income tax rate Income tax payable MC34 C Taxable income for 2015 (200,000 – 40,000) Income tax payable (160,000 x 30%) P160,000 P 48,000 MC35 B Deferred tax liability, December 31, 2015 150,000 x 35% 52,500 150,000 x 35% 52,500 150,000 x 30% 45,000 P150,000 MC36 B Deferred income tax liability (95,000 x 38%) P36,100 MC37 D Current income tax expense for 2015 (6.5M x 30%) Income tax payments in 2015 Income tax payable, December 31, 2015 P1,950,000 900,000 P1,050,000 MC38 C Future taxable amount (profit on installment) Future deductible amount (bad debt expense) Net amount Tax rate in 2016 Deferred portion of income tax expense P2,600,000 1,400,000 P1,200,000 x 38% P 456,000 MC39 D Given P750,000 MC40 D Income tax expense for 2015 (2M x 30%) P600,000 MC41 C Pretax accounting income Future deductible amount (accrued warranty cost) Future taxable amount (accrual basis profit > cash basis profit Operating loss carry-­‐forward (for tax purposes) Income tax expense Increase in deferred tax liability 5,000,000 x 30% Less: increase in deferred tax asset (from accrued warranty cost) = 1,200,000 x 30% (from operating loss carry forward)= 2.8M x 30% x 40% Total deferred tax asset Income tax expense MC42 C See MC 41 MC43 D Excess of tax depreciation over book depreciation (172,500/30%) Book depreciation expense for 2015 Depreciation expense per tax return of 2015 P5,000,000 (900,000) 1,200,000 200,000 P5,500,000 x 30% P1,650,000 P 1,000,000 1,200,000 (5,000,000) P 2,800,000 P 1,500,000 P 360,000 336,000 P 696,000 P 804,000 P696,000 Page 77 P 575,000 3,000,000 P3,575,000 Chapter 5 - Income Taxes
MC44 D Income before income tax Tax depreciation in excess of book depreciation Income reported for tax purposes in excess of book income Taxable income Income tax rate Current income tax liability, December 31, 2015 P1,800,000 (80,000) 60,000 P1,780,000 x 30% P 534,000 MC45 B Pretax financial income Future taxable amount (240,000 – 140,000) + (560,000 – 440,000) Non-­‐deductible expense (insurance premiums; assume company is the beneficiary) Taxable income Income tax rate Income tax payable P2,000,000 (220,000) 180,000 P1,960,000 x 30% P 588,000 MC46 A Pretax accounting income Non-­‐taxable revenue Non-­‐deductible expense Future taxable amount (10M – 6M) Future deductible amount (2.8M – 1.0M) Taxable income Income tax rate Income tax payable P5,000,000 (500,000) 200,000 (4,000,000) 1,800,000 P2,500,000 x 30% P 750,000 MC47 A Pretax accounting income Future deductible amount (write down on manufacturing facility) Future taxable amount (unrealized gain on financial assets at FVPL Taxable income Income tax rate Current tax expense P5,000,000 400,000 (600,000) P4,800,000 x 30% P1,440,000 Page 78 Chapter 6 – Employee Benefits Chapter 6 – Employee Benefits PROBLEMS 6–1. (a) (b) Liability for compensated absences, December 31, 2014 6 x 420 = P2,520 Employee Benefit Expense for Sick Leave and Vacation Leave Sick Leave 5 x P450 10 x 420 2 x 400 2 x 380 P2,250 4,200 800 760 Vacation Leave Total 12 x P450 12 x 420 2 x 400 5 x 380 P5,400 5,040 800 1,900 P8,010 13,140 P21,150 6-­‐2. (c) Liability for Compensated Absences 2,520 Employee Benefit Expense – Compensated Absences 10,280 Cash 12,800 Total amount paid for compensated absences Sick leave (as computed above) 8,010 Vacation leave 7 x 450 3,150 3 x 420 1,260 1 x 380 380 4,790 12,800 (d) Employee Benefit Expense – Compensated Absences 10,870 Liability for Compensated Absences 10,870 Liability for Compensated Absences, 12/31/15 Employee Unused Vacation Days Rate Amount A. B. Santos 12-­‐7 = 5 P450 P2,250 C. D. Garcia 12+6 -­‐3 = 15 420 6,300 E. F. Cruz 2 = 2 400 800 G. H. Buen 5 – 1 = 4 380 1,520 Total P10,870 (a)
(b) (c) Total payment in 2015 35 x 12 x 450 25 x 10 x 450 Liability, beginning of 2015 13-­‐10 = 3; 3 x 20 x 450 Liability, end of 2015 12-­‐10 = 2; 2 x 40 x 450 Sick leave expense in 2015 P189,000 112,500 P301,500 (27,000) 36,000 P310,500 P36,000 (see above) Liability for Compensated Absences Compensated Absences Reversing entry Page 79 27,000 27,000 Chapter 6 – Employee Benefits 6-­‐3. 6-­‐4. 6-­‐5. Compensated Absences Cash Payment of compensated absences 301,500 301,500 Compensated Absences Liability for Compensated Absences Year-­‐end accrual of liability for compensated absences 36,000 36,000 (a) Vacation earned for work in 20145 P400,000 Adjustment for 10% salary increase on unused vacation at beginning of year 10% x (500,000 – 300,000) 20,000 Vacation pay expense for year 2015 P420,000 (b) Liability for accumulated vacations, 12/31/14 Vacations taken during 2015 Vacation pay expense for 2015 Liability for accumulated vacations, 12/31/15 (a) Retirement Benefit Expense = Required Contribution (P6.0M x 8%) + 5% x (P35.0M -­‐ P10.0M) (b) 1. 2. P500,000 (300,000) 420,000 P620,000 = P1,730,000 Retirement Benefit Expense 1,730,000 Prepaid Retirement Benefit Cost 70,000 Cash 1,800,000 Retirement Benefit Expense Cash Accrued Retirement Benefit Cost 1,500,000 230,000 1,730,000 Beginning balances Current service cost Interest cost 10% x 3.0M 10% x 2.0M Actuarial gain or loss Benefit obligation Plan assets 300,000 -­‐260,000 Benefits paid Contributions Ending balances Defined Benefit Cost Other Profit or Comprehensive Loss Income P1,000,000 300,000 (260,000) 100,000 (40,000) 1,040,000 60,000 Benefit Liability (Asset) Benefit Obligation Plan Assets P3,000,000 P2,600,000 1,000,000 300,000 260,000 100,000 40,000 (350,000) (350,000) 900,000 4,050,000 3,450,000 (a)
(b)
Net Prepaid/Accrued Benefit Cost, December 31, 2014 P3,000,000 – P2,600,000 Retirement benefit expense in 2015 P1,040,000 Page 80 P 400,000 Chapter 6 – Employee Benefits 6-­‐6. (c)
(d)
(e)
(f)
Defined benefit cost taken to OCI Retirement Benefit Expense 1,040,000 Remeasurement of Defined Benefit Asset/ Liability – OCI 60,000 Cash Defined Benefit Liability/Asset P 60,000 1. 2. Benefit Obligation Plan Assets P4,050,000 P3,450,000 P 400,000 200,000 P 600,000 Reconciled with the memorandum records Defined benefit obligation Plan assets Net liability P4,050,000 3,450,000 P 600,000 Net defined benefit liability/asset Beginning balance (Liability) Underfunding (see entry d) Ending balance (Liability) 900,000 200,000 Balances, beginning Service cost Interest cost 9% x 1,350,000 9% x 1,250,000 Actuarial loss On benefit obligation On plan assets Past service cost Benefits paid Contributions Balances, end Defined Benefit Cost Other Profit or Comprehensive Loss Income 2,000,000 121,500 (112,500) 50,000 Benefit Liability (Asset) Benefit Obligation Plan Assets 1,350,000 1,250,000 2,000,000 121,500 112,500 50,000 300,000 2,309,000 300,000 (120,000) 3,701,500 2,000 52,000 (a) Retirement Benefit Expense Remeasurement of Defined Benefit Liability/Asset Cash Defined Benefit Liability/Asset (b)
Defined benefit liability, end Beginning balance (1,350,000 – 1,250,000) Underfunding Defined benefit liability, end Or P3,701,500 – P3,600,500 Page 81 (2,000) (120,000) 2,360,000 3,600,500 2,309,000 52,000 2,360,000 1,000 P100,000 1,000 P101,000 P101,000 Chapter 6 – Employee Benefits 6-­‐7. 6-­‐8. (a)
(b)
(c)
(d)
(e)
(f)
(a) Beginning balances Current service cost Interest cost 10% x 8,200,000 10% x 8,500,000 Actuarial gain or loss On Benefit Obligation On Plan Assets 780,000-­‐850,000 Contribution Ending balances *Squeezed Defined Benefit Cost Other Profit or Comprehensive Loss Income 1,200,000 820,000 (850,000) (40,000) 1,170,000 70,000 30,000 Defined benefit liability/ asset, January 1, 2015 P8,200,000 – P8,500,000 Benefit Liability (Asset) Benefit Obligation Plan Assets 8,200,000 8,500,000 1,200,000 820,000 850,000 (40,000)* 10,180,000 P300,000 asset Actuarial gain or loss (1) On plan assets (780,000 – 850,000) (2) On benefit obligation (squeezed, see above) P70,000 loss P40,000 gain Retirement Benefit Cost taken to Profit or loss Other comprehensive income P1,170,000 P 30,000 (70,000) 1,500,000 10,780,000 Retirement Benefit Expense 1,170,000 Remeasurement of Defined Benefit Asset/Liability – OCI 30,000 Defined Benefit Liability/Asset 300,000 Cash Defined Benefit Asset Beginning balance Overfunding (1,500,000 – 1,200,000) Ending balance – asset Remeasurement of Defined Benefit Asset/Liability – OCI Defined Benefit Asset/Liability 50,000 Fair value of plan asset, ending Fair value of plan assets, beginning Contributions to the plan Benefits paid Balance, before actual return Actual return on plan assets P4,600,000 500,000 (700,000) Page 82 1,500,000 P300,000 300,000 P600,000 50,000 P4,950,000 P4,400,000 P 550,000 Chapter 6 – Employee Benefits 6-­‐9. (b) Actual return Expected return (10% x P4,600,000) Actuarial gain taken to OCI (a) P 550,000 460,000 P 90,000 Beginning balances Current service cost Interest cost 10% x 9,000,000 10% x 8,000,000 Actuarial gain/loss Benefit obligation Plan assets (640,000-­‐800,000) Benefits paid Contributions Past service cost Ending balances *squeezed Defined Benefit Cost Other Profit or Comprehensive Loss Income 1,000,000 900,000 (800,000) (50,000)* 160,000 800,000 1,900,000 110,000 Benefit Liability (Asset) Benefit Obligation Plan Assets 9,000,000 8,000,000 1,000,000 900,000 800,000 (50,000)* (160,000) (600,000) (600,000) 2,000,000 800,000 11,050,000 10,040,000 (b) Retirement Benefit Expense Remeasurement of Defined Benefit Liability/Asset – OCI Defined Benefit Liability/Asset 1,900,000 110,000 2,010,000 Defined Benefit Liability/Asset Cash 2,000,000 2,000,000 (c)
(d) Defined Benefit Liability/Asset, Dec. 31, 2014 Beginning balance (9,000,000 – 8,000,000) Underfunding (2,010,000 – 2,000,000) Defined benefit liability, Dec. 31, 2014 P1,000,000 10,000 P1,010,000 Or 11,050,000 – 10,040,000 P1,010,000 Page 83 Chapter 6 – Employee Benefits MULTIPLE CHOICE QUESTIONS Theory MC1 C MC2 A MC3 B MC4 A MC5 D Problems MC19 B MC6 MC7 MC8 MC9 MC10 D A A A A MC11 MC12 MC13 MC14 MC15 D D A C B MC16 MC17 MC18 A B D Current service cost Expected return on plan assets (9% x 3.0M) Interest on defined benefit obligation (9% x 3.2M) Retirement benefit expense for 2015 P140,000 (270,000) 288,000 P158,000 MC20 D Actuarial loss on plan assets (270,000 – 185,000) Actuarial loss on benefit obligation (given) Defined benefit cost taken to other comprehensive income P 85,000 20,000 P105,000 MC21 C Total retirement benefit cost (158,000 + 105,000) Contributions to the plan Underfunding Defined benefit liability, beginning (3.2M – 3.0M) Defined benefit liability, December 31, 2015 P263,000 204,000 P 59,000 200,000 P259,000 MC22 A Fair value of plan assets, January 1 Contributions to the fund Benefits paid Fair value of plan assets before actual return Fair value of plan assets, December 31 Actual return on plan assets P2,500,000 800,000 (340,000) P2,960,000 3,200,000 P 240,000 MC23 B Expected return on plan assets (10% x 2.5M) Actual return on plan assets Actuarial loss P 250,000 240,000 P 10,000 MC24 B Accrued benefit obligation, January 1 Fair value of plan assets, January 1 Retirement benefit liability, January 1 P5,000,000 3,800,000 P1,200,000 MC25 A Full amount of past service cost is recognized as expense P 580,000 MC26 A Actuarial gain or loss is taken to other comprehensive income, not in profit or loss MC27 B Current service cost Past service cost Net interest cost 12% x (5.0M – 3.8M) Retirement benefit expense for 2015 P 600,000 580,000 144,000 P1,324,000 MC28 C Fair value of plan assets, January 1 Actual return on plan assets Contributions to the fund Fair value of plan assets, December 31 P3,800,000 550,000 750,000 P5,100,000 Page 84 Zero Chapter 6 – Employee Benefits MC29 D Accrued benefit obligation, January 1 Interest cost (12% x 5M) Current service cost Past service cost Actuarial gain on benefit obligation Accrued benefit obligation, December 31 P5,000,000 600,000 600,000 580,000 (70,000) P6,710,000 MC30 B Retirement benefit cost taken to profit or loss Actuarial gain on benefit obligation Actuarial gain on plan assets 12% x 3.8M = 456,000 12% x 3.8M = 456,000; 456,000 – 550,000 Total retirement benefit cost Contributions to the fund Underfunding P1,324,000 (70,000) (94,000) P1,160,000 750,000 P 410,000 MC31 D Accrued benefit obligation, December 31 (MC29) Fair value of plan assets, December 31 (MC 28) Defined benefit liability, December 31, 2015 P6,710,000 5,100,000 P1,610,000 MC32 C Accrued benefit obligation, January 1 P4,600,000 Interest cost (10% x 4.6M) 460,000 Benefits paid (390,000) Actuarial gain on benefit obligation Net actuarial gain P32,500 Actuarial loss on plan assets (503,500-­‐495,000) 8,500 (41,000) Accrued benefit obligation before current service cost P4,629,000 Accrued benefit obligation, December 31 5,629,000 Service cost for the year P1,000,000 MC33 A Fair value of plan assets, beginning Contributions to the fund Benefits paid Fair value of plan assets before actual return Fair value of plan assets, ending Actual return on plan assets P5,035,000 425,00 (390,000 P5,070,000 5,565,000 P 495,000 MC34 A Current service cost Net interest cost 10% x (5,035,000 – 4,600,000) Net actuarial gains Total retirement benefit cost for 2015 P1,000,000 (43,500) (32,500) P924,000 MC35 A Past service cost Funding for past service cost Underfunding/Defined benefit liability Current service cost is fully funded. MC36 C Defined benefit obligation, January 1 Current service cost Actuarial gain (200,000 – 150,000) Interest cost (12% x 4.4M) Benefits paid to retirees Defined benefit obligation, December 31 Page 85 P600,000 240,000 P360,000 P4,400,000 1,480,000 (50,000) 528,000 (600,000) P5,758,000 Chapter 6 – Employee Benefits MC37 D Total amount to be funded (2.4M + 300,000) Contributions made Underfunding (Liability) MC38 C P4.2M – P3.3M = 900,000 asset; however, the asset amount is limited by the present value of future refunds and reductions in future contributions of P500,000; so the defined benefit asset will be shown at P500,000 only. MC39 MC40 D C Current service cost Past service cost Interest cost (see MC40) 10% x (12M – 10M) Retirement benefit cost taken to profit or loss Discount rate Actual return on plan assets P1,500,000 Actuarial gain on plan assets 500,000 Expected return P1,000,000 Rate: 1M/10M Page 86 P2,700,000 2,500,000 P 200,000 P2,000,000 1,300,000 200,000 P3,500,000 10%