Applied Auditing Asuncion Solman

A guide in applying auditing procedures to specific accounts of the financial statements.

TEACHERS MANUAL 2015 Edition By

DARRELL JOE O. ASUNCION, MBA, CPA RAYMUND FRANCIS A. ESCALA, MBA, CPA MARK ALYSON B. NGINA, CPA

Dear fellow teacher, This “Teacher’s Manual” should be used solely by the teacher and for classroom purposes only. This manual should NOT be reproduced either manually (e.g., printing or photocopy) or electronically (e.g., copying or uploading in the net) without our written consent (or the publisher’s written authorization). If you have comments, queries or suggestions, please do not hesitate to contact us at: Telephone: 074-2441894 Mobile No.: Darrell Joe O. Asuncion – 0923-424-8286 Raymund Francis A. Escala – 0917-715-1226 Mark Alyson B. Ngina – 0915-510-7281 Email ad: [email protected]. Thanks and God bless. Sincerely, Darrell Joe O. Asuncion, MBA, CPA Raymund Francis A. Escala, MBA, CPA Mark Alyson B. Ngina, CMA, CPA

Table of Contents Chapter 25 INTRODUCTION To LIABILITIES ....................................................... 4 Chapter 26 FINANCIAL LIABILITIES AND DEBT RESTRUCTURING.........17 Chapter 27 LEASE ..........................................................................................................35 Chapter 29 SHAREHOLDERS' EQUITY...................................................................61 Chapter 30 BOOK VALUE AND EARNINGS PER SHARE .................................85 Chapter 32 STATEMENT OF FINANCIAL POSITION ........................................97 Chapter 33 STATEMENT OF CASH FLOWS....................................................... 112

Chapter 25: Introduction to Liabilities

CHAPTER 25: INTRODUCTION TO LIABILITIES Note to the professor: Page 902

910 925

Existing data: Illustration: Long-term debt falling due within one year Additional information no. 3 As of December 31, 2015, Rondo’s current ratio is 1.5:1. B

=

Change Rondo’s to Rajon’s Change 5.5 to 5.5M

10% x [(5.5 x (1-30%] 1 - 10% + [10% x (1-30%)]

Requirement No. 1 Warranty Sales in 2014 earned in 2015 (41% x 800 x P1,000) Warranty Sales in 2015 earned in 2015 (22% x 800 x P1,000) Total warranty sales revenue earned in 2015

Change to:

328,000

Change 800 to 900.

198,000 526,000

PROBLEM 25-1 Total Liabilities Total liabilities Current Accounts payable Loan payable – current portion Unearned rent income Income tax payable Dividends payable Total current liabilities

P 1,000,000 1,000,000 300,000 250,000 100,000 P 2,650,000

Non-current Bonds payable Discount on bonds payable Loan payable – non-current portion Deferred tax liability Total non-current liabilities Total liabilities

(

(B)

Below items shall be presented as part of entity’s assets: Current asset Advances to employees Non-current asset Cash surrender value of officers’ life insurance Patent

P 5,000,000 500,000) 1,500,000 15,000 P 6,015,000 P 8,665,000

P

45,000 75,000 50,000

Below item shall be disclosed in the notes to financial statements: Contingent liability P 500,000

4


PROBLEM 25-2 Current Liabilities Current liabilities Accounts payable – unadjusted Add/(Deduct): Adjustments Debit balances in suppliers’ accounts Postdated checks of Accounts payable – adjusted Credit balances in customers’ accounts Premiums payable Accrued expenses Total current liabilities

P 4,000,000

(A)

100,000 50,000 P 4,150,000 500,000 600,000 150,000 P 5,400,000

Below items shall be presented as part of entity’s non-current liabilities: Bonds payable 1,000,000 Premium on bonds payable 100,000 Mortgage payable 850,000 Deferred tax liability 200,000 Deferred revenue 175,000 Below item shall be presented as part of shareholders’ equity: Stock dividends payable PROBLEM 25-3 Refinancing Current liabilities 10% note payable, maturing 03/3 1/2015 Annual sinking fund requirement Total current liabilities

(C)

750,000

P10,000,000 500,000 10,500,000

Below items shall be presented as part of entity’s non-current liabilities: 12% note payable, maturing 06/30/2015 6,000,000 7% guaranteed debentures, due 2018 2,000,000 PROBLEM 25-4 Refinancing (A) The amount to be reported as current liabilities in 2014 is P2,000,000 since the refinancing agreement was completed after the reporting date. PROBLEM 25-5 Refinancing (A) The amount to be reported as current liabilities in 2014 is P2,000,000 since the grace period was granted after the reporting date. PROBLEM 25-6 Accounts payable Accounts payable Accounts payable – unadjusted Cost of goods lost in transit Cost of returned goods Accounts payable – adjusted

(B)

5

P 8,000,000 500,000 ( 200,000) P 8,300,000


PROBLEM 25-7 Accounts payable Amount of cash to eliminate accounts payable Accounts payable from: *Purchases through March 15 (gross)(P4,900,000 / 98%) Merchandise inventory at cost(P1,500,000 / 150%) Accounts payable (B)

P 5,000,000 1,000,000 P 6,000,000

*The amount was grossed-up since the entity is no longer entitled to cash discount. The liability as of March 15, 2014 has been outstanding for more than 10 days. PROBLEM 25-8 Bonus payable Amount of bonus Net income before bonus and income tax Less: Required income to earn bonus Basis of bonus Multiply by: Bonus rate Total current liabilities PROBLEM 25-9 Bonus payable Amount of bonus Net income before bonus and income tax Less: Required income to earn bonus Amount of income subject to bonus (125%) Less: Bonus (25%) (squeeze) Basis of bonus (100%) (P600,000/125%)

P 2,200,000 880,000 P 1,320,000 10% P 132,000

(C)

P 1,600,000 1,000,000 P 600,000 120,000 P 480,000

(D)

PROBLEM 25-10 Unearned Revenue Unearned revenue – gift certificates Unearned revenue 1,500,000 Gift certificate redeemed 4,000,000 5,000,000 Expired gift certificate 300,000 4,300,000 6,500,000 Balance, End (B) 2,200,000 6,500,000 6,500,000

Balance, Beg. Cash receipts from gift certificate sold

PROBLEM 25-11 Advances from Customers Unearned revenue – Advances from customers Unearned revenue 1,100,000 Advances applied to shipments 1,600,000 1,800,000 Orders cancelled 100,000

6

Balance, Beg. Advances received


Balance, End (C)

1,700,000 1,200,000 2,900,000

2,900,000 2,900,000

PROBLEM 25-12 Escrow Liability Deposits received – Escrow account Escrow liability 600,000 Cash payments nine months 4,200,000 4,500,000 4,200,000 5,100,000 Balance, End (C) 900,000 5,100,000 5,100,000 PROBLEM 25-13 Container’s Deposits Deposits received – Escrow account Liability for Deposits 100,000 Cash refunds for container returned in 2014 92,000 100,000 Balance, End (C)

92,000 108,000 200,000

Balance, Beg. Cash receipts for nine months

Balance, Beg. Cash deposits from deliveries

200,000 200,000

PROBLEM 25-14 VAT payable Provision - VAT payable VAT Payable Payment made

120,000

Balance, End (A)

120,000 180,000 300,000

120,000 84,000 96,000 300,000

Balance, Beg. For October For November For December

300,000

PROBLEM 25-15 Contingencies (C) Since the outcome of the lawsuit remains uncertain, disclosure of the contingency in the notes to financial statements would be the necessary. PROBLEM 25-16 Contingencies (B) Since it is probable that AAA will be liable to pay the P3,000,000 as supported by BBB’s filing of a petition for bankruptcy, AAA should accrue and disclose the provision for guarantee on a loan of P3,000,000.

7


PROBLEM 25-17 Premiums Payable Provision – Premiums liability Premiums liability **Coupons redeemed

50,000 50,000 Balance, End (D) 30,000 80,000 *(20,000 x 80%)/5 x (P30 + P5 - P10) **(10,000/5) x (P30 + P5 - P10)

80,000 80,000

**Balance, End

800,000 1,000,000

*Premiums expense

80,000

PROBLEM 25-18 Premiums Premiums liability (2014) **Balance, End 200,000 *Coupons redeemed

Balance, Beg.

1,000,000 1,000,000

Premiums liability (2015) 120,000 200,000

*Coupons redeemed

2,000,000 1,920,000 2,120,000 2,120,000 *Number of towels distributed x net cost of P40 **Number of towels yet to be distributed x net cost of P40

Balance, Beg. Premiums expense (squeeze)

Balance, Beg. Premiums expense (squeeze) (D)

The beginning balance of the 5,000 towels is included as part of the 50,000 towels distributed in 2015. If the actual towels distributed from 2015 is different from that was recorded as of the end of 2014, this is considered as a change in accounting estimate which should be taken into account during 2015 and for the succeeding accounting period. PROBLEM 25-19 Warranty Liability Warranties liability (2014) Actual expenditures 150,000 500,000 150,000 500,000 Balance, End 350,000 500,000 500,000

8

Balance, Beg. *Warranties expense


Warranties liability (2015) 350,000 Actual expenditures 550,000 600,000 550,000 950,000 Balance, End (A) 400,000 950,000 950,000 *Sales x Total estimated warranty cost of 10%

Balance, Beg. *Warranties expense

PROBLEM 25-20 Warranty Liability Warranties liability Actual expenditures Balance, End (C)

480,000 480,000

140,000 140,000 340,000 480,000

Balance, Beg. Warranties expense

480,000

PROBLEM 25-21 Warranty - Sales are Made Evenly Pattern of Realized Revenues: 2014 SALES From sales in: 2014 1st (40% x ½) 0.20 2nd (36% x ½) 3rd (24% x ½) Total 0.20 2015 SALES From sales in: 2015 1st (40% x ½) 0.20 2nd (36% x ½ 3rd (24% x ½) Total 0.20

2015 0.20 0.18 0.38 2016 0.20 0.18 0.38

2016

2017

0.18 0.12 0.30 2017

Total 0.40 0.36 0.24 1

0.12 0.12 2018

0.18 0.12 0.30

Requirement No. 1 (A) Warranty Sales in 2014 earned in 2015 (38% x 1,000 x P1,500) Warranty Sales in 2015 earned in 2015 (20% x 1,200 x P1,500) Total warranty sales revenue earned in 2015

Total 0.40 0.36 0.24 1

0.12 0.12

570,000 360,000 930,000

Notes:  The 38% represents the realized revenue in 2015 from 2014 Sales.  The 20% represents the realized revenue in 2015 from 2015 Sales. Requirement No. 2 (B) Total warranty sales revenue earned in 2015 (see No. 1) Expenses relating to computer warranties Profit from sales warranty

9

930,000 60,000 870,000


Requirement No. 3 (A) Unearned sales warranty from 2014 [(30% + 12% x 1,000 x P1,500)] Unearned sales warranty from 2015 [(100%-20%) x 1,200 x P1,500)] Total unearned sales warranty

630,000 1,440,000 2,070,000

Notes:  The 30% and 12% represent the unrealized revenues in 2015 from 2014 Sales.  The 20% represents the realized revenue in 2015 from 2015 Sales. So 100% minus 20% realized is equal to 80% unrealized revenue in 2015 from 2015 Sales. SUMMARY OF ANSWERS: 1. A 2. B 3. A PROBLEM 25-22 Refinancing 1. P2,000,000 (Letter B). The entire amount is payable within one year from the reporting date thus presented as current liability. 2. Nil (Letter A). Since both parties are financially capable of honoring the agreement’s provisions and the debtor has the discretion to refinance or roll over the loan for at least twelve months from December 31, 2014 the entire amount is treated as Noncurrent liability. 3. Nil (Letter A). Since the company entered into a refinancing agreement with a bank to refinance the loan on a long-term basis before the reporting date, the entire amount of liability is treated as noncurrent. 4. P2,000,000 (Letter B). Since the company entered into a refinancing agreement with a bank to refinance the loan on a long-term basis after the reporting date, the entire amount of liability is treated as current. PROBLEM 25-23 Obligations Payable on Demand, Breach of Loan Agreement 1. P2,000,000 (Letter C). Only if an enforceable promise is received by the end of the reporting period from the creditor not to demand payment for at least 12 months from the end of the reporting period that the note may be classified as noncurrent. 2. Nil (Letter A). The entire amount of loan is noncurrent liability since there was an agreement on the reporting date not to demand payment in order for the debtor to rectify the breach with 12 months from the reporting date. 3. P2,000,000 (Letter B). The entire amount of loan is current liability since the agreement not to demand payment happened after the reporting period.

10


PROBLEM 25-24 Contingencies 1. A 2. D 3. B 4. B 5. A (Amount of accrual is P2,040,000 using expected value method which is calculated as (P1.6M x 20 + (2M x 50%) + (2.4M x 30%) 6. A (Amount of accrual is P2,250,000 using midpoint of the range which is calculated as (P1.5M+3M)/2) PROBLEM 25-25 Contingencies 1. A 2. B (Disclose an amount of P1,500,000) 3. B (Disclose an amount of P1,500,000) 4. B (Disclose an amount of P1,000,000) 5. D 6. A (It is virtually certain that the company will be receiving the P1,5000,000.) PROBLEM 25-26 Bonus Computation 1.

Net income before bonus but before tax

B

= = =

NY 3,090,000 618,000

x x

BR 20%

2.

Net income after bonus but before tax NY B = BR x 100% + BR = 20% x 3,090,000 100% + 20% = 515,000

3.

Net income after bonus and tax B = BR X (NY – B – T) B = 20% x (3,090,000-B-(927,000-3.B) B = 20% x (3,090,000-B-927,000+.3B) B = 618,000-.2B-185,400+.06B 1B+.2B-.06B = 618,000-185,400 1.14B = 432,600 1.14 1.14 B = 379,474

11


T

B

= = = = = = =

30%

X (3,090,000 – B) 927,000-.3B

OR BR x [NY x (1-TR)] 1 + [BR x (1-TR)] 20% x (3,090,000 x (1-30%) 1+[20% x (1-30%)] 20% x (3,090,000 x 70%) 1+(20% x 70%) 20% x (2,163,000) 1.14 379,474

Where: NY = Net income before bonus and tax B = Bonus BR = Bonus Rate T = Tax TR = Tax Rate SUMMARY OF ANSWERS: 1. D 2. B 3. C PROBLEM 25-27 Question Nos. 1 and 2

Estimated liability from Warranties

Disbursement warranties Balance end

for

164,000 212,000

Total

44,800

Beginning balance

240,000

Warranty expense.

376,000

Warranty expense Divide by % age of warranty Sales from musical instruments and sound reproduction equipment (Question No. 1) Question No. 3 Premium expense = P2,000,000 =

X

1 coupon P2

200 coupons P63,000

12

240,000 4% 6,000,000

x

90%

P34-P20


Question No. 4

Inventory of Premium

Beg. Balance Net Purchases (6,500 x P34)

39,950 221,000

56,950 204,000

Total

Balance end Cost of issued premium (1.2M coupons.200 coupons x P34

260,950

Question No. 5 Estimated liability for Premiums Disbursement for premiums (1.2M coupons/200 coupons x P(34-P20) Balance end Total

84,000 23,800

44,800

Beginning balance

63,000

Premium expense.

107,800

SUMMARY OF ANSWERS: 1. A 2. A 3. C 4.

D

5.

D

PROBLEM 25-28 Refinancing of Loan, Notes Payable Interest and NonInterest Bearing Note to the Professor: This problem should be discussed after the discussion in Chapter 26. Question No. 1 Periodic payment-NP Delivery equipment (P2M/4) Multiply by PV of ordinary annuity Present value of NP-delivery equipment Amortization table: Payment Date 01/01/2015 12/31/2015 500,000 12/31/2016 500,000

500,000 3.0373 1,518,650

Interest Expense

Discount Amortization

182,238 144,107

317,762 355,893

Question Nos. 2 and 3 12% Note payable 10% note payable

Noncurrent 1,400,000 2,000,000

13

Current 700,000

Present value 1,518,650 1,200,888 844,995


Note payable-del. Equipment Total

844,995 4,244,995

355,893 1,055,893

Question No. 4 Accrued interest payable-12% Note payable =P2,100,000 x 12% x 8/12 =P168,000 Question No. 5 Interest expense: 12% Note payable 1/1-5/1 (2.8M x 12% x 4/12) 5/1-12/31 (2.1M x 12% x 8/12) 10% Note payable (2M x 10%) Note payable - Delivery. Equipment (see amortization table) Total SUMMARY OF ANSWERS: 1. A 2. B 3. B 4.

B

112,000 168,000 200,000 182,238 662,238 5.

C

PROBLEM 25-29 Warranty, Premiums and Bonus Note to the professor: The last sentence should be: Premium expense of P270,000 (not P120,000). Question No. 1 Warranty expense (P150 x 1,200) Less: Warranty paid Estimated Premiums payable

180,000 85,000 95,000

Question No. 2 Premium expense (P1,200,000 x 1 coupon/P1)/400 x 60% x (P45-P20) Less: Net cost of redeemed coupons (500,000/400)x( P45-P20) Estimated Premiums payable Question No. 3 Unadjusted net income Warranty expense under, Net income over (P180,000-P85,000) Premium expense over, Net income under (P270,000-P45,000) Adjusted Net income 4.

Net income after bonus but before tax NY B = BR x 100% + BR = 20% x 2,065,000

14

45,000 31,250 13,750 1,935,000 (95,000) 225,000 2,065,000


= 5.

344,167

100% + 20%

Net income after bonus and tax B = BR x (NY – B – T) T

=

B

=

TR

x (NY – B) OR BR x [NY x (1-TR)] 1 + [BR x (1-TR)]

Net income after bonus and tax B = BR X (NY – B – T) B = 20% x (2,065,000-B-(9619,500-3.B) B = 20% x (2,065,000-B-619,500+.3B) B = 413,000-.2B-123,900+.06B 1B+.2B-.06B = 413,000-123,900 1.14B = 289,100 1.14 1.14 B = 253,596 T

B

= = = = = = =

30%

X (2,065,000 – B) 619,500-.3B

OR BR x [NY x (1-TR)] 1 + [BR x (1-TR)] 20% x (2,065,000 x (1-30%) 1+[20% x (1-30%)] 20% x (2,065,000 x 70%) 1+(20% x 70%) 20% x (1,445,500) 1.14 253,596

Where: NY = Net income before bonus and tax B = Bonus BR = Bonus Rate T = Tax TR = Tax Rate SUMMARY OF ANSWERS: 1. A 2. C 3. C 4.

B

5.

C

15


PROBLEM 25-30 Comprehensive Question No. 1 (B) SSS Payable Philhealth payable Estimated liabilities under guarantee agreement Estimated warranties on goods sold Utilities payable Trade payables (170,000+30,000+20,000+12,000-8,000) Notes payable arising from purchase of goods Convertible bonds payable due July 1, 2014 Serial bonds payable (40,000 x 2) Accrued interest expense Advances from customers Unearned rent income Unearned interest on receivables Income taxes payables Cash dividends payable Property dividends payable Credit balance of notes payable Overdraft with PNB Container's deposit Loans payable-12% Financial liability designated as FVTPL Current liabilities

10,000 9,000 110,000 120,000 6,000 224,000 200,000 1,000,000 80,000 4,000 25,000 36,000 3,500 45,000 100,000 120,000 40,000 80,000 45,000 270,000 200,000 2,727,500

Question No. 2 (A) Deferred tax liability Notes payable Arising from 4-year bank loan Arising from advances by officers, dune in 3 years Serial bonds payable (800,000 minus (40,000 x 2) Security deposit received from lessee Loans payable-10% Total noncurrent liabilities

400,000 300,000 720,000 89,000 150,000 1,699,000

Question No. 3 (B) Total liabilities Current liabilities Total noncurrent liabilities Total liabilities

2,727,500 1,699,000 4,426,500

SUMMARY OF ANSWERS: 1. B 2. A 3. B

16

40,000

Chapter 26: Financial Liabilities and Debt Restructuring

CHAPTER 26 FINANCIAL LIABILITIES AND DEBT RESTRUCTURING Note to professor: Page 953

Existing data: Note: In amortizing these bonds, a new effective rate shall be computed thru interpolation. Refer to the previous chapter for sample computation of effective interest rate.

Change to; (Kindly delete the second sentence)

957

Note: Alternatively …. Total present value= P5,588,332

Total present value= P5,788,332

974

Requirement No. 2 Date on the third journal entry- Dec. 31, 2017 Fifth journal entry: Preference shares 150,000 Premium on redemption of bonds 30,000 Cash 180,000

975

Statement of Comprehensive Income (2015) Interest expense P23,580

986

To record transaction Note payable 1,600,000 Accrued interest payable 200,000 Land 1,500,000 Gain on extinguishment of debt 500,000

988

ILLUSTRATION: Modification of Terms Mandaue Company has an overdue notes payable to National Bank of P8,000,000 and recorded accrued interest of P640,000

Date on the third journal entry- Dec. 31, 2016 Fifth journal entry: Bonds payable 200,000 Premium on redemption of bonds 10,000 Cash 210,000 Should be P29,174

Change 500,000 300,000

to

Change P640,000 to P840,000

BONDS PAYABLE PROBLEM 26-1 Financial Liabilities at FVTPL (Interest Expense and Unrealized gains or losses) Question No. 1 Face value Multiply by: nominal rate Multiply by: months outstanding/12 Interest expense (A)

3,000,000 8% 12/12 P240,000

17


Question No. 2 Fair value of the bonds Less: Carrying value Unrealized loss (or gain)-P&L

3,090,000 2,850,756 239,244

(B)

SUMMARY OF ANSWERS: 1. A 2. B PROBLEM 26-2 Unrealized Gain or Loss of FVTPL with Change Due To Credit Risk Question No. 1 Market price of the liability, end of the period Less: Fair value of liability using the sum observed interest rate and instrument specific IRR Unrealized loss (or gain)-OCI (B) Internal rate of return at the start of the period - yield or effective rate Less: Observed (benchmark) interest rate, date of inception Instrument specific IRR Observed (benchmark) interest rate, end of period Add: Instrument specific-IRR Discount rate Question No. 2 Market price of the liability, end of the period Less: Carrying amount of FVTPL Increase (or decrease) in FVTPL Less: Unrealized loss (or gain) in the OCI Unrealized loss (or gain) in the P&L Present value market rate of 8% Present value of Principal (2,000,000 X 0.6806 ) Add: Present value of interest payments (2,000,000 x 10% x 3.9927) Market price of the liability, end of the period Present value using 9% Present value of Principal (2,000,000 X 0.6499 ) Add: Present value of interest payments (2,000,000 x 10% x 3.8897 ) Fair value of liability using the sum observed interest rate and instrument specific IRR

18

2,159,740 2,077,740 82,000 10% 7% 3% 6.00% 3% 9.00%

2,159,740 2,000,000 159,740 82,000 77,740 1,361,200 798,540 2,159,740 1,299,800 777,940 2,077,740


Journal entry end of the period is: Unrealized loss-OCI Unrealized loss-P&L Financial liability at FVTPL (Increase in FV of the liability)

82,000 77,740 159,740

SUMMARY OF ANSWERS: 1. B 2. C PROBLEM 26-3 Derecognition of Held for Trading Debt Securities Retirement Price Less: Carrying value Loss on sale (D)

3,120,000 3,090,000 30,000

PROBLEM 26-4 Financial Liabilities at Amortized Cost-Term Bonds Question No. 1 Present value of Principal (1,200,000 X 0.7513 ) Add: PV of interest payments (96,000 X 2.4869 ) Present value of the investment bonds Question No. 2 Amortization Table Interest Date payment 01/01/2015 12/31/2015 96,000 12/31/2016 96,000 12/31/2017 96,000

(C)

Interest expense 114,030 115,833 117,867

901,560 238,742 1,140,302

Premium Amortization (B)

18,030 19,833 21,835

Present value 1,140,302 1,158,333 1,178,166 1,200,000

SUMMARY OF ANSWERS: 1. C 2. B PROBLEM 26-5 Financial Liabilities at Amortized Cost-Serial Bonds Question No. 1

Interest Principal payment 400,000 96,000 400,000 64,000 400,000 32,000 Total PV of the bonds

Total payment 496,000 464,000 432,000

19

Preset value factor 0.9091 0.8264 0.7513 (A)

Total PV 450,914 383,450 324,562 P1,158,925


Question No. 2 Date 01/01/2015 12/31/2015 12/31/2016 12/31/2017

Interest Payment

Interest Expense


Principal

96,000 64,000 32,000

115,892 77,882 39,301

19,892 13,882 7,301

400,000 400,000 400,000

Present value 1,158,925 778,817 392,699 -

SUMMARY OF ANSWERS: 1. A 2. A PROBLEM 26-6 Financial Liabilities at Amortized Cost-Term Bonds Issue Price (110% x 5,000 x P1,000) Less: Bond issue cost Net cash received from issuance

5,500,000 300,000 P5,200,000

(D)

PROBLEM 26-7 Financial Liabilities at Amortized Cost - Term Bonds with Transaction Costs Issue Price (5,000,000 x 98%) Less: Bond issue cost Present value on January 1, 2015 Add: Discount amortization Nominal interest (5M x 10%) Effective interest (4,760,000 x 12%) Carrying value – 12/31/2015

4,900,000 140,000 4,760,000 500,000 571,200 (D)

71,200 4,831,200

PROBLEM 26-8 Financial Liabilities at Amortized Cost - Term Bonds with Transaction Costs Issue Price (5,000,000 x 110%) Less: Bond issue cost Present value on January 1, 2015 Less: Premium amortization Nominal interest (5M x 8%) Effective interest (5,420,000 x 6%) Carrying value – 12/31/2015

5.500,000 80,000 5,420,000 400,000 325,200 (B)

74,800 5,345,200

PROBLEM 26-9 Bonds payable with warrants Market value of the bonds without the warrants

20

(B)

4,800,000


PROBLEM 26-10 Bonds Payable with Warrants Present value of principal (8M x .61) Add: Present value of interest (8M x 6% x 7.72) Net cash received from issuance – initial carrying amount (B)

4,880,000 3,705,600 P8,585,600

Suggested Answer: B PROBLEM 26-11 Issuance of Convertible Bonds Total Proceeds (5M X 110%) Less: Present value of the bonds without conversion option Present value of Principal (5M x. 77) 3,850,000 Add: Present value of int. payments (5M x 6% x 2.53) 759,000 Residual amount allocated to Equity component (B)

5,500,000

4,609,000 891,000

PROBLEM 26-12 Issuance of Convertible Bonds Carrying amount of the bonds Less: Par value of issued shares (50,000 x P50) Share issue cost Total Add: Share Premium - conversion option Total Share Premium (C)

6,000,000 2,500,000 100,000 3,400,000 1,500,000 4,900,000

PROBLEM 26-13 Issuance of Convertible Bonds Question No. 1 Total Proceeds (P1,000 x 1,000) Less: Fair value of the bonds without conversion privilege Total Share Premium (A) Using 7.48% Present value of Principal (1,000,000 x 0.7 ) Add: Present value of interest payments (50,000 x 4 ) Total present value

1,000,000 900,000 100,000

700,000 200,000 900,000

Question No. 2 See amortization table below. Amortization Table Interest Date Payment 01/01/2015 12/31/2015 50,000

Interest Expense


67,320

17,320

21

Present value 900,000 917,320


SUMMARY OF ANSWERS: 1. A 2. B PROBLEM 26-14 Retirement of Bonds Payable Suggested Answer: A PROBLEM 26-15 Conversion of Convertible Bonds Question No. 1 – Case No. 1 Nil. (A) No gain or loss on conversion of convertible bonds unless the conversion is induced by the company. The journal entry to record the transaction would then be: Bonds payable 1,500,000 Share premium-conversion option 60,000 Premium on bonds payable 52,049 Ordinary shares (20000 X 50 ) 1,000,000 Share Premium 612,049 Question No. 2 - Case No. 2 Fair value of liability Less: Carrying amount of the bonds payable Loss on settlement (conversion) of liability Fair value of liability Less: Total par value of the shares issued Share Premium

(B)

The journal entry to record the transaction would then be: Bonds payable 1,500,000 Loss on settlement of liability 47,951 Premium on bonds payable 52,049 Ordinary shares (20,000 X 50 ) Share Premium

1,600,000 1,552,049 47,951 1,600,000 1,000,000 600,000

1,000,000 600,000

SUMMARY OF ANSWERS: 1. A 2. B PROBLEM 26-16 INDUCED CONVERSION Face amount of debt securities converted Divide by: New conversion price Number of shares issued upon conversion Multiply by: Fair value of shares on the conversion date Fair value of shares converted

1,500,000 20 75,000 30 2,250,000

Face amount of debt securities converted

1,500,000

22


Divide by: Old conversion price Number of shares issued under original conversion Multiply by: Fair value of shares on the conversion date Fair value of shares under original conversion

25 60,000 30 1,800,000

Fair value of shares converted Less: Fair value of shares under original conversion Debt conversion expense or loss on induced conversion (B)

2,250,000 1,800,000 450,000

Journal entry is: Bonds payable Debt conversion expense or loss on induced conversion Premium on bonds payable Ordinary shares (75,000 x 10 ) Share premium

1,500,000 450,000 52,049 750,000 1,252,049

PROBLEM 26-17 Interest-Bearing Note Suggested Answer: C PROBLEM 26-18 Non-Interest Bearing Note Note to the professor: The July 31, 2015 due date should be July 31, 2016 Principal Less: Discount on notes payable (2M x 10.8% x 12/12) Amortization (216,000/12 x 5) Carrying amount of the note payable

2,000,000 216,000 (90,000) (B)

126,000 1,874,000

PROBLEM 26-19 Interest-Bearing Note Suggested Answer: B PROBLEM 26-20 Interest-Bearing Note Suggested Answer: A PROBLEM 26-21 Loans Payable Principal Less: Direct origination fees paid (1.5M x 4%) Initial carrying amount of the loans payable

PROBLEM 26-22 Debt Restructuring

23

(D)

1,500,000 60,000 1,440,000


Suggested Answer: D PROBLEM 26-23 Debt Restructuring Suggested Answer: D PROBLEM 26-24 Debt Restructuring SUMMARY OF ANSWERS: 1. C 2. B PROBLEM 26-25 Debt Restructuring Principal Add: Accrued interest – January 1, 2014 Accrued interest – 2014 Carrying amount of old liability Less: Present value of new liability Present value of principal (P4M x .6209) Present value of interest (P4M x .08 x 3.7908) Gain on extinguishment of liability (E)

P6,000,000 600,000 600,000 7,200,000 2,483,600 1,213,056

3,696,656 3,503,344

Suggested Answer: 3,503,344 (None of the choices given) COMPREHENSIVE PROBLEMS PROBLEM 26-26 Interest-Bearing Note – Lump Sum Question No. 1 Present value of Principal (1,200,000 x 0.7118 ) Add: Present value of interest payments (36,000 x 2.4018 ) Present value of the notes payable (A) Amortization Table: Interest Date Payment 01/01/2015 12/31/2015 36,000 12/31/2016 36,000 12/31/2017 36,000

Interest Expense


112,875 122,100 132,432

76,875 86,100 96,400

Question No. 2 Interest Expense (940,625 x .12) = P112,875 Question No. 3

24

(B)

854,160 86,465 940,625 Present value 940,625 1,017,500 1,103,600 1,200,000


P1,017,500. See amortization table above.

(A)

Question No. 4 Nil. (A) The entire note payable is noncurrent liability. Question No. 5 Note to the professor: The requirement should be noncurrent portion of the note on December 31, 2016. The noncurrent portion as of December 31, 2016 is P1,103,600. See amortization table above. (D) SUMMARY OF ANSWERS: 1. A 2. B 3. A 4.

A

5.

D

PROBLEM 26-27 interest-bearing note – non-uniform installments Note to the professor: The principal should be P2,000,000 not P1,200,000. The interest is payable every December 31 while the principal shall be payable as follows: December 31, 2015 December 31, 2016 December 31, 2017

1,200,000 400,000 400,000

SOLUTION: Question No. 1 Interest Principal payment 1,200,000 60,000 400,000 24,000 400,000 12,000 Total PV of notes payable Amortization Table Date Date 01/01/2015 12/31/2015 60,000 12/31/2016 24,000 12/31/2017 12,000

Total payment 1,260,000 424,000 412,000

Preset value factor 0.8929 0.7972 0.7118 (E)

Interest Payment

Interest Expense

Principal Payment

210,759 84,851 44,079

150,759 60,851 32,062

1,200,000 400,000 400,000

Question No. 2 Interest expense (1,756,328 x .12)

Present Value 1,125,054 338,013 293,262 1,756,328

Present Value 1,756,328 707,088 367,938 -

P210,759

Question No. 3

25

(E)


Carrying amount – December 31, 2015

P707,088

Question No. 4 Principal (payable Dec. 31, 2016 Less: Discount on notes payable Carrying amount-current liability Question No. 5 Principal (payable Dec. 31, 2016 Less: Discount on notes payable Carrying amount-noncurrent liability

(E)

P400,000 60,851 P339,149

(E)

P400,000 32,062 P367,938

(E)

SUMMARY OF ANSWERS BASED ON REVISED CHOICES: 1. D 2. D 3. C 4. C 5. C PROBLEM 26-28 Interest-Bearing Note –Uniform Installments Question No. 1 Interest Principal payment 400,000 36,000 400,000 24,000 400,000 12,000 Total PV of notes payable Amortization Table Interest Date Payment 01/01/2015 12/31/2015 36,000 12/31/2016 24,000 12/31/2017 12,000

Total payment 436,000 424,000 412,000

Preset value factor 0.8929 0.7972 0.7118 (A)

Present Value 389,304 338,013 293,262 1,020,579

Interest Expense

Amortization

Principal Payment

122,469 84,846 44,106

86,469 60,846 32,106

400,000 400,000 400,000

Present Value 1,020,579 707,048 367,894 -

Question No. 2 Interest expense (1,020,579 x .12)

P122,469

(B)

Question No. 3 Carrying amount – December 31, 2015

707,048

(A)

Question No. 4 Principal (payable Dec. 31, 2016 Less: Discount on notes payable Carrying amount-current liability

(B)

Question No. 5

26

P400,000 60,846 P339,154


Principal (payable Dec. 31, 2016 Less: Discount on notes payable Carrying amount-noncurrent liability SUMMARY OF ANSWERS: 1. A 2. B 3. A 4.

B

5.

(A)

P400,000 32,106 P367,894

A

PROBLEM 26-29 Noninterest-Bearing Note – With Cash Price Equivalent Question No. 1 The carrying amount of the note on initial recognition is equal to its cash price equivalent of P994,760. (C) Coincidentally, the effective rate using the cash price equivalent is 12% and the amortization table is as follows: Amortization Table at 12% Principal Date payment 01/01/2015 12/31/2015 400,000 12/31/2016 400,000 12/31/2017 400,000

Interest expense

Amortization

99,476 69,424 36,340

300,524 330,576 363,660

Present value 994,760 694,236 363,660 -

Question No. 2 Interest expense (994,760x .12)

P99,476

(A)


P694,236

(A)

Question No. 4 Principal (payable Dec. 31, 2016 Less: Discount on notes payable Carrying amount-current liability Question No. 5 Principal (payable Dec. 31, 2016 Less: Discount on notes payable Carrying amount-noncurrent liability SUMMARY OF ANSWERS: 1. C 2. A 3. A 4.

B

5.

(B)

P400,000 69,424 P330,576

(C)

P400,000 36,340 P363,660

C

27


PROBLEM 26-30 Noninterest-Bearing Note – Lump Sum Question No. 1 Present value of Principal (1,200,000 x 0.7118 ) Amortization Table Date Interest expense 01/01/2015 12/31/2015 102,499 12/31/2016 114,799 12/31/2017 128,542

(B)

854,160

Present value 854,160 956,659 1,071,458 1,200,000

Question No. 2 Interest expense (854,160 x .12)

P102,499

(B)


P956,659

(A)

Question No. 4 Nil. The entire note payable is noncurrent liability since it is due beyond 12 months from the reporting date. (B) Question No. 5 The total entire carrying amount of note payable is presented as noncurrent liability. See Question No. 4. (A) SUMMARY OF ANSWERS: 1. B 2. B 3. A 4.

B

5.

A

PROBLEM 26-31 Noninterest-Bearing Note – Installments Question No. 1 Present value of Principal (400,000 X 2.4018 ) Amortization Table Date Interest Payment 01/01/2015 12/31/2015 400,000 12/31/2016 400,000 12/31/2017 400,000

(D)

Interest expense

Amortization

115,286 81,121 42,873

284,714 318,879 357,127

Question No. 2 P115,286. See amortization table above.

28

960,720

Present value 960,720 676,006 357,127 (A)



(A)

Question No. 4 Principal (payable Dec. 31, 2016 Less: Discount on notes payable Carrying amount-current liability Question No. 5 Principal (payable Dec. 31, 2016 Less: Discount on notes payable Carrying amount-noncurrent liability SUMMARY OF ANSWERS: 1. D 2. A 3. A 4.

B

5.

(B)

P400,000 81,121 P318,879

(C)

P400,000 42,873 P357,127

C

PROBLEM 26-32 Issuance, Retirement and Conversion of Non-Convertible Bonds Question No. 1 Present value of Principal (10,000,000 x 0.5674 ) Add: Present value of interest payments (10,000,000 x 10% x 3.6048 ) Present value of the bonds payable (D) Amortization Table Date Interest payment 01/01/2013 12/31/2013 1,000,000 12/31/2014 1,000,000

Interest expense


1,113,456 1,127,071

113,456 127,071

Question No. 2 Retirement Price Less: Carrying amount (9,519,327 x 1/2) Loss on retirement Question No. 3 Amortization table: Interest Date payment 12/31/2014 12/31/2015 500,000

(C)

5,674,000 3,604,800 9,278,800

Present value 9,278,800 9,392,256 9,519,327 P5,200,000 4,759,664 P440,336

(C) Interest expense

Amortization

571,160

(71,160)

29

Present value 4,759,663 4,830,823


Question No. 4 Fair value of the ordinary shares issued (50 x 50,000) Less: Carrying amount of the liability (4,830,823 x 250/500) Loss on conversion (D)

P2,500,000 2,415,412 P84,588

Question No. 5 Fair value of the ordinary shares issued (50 x 50,000) Less: Total par value of the shares issued (40 x 50,000) Share Premium (B)

P2,500,000 2,000,000 P500,000

SUMMARY OF ANSWERS: 1. D 2. C 3. C 4.

D

5.

B

PROBLEM 26-33 Issuance, Retirement and Conversion of Convertible Bonds Question No. 1 Total Proceeds Less: Present value of the bonds without the conversion option Present value of Principal (5,000,000 x 0.5674 ) Present value of interest payments (500,000 x 3.6048 ) Residual amount to equity Amortization Table Date Interest payment 01/01/2014 12/31/2015 500,000 12/31/2016 500,000

P5,000,000 2,837,000 1,802,400 (C)

Interest expense


556,728 563,535

56,728 63,535

Question No. 2 Fair value of liability using current rate Less: Carrying amount (4,759,663 x ½) Loss on settlement of liability

(C)

4,639,400 P360,600

Present value 4,639,400 4,696,128 4,759,663 2,438,925 2,379,832 59,093

Present value using 11% for 3 periods Present value of Principal (2500000 x 0.7312 ) Add: Present value of interest payments (250000 x 2.4437 ) Present value of the bonds payable

1,828,000 610,925 2,438,925

Question No. 3 Retirement Price Less: Fair value of liability using current rate Decrease in equity

2,600,000 2,438,925 161,075

30

(C)


Question No. 4 Interest expense is P556,728 based on the amortization table above. Question No. 5 Shares to be issued based on amended terms (2.5M/420) Less: Shares to be issued based on amended terms (2.5M/450) Incremental shares Multiply by: Fair value Debt settlement expense (C)

(E) P5,952 5,556 397 440 P174,680

(P174,680 or P174,240) SUMMARY OF ANSWERS: 1. C 2. C 3. C 4.

E

5.

C

PROBLEM 26-34 Redeemable Preference Shares and Debentures Present value of the redeemable preference shares Present value of Principal (15000 x 1.05 x 0.72161 ) Add: Present value of interest payments (1500 x 2.42308 ) Present value of the preference shares Amortization table: Date Interest Payment 01/01/2015 12/31/2015 1,500 12/31/2016 1,500 12/31/2017 1,500

Interest Expense

Amortization

1,723 1,749 1,778

223 249 246

11,365 3,635 15,000

Present value 15,000 15,223 15,472 15,718


(B)


(C)


(D)

Present value of the debentures Present value of Principal (20,000 x 1.02 x 0.53884 ) Add: Present value of interest payments (2400 x 3.5032 ) Present value of bonds payable

31

10,992 8,408 19,400


Amortization Table Date Interest Payment 12/31/2017 12/31/2018 2,400

Interest Expense

Amortization

2,554

(154)

Present value 19,400 19,554


(B)


(B)

SUMMARY OF ANSWERS: 1. B 2. C 3. D 4.

B

5.

B

PROBLEM 26-35 Question No. 1 Accounts payable, unadjusted Good in transit FOB shipping point Undelivered check Accounts payable, adjusted

(D)

P1,350,000 75,000 60,000 P1,485,000

Question No. 2 14% Note payable (1,250,000 x 14%) 16% Note payable (3,000,000 x 16%) 10% Note payable (2,000,000 x 10% x 6/12) Interest expense (D)

P175,000 480,000 100,000 P755,000

Question No. 3 14% Note payable (1,250,000 x 14% x 3/12) 16% Note payable (3,000,000 x 16% x 9/12) 10% Note payable (2,000,000 x 10% x 6/12) Interest expense (C)

P43,750 360,000 100,000 P503,750

Question Nos. 4 and 5 Current 1,485,000 1,250,000

Accounts payable 14% Note payable 16% Note payable 10% Note payable Accrued interest payable Total

Noncurrent 3,000,000 2,000,000

503,750 P3,238,750 (C)

32

P5,000,000 (C)


SUMMARY OF ANSWERS: 1. D 2. D 3. C 4.

C

5.

C

PROBLEM 26-36 (Comprehensive) Note to professor: The bonds will mature on July 1, 2022 instead of 2015. Question No. 1 Present value of Principal (10,000,000 X 0.3118 ) Add: Present value of interest payments (500,000 X 11.46992 ) Present value of the bonds payable (A) Question No. 2 April 1, 2014 July 1, 2014 October 1, 2014 January 1, 2015 Notes payable-current liability

3,118,000 5,734,960 8,852,960

P 400,000 600,000 300,000 300,000 P1,600,000

(B)

Question Nos. 3 and 4 Estimated liability from Warranties Disbursement for warranties Balance end (A)

358,000 342,000

Total

180,000

Beginning balance

520,000

Warranty expense (C)

700,000

Question No. 5 (a)

A B C Total

Fixed salary 10,000 14,000 18,000

(b)

( c)

Net Sales 200,000 400,000 600,000

Comm. Rate 4% 6% 6%

d=b x c Comm. Expense 8,000 24,000 36,000 (C)

E=d-a Accrued Salaries Payable 0 10,000 18,000 P28,000

Question Nos. 6 and 7 Int. payable - Bonds (10M x 10% x 3/12) Int. payable - Note payable Notes payable Estimated warranties payable Trade payable Sales commissions payable

33

Current 250,000 600,000 1,600,000 342,000 740,000 28,000

Noncurrent 5,400,000*


Cash dividends payable (6M x P.2) Bonds payable Total

1,200,000 P4,760,000 (B)

8,970,751 P14,370,751** (C)

*(P7M-1.6M) ** or P14,370,783 which is the same as P8,952,185 x 100% +(Effective rate x months outstanding/12) minus payment Or [(P8,952,185 x 103%) - P250,000] Amortization Table Interest Date Payment 07/01/2012 01/01/2013 500,000 07/01/2013 500,000 01/01/2014 500,000 03/31/2014 250,000 (8,952,185 x 12% x 3/12) SUMMARY OF ANSWERS: 1. A 2. B 3. A 4.

C

Interest Expense

Amortization

531,178 533,048 535,031 268,566

31,178 33,048 34,999 18,566

5.

C

34

6

B

7

Present value 8,852,960 8,884,138 8,917,186 8,952,185 8,970,751

C

Chapter 27 – Lease

CHAPTER 27: LEASE Note to professor: Page 1015

SOLUTION: #6 Contingent rent: First P3,000,000 at 6% In excess of P3,000,000 at 5% Total Rental Expense – 2015

P 180,000 100,000

280,000 P 520,000

Change to: Contingent rent: First P1,500,000 to P3,000,000 at 6% P 90,000 In excess of P3,000,000 at 5% 100,000 190,000 Total Rental Expense – 2015 P 430,000 1017

Unguaranteed residual value: Lessee's point of view Guaranteed by a party other than the lessee or party related to the lessee Kindly change related to unrelated.

1030

Requirement No. 3 Lease receivable Less: Unearned interest income Present value of lease receivable

Current Asset 467,273 183,927 283,345

Noncurrent Asset 1,601,819 352,436 1,249,382

Kindly disregard this table. 1037

Journal entry No. 7 Expiration under Unguaranteed Residual Value Add: Expiration under Unguaranteed Residual Value: Fair value is less than the residual value

1040

2. To record the leaseback Equipment Cash

xx xx

Change Cash to Lease Liability 1043

Solution: Requirement No. 1 Gain on sale and leaseback= P80,000 Change P80,000 to P100,000

Page 1024 CASE NO. 2 Requirement No. 1 Amount to be capitalized as machinery Since the present value of minimum lease payments of P529,335 is higher than leased asset’s fair value of P515,000, the assets will be capitalized at P515,000. In addition, there is a need to compute for the new implicit rate using interpolation.

35


Recall the very basic principle in computing for present value that a lower rate will give higher present value. The previous implicit rate of 12% yielded a present value of P529,340 which is higher than P515,000. With that, the P515,000 fair value will mean higher effective rate. Applying trial and error, let us try 15%. Present value is as follows: Present value of periodic rent payment (P150,000 x 3.2832) Add: Present value of GRV (P30,000 x .5718) Total present value of minimum lease payment We can analyze the computation as follows: Gap Effective rate Present value differences 12% P 529,335 P 14,335 X? P 515,000 P 5,366 15% 509,634 Total gap difference P 19,701

492,480 17,154 509,634 Gap percentage 3%

Computation using the lower rate as a starting point: X

=

Lower rate + [(HR - LR)

X

=

12% + [(15% - 12%)

X

=

14.183%

x x

PV of LR - PV of X PV of LR - PV of HR 14,335 19,701

]

Computation using the higher rate as a starting point: PV of X - PV of HR X = Higher rate - [(HR - LR) x PV of LR - PV of HR X

=

15% - [(15% - 12%)

X

=

14.183%

x

5,366 19,701

]

Alternative computation: Using ratio and proportion, the computation is as follows: 12% - X = 529,340 - 515,000 12% - 15% 529,340 - 509,636 We can simplify the equation by isolating X 12% - X = (12%-15%) x (14,335/19,701) 12% - X = (-3%) x (14,335/19,701) 12% + (3% x (14,335/19,701)) = X .12 + (.021829) = X .14183 = X

36

]

]


Page 1031

Gross Investment or lease receivable = Total amount lessor receives = MLPs + URV PV of MLPs + PV of URV = PV of net investment Fair market value = Sales price = PV of MLPs = Sales Net cost = Cost of goods sold minus Present value of URV 0

Unearned interest revenue to be recognized as revenue using the effective interest method

Gross (dealer's) profit - recognize immediately (move bracket downwards)

PROBLEM 27-1 Unequal rental payments 2013 2014 2015 2016 Total rent Divide by: Number of years Rent expense per year

20,000 18,000 16,000 14,000 68,000 4 17,000

(C)

PROBLEM 27-2 Operating Lease - Unequal rental payments 07/01/2013 to 06/30/2014 07/01/2014 to 06/30/2015 07/01/2015 to 06/30/2016 Total divide by Rent income per year

60,000 90,000 210,000 360,000 3 120,000

Rent income to date (120,000 x 2) Less: Collection to date (60,000 + 90,000) Rent receivable (A)

240,000 150,000 90,000

37


PROBLEM 27-3 Operating Lease - Comprehensive Question No. 1 Periodic rent-one year

CASE NO. 1 (B)

360,000

CASE NO. 2 Question No. 2 Periodic rent-one year Amortization of lease bonus (200,000 / 4 ) Rent expense (C)

360,000 50,000 410,000

CASE NO. 3 Question No. 3 Total lease payments [4 X (12 – 7) X 30,000] Divide by: Lease term Rent expense per year (D)

1,230,000 4 307,500

Question No. 4 Total payments to date, 2015 (2 x (12 – 7) X 30,000 ) Less: Total expense to date, 2015 (307500 X 2 ) Accrued rent payable (B)

510,000 615,000 (105,000)

CASE NO. 4 Question No. 5 Total lease payments (25000 X 2 X 12 ) (30000 X 2 X 12 ) Divide by: Lease term Rent expense per year

600,000 720,000 (A)

Question No. 6 Total payments to date, 2015 Less: Total expense to date, 2015 (330,000 X 2 ) Accrued rent payable (C) CASE NO. 5 Question No. 7 Rent Revenue Less: Amortization of Direct Cost (60,000 / 4 ) Insurance and property tax expense on leased asset Depreciation of the leased asset Net income (A)

38

1,320,000 4 330,000

600,000 660,000 (60,000)

360,000 15,000 30,000 30,000 285,000


CASE NO. 6 Question No. 8 Period rent for one year Add: Contingent rent 1st [(3,000,000 – 1,000,000) x 8%] 160,000 2nd [(6,000,000 – 3,000,000) x 5%] 150,000 Total rent expense (A) SUMMARY OF ANSWERS: 1. B 2. C 3. D 6. C 7. A 8. A

4.

B

5.

360,000 310,000 670,000

A

PROBLEM 27-4 Finance Lease - Lease Liability The capitalized lease liability should be the annual lease payments less the executory cost (real estate taxes) times the present value factor for an ordinary annuity of 1 for nine years at 9%. The calculation would be: (P26,000 - 1,000) × 6.0 = P150,000. The real estate taxes are a period cost and should be charged to expense. Answer: A PROBLEM 27-5 (FINANCE LEASE WITH BARGAIN PURCHASE OPTION) Question No. 1 (A) Present value of periodic payment (100,000 x 4.1699) Add: Present value of bargain purchase option (30,000 x 0.6209) Present value of minimum lease payments Amortization Table Annual Date payment 12/31/2015 12/31/2015 100,000 12/31/2016 100,000 12/31/2017 100,000 12/31/2018 100,000 12/31/2019 100,000 12/31/2019 30,000

Interest expense

Amortization

33,562 26,918 19,610 11,571 2,723

100,000 66,438 73,082 80,390 88,429 27,277

Question No. 2 (B) P33,562. See amortization table above. Question No. 3 (C) P66,438. See amortization table above.

39

416,990 18,627 435,617

Present value 435,617 335,617 269,179 196,097 115,706 27,277 (0)


Question No. 4 (B) P269,179. See amortization table above. SUMMARY OF ANSWERS: 1. A 2. B 3. C

4.

B

PROBLEM 27-6 With Guaranteed Residual Value And Initial Direct Cost Note to the professor: The date for question Numbers 3 and 4 should be December 31, 2015 and not December 31, 2016. CASE NO. 1 Question No. 1 Present value of periodic payment (120,000 x 3.4869) Add: Present value of guaranteed residual value (30,000 x 0.683) Present value of minimum lease payments Add: Initial direct cost Cost of the Machinery (C) Amortization Table Annual Date payment 12/31/2015 12/31/2015 120,000 12/31/2016 120,000 12/31/2017 120,000 12/31/2018 120,000 12/31/2019 30,000

Interest expense

Amortization

31,892 23,081 13,389 2,720

120,000 88,108 96,919 106,611 27,280

418,428 20,490 438,918 20,000 458,918

Present value 438,918 318,918 230,810 133,891 27,280 -

Question No. 2 (B) P31,892. See amortization table above. Question No. 3 (C) P88,108. See amortization table above. Question No. 4 (B) P230,810. See amortization table above. CASE NO. 2 Question No. 5 Present value of periodic payment (120,000 x 3.4226) Add: Present value of guaranteed residual value (30,000 x 0.647) Present value of minimum lease payments = Fair value Add: Initial direct cost Cost of the Machinery (D)

40

410,712 19,410 430,122 20,000 450,122


Amortization Table: Effective rate = 11.50% Annual Interest Date payment expense Amortization 12/31/2015 12/31/2015 120,000 120,000 12/31/2016 120,000 35,664 84,336 12/31/2017 120,000 25,965 94,035 12/31/2018 120,000 15,151 104,849 12/31/2019 30,000 3,097 26,903

Present value 430,122 310,122 225,786 131,751 26,903 (0)

Question No. 6 (D) P35,664. See amortization table above. Question No. 7 (A) P84,336. See amortization table above. Question No. 8 (D) P225,786. See amortization table above. SUMMARY OF ANSWERS: 1. C 2. B 3. C

4.

B

5.

D

6.

D

7.

A

8.

D

PROBLEM 27-7 Finance Lease - Depreciation Question No. 1 Cost of the lease asset Less: Estimated residual value end of the useful life of the asset Depreciable cost Divide by: Useful life Depreciation (A)

438,918 50,000 388,918 10 38,892

Question No. 2 Cost of the lease asset Less: Gross amount of guaranteed residual value Depreciable amount Divide by: Lease term Depreciation (B)

438,918 30,000 408,918 4 102,230

PROBLEM 27-8 Computation of Periodic Lease Payments Fair value Less: Present Value of Guaranteed Residual Value Total Divide by: Present value of Annuity Due Periodic lease payments (B)

41

4,000,000 1,024,500 2,975,500 3.4869 853,337


PROBLEM 27-9 Direct Financing Lease - Lessor Question No. 1 Gross Investment: Total Periodic Lease Payment (914,585 x 5) Add Unguaranteed Residual value (URV) Less: Cost of the equipment Unearned interest income (A)

*4,572,927 300,000

4,872,927 4,000,000 872,927

*4,573,927 OR 4,573,925 Amortization Table Annual Date Collection 12/31/2015 12/31/2015 914,585 12/31/2016 914,585 12/31/2017 914,585 12/31/2018 914,585 12/31/2019 914,585 12/31/2020 300,000

Interest Income

Amortization

308,541 247,937 181,272 107,941 27,235

914,585 606,044 666,648 733,313 806,645 272,765

Present value 4,000,000 3,085,415 2,479,370 1,812,722 1,079,409 272,764 (0)

Question No. 2 (A) P308,541. See amortization table above. Question No. 3 (B) P606,044. See amortization table above. PROBLEM 27-10 Direct Financing Lease - With Initial Direct Cost Question No. 1 Gross Investment: Total Periodic Lease Payment (959,256 X 5) Add Unguaranteed Residual value (URV) Less: Cost of the equipment Unearned interest income (A)

*4,796,278 -

4,796,278 4,066,956 729,322

*4,796,278 OR *4,796,280 Amortization Table Annual Date Collection 12/31/2015 12/31/2015 959,256 12/31/2016 959,256 12/31/2017 959,256 12/31/2018 959,256 12/31/2019 959,256

Interest Income

Amortization

304,074 238,556 166,486 87,160

959,256 655,181 720,699 792,769 872,095

42

Present value 4,000,000 3,040,744 2,385,563 1,664,864 872,095 (0)


Question No. 2 (A) P304,074. See amortization table above. Question No. 3 (B) P655,181 See amortization table above. PROBLEM 27-11 Direct Financing Lease - Sale Of Leased Asset CASE NO. 1 Question No. 1 Gross Investment: Total periodic lease payments (6M X 5) Add: Residual Value Present value of the leased asset Present value of minimum lease payments (600,000 x 3.6048) Add: Present value of residual value (100,000 x .5674) Unearned interest income (A) Amortization Table Annual Date Collection 01/01/2015 12/31/2015 600,000 12/31/2016 600,000 12/31/2017 600,000 12/31/2018 600,000 12/31/2019 700,000

Interest Income

(B)

Question No. 4 Nil.

(A)

The journal entry is: Inventory Cash Lease receivable

2,219,620 2,000,000 40,000 179,620

90,000 10,000

43

56,740

333,646 373,683 418,525 468,767 624,999


100,000

3,100,000

2,162,880

Amortization

266,354 226,317 181,475 131,233 75,001

Question No. 3: Guaranteed Sales Less: Cost of goods sold Initial direct cost Dealer's profit

3,000,000 100,000

2,219,620 880,380

Present value 2,219,620 1,885,974 1,512,291 1,093,766 624,999 0


SUMMARY OF ANSWERS: 1. A 2. A 3. B

4.

A

CASE NO. 2 Question No. 1 Gross Investment: Total periodic lease payments (6M X 5) Add: Residual Value Present value of the leased asset Present value of minimum lease payments (600,000 x 3.6048) Add: Present value of residual value (100,000 x .5674) Unearned interest income (A) Question No. 2 Amortization Table Annual Date Collection 01/01/2015 12/31/2015 600,000 12/31/2016 600,000 12/31/2017 600,000 12/31/2018 600,000 12/31/2019 700,000

3,100,000

2,162,880 56,740

2,219,620 880,380

(A) Interest Income

Amortization

266,354 226,317 181,475 131,233 75,001

Question No. 3: Unguaranteed Sales Less: Net cost Cost of goods sold Less: Present value of URV Initial direct cost Dealer's profit (B) Question No. 4 P10,000.

333,646 373,683 418,525 468,767 624,999

2,000,000 56,740

90,000 10,000

4.

Present value 2,219,620 1,885,974 1,512,291 1,093,766 624,999 0

2,162,880

(B)

The journal entry is: Inventory Loss on sales type Lease receivable SUMMARY OF ANSWERS: 1. A 2. A 3. B

3,000,000 100,000

B

44

100,000

1,943,260 40,000 179,620


PROBLEM 27-12 Sales-Type Lease Net Selling Price Less: Present value of lease receivable Loss on sale (D)

200,000 227,436 (27,436)

PROBLEM 27-13 Sale and Leaseback as Finance Lease Sales Price Less: Carrying amount Deferred gain on sale

2,162,880 1,900,000 262,880

Answer A. Answer is zero, the gain on sale is to be deferred and amortize over the lease term PROBLEM 27-14 Sale and Leaseback as Operating Lease - Treatment of Gain Question No. 1 (B) Sales Price = Fair value Less: Carrying amount Gain on sale - recognize immediately

1,400,000 1,000,000 400,000

Question No. 2 (B) Sales price Less: Carrying amount Gain on sale - recognize immediately

1,400,000 1,000,000 400,000

Question No. 3 Sales price Less: Fair value Deferred Gain

1,400,000 1,100,000 300,000

Fair value Less: Carrying amount Outright gain

1,100,000 1,000,000 100,000

(D)

PROBLEM 27-15 Sale and Leaseback as Operating Lease - Treatment of Loss Question No. 1 (B) Sales Price = Fair value Less: Carrying amount Loss on sale - recognized immediately

900,000 1,000,000 (100,000)

45


Question No. 2 (B) Sales price Less: Carrying amount Loss on sale - recognized immediately

900,000 1,000,000 (100,000)

Question No. 3 (A) Nil. The entire loss is deferred since it will be compensated by below-market future rentals. COMPREHENSIVE PROBLEMS PROBLEM 27-16

CASE NO. 1 Question No. 1 (A) “Substantially all” test Present value of Periodic Payment (200,000 x 6.75902) % age

1,351,805 2,000,000

1,351,805

=68%

Not substantially all. Major part test % age

10 20

=50%

The lease term does not amount to major part of the economic life of the asset. Answer: Nil. The lease do not classify as finance lease. Question No. 2 Rent expense

(B)

Question No. 3 Nil.

(A)

Question No. 4 Nil.

(A)

P200,000

Question No. 5 (D) Depreciation expense overstated, net income understated Interest expense overstated, net income understated Rent expense understated, net income overstated Net income understated SUMMARY OF ANSWERS – CASE NO. 1: 1. A 2. B 3. A 4. A 5.

46

D

(115,181) (135,181) 200,000 (50,362)


Question No. 1 “Substantially all” test % age 1,351,805 =90% 1,500,000

CASE NO. 2 (B)

The lease is a finance lease. The cost of the leased asset is lower between the fair value and the present value of minimum lease payment which is P1,351,805. Amortization Table Annual Date Payment 12/31/2014 12/31/2014 200,000 12/31/2015 200,000 12/31/2016 200,000 12/31/2017 200,000

Interest Expense

Amortization

115,181 106,699 97,368

200,000 84,819 93,301 102,632

Question No. 2 (D) Depreciation expense (1,351,805/10) Interest expense Total lease- related expenses

Present value 1,351,805 1,151,805 1,066,986 973,684 871,052

135,181 115,181 250,362

Question No. 3 (C) P93,301. See amortization table above. Question No. 4 (B) P1,066,986. See amortization table above. Question No. 5 (A) Nil. The company did not commit any error. SUMMARY OF ANSWERS – CASE NO. 2: 1. B 2. D 3. C 4. B 5.

A

PROBLEM 27-17 Question No. 1 (B) Lease is a finance lease thus any gain should be deferred and amortize over the lease term. Selling Price Less: Carrying amount Deferred gain on sale and leaseback Less: Amortization in 2014 (29,695/10) Deferred gain on sale and leaseback, end

47

379,695 350,000 29,695 2,970 26,725


Question No. 2 (D) Interest expense Depreciation expense (379,695/10) Rent expense (5,000 x 12) Total lease related expenses Amortization Table Annual Date Payment 01/02/2015 01/02/2015 60,000 01/02/2016 60,000

38,363 37,970 60,000 136,333

Interest Expense

Amortization

38,363

60,000 21,637

Question No. 3 (C) Sale and leaseback as finance lease Lease liability, 01/02/2015 Add: Accrued interest Total lease-related liability

Present value 379,695 319,695 298,058

319,695 38,363 358,058

Question No. 4 (B) Amortization of deferred gain on sale and leaseback (see No. 1) Add: Gain on sale and leaseback as operating lease (P400,000P350,000) Total gain on sale and leaseback

2,970 50,000 52,970

Question No. 5 (B) The deferred gain on sale and leaseback should be recognized immediately. SUMMARY OF ANSWERS – CASE NO. 2: 1. B 2. D 3. C 4. B 5.

B

PROBLEM 27-18 Question No. 1 (C) Present value of Periodic Payment (50,000 x 4.0373) - LOWER Fair Value of the leased asset

201,865 P213,213

PAR. 20 OF PAS 17 States that: At the commencement of the lease term, lessees shall recognise finance leases as assets and liabilities in their balance sheets at amounts equal to the fair value of the leased property or, if lower, the present value of the minimum lease payments, each determined at the inception of the lease. The discount rate to be used in calculating the present value of the minimum lease payments is the interest rate implicit in the lease, if this is practicable to determine; if not, the lessee’s incremental borrowing rate shall be used. Any initial direct costs of the lessee are added to the amount recognized as an asset.

48


QUESTION NOS. 2-4 Amortization Table Annual Date Payment 12/31/2014 12/31/2014 50,000 12/31/2015 50,000 12/31/2016 50,000 12/31/2017 50,000 12/31/2018 50,000

Interest Expense

Amortization

18,224 14,411 10,140 5,361

50,000 31,776 35,589 39,860 44,639

Present value 201,865 151,865 120,089 84,499 44,639 0

Question No. 2 (D) P120,089. See amortization table above. Question No. 3 (C) P35,589. See amortization table above. Question No. 4 (C) P18,224. See amortization table above. Question No. 5 (A) Depreciation expense (201,865/5) SUMMARY OF ANSWERS: 1. C 2. D 3. C

4.

C

P40,373 5.

A

PROBLEM 27-19 Question No. 1 Annual lease payments

(A) = =

Annual lease payments

=

Fair market value – Present value of Unguaranteed Residual Value Annuity due 286,420 - (.5066 X 20,000) 4.6048 60,000

Question No. 2 (C) Total minimum lease payments(60,000 x 6) Add: Unguaranteed residual value Total lease receivable Less: Fair market value of the leased asset Total Financial revenue

49

360,000 20,000 380,000 286,420 93,580


Question No. 3 Amortization Table Annual Date Collection 01/01/2015 01/01/2015 60,000 12/31/2015 60,000

(A) Interest Income

Amortization

27,170

60,000 32,830

Present value 286,420 226,420 193,590

Question No. 4 (C) Present value of periodic lease payments (60,000 x 4.6048) Amortization Table Annual Date Collection 01/01/2015 01/01/2015 60,000 12/31/2015 60,000

Interest Income

Amortization

25,955

60,000 34,045

Depreciation expense (276,288/6) Add: Interest expense Total expenses

P 276,288 Present value 276,288 216,288 182,243

46,048 25,955 72,003

Question No. 5 (C) P182,243. See amortization table in No. 4. SUMMARY OF ANSWERS: 1. A 2. C 3. A

4.

C

5.

C

PROBLEM 27-20 Question No. 1 (B) Periodic rent (12,000 x 12) Amortization of lease bonus (300,000/6) Rent expense Question No. 2 (C) Periodic rent Contingent rent: 1st (4M x 4%) 160,000 2nd (6M-4M) x 5%) 100,000 Amortization of lease bonus (500,000/5) Total rent expense Question No. 3 Rent expense

=

(B) [(3 x 12)-6] x 10,000 3

50

144,000 50,000 194,000

480,000 260,000 100,000 840,000


Rent expense

=

100,000

Question No. 4 (B) Lease No. 1 (Rent expense overstated, asset understated) (P444,000-P194,000) Lease No. 2 (Rent expense overstated, asset understated) Asset understated Rent expense per year-Lease 3 Less: Payment (10,000 x 6 months) Accrued rent payable under, Liability understated

100,000 60,000 (40,000)

Question No. 5 (C) Lease no. 1 (Rent expense overstated, net income understated) Lease No. 2 (Rent expense overstated, net income understated) Lease No. 3 (Rent expense understated, net income overstated) (100,000-60,000) Net income understated SUMMARY OF ANSWERS: 1. B 2. C 3. B

4.

B

5.

(250,000) (400,000) (650,000)

(250,000) (400,000) 40,000 (610,000)

C

PROBLEM 27-21 Question No. 1 (B) The present value of annuity due of 12% for 10 periods can be computed as: [1 – (1+12%)-9] + 1 = 6.33 12% Annual rentals Executory costs Minimum lease payment Multiply by: Present value of annuity due Present value of minimum lease payments

P1,440,000 (49,410) P1,390,590 6.33 P8,802,438

Fair value of the property P8,800,000 (The difference is immaterial, implicit rate is 12% at P8.8M) Question No. 2 (D) [12/31/2014 balance x (1+Effective rate)] – annual payments = 12/31/15 balance [(P8,800,000 – P1,390,590) x 1.12%] - P1,390,590 = P6,907,949 The current portion as of 12/31/2015 can be computed as: (P6,907,949 - P1,390,590) x 12% = P561,636

51


Question No. 3 (B) 12/31/2015 balance – current portion(no.2) = Non-current portion = P6,907,949 - P561,636 = P6,346,313 Question No. 4 P8,800,000/10 = P880,000

(A)

Question No. 5 (A) Depreciation expense Interest expense (P8,800,000 – P1,390,590) x 12 Executory costs Total lease-related expenses SUMMARY OF ANSWERS: 1. B 2. D 3. B

4.

B

5.

P 880,000 889,129 49,410 P1,818,539

A

PROBLEM 27-22 Note to professor:

The fair value of the building on June 30, 2015 is P2,380,000. Mallig has the option to purchase the machine on June 30, 2025 (instead of 20 16) by paying ….

Question No. 1 07/01/2014 to 06/30/2015 07/01/2015 to 06/30/2016 07/01/2016 to 06/30/2017 Total Divide by: Number of years Rent expense per year

(E) 60,000 90,000 210,000 360,000 3 120,000

Rent expense to date (120,000 x 1) Less: Payment to date Accrued rent payable

120,000 60,000 60,000

Question No. 2 (B) Present value of Periodic Payment (400,000 x 5.9500) Fair value of leased asset

2,380,000 P2,380,000

Cost is equal to P2,380,000 (Fair value which is the same as the Present value of minimum lease payments.) Amortization Table Annual Date Payment 06/30/15 06/30/15 400,000 06/30/16 400,000

Interest Expense

Amortization

277,200

400,000 122,800

52

Present value 2,380,000 1,980,000 1,857,200


Question No. 3 (E) First lease (See No. 1) Second lease (see amortization table) Current liabilities

60,000 122,800 182,800

Question No. 4 (A) Rent expense (First lease) Interest expense Depreciation expense (2,380,000/10) Total lease-related expenses

120,000 277,200 238,000 635,200

SUMMARY OF ANSWERS: 1. E 2. B 3. E

4.

A

PROBLEM 27-23 Exercise of Guaranteed Residual Value Question No. 1 (C) Present value of periodic payment (120,000 x 3.4437) Add: Present value of bargain purchase option (30,000 x 0.6587) Present value of minimum lease payments Add: Initial direct cost Cost of the Machinery Question No. 2 Interest expense Executory cost Depreciation Total lease-related expenses Question Nos. 3 to 4 Amortization Table Annual Date Payment 12/31/2015 12/31/2015 120,000 12/31/2016 120,000 12/31/2017 120,000 12/31/2018 120,000 12/31/2019 30,000

(B)

413,244 19,761 433,005 20,000 453,005

34,431 20,000 105,751 160,182

Interest Expense

Amortization

34,431 25,018 14,570 2,977

120,000 85,569 94,982 105,430 27,023

Question No. 3 (C) P85,569. See amortization table above. Question No. 4 (B) P227,436. See amortization table above.

53

Present value 433,005 313,005 227,436 132,453 27,023 (0)


Question No. 5 (B) Gross amount of guaranteed residual value Less: Fair value Loss on finance lease Question No. 6 Zero

30,000 25,000 5,000

(A)

Question No. 7 (C) Cost of leased asset Less: Accumulated depreciation Carrying amount Add: Cash payment Total consideration Less: Lease liability Cost of equipment purchased SUMMARY OF ANSWERS: 1. C 2. B 3. C

4.

B

453,005 211,503 241,503 200,000 441,503 227,436 214,067 5.

B

6.

A

7.

C

PROBLEM 27-24 Direct Financing Lease Question No. 1 (C) Annual payment = P3,224,000 = P750,000 4.312 Total interest to be earned = [(P750,000 x 5) – P3,234,000] = P516,000 Question No. 2 (B) (P3,234,000 – P750,000) x 8% = P198,720 Question No. 3 (A) The PV annuity due of 12% over 8 years can be computed as: [1 – (1+12%) -7] + 1= 5.5638 12% The present value of 12% for 8 years can also be computed as: (1+12%)-8 = 0.4039 The total interest revenue is the difference the lease receivable and the present value of the minimum lease payments. Lease receivable (P959,500 x 8 + P400,000) Present value of the lease Unguaranteed residual value (P400,000 x 0.4039) P 161,560 Present value of lease payments (P959,500 x 5.5638) 5,338,466 Total interest over the lease term

54

P 8,076,000

5,499,966 P2,576,034*


Since the lease is a direct financing lease (meaning, present value of the minimum lease payments approximates the value of the property upon the commencement of the lease), this can be solved alternatively as: [(P959,500 x 8 + P400,000) – P5,500,000)] = P2,576,000 Question No. 4 (B) (P5,500,000 – P959,500) x 12% = P544,860 SUMMARY OF ANSWERS: 1. C 2. B 3. A

4.

B

PROBLEM 27-25 Sales-Type Lease Note to professor:

Tequila Sunrise Company leased equipment from Wasted Time Co. on July 1, 2015 for an eight-year period expiring June 30, 2023 (instead of 2014).

Question No. 1 (A) Lease receivable (P3,000,000 x 5 + P1,000,000) Present value of minimum lease payments: Rental (3.60 x P3,000,000) P10,800,000 Unguaranteed residual value (0.57 x P1,000,000) 570,000 Total unearned interest income Question No. 2 (B) Present value of minimum lease payments Cost of goods sold (P8,000,000 + P300,000)

(B) P 7,040,000 ( 5,600,000) P 1,440,000

Question No. 5 (B) P7,040,000 x 10% x 6/12 = P352,000 SUMMARY OF ANSWERS: 1. A 2. B 3. A

4.

B

5.

55

(11,370,000) P 4,630,000 11,370,000 (8,300,000) P3,070,000

Question No. 3 (A) P11,370,000 x 12% = P1,364,400 Question No. 4 Selling price Book value Gain on sale

P16,000,000

B


PROBLEM 27-26 Comprehensive Question No. 1 (C) Sales-type lease since Siegfried is a seller of computers and it qualifies as finance lease. Question No. 2 (A) Direct financing lease. The lease qualifies as finance lease on the part of the lessee. Amortization Table Annual Date Payment 1/1/2015 1/1/2015 2,466,754 6/30/2015 2,466,754 1/1/2016 2,466,754

Interest Expense

Amortization

876,662 797,158

2,466,754 1,590,092 1,669,596

Present value 20,000,000 17,533,246 15,943,154 14,273,558

Question No. 3 (A) P15,943,154. See amortization table above. Question No. 4 January 1 to June 30, 2015 June 30 to December 31, 2015 Total Interest income

(B) 876,662 797,158 1,673,820

This is P876,662 interest for the first six months: (P20,000,000 - lease payment of P2,466,754) x 5%, plus P797,158 for the second six months: (P20,000,000 lease payment of P2,466,754 - [P2,466,754 - 876,662]) x 5% SUMMARY OF ANSWERS: 1. C 2. A 3. A

4.

B

PROBLEM 27-27 Investment Property Note to the professor: Assume that the fair value of the land is material and not immaterial. Question No. 1 (A) Nil, since the property should be investment property and not property, plant and equipment. Present value of periodic payment (500,000 x 4.97) Add: Present value of bargain purchase option (400,000 x 0.40) Present value of Minimum lease payments Present value of minimum lease payments Less: Fair value of the land at the inception of the lease Cost of the building as investment property

56

2,485,000 160,000 2,645,000 2,645,000 200,000 2,445,000


Amortization Table Annual Date Payment 01/01/2015 12/31/2015 500,000 12/31/2016 500,000

Interest Expense

Amortization

317,400 295,488

182,600 204,512

Present value 2,645,000 2,462,400 2,257,888

Question No. 2 (C) P317,400. See amortization table above. Question No. 3 (C) P204,512. See amortization table above. Question No. 4 (C) P2,257,888. See amortization table above. Question No. 5 and 6 Total rent income (40,000 x 24) + (50,000 x 24) x 20 Divide by: Number of years Rent income per year

43,200,000 4 10,800,000

Periodic rent Add: Amortization of lease bonus (30,000 x 20)/4 Gross Rental income (No. 5) (A) Less: Expenses Amortization of initial direct cost (5,000 x 20)/4 Annual maintenance cost Interest expense Depreciation *(2,645,000-200,000/10) Net rental income (B) SUMMARY OF ANSWERS: 1. A 2. C 3. C

4.

C

5.

A

10,800,000 150,000 10,950,000 25,000 40,000 317,400 244,500 10,323,100

6.

B

PROBLEM 27-28 Question No. 1 (900,000+50,000+25,000)

(D)

Question No. 2 (D) Total warranty expense (1.4M x 12%) Less: Total actual expenditures Warranty liability end of 2015

P

975,000

P

168,000 63,000 105,000

P

57


Question No. 3 Legal services Add: Medical services Payroll (14,400/12 x 8) Royalties Total accrual

(C) P

P

Question No. 4 (D) Fair value (equal to present value MLP) Less: First payment Total Add: Interest accrued (420,000 x 9%) Total lease liability Question No. 5 (3,875,902 x 111%)-400,000 SUMMARY OF ANSWERS: 1. D 2. D 3. C

4,600 5,500 9,600 3,900 23,600

P

P

(A)

4.

490,000 70,000 420,000 37,800 457,800

P 3,902,251

D

5.

A

PROBLEM 27-29 Question No. 1 (C) Unadjusted balance – Accounts Payable 2 3 Adjusted balance

450,000 60,000 45,000 555,000

Question No. 2 (A) Units sold: October November December Total Multiply by Total failures expected Less: Failures already recorded: October sales November sales December sales Expected future failures Multiply by Estimated cost

32,000 28,000 40,000 100,000 2% 2,000 640 360 180

Warranty expense Estimated warranty liability

123,000 123,000

58

1,180 820 150 123,000


Question No. 3 (C) Notes payable is (200,000 x 3.6048) = 720,960 Amortization Table Annual Date Payment 01/01/2015 12/31/2015 200,000 12/31/2016 200,000

Interest Expense

Amortization

86,515 72,897

113,485 127,103

Question No. 4 (A) Present value of principal (4M x .6830) Present value of interest payments (480,000 x 3.1699) Total Present value Amortization Table Interest Date Payment 01/01/2015 12/31/2015 480,000 Question No. 5

Interest Expense

Premium Amortization

425,355

54,645

2,732,000 1,521,552 4,253,552 Present value 4,253,552 4,198,907

(D)

Present value of minimum lease payments (200,000 x 6.759) Amortization Table Annual Date Payment 01/01/2015 01/01/2015 200,000 12/31/2015 SUMMARY OF ANSWERS: 1. C 2. A 3. C

Present value 720,960 607,475 480,372

Interest Expense

Amortization

115,180 4.

A

5.

200,000

P1,351,800 Present value 1,351,800 1,151,800 1,266,980

D


By reason of financial difficulties, it is probable that Revo shall pay the P200,000 loan with only a 60% recovery anticipated from Innova (not Suzette) Company.

Question No. 1 (D) Zero, the two notes payable should be presented as noncurrent liabilities.

59


Question No. 2 (D) FINANCE LEASE: Amortization Table Annual Interest Date Payment Expense 12/31/2014 12/31/2014 60,000 12/31/2015 60,000 38,363 12/31/2016 60,000 35,767

Amortization 60,000 21,637 24,233

Present value 379,692 319,692 298,055 273,822

Answer: P273,822. Refer to amortization table above. Question No. 3 (B) Answer: P38,363. Refer to amortization table above. Question No. 4

(B)

Annual rent expense=P720,000/3=P240,000 Operating lease Date Expense 1/1-12/31/15 1/1-12/31/16 1/1-12/31/17

240,000 240,000 240,000

Expense To date 240,000 480,000 720,000

Payment to date 120,000 300,000 720,000

Accrued rent (Prepaid) 120,000 180,000 -

Question No. 5 (C) CONTINGENCIES Answer: P400,000 (P200,000+P200,000) 1.

Only a disclosure is necessary because it is not probable that the company will be liable, although the amount can be measured reliably.

2. Retained earnings Estimated liability for income tax

200,000

3. Accounts receivable – Innova Loss on guaranty Note payable – bank SUMMARY OF ANSWERS: 1. D 2. D 3. B

4.

200,000

120,000 80,000 200,000 B

5.

60

C

Chapter 29 – Shareholders’ Equity

CHAPTER 29: SHAREHOLDERS’ EQUITY Note to professor: Page 1099 1123

1125

1127

Existing data: To record cash collection Cash (250,000-62,500) P 62,500

Change to: Cash

If the shareholders opted to receive noncash, the journal entry is: Dividends payable 54,000 Loss on distribution of dividends (balancing figure) 4,000 Noncash (5 x 12,000) 60,000 Illustration: Treasury Stock as Share Dividend Ordinary share P50 par, 105,000 shares issued and Outstanding 5,050,000

e. On December 15, 2015, Roxas declared its first cash dividend to shareholders of P15 per share, payable on January 14, 2008

Page 1121 Existing Data: Journal entry on Feb. 15, 2015 Dividends payable Inventory Gain on distribution - prop. dividends Carrying amount of dividend payable = Fair value Less: Carrying amount of noncash assets Gain on distribution of prop. Dividends Change to: Dividends payable Inventory Gain on distribution - prop. dividends Carrying amount of dividend payable = Fair value Less: Carrying amount of noncash assets Gain on distribution of prop. Dividends

61

P 62,500

Change 4,000 to 6,000

Remove ‘and outstanding’ and change 5,050,000 to 5,250,000 Change 2008 to 2016.

780,000 600,000 180,000 780,000 600,000 180,000

780,000 700,000 80,000 780,000 700,000 80,000


PROBLEM 29-1 Question No. 1 (A) Authorized ordinary shares at P10 stated value Less: Unissued ordinary shares Ordinary Shares issued

2,400,000 1,300,000 1,100,000

Question No. 2 (B) Authorized preference shares at P50 par value Less: Unissued preference shares Preference Shares issued

1,600,000 300,000 1,300,000

Question No. 3 (D) Share Premium on ordinary shares Share Premium conversion option-bonds payable Share premium on preference shares Gain on sale of treasury shares Ordinary share warrants outstanding Donated capital Ordinary shares options outstanding Total Share Premium

600,000 80,000 300,000 120,000 70,000 80,000 50,000 1,300,000

Question No. 4 (A) Ordinary Shares issued Preference Shares issued Subscribed Ordinary shares Subscription receivable – ordinary shares Subscribed Preference shares Subscription receivable – preference Total Share Premium Contributed Capital

1,100,000 1,300,000 400,000 (40,000) 120,000 (30,000) 1,300,000 4,150,000

Question No. 5 (C) Preference Shares issued Subscribed Preference shares Ordinary Shares issued Subscribed Ordinary shares Share Premium on ordinary shares Total Legal Capital

1,300,000 120,000 1,100,000 400,000 600,000 3,520,000

Question No. 6 (D) Contributed Capital Accumulated profits – unappropriated Unrealized increase in value of FVTOCI securities Reserve for bond sinking fund Revaluation surplus Total Shareholders' Equity

4,150,000 1,000,000 20,000 640,000 260,000 6,070,000

SUMMARY OF ANSWERS: 1. A 2. B 3. D

4.

A

5.

62

C

6.

D


PROBLEM 29-2 1.

2.

3.

Cash (2,000 x P50) Share capital To record share issuance at a premium

100,000

Cash (5,000 x P60) Share capital (5,000 x P50) Share premium To record share issuance at a premium

300,000

Share premium Retained earnings Cash To record payment of share issue cost

50,000 20,000

Cash (4,000 x P40) Discount on share capital Share capital (4,000 x P50) To record share issuance at a discount

160,000 40,000

100,000

250,000 50,000

70,000

200,000

PROBLEM 29-3 1.

2.

3.

Machinery Share capital (2,500 x P50) Share premium To record share issuance for machinery

180,000 125,000 55,000

Patent (1,000 x P65) Share capital (1,000 x 50) Share premium To record share issuance for patent

65,000

Organization expense Share capital (400 x P50) Share premium To record share issuance for organization services.

40,000

50,000 15,000

20,000 20,000

PROBLEM 29-4 Loans payable - bank Share capital Share premium** Gain on settlement on liability To record issuance of shares for liability

150,000 100,000 40,000 10,000

*Computation of loss on extinguishment of liability Fair value of equity instruments issued (or if not reliably determinable, use the fair value of liability) (2,000 x P70) Less: Carrying amount of liability Gain on settlement of liability **Computation of increase in share premium Fair value of equity instruments issued (or if not reliably determinable, use the fair value of liability) (2,000 x P70) Less: Total par or stated value of equity issued (2,000 x P50) Share premium (or Discount)

63

140,000 150,000 10,000 140,000 100,000 40,000


PROBLEM 29-5 1.

2.

Cash (2,500 x P216) Preference shares (2,500 x P200) Share premium-pref. share To record issuance of preference shares Cash (500 x P120) Ordinary shares (500 x P100) Share premium - ordinary shares To record issuance of ordinary shares

540,000 500,000 40,000 60,000 50,000 10,000

PROBLEM 29-6 Allocation of the lump-sum price: Preference shares (2,500 x P216) Ordinary shares (500 x 120) Total

Total Fair value 540,000 60,000 600,000

The transaction will then be recorded as follows: Cash Preference shares (2,500 x P200) Share premium-preference share (810,000-500,000) Ordinary shares (500 x 100) Share premium - ordinary share (90,000-50,000)

Fraction 54/60 6/60

Allocated proceeds 810,000 90,000 900,000

900,000 500,000 310,000 50,000 40,000

PROBLEM 29-7 Allocation of the lump-sum price: Total proceeds Less: Total fair value of preference shares (2,500 x P216) Amount allocated to the ordinary shares The transaction will then be recorded as follows: Cash Preference shares (2,500 x P200) Share premium-preference share (540,000-500,000) Ordinary shares (500 x P100) Share premium-ordinary share (360,000-50,000) To record issuance of preference and ordinary shares

900,000 540,000 360,000 900,000 500,000 40,000 50,000 310,000

PROBLEM 29-8 1.

2.

Subscription receivable (4,000 x P60) Subscribed share capital (4,000 x P50) Share premium To record subscriptions of share capital Cash (240,000 x 40%) Subscription receivable To record cash collection

240,000 200,000 40,000 96,000 96,000

64


3.

Cash (240,000 x 60%) Subscription receivable To record cash collection

144,000 144,000

Subscribed share capital Share Capital (4,000 x 50) To record issuance of share certificate

200,000 200,000

PROBLEM 29-9 1.

2.

3.

Subscriptions receivable (5,000 x P60) Subscribed ordinary shares (5,000 x P50) Share premium-ordinary share To record subscriptions of 10,000 shares at P110

300,000

Cash (300,000 x 40%) Subscriptions receivable To record receipt of cash for subscriptions

120,000

Subscribed ordinary shares Share premium-ordinary share Subscriptions receivable (300,000 x 60%) Share premium forfeited down-payment

250,000 50,000

250,000 50,000

120,000

180,000 120,000

PROBLEM 29-10 Journal entries to record the transactions would be: To record the expenses incurred related to the auction Receivable from highest bidder P 10,000 Cash To record the collection from highest bidder Cash Subscription receivable Receivable from highest bidder To record the issuance of share capital Subscribed share capital (7,500 x P50) Share capital

P

10,000

300,000 290,000 10,000 375,000 375,000

PROBLEM 29-11 To record the expenses incurred related to the auction Receivable from highest bidder P 10,000 Cash P To record the acquisition of entity’s own shares Treasury shares Subscription receivable Receivable from highest bidder To record the issuance of share capital Subscribed share capital (7,500 x P50) 375,000 Share capital

65

10,000

300,000 290,000 10,000

375,000


PROBLEM 29-12 1)

Treasury shares (15,000 x 24) Cash

360,000

2)

Cash (5,000 x P26) Treasury shares (5,000 x P24) Share premium-Treasury shares

130,000

3)

4)

5)

360,000 120,000 10,000

Cash (4,000 x 20) Share premium-Treasury shares Retained earnings Treasury shares (4,000 x 24)

80,000 10,000 6,000 96,000

Ordinary shares (6,000 x 20) Share premium (600,000/100,000) x 6,000 Share premium-Treasury shares Treasury shares (6,000 x P24) Memo entry: Received 5,000 shares from a stockholder as a donation. Cash (2,000 x 28) Donated capital

120,000 36,000

12,000 144,000

56,000 56,000

PROBLEM 29-13 Note to professor: Preference share P100 par, 20,000 shares issued and outstanding

3,000,000

Change ‘20,000’ to 30,000. a.

b.

Preference shares (3,000 x P100) Share Premium on Preference shares [(300,000/30,000) x 3,000] Accumulated profits (balancing figure) Cash (3,000 x P140)

300,000

Preference shares Share Premium on Preference shares Cash (95 x 3,000) Share premium retirement of shares (balancing figure)

300,000 30,000

30,000 90,000 420,000

285,000 45,000

PROBLEM 29-14 Note to professor: Preference share P100 par, 20,000 shares issued and outstanding

3,000,000

Change ‘20,000’ to 30,000. 1)

Preference shares (4,000 x P100) Share Premium on Preference shares [(300,000/30,000) x 4,000] Ordinary shares (4,000 x P50) Share premium-ordinary shares

66

400,000 40,000

200,000 240,000


2)

Preference shares (4,000 x P100) Share Premium on Preference shares [(300,000/30,000) x 4,000] Accumulated profits Ordinary shares (4,000 x 5/1 x P50)

400,000 40,000 560,000 1,000,000

PROBLEM 29-15 1a.

1b.

2.

Ordinary shares (50,000 x P50) Share Premium on Ordinary shares Ordinary shares (50,000 x P40) Share premium-recapitalization

2,500,000 100,000

Ordinary shares Share Premium on Ordinary shares Accumulated profits Ordinary shares (50,000 x P140)

2,500,000 100,000 4,400,000

2,000,000 600,000

7,000,000

Ordinary shares ((P50-P40) x 50,000) Share premium-recapitalization

500,000 500,000

3. Share split Ordinary Share capital issued Subscribed share capital Total Less: Treasury shares Outstanding shares

Before 100,000 100,000 100,000

Multiply by 5/1 5/1 5/1 5/1 5/1

After 500,000 500,000 500,000

Par value per share

Before P50

multiply by 1/5

After P10

Memo entry: Changes:

increase number of shares Same SHE Decrease number in Par value

PROBLEM 29-16

Preference shares (2,000 x P80) Warrants (2,000 x P20) Total *(150 x 4,000)

CASE NO. 1 Total Fair value 160,000 40,000 200,000

Cash Preference Share capital (2,000 x P50) Share Premium (320,000 -100,000) Ordinary share warrants outstanding

Fraction

Allocated cost

80% 20%

320,000 80,000 400,000*

400,000 100,000 220,000 80,000

67


When the warrants are exercised: Cash (1,000 x 80% x P40) Ordinary share warrants outstanding (80,000 x 80%) Ordinary Share capital (1,000 x 80% x P20) Share Premium –ordinary share

32,000 64,000 16,000 80,000

CASE NO. 2 Total proceeds Less: Total fair value of the preference shares (2,000 x P80) Value of the warrants Cash Preference Share capital (2,000 x P50) Share Premium (160,000-100,000) Ordinary share warrants outstanding

400,000 160,000 240,000 400,000 100,000 60,000 240,000

CASE NO. 3 Market value of ordinary shares Less: Option price/exercise price Intrinsic value of warrant Multiply: # of ordinary shares claimable under warrants Market value of share warrants

P

P

Total proceeds Less: Value of Share warrants Value assigned to Preference Share

50 40 10 1,000 10,000 400,000 10,000 390,000

Cash Preference Share capital (2,000 x P50) Share Premium (390,000-100,000) Ordinary share warrants outstanding

400,000 100,000 290,000 10,000

PROBLEM 29-17 Ordinary shares issued Less: Treasury shares Outstanding shares a.

40,000 2,000 38,000

Retained earnings (38,000 x P5) Dividends payable

b.

No formal accounting entry

c.

Dividends payable Cash

190,000 190,000 190,000 190,000

PROBLEM 29-18 Cash dividends for Preference Shares-Semi-annual Payment July 1:

Retained Earnings Dividends Payable (9,000 x P100 x 10% x 6/12) Dec. 31: Retained Earnings Dividends Payable (9,600 x P100 x 10% x 6/12)

45,000 45,000 48,000 48,000

68


Computation of outstanding shares: July 1 Preference shares issued 10,000 Less: Treasury shares 1,000 Outstanding shares 9,000

December 31 Preference shares issued Less: Treasury shares (1,000-600) Outstanding shares

10,000 400 9,600

PROBLEM 29-19 Feb. 15, 2015

Retained earnings Dividends payable

450,000

Dec. 31, 2014


150,000

Fair value, Dec. 31 Less: Previous Fair value Increase in dividends payable

600,000 450,000 150,000

Feb. 15, 2015

450,000 150,000

Dividends payable Retained earnings

60,000

Fair value, Feb. 15 Less: Previous Fair value Decrease in dividends payable

540,000 600,000 (60,000)

Dividends payable Inventory Gain on distribution - prop. dividends

540,000

Carrying amount of dividend payable = Fair value Less: Carrying amount of noncash assets Gain on distribution of prop. Dividends

540,000 500,000 40,000

60,000

500,000 40,000

PROBLEM 29-20 Nov. 1, 2015

Dec. 31, 2015

Feb. 15, 2016


450,000

Equipment-noncurrent asset for distribution* Impairment loss (P500,000 – P450,000) Equipment

450,000 50,000


150,000

Fair value, Dec. 31 Less: Previous Fair value Increase in dividends payable

600,000 450,000 150,000

450,000

500,000 150,000

Equipment-noncurrent asset for distribution** Gain on recovery of impairment loss

50,000

Dividends payable Retained earnings

60,000

50,000 60,000

69


Fair value, Feb. `5 Less: Previous Fair value Decrease in dividends payable

540,000 600,000 (60,000)

Dividends payable Equipment-noncurrent asset for distribution Gain on distribution of prop. Dividends

540,000

500,000 40,000

Carrying amount of dividend payable = Fair value 540,000 Less: Carrying amount of noncash assets 500,000 Gain on distribution of prop. Dividends 40,000 *(Lower between P500,000 and P450,000) **(P800,000 minus P600,000) but the gain shall not exceed the amount of impairment loss of P100,000. Alternative Computation: *Computation of the impairment loss is as follows: Original carrying amount Less: Lower between these two amounts FV Less Cost To Distribute (FVLCTD) Original carrying amount Impairment loss

500,000 450,000 500,000

450,000 50,000

**Computation of the gain on reversal of the impairment loss is as follows: Lower between subsequent FVLTCD and original carrying amount Original carrying amount 500,000 FVLCTD, Dec. 31 600,000 500,000 Carrying amount at initial recognition 450,000 Gain on reversal 50,000

PROBLEM 29-21 Retained earnings Dividends payable

P

84,000 P

Supporting computation: Cash alternative (10 x 60% x P8,000) Non-cash alternative (10 x 40% x P9,000) Total dividends

84,000 P P

Date of payment: If the shareholders opted to receive cash, the journal entry is: a. Dividends payable Cash (10 X 8,000) Retained earnings (balancing figure)

84,000

If the shareholders opted to receive noncash, the journal entry is: b. Dividends payable 84,000 Loss on distribution of dividends (balancing figure) 6,000 Noncash (10 x 9,000)

70

48,000 36,000 84,000

80,000 4,000

90,000


PROBLEM 29-22 Note to professor: Ordinary share P50 par, 53,000 shares issued and outstanding Remove ‘and outstanding’ Computation of outstanding shares: Ordinary shares issued Less: Treasury shares Outstanding shares 1)

2)

3) 4)

53,000 3,000 50,000

Accumulated Profits [(50,000) x 10% x P80] Share dividends payable [(50,000) x 10% x P50] Share premium on Ordinary shares

400,000

Accumulated Profits [(50,000) x 20% x P50] Share dividends payable [(50,000) x 20% x P50]

500,000

Capital Liquidated (P2 x 50,000 shares) Cash

100,000

Accumulated Profits Treasury shares

120,000

250,000 150,000

500,000 100,000 120,000

PROBLEM 29-23

Journal entries: 1/5 Cash (20,000 x P180) Ordinary shares (20,000 x P100) Share Premium-Ordinary 1/28


3,600,000

1,200,000 1,200,000

2/2

Received 5,000 shares from shareholders as a donation.

2/14

Cash (6,000 x ½ x 220) Treasury shares (6,000 x ½ x 200) Share premium – treasury shares

2/14

660,000 600,000 60,000

Cash (5,000 x 220) Donated capital (Share Premium)

1,100,000

7/15

Equipment Preference shares (4,000 x P200) Share Premium-Preference

1,440,000

10/15

Subscriptions receivable (18,000 x P250) Subscribed ordinary shares (18,000 x P100) Share Premium-Ordinary

4,500,000

Cash (4,500,000 x 40%) Subscriptions receivable

1,800,000

11/15

2,000,000 1,600,000

1,100,000 800,000 640,000 1,800,000 2,700,000 1,800,000

71


11/27

12/31

Cash (10,000 x P250 x 60%) Subscriptions receivable

1,500,000

Subscribed ordinary shares (10,000 x P100) Ordinary shares

1,000,000

Income summary Retained earnings

1,000,000

1,500,000 1,000,000 1,000,000

Retained earnings-unappropriated (1.2M600,000) Retained earnings appropriated for TS

600,000 600,000

Questions 1 to 3 * Beg bal Jan. 5 Jan. 28 Feb. 14 Feb. 14 July 15 Oct. 15 Nov. 15 Nov. 27 Dec. 31 Total

Pref. shares 1,400

Ord. shares 3,500 2,000

Share Premium 1,925 1,600

Retained earnings 4,500

1,800

1,000 2,200 (1)B

6,500 (2)B

Subs. Receivable 0

1,000 5,500

8,025 (3)A

(1,000)

4,500 (1,800) (1,500)

800

1,200

*in ‘000s

Question No. 4 (C) Retained earnings, total Outstanding balance of treasury stocks Retained earnings – unappropriated

P 5,500,000 ( 600,000) P 4,900,000

Question No. 5 (B) Preference shares Ordinary shares Subscribed ordinary shares Subscriptions receivable Share premium Retained Earnings Treasury stocks Total

P 2,200,000 6,500,000 800,000 (1,200,000) 8,025,000 5,500,000 ( 600,000) P21,225,000

SUMMARY OF ANSWERS: 1. B 2. B 3. A

4.

C

Treasury shares 0 1,200 (600)

60 1,100 640 2,700

800

Subs. Ord. share 0

5.

72

B

600


PROBLEM 29-24

Beg. Balances 1. 2. 3. 4. 5. 6. 7. 8. Total

Pref. shares 400

*in ‘000s.

Ord. shares 200

Share Prem 250

4 2.5 152

50

Treasury shares

Question No. 3

219 2. (C)

408.5

(C)

Retained earnings (see table above) Less: Treasury shares Market value of share warrants

Question No. 5

Preference shares Ordinary shares Share premium Retained earnings-total Treasury shares Total shareholder’s equity

(171)

80 4. (B)

2,500 (128.6) 3,100.4

P P

(C)

SDP

136 (56)

19 450 1. (B)

Retained earnings 900

P

P

19 (19) 0

3,100,400 80,000 3,020,400 450,000 219,000 408,500 3,100,400 (80,000) 4,097,900

Journal entries:

1.

2. 3.

4.


120,000

Preference share dividend (4,000 x P10) Ordinary shares-dividends (40,000 x P2) Total dividends

40,000 80,000 120,000


136,000

120,000

136,000

Land Treasury shares (1,400 x 40) Share Premium – Treasure shares

60,000

Cash (500 x 105) Preference shares (500 x 100) Share Premium – Preference shares

52,500

73

56,000 4,000 50,000 2,500


5.

6. 7. 8.

Retained earnings (38,000 x 45 x 10%) Share dividends payable (38,000 x 5 x 10%) Share Premium

171,000 19,000 152,000

Ordinary Shares Issued Less: Treasury shares (3,400-1,400) Outstanding shares

40,000 2,000 38,000

Share dividends payable Ordinary shares

19,000 19,000

Income summary Retained earnings unappropriated

2,500,000 2,500,000

Retained earnings unappropriated Dividends payable

128,600 128,600

O/S outstanding (38,000 x 110%) Multiply by: Dividends per share Pref. dividends (450,000/100 x P10) Total SUMMARY OF ANSWERS: 1. B 2. C 3. C

4.

B

5.

74

41,800 P2

C

83,600 45,000 128,600

Adjusted balances

e. f.

b. g. c. d. g.

Beg. Balances a.

3,500

(500)

Pref. shares 4,000

2,520

250

1,350

Ord. Shares 840 80

-

Subs. Os 100 (80) (20)

-

Subs. Rec 52 (41.6) (10.4)

1,925.1

22.50 250

(6) 15.6 675

Share Prem 968

(280) 2,500 (16.5) 16,355

(425.5)

(423)

RE-unapp 15,000

16.50 16.50

RE Appr

16.50

(27.5)

Treas. Shares 44


PROBLEM 29-25

75


Question No. 5 Total shareholders’ equity

(D)

Preference shares Ordinary Shares Subscribed Ordinary shares Subscription Receivable Share Premium Retained Earnings - Unappropriated Retained Earnings - Appropriated Total Treasury Shares Shareholder’s Equity

3,500 2,520 1,925.1 16,355 16.50 24,316.60 (16.50) 24,300.10

Journal entries: a. Cash (8,000 x 13 x 40%) Subscription Receivable

b.

g. 4/30

c.

d.

g.

41,600 41,600

Subscription Ordinary Share (8,000 x 10) Ordinary shares

80,000

Subscription Ordinary Share (2,000 x 10) Share premium (3 x 2,000) Subs. Receivable (P13 x 2,000 x 40%) Share Premium - forfeited downpayment

20,000 6,000

80,000

10,400 15,600

Issued 92,000 share rights to existing shareholders Cash (67,500 x 2 x P15) 2,025,000 Ordinary shares (67,500 x 2 x P10) Share premium Retained earnings-unappropriated Dividends payable

423,000

O/S Issued (84,000 + 8,000+135,000) Less: Treasury shares Outstanding shares Multiply by: Dividend per share Pref. dividends (P100 x 10%/2 x 40,000) Total dividends

227,000 4,000 223,000 P1

Cash (2,500 x 20) Treasury shares (P44,000/4,000 x 2,500) Share premium – Treasury Shares

423,000

223,000 200,000 423,000

50,000 27,500 22,500

Pref. shares (5,000 x P100) Ordinary shares (5,000 x 5 x P10) Share premium – Ordinary Shares

500,000

Retained earnings-unappropriated Dividends payable

425,500

76

1,350,000 675,000

250,000 250,000 425,500


e.

f.

O/S Issued (227,000+25,000) Less: Treasury shares (4,000-2,500) Outstanding shares Multiply by: Dividends per share Preference dividends (P100 x 10%/2 x 35,000) Total dividends

252,000 1,500 250,500 P1

Retained earnings - unappropriated Tax Rent income

280,000 120,000

Income summary Retained earnings-unappropriated

2,500,000

400,000 2,500,000

Retained earnings-unappropriated Retained earnings-appropriated SUMMARY OF ANSWERS: 1. C 2. D 3. D

4.

D

5.

250,500 175,000 425,500

16,500 16,500 D

PROBLEM 29-26 P/S Beg. Bal. a. c. d.

O/S 840

200

e.

7

S/P 420 4

200 1. (C)

847 2. (B)

RE Appr

T/S 44 (11)

(600) (100)

340 60 (42) 56

f. g. Adjusted bal.

RE-unapp 15,000

838 3. (E)

Question No. 5 (C) Total Shareholders’ Equity: Preference shares Ordinary Shares Share Premium Retained earnings -unappropriated Retained earnings - appropriated Total Treasury Shares Shareholders’ Equity

(326.80) 2,400 (33) 16,340.20 4. (E)

200 847 838 16,340.20 33 18,258.20 33 18,225.20

77

33 33

33


SUMMARY OF ANSWERS: 1. C 2. B 3. E

4.

E

5.

C

PROBLEM 29-27 Journal entries: Jan. 4

Jan. 30

Mar. 2

May 7

June 15

July 2

Cash (30,000 x 18) Ordinary shares (30,000 x 10) Share Premium – Ordinary Shares

750,000


416,000

Preference dividends (8% x 1,200,000) Ordinary Shares (180,000-20,000) x 2 Total dividends

96,000 320,000 416,000

Cash (4,000 x 125) Preference shares (4,000 x 100) Share Premium – Preference Share

500,000

Cash (6,000 x 24) Treasury shares (6,000 x 21) Share Premium – Treasury Share

144,000

300,000 450,000 416,000

Memo: Effected a two for one share split. Ordinary Shares issued (180,000 +30,000) x 2/1 Less: Treasury shares (20,000-6,000) x 2/1 Outstanding shares

400,000 100,000 126,000 18,000 420,000 28,000 392,000

Retained earnings (5% x 392,000 x P14) Share dividends payable (5% x 392,000 x P5) Share Premium - Ordinary Shares

274,400

Aug. 3

Share dividends payable (5% x 392,000 x P5) Ordinary Shares

98,000

Oct. 1

Retained earnings (20,580 x 16) Dividends payable

Nov. 1

Retained earnings (20,580 x (18-16) Dividends payable Dividends payable (18 x 20,580) FVTOCI - at carrying value (15 x 20,580) Gain on distribution of property div. Unrealized gain-FVTOCI Retained earnings

Dec. 31

98,000 176,400 98,000 329,280 329,280 41,160 41,160 370,440

308,700 61,740

61,740 61,740


539,600 539,600

Preference div (8% x 1,200,000 +400,000) Ordinary Shares issued (420,000 + 19,600) Less :Treasury shares Outstanding Ordinary Shares Multiply: Dividend per share

78

128,000 439,600 28,000 411,600 P1

411,600

Total

Dec. 31

‘000 Beg. Bal. Jan. 4 Mar. 2 May 7 July 2 Aug. 3 Oct. 1 Nov. 1

1,600

400

PS 1,200

2,198

98

OS 1,800 300

316

100

SP-PS 216

1,526.4

176.4

SP-OS 900 450

18

18

SP-TS

(329.28) (41.16) 61.74 (539.6) 2,250 3,427.3

(274.4)

RE 2,300

0

(61.74)

UG-AFS 61.74

294

(126)

TS 420

0

98 (98)

SDP


Total dividends 539,600

Income Summary Retained earnings 2,250,000 2,250,000

79


Question No. 4 (E) Retained earnings-total Less: Appropriated for Treasury shares Retained earnings-unappropriated

3,427,300 294,000 3,133,300

Question Nos. 3 and 5 Preference share Ordinary share Share Premium – Preference Share Share Premium – Ordinary Share Share Premium - Treasury Share Total Contributed capital or Paid-in capital (No. 3) Retained earnings Total Less: Treasury Shares Total Shareholders’ equity (No. 5) SUMMARY OF ANSWERS: 1. C 2. A 3. A

4.

E

5.

80

D

1,600,000 2,198,000 316,000 1,526,400 18,000 5,658,400 3,427,300 9,085,700 294,000 8,791,700

*in ‘000s 1/1 2/23 3/10 4/10 7/14 7/14 8/3 12/1 - Preferred Ordinary 12/31 Net income

SP-PS P 850 180

P1,030

Pref. shares P 2,000

280

P 2,280 P

136

14 12 40

Ord. shares P10 60

50 P 7,234

SP-OS P 470 2,230 3,520 546 468

P

40

(40)

80

Sub. OS P -

P800

(2,800)

3,600

Subs. Rec

1,280 P700

(228) (352)

Ret. Earnings P -


PROBLEM 29-28

81


Journal entries: Jan. 1 Land Organization expense Ordinary shares (1,000 x P100 Share Premium – Ordinary Shares

340,000 140,000 10,000 470,000

Feb. 23

Cash (20,000 x 150)-150,000 Preference shares (20,000 x P100) Share premium – Preference Shares

2,850,000

Mar. 10

Cash (6,000 x 390)-50,000 Ordinary shares (6,000 x P10) Share premium - Ordinary Shares

2,290,000

Apr. 10

Subscriptions receivable (8,000 x P450) Subs. Ordinary shares (8,000 x P10) Share premium - Ordinary Shares

3,600,000

Building Preference shares (2,800 x P100) Share Premium-PS (460,000-280,000) Ordinary shares (1,400 x P10) Share premium-OS (560,000-14,000)

1,080,000

Fair value of the building Less: Fair value of the ordinary shares (480,000/1,200 x 1,400) Value of the preference shares

1,020,000 560,000

July 14

July 14

Aug. 3

Cash Ordinary shares (1,200 x P10) Share Premium - Ordinary Shares Cash Subscriptions receivable

80,000 3,520,000 280,000 180,000 14,000 546,000

460,000 480,000 12,000 468,000 2,800,000


40,000 40,000 580,000 580,000

Preference dividends (2,280,000 x 10%) Ordinary shares issued (136,000/10) Add: Subscribed ordinary shares Outstanding shares Multiply by: Dividend per share Total dividends Dec. 31

60,000 2,230,000

2,800,000

Subs. Ordinary shares (8,000 x ½ x P10) Ordinary shares Dec. 1

2,000,000 850,000


13,600 4,000 17,600 20

228,000

352,000 580,000

228,000 228,000

82


Question No. 1

(B)

Question No. 2

(C)

Question No. 3

(C)

Question No. 4

(C)

Question No. 5 (B) (1,280,000-228,000-352,000) Net income (4,080,000-2,000,000-800,000)=1,280,000 Question No. 6 (C) Preference shares Ordinary shares Subscribed ordinary shares Less: Subscriptions receivable Paid in capital-Pref. shares Paid in capital-Ordinary shares Retained earnings Total shareholders’ equity

2,280,000 136,000 40,000 800,000

(760,000) 1,030,000 7,234,000 700,000 10,620,000

Note: Sec. 43 of the Corporation Code of the Philippines states that “ The board of directors of a stock corporation may declare dividends out of the unrestricted retained earnings which shall be payable in cash, in property, or in stock to all stockholders on the basis of outstanding stock held by them: Provided, That any cash dividends due on delinquent stock shall first be applied to the unpaid balance on the subscription plus costs and expenses, while stock dividends shall be withheld from the delinquent stockholder until his unpaid subscription is fully paid” Thus, the dividend on the subscribed share capital is paid to that shareholder because he was not yet declared delinquent by corporation.

SUMMARY OF ANSWERS: 1. B 2. C 3. C

4.

C

5.

B

6.

C

PROBLEM 29-29 Question No. 1 (C) Preference shares, beg. Additional issue (20,000 x P10) Total

P P

Question No. 2 (A) Ordinary shares, beg. Stock dividend (3,480 shares x P5)* Total

P P

83

800,000 200,000 1,000,000 200,000 17,400 217,400


Outstanding shares, beginning Treasury shares acquisition Treasury shares re-issue Total outstanding shares Multiplied by: Dividend shares

40,000 (8,000) 2,800 34,800 10% 3,480

Question No. 3 (A) Share premium, beg. Premium on treasury share re-issue (100,000 – (2,800 x P20) Premium on preference share issue (P15 – P10) x 20,000 shares Premium on stock dividends (P12 – P5) x 3,480 shares Total share premium, end Question No. 4 (D) Retained earnings, beg. Add: Net Income Unadjusted Net Income Overstatement in operating expenses Less: Dividends Stock dividends (3,480 x P12) Cash dividends* Retained earnings, adjusted Retained earnings, appropriated for treasury shares Retained earnings, appropriated for plant expansion Retained earnings, unappropriated * Cash dividends Preferred stock dividends (80,000 + 20,000) x P1 Ordinary shares (34,800 + 3,480) x P.50 Total cash dividends

* Computation of the Cash dividends Preferred stock dividends (80,000 + 20,000) x P1 Ordinary shares (34,800 + 3,480) x P.50 Total cash dividends

D

P

2,400,000

1,780,000 100,000 41,760 119,140

1,880,000 (160,900) 4,119,100 (104,000) (1,200,000) P 2,815,100 P

P

100,000 19,140 119,140

P ( P

160,000 56,000) 104,000

P

100,000 19,140 119,140

P

Computation of the net income: Net Income Unadjusted Net Income Overstatement in operating expenses Adjusted net income

4.

P

P

384,000 44,000 100,000 24,360 552,360

P

Question No. 5 (B) Treasury shares acquired (8,000 x P20) Treasury shares reissued (2,800 x P20) Treasury shares, end

SUMMARY OF ANSWERS: 1. C 2. A 3. A

P

P

P P

5.

84

B

1,780,000 100,000 1,880,000

Chapter 30 – Book Value and Earnings Per Share

CHAPTER 30: BOOK VALUE AND EARNINGS PER SHARE Note to professor: Page 1164

Existing data: P5,000,000 + [(4,000,000 x 10% x Diluted 9/12) x (1-30%)] = EPS 105,000 shares* Illustration: ….The prevailing interest rate of bonds is 12% and the principal amount is due on April 1, 208….

1167

2.b Total weighted average of ordinary shares – 15,000

1169

3. Compute for the incremental shares using the following formula: Option shares xxx Add: Assumed treasury shares xxx Incremental shares xxx

1171

Option shares Add: Assumed treasury shares Incremental shares

20,000 16,000 4,000

Change to: Change 105,000 to 120,000. Change 208 to 2019. Change to 115,000 Change ‘add’ to Less.

Change ‘add’ to Less.

PROBLEM 30-1 One Class of Shares Total shareholders' equity Add: Subscription receivable Total SHE excluding subscription receivable Divided by: Ordinary shares outstanding* Book value per share

16,220,000 1,200,000 17,420,000 200,000 87.10

(A)

Shares issued Add: Subscribed shares (P1,000,000 / P50 par) Less: Treasury shares Ordinary shares outstanding

200,000 20,000 20,000 200,000

PROBLEM 30-2 Two Classes of Shares - Preference and Ordinary Shares Preference shares: Preference share capital issued Add: Subscribed preference shares Total Less: Treasury shares at par Shares outstanding and total par value

Shares 12,500 12,500 12,500

85

Total par value P5,000,000 P5,000,000 P5,000,000


Ordinary shares: Ordinary share capital issued Add: Subscribed ordinary shares Total Less: Treasury shares at par Shares outstanding and total par value

Shares 75,000 75,000 75,000

Total shareholders' equity Less: Par value of outstanding preference shares Par value of outstanding ordinary shares Excess over par

Total par value P3,000,000 P3,000,000 P3,000,000 15,000,000 5,000,000 3,000,000 7,000,000

CASE NO. 1 Question No. 1 & 2 Balances Preference dividend (5,000,000 x 8% x 4) Balance to ordinary shares Total shareholders’ equity Divide by: Outstanding shares Book value per share

Excess over par P7,000,000

Preference shares P5,000,000

(1,600,000) 5,400,000

1,600,000

Ordinary shares P3,000,000

6,600,000 12,500 P528.00

5,400,000 8,400,000 75,000 P112.00




(1,600,000)

1,600,000

(250,000) 5,150,000

250,000

CASE NO. 2 Question No. 3 & 4 Balances Preference dividend (5,000,000 x 8% x 4) Liquidation premium [(P420P400) x 12,500] Balance to ordinary shares Total shareholders’ equity Divide by: Outstanding shares Book value per share

6,850,000 12,500 P548.00

5,150,000 8,150,000 75,000 P108.67




(400,000) 6,600,000

400,000

CASE NO. 3 Question No. 4 & 5 Balances Preference dividend (5,000,000 x 8% x 1) Balance to ordinary shares Total shareholders’ equity

5,400,000

86

6,600,000 9,600,000


Divide by: Outstanding shares Book value per share

12,500 P432.00

75,000 P128.00




(1,600,000)

1,600,000

CASE NO. 4 Question No. 7 & 8 Balances Preference dividend (5,000,000 x 8% x 4) Ordinary dividend (3,000,000 x 8% x 1) Balance for participation Preference (5/8 x 5,160,000) Balance to ordinary shares Total shareholders’ equity Divide by: Outstanding shares Book value per share SUMMARY OF ANSWERS: 1. A 2. A 3. B

(240,000) 5,160,000 (3,225,000) 1,935,000

240,000 3,225,000 9,825,000 12,500 P786.00

4.

D

5.

C

6.

B

7.

1,935,000 5,175,000 75,000 P69.00 D

8.

PROBLEM 30-3 Book Value per Share Preference shares: Preference share capital issued Add: Subscribed preference shares Total Less: Treasury shares at par Shares outstanding and total par value

Shares 40,000 40,000 40,000

Total par value P4,000,000 P4,000,000 P4,000,000

Ordinary shares: Ordinary share capital issued Add: Subscribed ordinary shares Total Less: Treasury shares at par Shares outstanding and total par value

Shares 26,000 26,000 1,000 25,000

Total par value P1,040,000 P1,040,000 40,000 P1,000,000

Total shareholders' equity Less: Par value of outstanding preference shares Par value of outstanding ordinary shares Excess over par

87

11,970,000 4,000,000 1,000,000 6,970,000

C


CASE NO. 1 Question No. 1 & 2 Balances Preference dividend (4,000,000 x 8% x 4) Balance to ordinary shares Total shareholders’ equity Divide by: Outstanding shares Book value per share Question No. 3 & 4 Balances Preference dividend (4,000,000 x 8% x 4) Liquidation premium [(P105-P100) x 40,000] Balance to ordinary shares Total shareholders’ equity Divide by: Outstanding shares Book value per share



(1,280,000) 5,690,000

1,280,000


5,280,000 40,000 P132.00

5,690,000 6,690,000 25,000 P267.60




(1,280,000)

1,280,000

(200,000) 5,490,000

200,000

CASE NO. 2

5,480,000 40,000 P137.00

5,490,000 6,490,000 25,000 P259.60




(320,000) 6,650,000

320,000

CASE NO. 3 Question No. 5 & 6 Balances Preference dividend (4,000,000 x 8% x 1) Balance to ordinary shares Total shareholders’ equity Divide by: Outstanding shares Book value per share Question No. 7 & 8 Balances Preference dividend (4,000,000 x 8% x 1) Balance to ordinary shares Total shareholders’ equity

4,320,000 40,000 P108.00

6,650,000 7,650,000 25,000 P306.00




(320,000) 6,650,000

320,000

CASE NO. 4

4,320,000

88

6,650,000 7,650,000


Divide by: Outstanding shares Book value per share

Balances Preference dividend (4,000,000 x 8% x 1) Ordinary dividend (1,000,000 x 8% x 1) Balance for participation Preference (4/5 x 6,570,000) Balance to ordinary shares Total shareholders’ equity Divide by: Outstanding shares Book value per share SUMMARY OF ANSWERS: 1. B 2. C 3. B

40,000 P108.00

25,000 P306.00




(320,000)

320,000

(80,000) 6,570,000 (5,256,000) 1,314,000

80,000 5,256,000 9,576,000 40,000 P239.40

4.

B

5.

C

6.

A

7.

1,314,000 2,394,000 25,000 P95.76

D

8.

D

PROBLEM 30-4 Weighted Average with Bonus Issue Outstanding Date Shares Fraction 01/01/2015 200,000 x 120% 240,000 12/12 03/01/2015 15,000 x 120% 18,000 10/12 07/01/2015 (10,000) (10,000) 6/12 10/01/2015 4,000 4,000 3/12 Weighted average outstanding shares (A)

Average 240,000 15,000 (5,000) 1,000 251,000

PROBLEM 30-5 Weighted Average with Share Split Outstanding Date Shares Fraction 01/01/2015 220,000 x 4/1 880,000 12/12 03/01/2015 12,000 x 4/1 48,000 10/12 04/01/2015 9,000 9,000 9/12 10/01/2015 6,000 6,000 3/12 Weighted average outstanding shares (A)

89

Average 880,000 40,000 6,750 1,500 928,250


PROBLEM 30-6 Basic Earnings per Share Question No. 1 (B) Basic EPS = [P3,000,000 / 40,000] = P75 per share Question No. 2 (C) Basic EPS = [P3,000,000 - (10,000 x 10% x P50)]/40,000= P73.75 per share Question No. 3 (C) Basic EPS = [P3,000,000 - (10,000 x 10% x P50)]/40,000= P73.75 per share PROBLEM 30-7 Basic Loss per Share Question No. 1 (B) Basic LPS = [P2,000,000 / 30,000] = P66.67 per share Question No. 2 (C) Basic LPS = [P2,000,000 + (5,000 x 10% x P100)]/30,000= 68.33 per share Question No. 3 (D) Basic LPS = [P2,000,000 + (60,000)]/30,000= P68.67 per share PROBLEM 30-8 Basic and Diluted EPS with Convertible Bonds Payable Question No. 1 Basic EPS = P3,000,000 / 120,000 = P25 per share Question No. 2 P3,000,000 + [(P1,800,000 x 10%) x (1 – 30%)] Diluted = EPS 129,000 shares * Diluted EPS = P24.23 per share Weighted average of actual ordinary shares Add: Weighted average of potential ordinary shares from assumed conversion (1,800 x 5 x 12/12) Total weighted average of ordinary shares

120,000 9,000 129,000

Question No. 3 P3,000,000 + [(P1,800,000 x 10% 8/12) x (1 – 30%)] Diluted = EPS 126,000 shares * Diluted EPS = P24.48 per share Weighted average of actual ordinary shares Add: Weighted average of potential ordinary shares from assumed conversion (1,800 x 5 x 8/12) Total weighted average of ordinary shares Question No. 4 Basic EPS

=

P3,000,000 123,750*

90

120,000 6,000 126,000


=

P24.24

Weighted average of actual ordinary shares Add: Issuance of shares related to conversion (1,800 x 5 x 5/12) Total weighted average of actual ordinary shares issued Add: Assumed converted ordinary shares x months outstanding (1,800 x 5 x 7/12) Total weighted average outstanding ordinary shares

120,000 3,750 123,750 5,250 129,000

Question No. 5 P3,000,000 + [(P1,800,000 x 10% x 7/12) x (1 – 30%)] 129,000 shares * Diluted EPS = P23.83 per share Diluted EPS

=

SUMMARY OF ANSWERS: 1. A 2. D 3. B

4.

D

5.

B

PROBLEM 30-9 Basic and Diluted EPS with Convertible Bonds Payable Question No. 1 Basic EPS = P4,000,000 / 200,000 = P20 per share Question No. 2 P4,000,000 + [(P1,123,910 x 10% x 8/12) x (1 – 30%)] 210,000 shares* Diluted EPS = P19.30 per share Diluted EPS

=

Weighted average of actual ordinary shares Add: Weighted average of potential ordinary shares from assumed conversion(15,000 x 8/12) Total weighted average of ordinary shares

200,000 10,000 210,000

PROBLEM 30-10 Basic and Diluted EPS with Convertible Preference Shares Question No. 1 Basic EPS Basic EPS

P4,000,000 - [5,000 x P100 x 10%] 200,000 shares = P19.75 per share =

Question No. 2 Diluted EPS Diluted EPS

P4,000,000 225,000 shares* = P17.78 per share

=

*[200,000 + (5 x 5,000 x 12/12)]

91



P4,000,000 218,750 shares = P18.29 per share

=

*[200,000 + (5 x 5,000 x 9/12)] Question No. 4 Basic EPS Basic EPS

P4,000,000 – (5,000 x P100 x 10% x 9/12)] 206,250 shares = P19.21 per share =

*[200,000 + (5 x 5,000 x 3/12)] Question No. 5 Diluted EPS Diluted EPS

P4,000,000 225,000 shares = P17.78 per share

=

*[200,000 + (5 x 5,000 x 3/12) + (5 x 5,000 x 9/12)] SUMMARY OF ANSWERS: 1. A 2. D 3. C

4.

C

5.

D

PROBLEM 30-11 Basic and Diluted EPS with Warrants and Options Question No. 1 Basic EPS = P4,000,000 / 100,000 = P40 per share Question No. 2 Diluted EPS Diluted EPS

P4,000,000 101,200 shares * = P39.53 per share =

Weighted average of actual ordinary shares Add: Weighted average of incremental shares from assumed exercise of options (1,200 x 12/12) Total weighted average of ordinary shares

100,000 1,200 101,200

Note: Months outstanding for assumed exercise of options is 12 months, which is from date of issuance up to the reporting date. Option shares Multiply by: Total exercise price (120+10) Proceeds from assumed exercise of options Divided by: Average market price during the year Assumed treasury shares

92

9,000 130 1,170,000 150 7,800


Option shares Less: Assumed treasury shares Incremental shares

9,000 7,800 1,200



Weighted average of actual ordinary shares Add: Weighted average of incremental shares from assumed exercise of options (1,200 x 9/12) Total weighted average of ordinary shares

100,000 900 100,900



Weighted average of actual beginning ordinary shares Add: Weighted average number of shares from issuance of share options (9,000 x 4/12) Total weighted average of actual ordinary shares issued Add: Weighted average of incremental shares from assumed exercise of options (2,500 x 8/12) Total weighted average outstanding ordinary shares Option shares Multiply by: Total exercise price (120+10) Proceeds from assumed exercise of options Divided by: Market price at exercise date Assumed treasury shares Option shares Less: Assumed treasury shares Incremental shares SUMMARY OF ANSWERS: 1. A 2. C 3. B

4.

Basic EPS Basic EPS

3,000 103,000 1,667 104,667 9,000 130 1,170,000 180 6,500 9,000 6,500 2,500

D

PROBLEM 30-12 Multiple Potential Dilutive Securities Question No. 1

100,000

(A)

P2,360,000 – (60,000 x P100 x 6%) = 200,000 = P10 per share

93


Question No. 2 1) Check for initial test of dilution a. Options Dilutive. The exercise price (P50) is less than the average market price (P100). b.

Convertible preference shares Probably dilutive. The incremental EPS (P1.2) is less than the basic EPS (P10). (P6,000,000 x 6%) Incremental EPS = (60,000 x 5) Incremental EPS = P1.2 per share

c.

Convertible bonds Probably dilutive. The incremental EPS (P.84) is less than the basic EPS (P10). (P2,000,000 x 12%) x (1-30%) Incremental EPS = (P2,000,000/P1,000) x 100 Incremental EPS = P.84 per share

`

2) Rank the dilutive potential diluters from the most dilutive to the least dilutive. 1st Options 2nd Convertible bonds (incremental EPS of P.84 per share) 3rd Convertible preference share (incremental EPS of P1.2 per share) 3) Include potentially dilutive convertible securities one by one. Every time an item is included, calculate new earnings per share or new loss per share amount as follows: Ordinary Profit shares EPS Basic EPS from continuing *2,000,000 200,000 10 operations Options 0 10,000 Total 2,000,000 210,000 9.52 Convertible Bonds payable 168,000 200,000 Total 2,168,000 410,000 5.29 Convertible Preference share 360,000 300,000 Total 2,528,000 710,000 3.56 *Net Income less preference dividends [(P2,360,000 –(60,000 x P100 x 12%)] Answer: The final diluted EPS would be P3.56 per share. Question No. 3

Basic EPS Basic EPS

(B)

P500,000 = 200,000 = P2.5 per share

94

(E)



(E) P500,000 = 710,000 = P.70 per share

SUMMARY OF ANSWERS: 1. A 2. E 3. B

4.

E

PROBLEM 30-13 Rights Issue Fair value per share – right on Less: Theoretical value of one right* Theoretical ex-rights fair value per share *Value of one right

=

150 –40 4* + 1

=

P P 22

Adjustment factor (150/128)

1.17

Question No. 1 2013: Weighted average outstanding shares (40,000 x 1.17 x 12/12) Basic EPS (P562,500 /46,800)

(D)

Question No. 2 2014: Weighted average outstanding shares (40,000 x 1.17 x 3/12) [(40,000 + 10,000) x 9/12]

46,800 P12.02 / share

11,700 37,500

Basic EPS (P800,000/49,200)

(B)

49,200 P16.26 / share

Question No. 3 2015: Weighted average outstanding shares[(40,000 + 10,000) x 12/12] Basic EPS (P1,000,000 /50,000)

(A)

PROBLEM 30-14 Written Put Options

(C)

Incremental shares

=

150 22 128

(P350 – P280) x 10,000 P280

95

=

50,000

P20 per share

2,500 shares


PROBLEM 30-15 Comprehensive Problem Note to professor: Question No. 1 – Change 2014 to 2015. Item Unadjusted 1) 2) 3) 4) 5) 6) 7) 8) 9) Adjusted

Net Income 2014 2015 **1,300,000 *500,000 (50,000) 50,000 (30,000) 45,000 (45,000) ***28,000 (28,000) 5,000 (5,000) (20,000) 1,328,000 422,000

Retained Earnings 12/31/15 1,800,000 (30,000) (20,000) 1,750,000

* (P5 EPS x P1,000,000 / P10 par) ** (1,800,000 – 500,000 2015 net income) *** (P48,000 / 12 x 7 months) Question No. 1 (D) Refer to table above. Adjusted Net Income in 2015 is P422,000. Question No. 2 Refer to table above.

(C)

Question No. 3 (C) EPS 2015 (P422,000 / 100,000 shares) = P4.22 Question No. 4 (B) Ordinary share capital, P10 par Share premium Retained earnings, 12/31/2015 (as adjusted) Total shareholders' equity

1,000,000 500,000 1,750,000 3,250,000

Question No. 5 (B) BVPS (P3,250,000 / 100,000) = P32.50 SUMMARY OF ANSWERS: 1. D 2. C 3. C

4.

B

5.

96

B

Chapter 32 – Statement of Financial Position and Comprehensive Income

CHAPTER 32: STATEMENT OF FINANCIAL POSITION AND COMPREHENSIVE INCOME Note to professor: Page 1211

Existing data: On March 1, 2015, Joshua…

Change to: On March 1, 2016, Joshua…

PROBLEM 32-1 Current and Noncurrent Assets Question No. 1 Cash Trade receivables Inventory, including inventory expected in the ordinary course of operations to be sold beyond 12 months amounting to P800,000 Prepaid insurance Financial assets at fair value through profit or loss Noncurrent Assets held for sale building Total Current Assets (D) Question No. 2 Financial assets at fair value through other comprehensive income Financial assets at amortized cost Deferred tax asset Machinery Accumulated depreciation Land used as a plant site Total Noncurrent Assets (C)

400,000 1,500,000 1,200,000 240,000 300,000 650,000 4,290,000

600,000 1,000,000 150,000 800,000 (200,000) 920,000 3,270,000

PROBLEM 32-2 Current and Noncurrent Assets Question No. 1 Cash (1M+300,000+100,000-50,000-280,000) Accounts receivable (3M-200,000+50,000) Investments securities held for trading (1.8M-500,000) Inventories (800,000-200,000+(450,000/125%) Prepaid Expenses (only the prepaid insurance) Total Current Assets (A)

1,070,000 2,850,000 1,300,000 960,000 48,000 6,228,000

Question No. 2 Cash in sinking fund Long-term investments Deposit to supplier for inventories to be delivered in 16 months Cash surrender value Property, plant and equipment Total noncurrent Assets (A)

280,000 500,000 23,000 20,000 5,000,000 5,823,000

97


PROBLEM 32-3 Current and Noncurrent Liabilities Question No. 1 Bank overdraft Accounts payable (1M+25,000+100,000) Property dividends payable Income tax payable Note payable, due January 31, 2016 Cash dividends payable Financial liabilities at fair value through profit or loss Estimated expenses of meeting warranties Estimated damages as a result of unsatisfactory performance on a contract Loans payable-current Total current liabilities (A) Question No. 2 Bonds payable Premium on bonds payable Deferred tax liability Mortgage payable Loans payable-noncurrent Total noncurrent liabilities

(C)

300,000 1,125,000 400,000 300,000 500,000 80,000 130,000 335,000 268,000 100,000 3,538,000 3,400,000 200,000 400,000 1,000,000 400,000 5,400,000

PROBLEM 32-4 (Shareholders’ Equity) Ordinary share capital Share premium Subscribed ordinary share Subscriptions receivable Retained earnings unappropriated (6M-2M cost of treasury) Reserves: Retained earnings appropriated for treasury shares Reserve for contingencies Unrealized gain on FVTOCI Revaluation surplus Cumulative translation adjustment – debit Total Less: Treasury shares Total Shareholders' Equity (C)

98

10,000,000 1,000,000 100,000 (120,000) 4,000,000 2,000,000 3,000,000 1,000,000 4,000,000 (1,500,000) 23,480,000 2,000,000 21,480,000


PROBLEM 32-5 Adjusting and Nonadjusting events Note to the professor: The fifth bullet should be March 1, 2016 and not March 1, 2015. Loss on expropriation Impairment loss on Accounts Receivable Litigation loss Total adjusting events (A)

100,000 600,000 1,000,000 1,700,000

All other data are nonadjusting events. PROBLEM 32-6: Related Party Relationship Requirement No. 1 The following companies are considered to be related parties of Frozen Throne Company in accordance with PAS 24 Related Party Disclosures: Name Description 1) Sand King Co. Post-employment benefit plan established by Frozen Throne 2) Shadow Fiend Co. Associate 4) Harbringer Co. Subsidiary 5) Night Crawler Co. Subsidiary of Harbringer 6) Disruptor Co. Associate of Harbringer 7) Geomancer Co. Parent 8) Jakiro Co. Parent of Geomancer 9) Rylai Co. Sister company of Frozen Throne Company 10) Medusa Co. Key Management personnel of Frozen Throne Company. 11) Barathrum Co. Bank 16) Pudge Co. Joint venturer of Frozen Throne Company 17) Invoker Co. Joint venture of Frozen Throne Company Requirement No. 2 Regardless of whether there have been transactions between a parent and a subsidiary, an entity must disclose the name of its parent and, if different, the ultimate controlling party. Therefore, Frozen Throne Company should disclose Jakiro Co., its ultimate parent or controlling party.

99


PROBLEM 32-7 (Distribution costs and general and administrative expenses) Question No. 1 Advertising Delivery expense Rent for office space (500,000 X 1/2) Sales commissions Depreciation on delivery truck Total distribution costs

(E)

500,000 300,000 250,000 1,075,000 14,000 2,139,000

Question No. 2 Auditing and Accounting fees Officers’ salaries Rent for office space (500,000 X 1/2) Insurance Depreciation on office equipment Total general and administrative expenses(E)

300,000 625,000 250,000 200,000 15,000 1,390,000

PROBLEM 32-8 Comprehensive Income Net Sales Cost of goods sold Gross income Other income Share of profit of associate Total income Expenses: Distribution costs Administrative expenses Finance cost Other expense Income before income tax Income tax expense Income from continuing operations Income from discontinued operations Net Income Other comprehensive income: Revaluation surplus Translation gain Comprehensive income

4,000,000 2,500,000 1,500,000 30,000 125,000 1,655,000 60,000 120,000 35,000 80,000

300,000 50,000 (C)

Other income: Interest income Other expense: Loss on sale of equipment

30,000 80,000

100

295,000 1,360,000 408,000 952,000 200,000 1,152,000 350,000 1,502,000


COMPREHENSIVE PROBLEMS PROBLEM 32-9 Note to the professor:  Additional information number 1, the date should be April 1, 2019 and not April 1, 2016.  Additional information number 5, the date should be July 31, 2016 and not July 31, 2015. Unadjusted balances No. 1 NR-Noncurrent Land No. 2 No. 3 Inventory No. 4 Treasury shares No. 5 Prepaid insurancecurrent No. 6 Bonds payable No. 7 Accrued wages Mortgage-current No. 8 No. 9 Premium on BP No. 10 Allow. For DA Accum. Depr. bldg. Accum. Depr.-equipment Adjusted balances

CA 540,000

NCA 1,440,000

(70,000) (250,000) 0

70,000 250,000 0

70,000

(70,000)

CL 730,000

NCL 380,000

(23,000) 24,000

SHE 870,000

(23,000)

(24,000) (400,000)

400,000

180,000 40,000

(180,000) (40,000) 0 40,000

(40,000)

600,000 (B)

(12,000) (65,000) (30,000) 700,000 (A)

(12,000) 302,000 (C)

(65,000) (30,000) 1,548,000 (B)

550,000 (A)

PROBLEM 32-10

Unadjusted balances 1 2 3 4 5 6 7

Cash in bank 100

Inventory 1,800

Accts. Receivable 2,500

PPE 1,000

Accum. Depr 400

(14) 20 (5) -

4 (15) -

5 -

500

112.5

101

Depreciation 112.5


8 9 10 11 Adjusted balances

101 1. (B)

60 1,849

2,505

(20) 1,480

(4) 508.5

(4) 108.5

Continuation…

Unadjusted balances 1 2 3 4 5 6 7 8 9 10 11 Adjusted balances

Advances from customers -

Accounts payable 320

Interest payable

Bonds payable 1,924,144

Discount -

Amortization -

4 14 20 (5) 60 413 2. (E)

180 180

75,856 1,936,558

63.442 63.442

12.414 12,414

5 5

*000 Current Assets: Cash in bank Inventory Accounts Receivable

101,000 1,849,000 2,505,000

Noncurrent assets: PPE Less: Accumulated Depreciation Total assets

1,480,000 508,500

Current liabilities: Advances from customers Accounts payable Interest payable

5,000 413,000 180,000

Noncurrent liabilities: Bonds payable Discount on bonds payable Total liabilities SUMMARY OF ANSWERS: 1. B 2. E 3. A

2,000,000 63,442

4.

B

5.

102

E

6.

4,455,000

3. (A)

971,500 5,426,500

4. (B)

598,000

5. (E)

1,936,558 2,534,558

6. (C)

C


PROBLEM 32-11 Question No. 1 Unadjusted beginning balance (Credit) Add: Share premium credited to retained earnings Unadjusted retained earnings (Debit) Unadjusted Net loss (C)

70,000 40,000 143,200 253,200

Question No. 2 Unadjusted net loss Sales over, Net income over (20,000 x 140%) Ending inventory under, Net income over Gain under, Net income under Repairs expense over, Net income under Depreciation Expense building under, NI over (5% x 500,000) Depreciation Expense equipment under, Net income over Bad debts expense under, Net income over Adjusted net loss (C)

(253,200) (28,000) 20,000 1,000 20,000 (25,000) (20,100) (2,600) (287,900)

Computation of gain Net Selling Price Less: Carrying amount (10,000-(10,000 x 10% x 2) Gain on sale Computation of depreciation expense equipment: Beg. Balance of the eqpmt. net of asset disposed (201,000-10,000) 191,000 Asset disposed 10,000 Asset acquired 20,000 Depreciation expense

9,000 8,000 1,000

x 10% x 10% x 6/12 x 10% x 3/12

Equipment Unadjusted balance end Add: Amount credited for asset disposed Unadjusted balance beginning Add: Asset acquired Total Less: Cost of asset disposed Adjusted balance end

192,000 9,000 201,000 20,000 221,000 10,000 211,000

Computation of bad debts Required allowance (240,000-28,000) x 5% Less: Allowance for bad debts unadjusted Additional bad debts expense

10,600 8,000 2,600

103

19,100 500 500 20,100


Question No. 3 Cash Accounts Receivable (240,000-28,000) Less: Allowance for Bad Debts Advances to employees Interest Receivable Prepaid expenses Merchandise inventory (180,000 +20,000) Land Building Less: Accumulated Depreciation (150,000+25,000) Equipment Less: Accumulated Depreciation (59,200+20,100-2,000) Utility deposits Other Assets Total assets (D) Question No. 4 and 5 LIABILITIES AND CAPITAL Accounts payable Advances from customer Interest payable Accrued expense Mortgage Payable, current portion Total current Mortgage payable, noncurrent portion Total liabilities Ordinary shares Share Premium Retained earnings (deficit) Beg. Balance Less: Adjusted net loss Total liabilities and SHE SUMMARY OF ANSWERS: 1. C 2. C 3. D

4.

A

212,000 10,600

500,000 175,000 211,000 77,300

35,000 201,400 4,800 3,000 16,200 200,000 200,000 325,000 133,700 15,000 6,000 1,140,100

260,000 10,000 18,000 30,000 100,000 418,000 500,000 918,000

(A) 400,000 40,000 70,000 (287,900)

5.

(217,900)

222,100 1,140,100

A

PROBLEM 32-12

1. EI over, COS under 2014 2015

Sales 385,000

104

2014 COS EI 157,600 98,500 6,200 (6,200)

OPEX 69,300


2. Salaries expense under 2014 2015 3. Sales overstated 2014 2015 4. Expense overstated 2014 2015 5. Purch. Over, COS over 2014 2015 6. Sales under 2014 2015 7. Bad debt under 2014 (32.4+2.5) x 2% 2015 (66.1+4) x 2%-698 8. Dep. Expense under 2014 2015 Adjusted bal.

1. EI over, COS under 2014 2015 2. Salaries expense under 2014 2015 3. Sales overstated 2014 2015 4. Expense overstated 2014 2015 5. Purch. Over, COS over 2014 2015 6. Sales under 2014 2015 7. Bad debt under

14,600

(1,700)

(180)

(3,200)

2,500

698

14,500 385,800

Sales 420,000

160,600

92,300

2015 COS EI 203,800 164,900 (6,200) 8,500 (8,500)

98,918

OPEX 76,700

(14,600) 17,300 1,700 (800) 180 (200) 3,200 (4,600) (2,500) 4,000

105


2014 (32.4+2.5) x 2% 2015 (66.1+4) x 2%-698 8. Dep. Expense under 2014 2015 Adjusted bal.

704

422,400

204,700

156,400

Question No. 6 (A) Sales Less Cost of sales Gross Profit Less Operating expenses Add Other income Net profit Add: Retained earnings, beginning Retained earnings, December 31, 2014)

385,800 160,600 225,200 98,918 2,100 128,382 23,400 151,782

Question No. 7 (C) Cost Less Accumulated depreciation (14,500 x 2) Book value of machinery, December 31, 2015

145,000 29,000 116,000

Question No. 9 (B) Accounts receivable, 2014 (32,400+2,500) Less: Allowance for bad debts (32,400+2,500) * 2% Net realizable value Question No. 10 (B) Sales 2015 Less: Cost of sales Gross Profit Less: Operating expenses Add: Other income Net income SUMMARY OF ANSWERS: 1. C 2. C 3. D 6. A 7. C 8. B

34,900 698 34,202

422,400 204,700 217,700 94,584 1100 124,216 4. 9.

A B

5. 10.

106

C B

14,500 94,584


PROBLEM 32-13

Question Nos. 1-3 Net Income 2014 2015 290,000 375,000 100,000 (100,000) (30,000) 30,000 16,000 5,000 (5,000) 6,000

Unadjusted balances 1. Sales under, NI under. AR under 2. EI 2014 over, NI over EI 2015 under, NI under 3. Income under 2014 Income under 2015 4. Depreciation exp. 2014 over, NI under 5. Insurance exp. over, NI under (48,000 x 6/12) 6. Rent expense over, NI under (12,000 x 3/12) Adjusted

25,000

Question No. 4 Current liabilities Long-term liabilities Total liabilities Question No. 5 Capital stock Retained earnings Total shareholders’ equity

Total Assets 2014 750,000 100,000 (30,000) 5,000 25,000

(24,000)

(24,000)

(24,000)

3,000 369,000 (A)

(3,000) 295,000 (B)

3,000 829,000 (C)

(D)

50,000 150,000 200,000

(A)

100,000 649,000 799,000

The balance of the retained earnings on December 31, 2015 is computed as follows: Retained earnings, January 1, 2014 35,000 Add Net income 2014 369,000 2015 295,000 Retained earnings, December 31, 2015 699,000 SUMMARY OF ANSWERS: 1. A 2. B 3. C

4.

D

5.

107

A


PROBLEM 32-14 Question Nos. 1 and 2 Unadjusted net income 1) BD expense under, NI over (392,000 x 10% )27,000 2) Unreal. Gain (Loss) (81,000-78,000) and (62,000-81,000) 3) EI overstated, NI over EI overstated, NI over 4) *Expense over, NI under Depreciation expense under, NI over **Gain on sale under, NI under 5) Exp. Over Adjusted net income

2014 195,000

2015 220,000 (2,200)

3,000 (4,000)

(19,000) 4,000 (6,100)

10,900 1,800 206,700 (B)

(1,100) 2,500 (900) 197,200 (B)

*(Expenses recorded P12,000 should be (12,000-1,000)/10=12,000-1,000) **Net Selling Price 2,500 Less carrying amount Cost 17,500 Less Accumulated depreciation 17,500 0 Gain on sale 2,500 Question No. 3 Cash Accounts receivable (296,000-18,000) Trading securities at Fair value Merchandise inventory (202,000-4,000) Prepaid insurance (2,700-1,800) Total current assets (C) Question No. 4 Cash Accounts receivable (392,000 x 90%) Trading securities at Fair value Merchandise inventory (207,000-6,100) Prepaid insurance Total current assets Property, plant and equipment (169,500+12,000-17,500) Less: Accumulated. Depreciation (121,600+1,100+1,100-17,500) Net Book value Total Assets (B)

108

82,000 278,000 81,000 198,000 900 639,900

163,000 352,800 62,000 200,900 900 779,600 164,000 106,300 57,700 837,300


Question No. 5 Share capital (20,000 x P10) Share premium Retained earnings (206,700+197,200+*52,000) Adjusted Shareholders' equity (A) *(247,000-195,000) SUMMARY OF ANSWERS: 1. B 2. B 3. C

4.

B

5.

200,000 60,000 455,900 715,900

A

PROBLEM 32-15 Questions No. 1 to 3

1 2 3 4 5 6

7

Unadjusted balances 2014 Purchases over NI under 2014 Ins. Expense Over, NI Under – Prepaid insurance 2014 Sales under, NI under 2014 Bad debts exp. under, NI over (60,000 x 4%) Sales over, NI over Loss on sale under, NI over Admin exp over, NI under Depr. Under, NI over Equipment Building Patent EI under, NI under

Current

Total

Assets

NCA

SC and Share Prem

600,000 (40,000)

915,000

3,100,000

1,420,000

10,000 60,000

(5,000) (60,000)

5,000

(2,400)

(3,600) (20,000) (12,000) 10,000

(6,000)

R/E Jan. 1

Net Income

1,448,000 40,000

1,555,600 1. (B)

(118,250) (100,000) (55,000) 45,000 241,150 2. (D)

Net Proceeds Cost Less: Accumulated Depreciation Loss on sale

(32,000) 10,000

45,000 959,000 3. (A)

(118,250) (100,000) (55,000) 2,804,750

20,000 40,000 8,000

Depreciation: Equipment - old (1.2M-40,000+10,000) x 10% Equipment disposed (40,000 x 10% x 3/12) New equipment (10,000 x 10% x 3/12) Jan. 1 Total Depreciation Question No. 4 Total current assets Add: Non-current assets Total Assets

(C)

109

32,000 (12,000) 117,000 1,000 250 118,250

959,000 2,804,750 3,763,750

1,420,000


Question No. 5 Preference share Ordinary share Share Premium Retained earnings Jan. 1 Net income Total Shareholders’ Equity SUMMARY OF ANSWERS: 1. B 2. D 3. A

100,000 1,100,000 220,000 1,555,600 241,150 3,216,750

(B) 4.

C

5.

B


7) Dividends of P.05 per share were declared on March 25, 2015. – Change 2015 to 2016.

Questions No. 1 to 2 STATEMENT OF COMPREHENSIVE INCOME Revenue 12,000,000 Less Cost of sales (7,100,00+80,000) 7,180,000 Operating expenses (3,480,000+120,000) (3,600,000) Finance costs 240,000 Profit before tax 980,000 Income tax expense 284,200 Profit for the period (B) 695,800 Other comprehensive income Revaluation surplus 800,000 Total comprehensive income (C) 1,495,800

Beg. Balance, 12/31/2015 Total compre. Income Issue of share capital Share issue expenses Balance

STATEMENT OF CHANGES IN EQUITY Ord. Share Retained Other share Prem. earnings compre. income 2,500,000

0

1,424,200 695,800

500,000

1,500,000

3,000,000

(150,000) 1,350,000

110

Total

3,924,200 800,000

1,495,800 2,000,000

2,120,000

800,000

(150,000) 7,270,000


Question No. 3 Inventories Trade and other receivables (980,000+15,000) Cash and Cash equivalents Total Current Assets (E)

1,720,000 995,000 2,059,200 4,774,200

Question No. 4 Borrowings Trade and other payables (400,000+20,000) Current tax payable (*284,200-**200,000) Total current liabilities (D)

2,000,000 420,000 84,200 2,504,200

*Income tax payable of (980,000 x 29%)=P284,200 **Tax refundable Question No. 5 Ordinary shares Share premium Retained earnings Other comprehensive income Total shareholders’ equity SUMMARY OF ANSWERS: 1. B 2. C 3. E

3,000,000 1,350,000 2,120,000 800,000 7,270,000

(B)

4.

D

5.

111

B

Chapter 33 – Statement of Cash Flows

CHAPTER 33: STATEMENT OF CASH FLOWS PROBLEM 33-1 Indirect Method - Operating Activities Net income Decrease in accounts receivable Increase in accounts payable Depreciation expense Net cash provided by operating activities

(A)

668,000 96,000 44,000 20,000 828,000

PROBLEM 33-2 Indirect Method - Operating Activities Net income Increase in accounts receivable Decrease in prepaid expenses Increase in accumulated depreciation-depreciation expense Decrease in accounts payable Net cash provided by operating activities (A)

292,000 (40,000) 12,000 64,000 (16,000) 312,000

PROBLEM 33-3 Investing Activities Note to professor: The question should be net cash provided by investing activities and not financing activities. Cash acquisition of fair value through other comprehensive securities Proceeds from sale of the company’s used equipment Purchase of equipment Net cash provided by investing activities (E)

(100,000) 1,000,000 (560,000) 340,000

PROBLEM 33-4 Financing Activities Issuance of shares of the company’s own ordinary shares Dividends paid to the company’s own shareholders Repayment of principal on the company’s own bonds Net cash provided by financing activities (A)

112

680,000 (28,000) (160,000) 492,000


COMPREHENSIVE PROBLEMS PROBLEM 33-5 Question No. 1

(B) Accounts receivable

Beg. balance – AR Sales on account

125,0000 1,000,000

135,000 -

-

990,000 -

Recoveries

Total Question No. 2

1,125,000

Balance end - AR Sales returns and allowance* Sales discounts Collections (squeeze) Write-off

1,125,000

(C) Accounts Payable Trade

Payments (squeezed) Purchase returns and allow. Purchase discounts Balance end – AP Total

525,000 0

190,000 485,000

Beg. balance – AP Purchases

0 150,000 675,000 Merchandise Inventory

Beg. Balance Net Purchases (squeeze)

175,000 485,000

Total

660,000

Question No. 3 Payments (squeezed) Balance end Total

160,000 500,000

Balance end Cost of Sales

(D) Deferred income taxes 190,000 85,000

175,000 100,000

Beg. balance Income tax expense

275,000

Question No. 4 (D) Collection of accounts receivable Payment of accounts payable Payment of income taxes* Payment of operating expenses Net cash provided by (or used in) Operating activities *Computation of Payment of income taxes

113

990,000 (525,000) (190,000) (180,000) 95,000


Prepaid insurance Beg. Balance Payment (squeezed)

25,000 180,000

Total

40,000 165,000

Balance end Operating expenses excluding depreciation (260,000-95,000)

205,000

Depreciation expense=245,000-150,000 =95,000 Question No. 5 Receipt of cash from note payable-bank (200,000-160,000) Issuance for cash of ordinary shares(225,000-200,000) Dividends paid Net cash provided used in Financing activities (A)

40,000 25,000 (75,000) (10,000)

Question No. 6 *Proceeds from Sale of investment Cash acquisition of PPE (540,000-460,000) Net cash provided used in investing activities

20,000 (80,000) (60,000)

(B)

Cost of investment sold (190,000-180,000) Add: Gain on sale Proceeds from sale of investment SUMMARY OF ANSWERS: 1. B 2. C 3. D

4.

D

5.

10,000 10,000 20,000 A

6.

B

PROBLEM 33-6 Question No. 1 Beg. Balance Sales on account

Question No. 2 Bal. end Payment

(A) Accounts receivable 600,000 1,250,000 5,000,000 4,330,000 20,000 5,600,000 5,600,000 (B) Accounts payable 4,800,000 4,500,000 1,900,000 2,200,000 6,700,000 6,700,000

114

Bal. end Collections Write-off

Beg. Balance Net purchases



Merchandise inventory 2,000,000 2,200,000 2,200,000 2,000,000 4,200,000 4,200,000

Bal. end Cost of goods sold

Question No. 3 (A) Net income Amortization of premium of Investment in Bonds Depreciation Gain on sale of equipment Amortization of franchise Decrease (or increase) in Trading securities Decrease (or increase) in Net AR Decrease (or increase) in Inventories Increase (or decrease) in AP Increase (or decrease) in DTL Net cash provided by (or used in) Operating activities Computation of accumulated depreciation: Beg. Balance Add: Depreciation expense Less: Accumulated depreciation of asset sold Balance end

3,200,000 900,000 200,000 3,900,000

Gain or (loss) on sale Net Selling Price Less: Carrying amount Cost Less: Accumulated Depreciation Gain on sale Amortization table: Interest Date Collection 1/1/2014 12/31/2014 480,000 12/31/2015 480,000

700,000 60,109 900,000 (220,000) 100,000 (450,000) (530,000) (200,000) 300,000 200,000 860,109

500,000 480,000 200,000

Interest Income


425,355 419,891

54,645 60,109

Question No. 4 (B) Acquisition of PPE Sale of PPE Net cash provided by (or used in) investing activities Question No. 5 (D) Dividends paid Cash receipts-issuance of OS (10,000 x 120)

115

280,000 220,000

Present value 4,253,552 4,198,907 4,138,798 (1,000,000) 500,000 (500,000)

(300,000) 1,200,000


Cash paid for Treasury shares Net cash provided by (or used in) Financing activities SUMMARY OF ANSWERS: 1. A 2. B 3. A

4.

B

5.

(500,000) 400,000

D

PROBLEM 33-7 Note to the professor: Kindly change the name of Josiah Inc. to Jonalyn Inc. in additional information number 1. Question No. 1 Bal. end Payment


(D) Accounts payable 3,400,000 3,500,000 1,900,000 1,800,000 5,300,000 5,300,000 Merchandise inventory 2,000,000 1,800,000 1,800,000 2,000,000 3,800,000 3,800,000



Question No. 2 (B) Income tax payable/Deferred tax liability Bal. end-ITP 150,000 200,000 Beg. Balance-ITP Bal. end-DTL 700,000 500,000 Beg. Balance-DTL Payment 150,000 300,000 Income tax expense 1,000,000 1,000,000 Question No. 3 (A) Net income Share in the net income of associate Cash dividends from associate Depreciation Loss on sale of equipment Amortization of franchise Decrease (or increase) in Trading securities Decrease (or increase) in Net AR Decrease (or increase) in Inventories Increase (or decrease) in AP Increase (or decrease) in ITP Increase (or decrease) in DTL Net cash provided by (or used in) Operating activities

116

700,000 (1,024,000) 280,000 200,000 100,000 100,000 (90,000) 200,000 (100,000) (50,000) 200,000 516,000


Year of Acquisition Percentage of ownership Cost of Investment Less: Book value of net asset acquired Excess of cost over book value Over or (under)valued asset Inventory Machinery Land Goodwill Amortization of Over (Under) valued asset Inventory Machinery Divide by: Remaining life Amortization of Under (over) valued asset No of months divide by 12 (1st year) Amortization of Under (over) valued asset Net income of the associate Dividends declared and paid Net income of the associate Multiply by: Percentage of ownership Share in the net income Dividends declared and paid Multiply by: Percentage of ownership Dividends received

20% 4,000,000 2,400,000 1,600,000 (40,000) 240,000 1,800,000 2014 40,000

2015

(240,000) 10 (24,000) 1 (24,000)

(24,000) 1 (24,000)

2014 4,000,000 1,000,000 2014 4,000,000 20% 800,000 1,000,000 20% 200,000

2015 5,000,000 1,400,000 2015 5,000,000 20% 1,000,000 1,400,000 20% 280,000

2015 Investment Income Share in the Net Income Add: Amortization of overvalued machinery Net investment income - 2015

1,000,000 24,000 1,024,000

Investment in Associate Beg. Balance Add: Net investment income Less: Dividends received Balance end

4,584,000 1,024,000 280,000 5,328,000

Question No. 4 (B) Cash receipt from loan receivable Acquisition of PPE Sale of PPE Net cash provided by (or used in) investing activities

117

120,000 (2,000,000) 500,000 (1,380,000)


Question No. 5 (D) Dividends paid Cash receipts-issuance of Ordinary shares Cash receipts-reissuance of Treasury shares Net cash provided by (or used in) Financing activities SUMMARY OF ANSWERS: 1. D 2. B 3. A

4.

B

5.

(350,000) 1,120,000 105,000 875,000

D

PROBLEM 33-8 Note to the professor: Please change the name of Josiah Inc. to Samuel Inc. in additional information number 1. Question No. 1 Bal. end Payment


(D) Accounts payable 4,000,000 3,500,000 1,700,000 2,200,000 5,700,000 5,700,000 Merchandise inventory 1,500,000 1,700,000 2,200,000 2,000,000 3,700,000 3,700,000



Question No. 2 (B) Income tax payable/Deferred tax liability Bal. end-ITP 150,000 200,000 Beg. Balance-ITP Bal. end-DTL 700,000 500,000 Beg. Balance-DTL Payment 270,000 420,000 Income tax expense 1,120,000 1,120,000 Question No. 3 (A) Net income Share in the net income of associate Cash dividends from associate Depreciation Loss on sale of equipment Amortization of franchise Amortization of disc on investment in bonds Decrease (or increase) in Net Accounts Receivable Decrease (or increase) in Inventories Increase (or decrease) in Accounts Payable Increase (or decrease) in Income Tax Payable Increase (or decrease) in Deferred Tax Liability Net cash provided by (or used in) Operating activities

118

980,000 (630,000) 225,000 200,000 150,000 100,000 (12,708) (90,000) (200,000) 500,000 (50,000) 200,000 1,372,292


Amortization table: Interest Date Collection 01/01/2015 12/31/2015 100,000 12/31/2016 100,000

Interest Income


112,708 114,233

12,708 14,233

Year of Acquisition Percentage of ownership Cost of Investment Less: Book value of net asset acquired Excess of cost over book value Over or (under)valued asset Inventory Machinery Land Goodwill Amortization of Over (Under) valued asset Inventory Machinery Divide by: Remaining life Amortization of Under (over) valued asset No of months divide by 12 (1st year) Amortization of Under (over) valued asset Net income of the associate Dividends declared and paid Net income of the associate Multiply by: Percentage of ownership Share in the net income Dividends declared and paid Multiply by: Percentage of ownership Dividends received 2014 Investment Income Share in the Net Income Add: Amortization of overvalued machinery Less: Undervaluation of inventory Net investment income - 2014 Investment in Associate Cost of investment Add: Net investment income Less: Dividends received Balance end, 12/31/2014

Present value 939,230 951,938 966,170

25% 3,500,000 2,500,000 1,000,000 (50,000) 300,000 1,250,000 2014 50,000

2015

(300,000) 10 (30,000) 1 (30,000)

(30,000) 1 (30,000)

2014 2,000,000 800,000 2014 2,000,000 25% 500,000 800,000 25% 200,000

2015 2,400,000 900,000 2015 2,400,000 25% 600,000 900,000 25% 225,000 500,000 30,000 50,000 480,000 3,500,000 480,000 200,000 3,780,000

119


2014 Investment Income Share in the Net Income Add: Amortization of overvalued machinery Net investment income - 2014

600,000 30,000 630,000

Investment in Associate Beginning balance, 01/01/2015 Add: Net investment income Less: Dividends received Balance end, 12/31/2015

Beg. Balance Acquisition cost Present value of MLP

3,780,000 630,000 225,000 4,185,000

Property, Plant and Equipment 9,000,000 900,000 Cost of equipment sold 600,000 9,069,180 bal. end 369,180 9,969,180 9,969,180

Accumulated depreciation Bal. end 3,000,000 3,200,000 Beg. Balance Accumulated depreciation of asset sold 400,000 200,000 Depreciation expense 3,400,000 3,400,000 Net Selling Price Less: Carrying amount Cost Less: Accumulated Depreciation Loss on sale

350,000 900,000 400,000

Question No. 4 (B) Cash acquisition of Investment in Bonds Acquisition of PPE Sale of PPE Net cash provided by (or used in) investing activities Present Value of Periodic Payment (100,000 x 3.4869) Add: Present Value of Bargain Purchase option(30,000 x 0.683) Present Value of Minimum lease payments Amortization table: Interest Date Payment 12/31/2015 12/31/2015 100,000 12/31/2016 100,000

Interest Expense

Amortization

26,918

100,000 73,082

120

500,000 (150,000)

(939,230) (600,000) 350,000 (1,189,230) 348,690 20,490 369,180

Present value 369,180 269,180 196,098


Question No. 5 (D) Payment of principal finance lease liability Dividends paid Cash receipts-issuance of Ordinary Shares Net cash provided by (or used in) Financing activities

(100,000) (350,000) 720,000 270,000

Share Capital Beginning balance Issuance for cash Issuance thru SDP Balance end

10,000,000 600,000 1,910,000 12,510,000

Share Premium Beginning balance Issuance for cash Balance end

1,000,000 120,000 1,120,000

Retained Earnings Beginning balance Add: Net income Less: Dividends declared-cash Less: Share dividend Balance end

3,740,000 980,000 350,000 1,910,000 2,460,000

SUMMARY OF ANSWERS: 1. D 2. B 3. A

4.

B

5.

D

PROBLEM 33-9 Question No. 1 Cash Accounts receivable Allowance for doubtful accounts Inventories Total current assets (A)

5,639,900 1,000,000 (180,000) 2,200,000 8,659,900

Question No. 2 Investment in bonds - FA at amortized cost Property plant and equipment Accumulated depreciation Franchise - net Total noncurrent assets (A)

3,861,105 9,520,000 (3,900,000) 500,000 9,981,105

Total assets

18,641,005

121


Question No. 3 Liabilities and equity Accounts payable Dividends payable Total current liabilities

(A)

4,800,000 400,000 5,200,000

Question No. 4 Deferred tax liability Total noncurrent liabilities

(C)

700,000 700,000

Total liabilities

5,900,000

Question No. 5 Ordinary shares, P100 par value Share Premium Treasury shares at cost Retained earnings Total shareholders' equity (C)

11,000,000 1,200,000 (500,000) 1,041,005 12,741,005

Total liabilities and equity

18,641,005

Beg. Balance Sales on account

Bal. end Write-off

Accounts receivable 600,000 1,000,000 5,000,000 4,600,000 5,600,000 5,600,000

Bal. end Collections Write-off

Allowance for doubtful accounts 180,000 40,000 Beg. Balance Doubtful Account 140,000 expense 0 Recovery 180,000 180,000


Merchandise inventory 2,000,000 2,200,000 2,200,000 2,000,000 4,200,000 4,200,000

Bal. end Payment

Accounts payable 4,800,000 4,500,000 1,900,000 2,200,000 6,700,000 6,700,000

122




Amortization table: Interest Date Collection 01/01/2014 12/31/2014 320,000 12/31/2015 320,000 12/31/2016 320,000 12/31/2017 320,000 Beg. Balance Acquisition cost Present value of MLP

Interest Income


374,637 380,100 386,111 392,816

54,637 60,100 66,079 72,816

Present value 3,746,368 3,801,005 3,861,105 3,927,184 4,000,000

Property, Plant and Equipment 9,000,000 480,000 Cost of equipment sold 1,000,000 9,520,000 bal. end 10,000,000 10,000,000

Accumulated depreciation Bal. end 3,900,000 3,200,000 Beg. Balance Accumulated depreciation of asset sold 200,000 900,000 Depreciation expense 4,100,000 4,100,000 Net Selling Price Less: Carrying amount Cost Less: Accumulated Depreciation Gain on sale

500,000 480,000 200,000

280,000 220,000

Ordinary shares Beginning balance Issuance for cash Balance end

10,000,000 1,000,000 11,000,000

Share Premium Beginning balance Issuance for cash Balance end

1,000,000 200,000 1,20,000

Retained Earnings Beginning balance Add: Net income Less: Dividends declared-cash Balance end

461,005 980,000 400,000 1,041,005

SUMMARY OF ANSWERS: 1. A 2. A 3. A

4.

C

5.

123

C

Applied Auditing Asuncion Solman

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