LIABILITIES & EQUITY ALASTOY BSA 2-

PREMIUMS AND WARRANTY LIABILITY

In December 2016, Cucumber Company began including one coupon in each package of goodies that it sells and offering a pen in exchange for P30 and three coupons. The pens cost P60 each. Eventually, 70% of the coupons will be redeemed. During December, the entity sold 120,000 packaged of goodies and no coupons were redeemed.
On December 31, 2016, what amount should be reported as estimated liability for coupons?
a. 1,200,000 c. 1,680,000
b. 840,000 d. 2,400,000

Answer is b
Solution:
Coupons to be redeemed (70% x 120,000) 84,000
Divide by 3
Number of pens 28,000
Multiply by net cost of pen (60-30) 30
Estimated liability – December 31, 2015 840,000

At the beginning of the current year, Masigasig Company began marketing a bottled chocolate called ChocoMoTo. To help promote the product, the management is offering a special ChocoMoTo mug to each customer for every 10 marked bottle cops of ChocoMoTo. The entity estimated that out of the 250,000 bottles of ChocoMoTo sold during the year, only 80% of the marked bottle cops would be redeemed. During the year, the entity purchased 10,000 mugs at a total cost of P400,000 and already distributed 15,000 mugs to customers.
What is the premium liability at year-end?
a. 200,000 c. 400,000
b. 800,000 d. 600,000

Answer is a
Solution:
Mugs to be distributed (80% x 250,000 / 10) 20,000
Mugs already distributed 15,000
Mugs outstanding 5,000
Estimated liability at year-end (40 x 15,000) 200,000

Shark Company sells gift certificates redeemable only when merchandise is purchased. These gift certificates have no expiration date. Upon redemption or expiration, the entity recognizes unearned revenue as realized.
Information for the current yeas is as follows:
Unearned revenue, January 1, 2016 550,000
Gift certificates sold 1,250,000
Gift certificates redeemed 750,000
Gift certificates expected not to be redeemed 50,000
Cost of goods sold 50%

On December 31, 2016, what amount should be reported as unearned revenue?

a. 1,000,000 c. 1,050,000
b. 500,000 d. 550,000

Answer is a
Solution:
Unearned revenue – January 1, 2016 550,000
Add: Gift certificates sold 1,250,000
Total 1,800,000
Less: Gift certificates redeemed 750,000
Gift certificates expected not to be redeemed 50,000 800,000
Unearned revenue – December 31, 2016 1,000,000

On July 1, 2016, Xilam Company began offering a new product for sale under one-year warranty. Of the 60,000 units in inventory on July 1, 2015, 40,000 had been sold by September 30, 2016. Based on its experience with similar products, the entity estimated that the average warranty cost per unit sold would be P90. Actual warranty costs incurred from Jul 1 through September 31, 2016 amounted to P800,000.
On September 31, 2016, what is the estimated warranty liability?
a. 2,600,000 c. 2,800,000
b. 1,800,000 d. 4,400,000

Answer is c
Solution:
Warranty expense (40,000 x 90) 3,600,000
Actual warranty cost ( 800,000)
Warranty liability – September 31, 2016 2,800,000

Mayday Company introduced a new product that carried a 2-year warranty against defects. The estimated warranty cost related to sales is 4% in the year of sale and 5% in the year after sale. Sales are P3,800,000 for 2016 and P 4,500,000 for 2017. Actual warranty expenditures are P150,000 for 2016 and P400,000 for 2017.
What amount should be reported as estimated warranty liability on December 31, 2017?
a. 377,000 c. 192,000
b. 197,000 d. 0

Answer is b
Solution:
Warranty expense:
2016 (9% x 3,800,000) 342,000
2017 (9% x 4,500,000) 405,000 747,000
Actual warranty expenditures
2016 150,000
2017 400,000 550,000
Warranty liability – December 31, 2017 197,000

During 2016, Yamashita Co. introduced a new line of machines that carry a three-year warranty against manufacturer's defects. Based on industry experience, warranty costs are estimated at 2% of sales in the first year of sale, 3% in the year after sale, and 4% in the second year after sale. Sales and actual warranty expenditures for the first three-year period were as follows:
Sales Actual Warranty Expenditures
2016 P 600,000 P 4,000
2017 1,200,000 35,000
2018 1,600,000 120,000
P3,400,000 P159,000

What amount should Yamashita report as a liability at December 31, 2018?
a. 0 c. 147,000
b. 24,000 d. 112,000

Answer is c
Solution:

Warranty expense:
2016 (9% x 600,000) 54,000
2016 (9% x 1,200,000) 108,000
2017 (9% x 1,600,000) 144,000 306,000
Actual warranty expenditures
2016 4,000
2016 35,000
2017 120,000 159,000
Warranty liability – December 31, 2018 147,000

7. Delfin Co. includes one coupon in each bag of dog food it sells. In return for eight coupons, customers receive a leash. The leashes cost Delfin P3 each. Delfin estimates that 40 percent of the coupons will be redeemed. Data for 2016 and 2017 are as follows:
2016 2017
Bags of dog food sold 500,000 600,000
Leashes purchased 18,000 22,000
Coupons redeemed 120,000 150,000

What is the premium liability at December 31, 2017?

a. 16,875 c. 33,750

b. 31,875 d. 63,750

Answer is d
Solution:
Coupons to be redeemed – 2016 (40% x 500,000) 200,000
Less: Coupons redeemed – 2016 120,000
Balance 80,000
Add: Coupons to be redeemed – 2017 (40% x 600,000) 240,000
Balance 320,000
Less: Coupons redeemed – 2017 150,000
Total 170,000
Premiums to be distributed (170,000/8) 21,250
Premium liability – December 31, 2017 (21,250 x P3) 63,750

Similac Company offered a cash rebate of P8 on each P20 package of batteries sold during the current year. Historically, 10% of customers mail in the rebate form. During the year, 8,500,000 packages of batteries are sold, and 420,000 P8 rebates are mailed to customers.
What amount of rebate expense and liability for rebates should be reported respectively at year-end?
a. 6,800,000 and 3,440,000
b. 6,800,000 and 6,800,000
c. 3,440,000 and 3,360,000
d. 3,440,000 and 3,440,000

Answer is d
Solution:
Rebate expense (8,500,000 x 10% x 8) 6,800,000
Rebates redeemed (420,000 x 8) (3,360,000)
Liability for rebates at year-end 3,440,000

Diego Company sells its only line product at average selling price of P500 per unit. To promote its sales, a gift item is offered to customers on the return of 5 empty containers as proof of purchase, plus remittance of P50. The cost of gift item is P150/pc., and it is estimated that 80% of the proof of purchase will be redeemed. For the current year, Diego Company's total sales for the product amounted to P6,000,000, of which actual containers redeemed were 7,600.
How much of the estimated liability for premium payable should be reported in its current year's end balance sheet?
a. 20,000 c. 60,000
b. 40,000 d. 240,000

Answer is b
Solution:
Containers to be redeemed (6,000,000 / 500 x 80%) 9,600
Less: Containers redeemed 7,600
Balance 2,000
Gift items to be distributed (2,000 / 5) 400
Estimated Premium Liability – year end (400 x 100) 40,000

10. At December 31, 2016, Dora Company had 1,000 gift certificates outstanding, which had been sold to customers during 2016 for P75. Dora operates on a gross margin of 60%. How much revenue pertaining to the 1,000 outstanding gift certificates should be deferred at December 31, 2016?
a. P0 c. P30,000
b. P45,000 d. P75,000

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

DEFERRED REVENUE

Malan Depot sells gift certificates redeemable only when product is purchased. These gift certificates have no expiration date. Upon redemption or expiration, the entity recognizes the unearned revenue as realized.
Information for the current year is as follows:
Unearned revenue, Jan. 1, 2013 675,000
Gift certificates sold 2,250,000
Gift certificates redeemed 1, 950,000
Gift certificates expected not to be redeemed 100,000
Cost of goods sold 60 percent

On December 31, 2013, what amount should be reported as unearned revenue?
a. 595,000 c. 875,000
b. 485,000 d. 975,000

Answer is c
Solution:
Unearned Revenue, January 1, 2013 675,000
Add: Gift certificates sold 2,250,000
Total 2,925,000
Less: Gift Cert. Redeemed 1,950,000
Gift Cert. expected not to be redeemed 100,000 2,050,000
Unearned Revenue – December 31, 2013 875,000

Stilt Corporation sells subscriptions to a directory that is published semiannually and shippd to subscribers on April 15 and October 15. Subscriptions received after the March 31 and September 30 cut off dates are held for the next publication. Cash from subscribers is received evenly during the year and is credited to deferred revenue from subscriptions. Data relating to current year are as follows:
Deferred Revenue from subscriptions, January 1, 2010 1,500,000
Cash receipts from subscribers 7,200,000

On December 31, 2010, what amount should be reported as deferred revenue from subscriptions?

a. 1,800,000 c. 3,600,000
b. 3,300,000 d. 5,400,000

Answer is a
Solution:
Monthly Subscriptions (7,200,000/12) 600,000
Subscriptions after September 30
October 600,000
November 600,000
December 600,000
Total Unearned Subscription revenue – 12/31/10 1,800,000

In November and December 2009, Freud Company, a magazine publisher, received P7,200,000 for 1,000 3-year subscriptions at P2400 per year, starting with the January 2010 issue. The entity elected to include the entire P7,200,000 in the 2010 income tax return
What amount should be reported in the income statement for subscriptions revenue for 2009?
a. P7,200,000 c. P 400,000
b. P2,400,000 d. P 0

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

Ikaw lang sapat na Company sells magazine subscriptions for one year, two year or three year period. Cash receipts from subscribers are credited to magazine subscriptions collected in advance, and this account had a balance of P 2,400,000 on December 31, 2012 expire as follows :
During 2013 650,000
During 2014 830,000
During 2015 470,000

On December 31, 2012, what amount should be reported as magazine subscriptions collected in advance?
a. P 500,000 c. P 1,900,000
b. P 1,200,000 d. P 2,400,000

Answer is c
Solution:
2013 650,000
2014 830,000
2015 470,000
Total 1,900,000

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

#1 60,000 - 15
#2 30,000 4,200 12
#3 5,500 9

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

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

a. 330,000 c. 660,000
b. 438,000 d. 990,000

Answer is c
Solution:

Plan #1 (50,000 x 15) 750,000
Plan #2 (20,000 x 12) 240,000

Total initial payments 990,000

Deferred revenue – December 31, 2015 (990,000 x 8/12) 660,000

Plan #2 (3,000 x 12 x 4) 144,000
Plan #3 (5,000 x 9 x 4) 180,000

Total monthly fees – already earned 324,000

Umasa Company sells office equipment service contracts agreeing to service equipment for a two-year period. Cash receipts from contracts are credited to unearned service contract revenue and service contract costs are charged to service contract expense as incurred. Revenue from service contracts is recognized as earned over the lives of the contracts. Additional information for the current year is as follows:

Unearned service contract revenue at January 1 520,000
Cash receipts from service contracts sold 980,000
Service contract revenue recognized 860,000
Service contract expense 520,000

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

a. 380,000 c. 410,000
b. 400,000 d. 640,000

Answer is d
Solution:
Unearned revenue – January 1 520,000
Cash receipts from service contracts sold 980,000

Total 1,500,000
Less: Service contract revenue recognized 860,000
Unearned service contract revenue – December 31 720,000

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

2015 2016
Sales 420,000 500,000
Less cancelations 20,000 30,000
Net sales 400,000 470,000

Subscription expirations:

2015 120,000
2016 155,000 130,000
2017 125,000 200,000
2018 140,000
400,000 470,000

On December 31, 2016, what amount should be reported as unearned subscription revenue?

a. 495,000 c. 465,000
b. 470,000 d. 340,000

Answer is c
Solution:
Subscriptions received in 2015 that will expire in 2017 125,000

Unearned subscription revenue – December 31, 2016 465,000

Saunalang Company sells equipment service contracts that cover a two-year period. The sale price of each contract is P600. The past experience is that, of the total pesos spent for repairs on servicer contracts, 40% is incurred evenly during the first contract year and 60% evenly during the second contract year. The entity sold 1,000 contracts evenly throughout 2015.

What amount should be reported as deferred service revenue on December 31, 2015?
a. 540,000 c. 360,000
b. 480,000 d. 300,000

Answer is b
Solution:

First contract year (40% x 600,000) 240,000
Second contract year (60% x 600,000) 360,000

Total contracts sold in 2015 600,000

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

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

Total contracts sold (1,000 x 600) 600,000
Less: Contracts earned in 2015 (240,000 x ½) 120,000

Deferred service revenue – December 31, 2015 480,000

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

Advances from customers – January 1 1,180,000
Advances received with orders 1,840,000
Advances applied to orders shipped 1,640,000
Advances applicable to orders cancelled 500,000

What amount should be reported as current liability for advances from customers at year-end?

a. 1,480,000 c. 880,000
b. 1,380,000 d. 0

Answer is c
Solution:

Advances from customers – January 1 1,180,000
Add: Advances received with orders 1,840,000

Total 3,020,000
Less: Advances applied to orders shipped 1,640,000
Advances applicable to orders cancelled 500,000 2,140,000
Advances from customers – December 31 880,000

Ditokalang Company records stamp service revenue and provides for the cost of redemptions in the year stamps are sold to licenses. The past experience indicates that only 80% of the stamps sold to licenses would be redeemed. The liability for stamp redemptions was P6,000,000 on January 1, 2015. Additional information for the current year is s follows:
Stamp service revenue from stamps sold to licenses 5,000,000
Cost of redemption of stamps sold prior to 1/1/2015 2,750,000

If all the stamps sold in 2015 were presented for redemption in 2016, the redemption cost would be P2,250,000.

What amount should be reported as liability for stamps redemptions on December 31, 2015?

a. 7,250,000 c. 5,050,00
b. 5,500,000 d. 3,250,000

Answer is c
Solution:

Liability for stamp redemptions – January 1, 2015 6,000,000
Add: Estimated cost of redemptions for stamps sold
In 2015 (80% x 2,250,000) 1,800,000

Total 7,800,000
Less: Cost of redemption in 2015 2,750,000
Liability for stamp redemptions – December 31, 2015 5,050,000

PROVISION AND CONTINGENT LIABILITY

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

What amount of warranty expense should be shown on Hiloma's income statement for the year ended December 31, 2016?

P30,000,000 c. P60,000,000
P0 d. P90,000,000
Answer is d
Solution:
Warranty Expense (P750 x 120,000) P90,000,000

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

Cost for shipping goods 50,000
Airfare 15,000
Temporary accommodation cost for May and June 60,000
Temporary accommodation cost for July and August 80,000
Reimbursement for lease break cost paid in July
(lease was terminated in May) 20,000
Reimbursement for cost of living increases for the
period May 1, 2015 to May 1, 2016 150,000
Total 350,000

What amount should be recognized as provision for relocation costs on June 30, 2015?

a. 145,000 c. 295,000
b. 225,000 d. 170,000

Answer is d
Solution:

Cost for shipping goods 50,000
Airfare 15,000
Temporary accommodation cost for May and June 60,000
Reimbursement for lease break cost 20,000
Reimbursement for cost of living increases for
May and June (120,000x 2/12) 25,000
Total 170,000

On November 25, 2014, an explosion occurred at a Tom Company plant causing extensive property damage to area buildings. By March 10, 2015, claims had been asserted against the entity. The management and counsel concluded that it is probable that the entity would be responsible for damages, and that P2,500,000 is a reasonable estimate of the liability. Tom's P10,000,000 comprehensive public liability policy has a P500,000 deductible clause. What should be reported in the December 31, 2014 financial statements, issued on March 25, 2015, in relation to this item?

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

Answer is a
Solution:

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

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

What would be the effect of the settlement on Caso's income before tax in 2016?

a. 80,000 decrease c. 80,000 increase
b. 70,000 decrease d. 150,000 increase

Answer is c
Solution:

Accrued liability on December 31, 2015 500,000
Cash settlement on December 31, 2016 (350,000)
Carrying amount of copyright transferred ( 70,000)
Gain on settlement in 2016 80,000

During 2014, Steel Company became involved in a tax dispute with the BIR. On December 31, 2014, the tax advisor believed that an unfavourable outcome was probable and a reasonable estimate of additional taxes was P300,000. After the 2014 financial statements were issued, the entity received and accepted a BIR settlement offer of P400,000.

What amount of accrued liability should have been reported on December 31, 2014?

a. 300,000 c. 500,000
b. 400,000 d. 0

Answer is a
Solution:

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

Orlando Company decided on November 1, 2015 to restructure the entity's operations as follows:

Factory A would be closed down and put on the market for sale.

Employees working in Factory A would be retrenched on November 30, 2015, and would be paid their accumulated entitlements plus six months' wages.

Some employees working in Factory A would be transferred to Factory B, which would continue operating.

On December 31, 2015, the following transactions and events had occurred:

The retrenched employees have left and their accumulated entitlements have been paid. However, an amount of P1,200,000, representing a portion of the six months' wages for the retrenched employees, has still not been paid.

Costs of P300,000 are expected to be incurred in transferring the remaining employees to their new work in Factory B. The transfer is planned for January 15, 2016.

One employee, Juan Cruz, remains in order to complete administrative tasks relating to the closure of Factory A and the transfer of employees to Factory B.

Juan Cruz is expected to stay until January 31, 2016. His salary for January will be P50,000 and his retrenchment package will be P180,000, all of which will be paid on the day he leaves.

Juan Cruz, would spend 70% of his time administering the closure of Factory A, 20% on administering the transfer of employees to Factory B, and the remaining 10% on general administration.

What total amount should be recognized as restructuring provision on December 31, 2015?

a. 1,500,000 c. 1,425,000
b. 1,430,000 d. 1,415,000

Answer is d
Solution:

Unpaid wages of retrenched employees 1,200,000
Retrenchment package of Juan Cruz 180,000
Salary for administering closure of
Factory A (70% x P50,000) 35,000
Total restructuring provision 1,415,000

Regal Company has several contingent liabilities on December 31, 2014. The auditor obtained the following brief description of each liability.

In May 2014, Regal Company became involved in litigation. In December 2014, the court assessed a judgment for P1,000,000 against Regal.

The entity is appealing the amount of the judgment. The entity's attorneys believed it is probable that they can reduce the assessment on appeal by 50%.

In July 2014, Pasig City brought action against Regal Company for polluting the Pasig River with its waste products.

It is probable that Pasig City will be successful but the amount of damages Regal might have to pay should not exceed P800,000.

What total amount should be accrued as provision on December 31, 2014?

a. 800,000 c. 1,300,000
b. 1,800,000 d. 1,000,000

Answer is c
Solution:
Assessment on appeal (50% x 1,000,000) 500,000
Environmental Cost 800,000
Total provision 1,300,000

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

What amount should be reported as a receivable on December 31, 2014?

a. 300,000 c. 900,000
b. 1,200,000 d. 0

Answer is d
Solution:

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

During 2015, South Company filed suit against North Company seeking damages for patent infringement. On December 31, 2015, South's legal counsel believed that it was probable that South would be successful against North for an estimated amount of P2,000,000. In March 2016, South was awarded P1,300,000 and received full payment thereof.

In South's 2015 financial statements issued February 2016, how should this award be reported?

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

Answer is c
Solution:

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

During 2015, Iriga Company is the defendant a breach of patent lawsuit. The lawyers believe there is an 70% chance that the court will not dismiss the case and the entity will incur outflow of benefits.

If the court rules in favour of the claimant, the lawyers believe that there is a 60% chance that the entity will be required to pay damages of P1,000,000 and a 40% chance that the entity will be required to pay damages of P500,000. Other amounts of damages are unlikely.

The court is expected to rule in late December 2016. There is no indication that the claimant will settle out of court.

A 8% risk adjustment factor to the cash flows is considered appropriate to reflect the uncertainties in the cash flow estimates.

An appropriate discount rate is 12% per year.

What is the measurement of the provision on December 31, 2015?

a. 865,080 c. 801,000
b. 605,556 d. 560,700

Answer is b
Solution:

Weighted probabilities:

60% x 1,000,000 x 70% 420,000
60% x 500,000 x 70% 210,000

Expected cash flows 630,000
Multiply by risk adjustment factor (100% + 8%) 1.08
Adjusted cash flows 680,400
Multiply by PV of 1 at 12% for one period .89
Present value of cash flows 605,556

On January 1, 2014, Ranger Company owned a machine with cost of P2,500,000. The accumulated depreciation was P1,500,000 estimated residual value was P150,000 and fair value was P3,500,000. On January 3, 2014, this machine was irreparably damaged by Dean Company and became worthless. In October 2014, a court awarded damages of P3,500,000 against Dean in favour of Ranger. On December 31, 2014, the final outcome of this case was awaiting appeal and was therefore uncertain. However, in the opinion of Ranger's attorney, Dean's appeal would be denied.

On December 31, 2014, what amount of gain should be accrued?

a. 150,000 c. 250,000
b. 350,000 d. 0

Answer is d
Solution:

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

BONDS PAYABLE and EFFECTIVE INTEREST METHOD

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

150,000 c) 18,250
36,500 d) 65,000

Answer is c
Solution:
Interest Paid (5,000,000 x 10% x 6/12) P250,000
Interest Expense (5,150,000 x 9% x 6/12) (231,750)
Amortized Discount P 18,250

On May 1, 2016, Mabuhay Company issued 1,000, P2000 face value 6% bonds dated January 1, 2016 with interest payments June 30 and December 31. The entity received cash of P2,150,000 plus accrued interest. What is the discount or premium from the issuance of bonds?

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

Answer is a
Solution:
Cash Received P2,150,000
Accrued Interest (2,000,000 x 6% x 4/12) ( 40,000)
Carrying amount of Bonds P2,110,000
Face Value of Bonds (2,000,000)
Premium on Bonds P 110,000

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

334,080 c) 336,125
560,208 d) 280,104

Answer is a
Solution:
First Interest Payment
(June 1,2015 to December 1, 2015)
Interest expense (5,568,000 x 12% x 6/12) P334,080
Interest paid (6,000,000 x 10% x 6/12) (300,000)
Discount amortization P 34,080
Carrying amount as June 1, 2015 5,568,000
Carrying amount as of December 1, 2015 P5,602,080

Second Interest Payment
(December 1, 2015 to June 1, 2016)
Interest expense (5,602,080 x12% x6/12) P336,125
Interest expense related to second interest payment
yet already recognized on December 2015
(336,125 x 1/6) ( 56,021)
Interest expense on June 1, 2016 P280,104

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

5,190,000 c) 5,226,700
5,153,300 d) 5,226,700

Answer is b
Solution:
Bonds payable at issue price (5,000,000 x 105%) P5,250,000
Bond issue costs (60,000)
Carrying amount of bonds, January 1, 2015 P 5,190,000

Interest paid (5,000,000 x 8%) P400,000
Interest expense (5,190,000 x 7%) (363,300)
Premium Amortization P 36,700

Carrying amount P5,190,000
Premium amortization (36,700)
Carrying amount, December 31, 2015 P5,153,300

Face Value of bonds 4,000,000
Nominal rate 12%
Effective rate 14%
Date of issue January 1,2016

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

The present value of 1 at 14% is as follows:
One period .8772
Two periods .7695
Three periods .6750
Four periods .5921

What is the present value of the bonds on January 1, 2016?

3,844,928 c) 2,652,608
3,299,528 d) 4,000,000

Answer is a
Solution:

(a)
(b)
(axb)

Principal
Interest
Total
PV
Present
Date
Payment
Payment
Payment
Factor
Value
12-31-16
1,000,000
480,000
1,480,000
0.8772
1,298,256
12-31-17
1,000,000
360,000
1,360,000
0.7695
1,046,520
12-31-18
1,000,000
240,000
1,240,000
0.6749
837,000
12-31-19
1,000,000
120,000
1,120,000
0.5921
663,152

3,844,928

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

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

Answer is b
Solution:

Carrying amount of bonds—January 1, 2015 P7,553,000
(7,703,000-150,000)
Carrying amount of bonds—December 31, 2015 (7,650,000)
Increase in fair value of bonds payable—loss (P 97,000)

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

350,000 premium c) 100,000 discount
250,000 premium d) 50,000 discount

Answer is d
Solution:
Total cash paid P5,500,000
Accrued interest (400,000)
Retirement price P5,100,000
Loss on retirement (150,000)
Carrying amount of bonds P4,950,000

Face value of bonds P5,000,000
Carrying amount of bonds ( 4,950,000)
Unamortized discount (P 50,000)

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

300,000 loss c) 100,000 loss
300,000 gain d) 100,000 gain

Answer is c
Solution:
Retirement price (5,000,000 x 105%) P5,250,000
Carrying amount of bonds (5,000,000+150,000) (5,150,000)
Loss on retirement of bonds P 100,000

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

250,000 discount c) 50,000 discount
250,000 premium d) 50,000 premium

Answer is b
Solution:
Accrued interest (400,000)
Gain on retirement 150,000

Carrying amount of bonds P 8,250,000
Face value of bonds (P 8,000,000)
Unamortized premium P 250,000

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

4,850,000 c) 5,050,000
5,250,000 d) 4,650,000

Answer is a
Solution:
Gain on retirement of bonds (200,000)
Accrued interest 200,000

COMPOUND FINANCIAL INSTRUMENT

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

Q1: What is the carrying amount of bonds payable at year end?
a. 6,000,000 c. 6,900,000
b. 6,500,000 d. 7,200,000

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

Answer is b,d
Solution:
Issue price of bonds payable – equal to market value ex-warrants 6,500,000

Cash 7,200,000
Bonds Payable 6,000,000
Premiums on bonds payable 500,000 Share warrants outstanding 700,000

On December 31, 2015, Divergent Company had outstanding 10%, P2,000,000 face amount convertible bonds payable maturing on December 31, 2020. Interst is payable on June 30 an December 31. Each P1,000 bond is convertible into 50 shares of P15 par value. On December 31, 2015, the unamortized premium on bonds payable was P70,000. On December 31, 2015, 400 bonds were converted when Divergent's share had a market price of P25. The entity incurred P6,000 in connection with the conversion. No equity component was recognized when the bonds were originally issued.

Q1: What is the share premium from the issuance of shares as a result of the bond conversion on December 21,2015?
a. 108,000 c. 120,000
b. 114,000 d. 130,000

Q2: The carrying amount of converted bonds payable is equal to ______.
a. 300,000 c. 1,035,000
b. 414,000 d. 2,070,000

Answer is a,b
Solution:
Premium on bonds payable 70,000
Carrying amount 2,070,000

Carrying amount converted (400/2,000 x 2,070,000 414,000
Par value of shares issued (400 x 50 x P15) (300,000)
Share premium 114,000
Conversion Expenses (6,000)
Net share premium 108,000

Carrying amount converted (400/2,000 x 2,070,000) 414,000

Lychee Corporation issued P7,000,000 face value, 5-year bonds at 110 on December 31, 2015. Each P1,000 bond was issued with 25 detachable share warrants, each of which entitled the bondholder to purchase one ordinary share of P5 par value at P15. Immediately after issuance, the market value of each warrant is P7. The stated interest on the bonds is 9% payable annually every December 31. However, the prevailing market rate of interest for similar bonds without warrant is 11%.

Q1: On December 31, 2015, what amount should be recorded as discount or premium on bonds payable?
a. 359,000 c. 539,000
b. 395,000 d. 593,000

Q2: The amount allocated to equity is ____________.
a. 1,239,000 c. 3,129,000
b. 1,329,000 d. 3,192,000

Answer is c,a
Solution:
PV of principal (7,000,000 x 0.59) 4,130,000
PV of interest payments (630,000 x 3.70) 2,331,000
TOTAL PRESENT VALUE OF BONDS PAYABLE 6,461,000

Bonds payable 7,000,000
PV of bonds payable 6,461,000
Discount on bonds payable 539,000

Issue price of bonds with warrants (7,000,000 x 110%) 7,700,000
PV of bonds payable (6,461,000)
Residual amount allocated to warrants 1,239,000

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

Q1: What amount should be recorded as gain or loss on the full payment of the convertible bonds at maturity?
a. 8,000,000 loss c. 325,000 gain
b. 325,000 loss d. 0

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

Answer is d,c
Solution:
There is no gain or loss since the bonds were not converted and instead, the entity paid off the convertible bondholders as maturity.

Cash 8,000,000
Discount on bonds payable 325,000
Bonds payable 8,000,000
Share Premium - conversion privilege 325,000

9-10)
Fajardo Company had outstanding share capital with par value of P100,000,000 and a 9% convertible bond payable in the face amount of P20,000,000. Interest payment dates of the bond issue are June 30 and December 31. The conversion clause in the bond indenture entitled the bondholders to receive 20 shares of P20 par value in exchange for each P1,000 bond. On June 30, 2015, the holders of P5,000,000 face value bonds exercised the conversion privilege. The market price of the bonds on that date was P1,100 per bond and the market price of the share was P30. The total unamortized bond discount at the date of conversion was P900,000. The share premium from conversion privilege has a balance of P3,000,000 on June 30, 2015.
Q1: What amount of share premium should be recognized by reason of the conversion of bonds payable into share capital?
a. 3,525,000 c. 1,750,000
b. 2,775,000 d. 1,525,000

Q2: The total consideration is equal to ____________.

a. 3,525,000 c. 1,750,000
b. 2,775,000 d. 1,525,000

Answer is d,a
Solution:
Discount on bonds payable (900,000)

Carrying amount converted (5/20 x 11,100,000) 2,775,000
Applicable share premium from conversion privilege
(5/20 x 3,000,000) 750,000
Total consideration 3,525,000
Par value of shares issued (5,000 x 20 x 20) (2,000,000)
Carrying amount converted (5/20 x 11,100,000) 2,775,000
Applicable share premium from conversion privilege
(5/20 x 3,000,000) 750,000
Total consideration 3,525,000

NOTE PAYABLE
U-en-I Company had 1,500,000 note payable due on June 30,2016. Under the existing loan facility, the entity had the discretion to refinance or roll over the note payable for at least twelve months after the end of reporting period.
On December 31,2015, what amount of the note payable should be reported as noncurrent liability?
a. 1,500,000 c. 2,250,000
b. 1,800,000 d. 0

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

Fred Company reported the following liabilities on December 31,2015:
Accounts Payable 600,000
Short-term borrowings 300,000
Mortgage payable, current portion P100,000 2,000,000
Note payable, due June 30, 2016 900,000

The P900,000 note payable was refinanced with a 5-year loan on January 15, 2016 with the first principal payment due January 15, 2017. The financial statements were issued February 28, 2016.
What amount should be reported as current liabilities on December 31, 2015?
900,000 c. 1,000,000
1,900,000 d. 700,000

Answer is b
Solution:
Accounts Payable 600,000
Short-term borrowings 300,000
Mortgage payable- current portion 100,000
Note payable 900,000
Total current liabilities 1,900,000

On January 1, 2015, Anne Company sold land to Guring Company. There was no establish market price for the land. Guring gave Anne a P3,000,000 noninterest bearing note payable in three equal annual installments of P1,000,000 with the first payment due December 31, 2015.
The note has no ready market. The prevailing rate of interest for a note of this type is 12%. The present value of a P3,000,000 note payable in three equal annual installments of P1,000,000 at 12% rate of interest is P2,401,830.
What is the carrying amount of the note payable on December 31, 2015?
2,401,830 c. 1,690,050
1,401,830 d. 3,000,000

Answer is c
Solution:
Note Payable 3,000,000
Present Value (2,401,830)
Discount on note payable - January 1, 2015 598,170
Amortization or interest expense (12% × 2,401,830) 288,220
Discount on note payable - December 31, 2015 309,950

Note payable - January 1, 2015 3,000,000
Annual payment on December 31, 2015 1,000,000
Note payable - December 31, 2015 2,000,000
Discount on note payable - December 31, 2015 309,950
Carrying amount - December 31, 2015 1,690,050

On March 1, 2015, Puring Company borrowed P500,000 and signed a 2-year note bearing interest at 8% per annum compounded annually. Interest is payable in full at maturity on February 28, 2017.
What amount should be reported as accrued interest payable on December 31, 2016?
33,333 c. 76,000

40,000 d. 80,000

Answer is c
Solution:
Accrued interest from March 1, 2015
to February 28, 2016 (500,000 × 8%) 40,000
Accrued interest from March 1 to
December 31, 2016 (500,000 + 40,000 × 8% × 10/12) 36,000
Accrued interest payable - December 31, 2016 76,000

On July 1, 2015, Arman Company obtained a P1,000,000, 180-day bank loan at an annual rate of 10%. The loan agreement requires Arman to maintain a P200,000 compensating balance in its checking account. Arman would otherwise maintain a balance of only P100,000 in this account. The checking account earns interest at an annual rate of 5%.
What is the effective interest rate on the borrowing?
10% c. 11.33%
10.67% d. 10.56%

Answer is d
Solution:
Interest expense (1,000,000 × 10% × 180/360) 50,000
Interest income on compensating balance
in excess of the normal checking account
balance (100,000 × 5% × 180/360) (2,500)
Net interest expense 47,500

Net proceeds of loan (1,000,000 - 100,000) 900,000
Effective amount (900,000 × 180/360) 450,000
Effective interest rate (47,500/450,000) 10.56%

On January 1, 2015, Jinky Company signed a P200,000 noninterest bearing note at a discount rate of 11%. The entity elected the fair value option for reporting the note payable.
On December 31, 2015, the credit rating and risk factors indicated that the rate of interest applicable to its borrowings was 10%. The present value factors at 11% and 9% are as follows:
PV factor 11%, 3 periods .731 PV factor 10%, 3 periods .751
PV factor 11%, 2 periods .812 PV factor 10%, 2 periods .826
PV factor 11%, 1 period .901 PV factor 10%, 1 period .909

Q1: What is the initial carrying amount of the note payable on January 1, 2015?
146,200 c. 162,400
150,200 d. 165,200

Q2: What is the carrying amount of the note payable on December 31, 2015?
165,200 c. 181,800
162,400 d. 150,200

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

7. On July 1, 2015, Daniel Company borrowed P2,000,000 on a 11% five-year note payable. On December 31, 2015, the fair value of the note is determined to be P1,950,000 based on market and interest factors. The entity has elected the fair value option for reporting the financial liability.
Q1: What amount should be reported as interest expense for 2015?
220,000 c. 110,000
214,500 d. 107,250

Q2: What is the carrying amount of the note payable on December 31, 2015?
2,000,000 c. 1,000,000
1,950,000 d. 1,780,000

Q3: What is the gain or loss to be recognized in 2015 as a result of the fair value option?
150,000 gain c. 75,000 gain
150,000 loss d. 0

Answer is c,b,a
Solution
Interest expense for 2015 (2,000,000 × 11% × 6/12) 110,000

Carrying amount equal to fair value 1,950,000
Note Payable - July 1, 2015 2,000,000
Fair value - December 31, 2015 1,950,000
Decrease in fair value of note payable - gain 150,000

DEBT RESTRUCTURE

Balleta Company has the following three loans payable scheduled to be repaid in February next year. The Balleta's accounting year ends on December 31. The company intends to repay loan 1 for P100,000 when it comes due in February. In the following October, the company intends to get a new loan for P80,000 from the same bank. The company intends to refinance loan 2 for P150,000 when it is due in February. The refinancing agreement, for P180,000 will be signed in April after the financial statements for this year have been authorized issue. The company intends to refinance loan 3 for P200,000 before it comes due in February. The actual refinancing, for 175,000 took place in January, before the financial statements for this year have been authorized for issue.

As of December 31 of the year, what are the total current and non-current liabilities to be reported?

P100,000;P25,000 c. P450,000;0
P250,000;P175,000 d. P125,000;P350,000

Answer is c
Solution:
Loan 1 P100,000
Loan 2 150,000
Loan 3 200,000
Total current liabilities P450,000

No non-current liabilities

Under PAS 1: Presentation of Financial Statements, an entity classifies its financial Liabilities as current when they are due to be settled within 12 months after the end of the reporting period, even if:
The original term was for a period longer than 12 months; and
An agreement to refinance, or to reschedule payments, on a long-term basis is completed after the end of the reporting period and before the financial statements are authorized for issued.
PAS 1 further provides that if the refinancing on a long-term basis occurs between the end of the reporting period and the date the financial statements are authorized for issue, such events qualifies or disclosure as non-adjusting event in accordance with PAS 10.

Caramel Company has arranged with its bank to refinance its short-term loan when it becomes due in 3 months. The new loan will have a term of 5 years. The following items are based on the financial statements of Caramel:

Current Assets P750,000
Short-Term Loan Payable 600,000
Total Liabilities 3,000,000
Current Ratio 1.5
Debt-to-Equity Ratio 1.5
What are the total current, shareholders' equity and non-current liabilities?
P500,000; P2,000,000; P2,500,000
P2,500,000; P500,000; P2,000,000
P2,000,000; P2,500,000; P500,000
P500,000; P2,500,000; P2,000,000

Answer is b
Solution:
Current Ratio = Current AssetsCurrent Liabilities

1.5 = P750,000Current Liabilities
Current Liabilities = P750,0001.5

= P500,000

Debt-to-equity ratio = Total LiabilitiesTotal Equity

1.5 = P3,000,000Total Equity

Total Equity = P3,000,0001.5

= P2,000,000

Total Liabilities P3,000,000
Less: Current Liabilities 500,000
Non-current Liabilities P2,500,000

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

What entry should be made by Al Rey Co. for the restructure?

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

Land 800,000
Gain on restructuring of debt 1,998,000 `

Answer is b
Solution:
Land 800,000
Gain on restructuring of debt 1,198,000 `

Total liability P1,998,000
Book value of land 800,000
Gain in debt restructuring P1,198,000

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

12% 10%

Present value of 1 for 3 periods 0.71178 0.75132
Present value of an ordinary annuity
Of 1 for 3 periods 2.40183 2.48685

Q1: What is the gain on debt restructuring?

P1,096,074 c. P480,366
P1,903,926 d. P1,423,560

Q2: Discount on note payable

P480,366 c. P96,074
P903,926 d. P48,532

Answer is a,c
Solution:

Present value principal (P2,000,000 x 0.71178) P1,423,560
Present value of interest payments
(P2,000,000 x 10%= P200,000 x 2.40183) 480,366
Total P1,903,926

Note payable – old P3,000,000
Present value of restructured liability 1,903,926
Gain on debt restructuring P1,096,074

Face value of note payable – new P2,000,000
Present value of restructured liability 1,903,926
Discount on note payable P 96,074

At year-end, Yohannah Company showed the following data with respect to its matured obligation:

Accrued interest payable 750,000

The entity is threatened with a court suit it could not pay maturing debt. Accordingly, the entity entered into an agreement with the creditor for the issuance of share capital in full settlement of the note payable.

The agreement provided for the issue of 40,000 shares with par value of P100. The share is currently quoted at P120. The fair value of the note payable on the date of restructuring is P4,700,000

Q1: Under the "equity swap", what amount should be recognized as gain from extinguishment of debt?

450,000 c. 950,000
1,000,000 d. 800,000
Q2: What is the share Premium?
450,000 c. 950,000
1,000,000 d. 800,000
Answer is a,d
Solution:
Accrued Interest Payable 750,000
Total carrying amount of liability 5,250,000
Fair value of shares (40,000 x 120) 4,800,000
Gain on extinguishment of debt 450,000

Fair value of shares 4,800,000
Par Value of shares (40,000 x 100) 4,000,000
Share Premium 800,000

Due to extreme financial difficulties, Restine Co. had negotiated a restructuring of a 10% P5,000,000 note payable due on December 31, 2015. The unpaid interest on the note on such date is P500,000. The creditor had agreed to reduce the face value to P4,000,000 forgive the unpaid interest, reduce the interest rate to 8% and extend the due date three years from December 31, 2015.

The PV of 1 at 10% for 3 periods is 0.75 and the PV of an ordinary annuity of 1 at 10% for 3 periods is 2.49

Q1: What is the gain on extinguishment of debt in 2015?

1,703,000 c. 2,000,000
1,203,000 d. 540,000

Q2: What is the interest expense for 2016?
320,000 c. 400,000
379,680 d. 500,000
Answer is a,b
Solution:
PV of principal (4,000,000 x .75) 3,000,000
PV annual interest payments (320,000 x 2.49) 796,800
Total present value of new liability 3,796,800

Note payable – old 5,000,000
Accrued interest payable 500,000
Total old liability 5,500,000
Present value of new liability 3,796,000
Gain on extinguishment 1,703,200

Interest expense for 2016 (10% x 3,796,800) 379,680
Interest paid (8% x 4,000,000) 320,000
Amortization of discount 59,680

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

Q1: What is the gain on the extinguishment of the bonds payable?

1,500,000 c. 1,550,000
1,300,000 d. 0
Q2: What is the share premium from the issuance of the shares?
2,300,000 c. 1,000,000
1,300,000 d. 0

Answer is c,c
Solution:
Carrying amount of bonds payable 4,800,000
Accrued interest on bonds payable 250,000
Total 5,050,000
Fair value of bonds payable (3,500,000)

Gain on extinguishment of bonds payable 1,550,000

Fair value of bonds payable 3,500,000
Par Value of shares (50,000 x 50)-/ 2,500,000
Share premium 1,000,000

OPERATING LEASE

On December 1, 2015, Rain Company leased office space for five years at a monthly rental of P300,000. On the same date, the entity paid the lessor the following amounts:

Bonus to obtain Lease 150,000
First month's rent 300,000
Last month's rent 300,000
Security deposit refundable at
lease expiration 700,000
Installation of new walls and offices 2,400,000

What total amount of the expenses relating to utilization of the office space should be reported for 2015?

a.) 342,500 c.) 555,000
b.) 810,500 d.) 425,000

Answer is a
Solution:

Amortization of Lease Bonus (150,000 / 5 x 1/12) 2,500
Rent for December 300,000
Depreciation of leasehold improvement
(2,400,000 / 5 x 1/12) 40,000

Total December 2015 Expenses 342,500

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

In the income statement for the year ended June 30, 2016, what amount should be reported as rent expense?

a.) 1,050,000 c.) 900,000
b.) 300,000 d.) 255,000

Answer is a
Solution:

Total Rent Expense (100,000 x 63 remaining months) 6,300,000

Average annual rent expense, July 1, 2015 to
June 30, 2016 (6.300,000 / 6) 1,050,000

On July 1, 2015, Walton Company leased office premises for a three-year period at an annual rental of P360,000 payable on July 1 each year. The first rent payment was made July 1, 2015. Additionally on July 1, 2015, the entity paid P240,000 as a lease bonus to obtain a three-year lease instead of the lessor's usual term of six years.

On December 31, 2015, what amount should be reported as prepaid rent?

a.) 240,000 c.) 220,000
b.) 380,000 d.) 180,000

Answer is d

Solution:

Rent payment on July 1, 2015 (360,000 x 6/12) 180,000
Lease Bonus (240,000 x 30/36) 200,000

Prepaid Rent – December 31, 2015 380,000

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

12 months at 6,000 = P 72, 000
12 months at 6,500 = 78,000
12 months at 17,500 = 210,000

All payments were made when due. On June 30, 2017, what amount should be reported as accrued rent receivable?

a.) 90,000 c.) 210,000
b.) 120,000 d.) 0

Answer is a

Solution:

Average annual rent revenue (360,000 / 3) 120,000

Rent revenue from July 1, 2015 to June 30, 2017
(120,000 x 2) 240,000
Less: Rentals received:
First 12 months 72,000
Second 12 months 78,000 150,000
Rent Receivable – June 30, 2017 90,000

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

What amount of rental revenue should be reported for 2015?

a.) 900,000 c.) 1,250,000
b.) 1,000,000 d.) 1,400,000

Answer is b

Solution:

Annual Rental 900,000
Amortization of lease bonus (500,000 / 5) 100,000

Total Rental Revenue 1,000,000

Babe Company owns and manages apartment complex. On signing a lease, each tenant must pay the first and last month's rent and a P50,000 refundable security deposit. The security deposits are rarely refunded in total, because cleaning costs of P15,000 per apartment are almost always deducted. About 30% of the time, the tenants are also charged for damages to the apartment which typically cost P10,000 to repair.

If one-year lease is signed on a P90,000 per month apartment, what amount should be reported as refundable security deposit?

a.) 35,000 c.) 32,000
b.) 50,000 d.) 140,000

Answer is b

Solution:

Refundable Security Deposit 50,000

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

What is the amount of net rental income that would be reported by Dutch Company for the year ended December 31, 2016?

a.) 350,000 c.) 110,000
b.) 610,000 d.) 105,000

Answer is d

Solution:

Rent income – Ender (45,000 x 6) 270,000
Rent income – Foil (60,000 x 6) 360,000

Total rent income for 2016 630,000
Depreciation (4,200,000 / 8) 525,000
Net rental income for 2016 105,000

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

January 1, 2015 1,200,000
January 1, 2016 1,150,000
January 1, 2017 1,500,000
January 1, 2018 1,650,000
January 1, 2019 1,900,000

On December 31, 2016, what amount should be recognized as rent receivable?

a.) 1,210,000 c.) 410,000
b.) 610,000 d.) 0

Answer is b

Solution:

Average annual rental (7,400,000 / 5) 1,480,000

Rent Income for 2015 and 2016 (1, 480,000 x 2) 2,960,000
Rent Received for 2015 and 2016 (1,200,000 + 1,150,000) 2,350,000
Rent Receivable – December 31, 2016 610,000

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

What amount should Jaguar report as rental income for 2015?

a.) 1,300,000 c.) 900,000
b.) 1,130,000 d.) 450,000

Answer is b

Solution:

First Year (900,000 x 6/12) 450,000
Second Year 1,300,000
Third Year 1,300,000
Fourth Year 1,300,000
Fifth Year 1,300,000
Total rental revenue 5,650,000

Average annual rental revenue (5,650,000 / 5) 1,130,000

As an incentive to enter a four-year operating lease for a warehouse, Silent Hill Company received an upfront cash of P90,000 upon signing an agreement at the beginning of current year. The annual rental is P1,122,500.

What amount should be recognized as lease expense for the current year?

a.) 1,122,500 c.) 1,032,500
b.) 1,100,000 d.) 0

Answer is b

Solution:

Annual Rental 1,122,500
Amorization of upfront cash received (60,000 / 4) ( 22,500)
Lease expense for current year 1,100,000

FINANCE LEASE – LESSEE

Gandalf Company leased a machine from Harry Leasing Company. The lease qualifies as a finance lease and requires 10 annual payments of P200,000 beginning immediately. The lease specifies an interest rate of 11% and a purchase option of P200,000 at the end of the tenth year, even though the machine's estimated value on that date is 300,000.

Present Value of an annuity due (in advance)
of 1 at 11% for 10 periods. 6.537
Present value of 1 at 11% for 10 periods. 0.352

What amount should be recorded as lease liability at the beginning of the lease term?

a.) 1,307,400 c.) 1,321,500
b.) 1,377,800 d.) 1,397,200

Answer is b
Solution:

Present value of rentals (200,000 x 6.537) 1,307,400
Present value of bargain purchase option
(200,000 x .352) 70,400
Total lease liability – beginning of lease term 1,377,800

At the beginning of current year, Nick Company signed an eight-year noncancelable lease for a new machine, requiring P150,000 annual payments at the beginning of each year. The machine has a useful life of 12 years with no residual value. Title passes to the lessee at the lease expiration date. Cole uses straight line depreciation for all of the plant assets. Aggregate lease payments have a present value of P1,080,000 based on an appropriate rate of interest.

What amount should be recorded as depreciation expense of the leased machine for the current year?

a.) 150,000 c.) 90,000
b.) 135,000 d.) 0

Answer is c
Solution:
Depreciation for current year (1,080,000 / 12) 90,000

Ziggurat Company is a lessee under a finance lease. The asset is recorded at P5,300,000 and has an economic life of 8 years. The lease term is 5 years. The asset is expected to have a fair value of P1,300,000 at the end of 5 years and a fair value of P300,000 at the end of 8 years. The lease agreement provides for the transfer of title of the asset to the lesee at the end of the lease term.

What amount of depreciation expense should be recorded for the first year of the lease?

a.) 925,000 c.) 625,000
b.) 800,000 d.) 500,000

Answer is c
Solution:

Cost 5,300,000
Residual Value after 8 years ( 300,000)
Depreciable Amount 5,000,000

Annual Depreciation (5,000,000 / 8) 625,000

On January 1, 2015, Plow Company entered into a ten-year noncancelable lease requiring year-end payments of P1,000,000. Plow's incremental borrowing rate is 12%, while the lessor's implicit interest rate, known to Plow, is 10%. Present value factors for an ordinary annuity for ten periods are 6.145 at 10%, and 5.650 at 12%. On same date, Plow Company paid initial direct cost of P200,000 in negotiating and securing the leasing arrangement. Ownership of the property remains with the lessor at expiration of the lease. There is no bargain purchase option. The leased property has an estimated economic life of 12 years.

What amount should be capitalized initially as cost of the leased property?

a.) 5,850,000 c.) 6,145,000
b.) 5,650,000 d.) 6,345,000

Answer is d
Solution:

Present value of rentals (1,000,000 x 6.145) 6,145,000
Initial Direct Cost 200,000
Total Cost of Property 6,345,000

Loop Company leased a warehouse with adjoining land for a period of 15 years. The fair values of the leasehold interests in the land and the warehouse are P3,000,000 and P1,500,000 respectively. The land has an indefinite economic life whereas the warehouse has a useful life of 15 years. Title to the land is not expected to pass at the end of the lease.

At what amount should the asset in relation to finance lease be recognized in the financial statements of the lessee?

a.) 4,500,000 c.) 1,500,000
b.) 3,000,000 d.) 0

Answer is c
Solution:
The warehouse lease is a finance lease and therefore the leasehold interest of P1,500,000 is recognized as an asset.

Asylum Company leased a machine with a fair value of P2,450,000 for a period of 5 years under a finance lease. The initial direct costs included in negotiating the lease amounted to P22,500. The present value of the minimum lease payments discounted at the rate implicit in the lease is P2,384,000.

At what amount should the machine be recognized initially in the financial statement?

a.) 2,450,000 c.)2,562,500
b.) 2,406,500 d.)2,384,000

Answer is b
Solution:

Present value of minimum lease payments 2,384,000
Initial Direct Costs 22,500
Total Initial cost of machine 2,406,500

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

What amount should be reported as lease liability on December 31, 2015?

a.) 3,360,000 c.) 3,472,000
b.) 3,000,000 d.) 3,584,000

Answer is a
Solution:

Lease Liability (600,000 x 5.6) 3,360,000

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

What is the depreciation charge on the van for the current year?

a.) 400,000 c.) 300,000
b.) 390,000 d.) 292,500

Answer is b
Solution:

Annual Depreciation (2,340,000 / 6 years) 390,000

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

What is the amount of the annual depreciation expense?

a.) 197,200 c.) 246,500
b.) 200,000 d.) 250,000

Answer is a
Solution:

Annual depreciation (986,000 / 5 years) 197,200

Tambak Company leased a land and building for 20 years, the useful life of the building, with effect from January 1, 2015. At that date, the fair value of the leasehold interest was P10,000,000 and of which 8,000,000 are attributable to the building. Annual rentals of P900,000 are payable in advance on January 1.

What amount should be recognized as an operating lease expense for 2015?

a.) 900,000 c.) 180,000
b.) 200,000 d.) 0

Answer is c
Solution:

Leasehold interest 10,000,000
Attributable to building 8,000,000
Attributable to land 2,000,000

Operating lease expense
(2,000,000/10,000,000 x 900,000) 180,000

DIRECT FINANCING LEASE – LESSOR

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

Gross lease receivable 5,540,000
Unearned interest income 1,000,000
Present value of lease receivable 4,540,000

The interest rate implicit in the lease is 10%. On December 31, 2015, Bentong Company sold the leased machinery to the lessee for P3,150,000 cash.

What is the loss on sale of machinery that should be recognized on December 31, 2015?

a.) 1,700,000 c.) 2,150,000
b.) 1,754,000 d.) 1,390,000

Answer is b
Solution:

Interest income for 2015 (10% x 4,540,000) 454,000

Sale Price 3,150,000
Carrying amount of lease receivable
Lease receivable 5,450,000
Unearned interest income
(1,000,000 – 454,000) ( 546,000) 4,904,000
Loss on sale of machinery 1,754,000

DU30 Company entered into a finance lease on January 1, 2015. A third party guaranteed the residual value of the asset under the lease estimated to be P220,000 on January 1, 2020, the end of the lease term.

Annual lease payments are P200,000 dues each December 31, beginning December 31, 2015. The last payment is due December 31, 2019.

The remaining useful life of the asset was six years at the commencement of the lease.

Both the lessor and lessee used 10% as the interest rate. The PV of 1 at 10% for 5 periods is .62, and the PV of an ordinary annuity of 1 at 10% for 5 periods is 3.79.

What is the lease receivable of the lessor and lease liability of the lessee at the commencement of the lease?

Lease Receivable Lease Liability
a.) 894,400 894,400
b.) 758,000 758,000
c.) 894,400 758,000
d.) 758,000 894,000

Answer is c
Solution:

Lessor

Present value of rentals (200,000 x 3.79) 758,000
Guaranteed residual value (220,000 x .62) 136,400
Lease receivable 894,400

Lessee

Lease Liability (200,000 x 3;79) 758,000

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

What is the annual lease payment?

a.) 680,000 c.) 675,754
b.) 907,773 d.) 750,000

Answer is d
Solution:

Cost of asset 3,912,500
PV of guaranteed residual value (1,000,000 x .68) ( 680,000)
Net investment to be recovered from rentals 3,232,500
Divide by PV of an annuity of 1 in advance at 8%
for 5 periods 4.31
Annual lease payment 750,000

Peregrine Company decided to enter the leasing business. The entity acquired a specialized packaging machine for P4,600,000. On January 1, 2015, the entity leased the machine for a period of six years, after which title to the machine is transferred to the lessee.

The six annual lease payments are due each January 1 and the first payment was made on January 1, 2015. The residual value of the machine is P500,000.

The lease terms are arranged so that a return of 12% is earned by Irene Company. The present value of 1 at 12% for six periods is 0.51, and the present value of an annuity in advance of 1 at 12% for six periods is 4.60.

What is the annual lease rental payable in advance required to yield the desired return?

a.) 1,000,000 c.) 745,000
b.) 891,304 d.) 1,255,000

Answer is a
Solution:

Divide by PV of an annuity in advance of 1 at
12% for six periods 4.60
Annual Lease Payment 1,000,000

On January 1, 2015, Abram Company signed a ten-year noncancelable lease agreement to lease a storage building from Lot Company. The agreement required equal rental payments at the end of each year. The fair value of the building on January 1, 2015 is P3,871,350. However, the carrying amount to Lot Company is P3,568,000.

The building has an estimated economic life of 10 years with no residual value. At the termination of the lease, the title to the building will be transferred to Abram Company.

The incremental borrowing rate of Abram Company is 12% per year. Lot Company set the annual rental to insure a 10% rate of return. The implicit rate of the lessor is known by the lessee.

The annual total lease payment included P20,000 of executor costs related to taxes on the property. Round off present value factor to three decimal places.

Q1: What is the minimum annual lease payment?

a.) 580,635 c.) 600,000
b.) 630,000 d.) 589,400

Q2: What is the total annual lease payment?

a.) 680,635 c.) 620,000
b.) 650,000 d.) 619,400

Answer is b,b
Solution:

a. Fair Value 3,871,350
Divide by PV of an ordinary annuity of 1 at 10%
for ten periods 6.145
Minimum annual lease payment 630,000

b. Minimum annual lease payment 630,000
Executory costs: 20,000
Total annual lease payment 650,000

On January 1, 2015, B.I. Company, acting as a lessor, leased an equipment for ten years at an annual rental of P800,000, payable by H.I. Company, the lessee, at the beginning of each year under a direct financing lease. The equipment had a cost of P5,600,000 with an estimated life of 12 years and no residual value. The implicit rate is 9%.

What amount of interest income should be reported in 2015?

a.) 800,000 c.) 432,000
b.) 560,000 d.) 610,000

Answer is c
Solution:
Present of rentals equal to the cost of asset 5,600,000
Advance payment on January 1, 2015 800,000
Lease Receivable – January 1, 2015 4,800,000

Interest income for 2015 (4,800,000 x 9%) 432,000

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

What is the annual lease payment payable in advance required to yield the desired return?

a.) 680,000 c.) 852,174
b.) 800,000 d.) 732,000

Answer is b
Solution:
PV of unguaranteed residual value (450,000 x .51) ( 229,500)
Net investment to be recovered from rentals 3,680,000
Divide by PV of an annuity in advance of 1 at 12% 4.60
Annual rental payable in advance 800,000

Camia Company is in the business of leasing new sophisticated equipment. As lessor, the entity expects a 12% return. At the end of the lease term, the equipment will revert to Camia Company.

On January 1, 2015 an equipment is leased to another entity under a direct financing lease.

Cost of equipment to Camia 5,500,000
Residual value – unguaranteed 400,000
Annual rental payable in advance 959,500
Useful life and lease term 8 years
Implicit interest rate 12%
First lease payment January 1, 2015

Q1: What is the unearned interest income on January 1, 2015?

a.) 1,616,500 c.) 1,776,000
b.) 2,176,000 d.) 2,576,000

Q2: What is the interest income for 2015?

a.) 322,000 c.) 660,000
b.) 544.860 d.) 496,860

Answer is b,b
Solution:
Gross rentals (959,500 x 8) 7,676,000
Residual Value 400,000
Gross Investment 8,076,000
Net investment – equal to the
cost of the equipment 5,500,000
Unearned interest income – January 1, 2015 2,576,000

Present value of rentals equal
to the cost of the equipment 5,500,000
First Payment on January 1, 2015 959,500
Lease Receivable 4,540,500

Interest Income for 2015 (4,540,000 x 12%) 544,860

SALES TYPE LEASE – LESSOR

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

Q1: What is the gross profit on sale for 2016?

a.) 1,920,000 c.) 480,000
b.) 2,400,000 d.) 240,000

Q2: What amount of interest revenue should be recorded in 2016?

a.) 462,000 c.) 438,000
b.) 480,000 d.) 391,800
Answer is c,c
Solution:

Present value of rentals – sales revenue 5,280,000
Cost of sales 4,800,000
Gross profit on sale 480,000

Present Value – January 1, 2016 5,280,000
First Payment on January 1, 2016 900,000
Second payment on January 1, 2017 900,000
Interest for 2016 (10% x 4,380,000) (438,000) 462,000

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

The terms of the lease provided for annual advance payments of P2,500,000 to be paid over 10 years with the ownership transferring to the lessee at the end of the leased period. It is estimated that the helicopter will have a residual value of P1,600,000 at that date.

The lease payments began January 1, 2016, COOLang Company incurred initial direct cost of P500,000 in financing the lease agreement with LAOS. The sale price of the helicopter is P14,875,000.

Financing the construction was at a 14% rate. The present value of an annuity due of 1 at 14% for 10 periods is 5.95.

Q1: What is the gross profit on sale that should be recognized by COOLang Company?

a.) 5,875,000 c.) 4,275,000
b.) 6,375,000 d.) 4,775,000


a.) 10,125,000 c.) 9,625,000
b.) 11,725,000 d.) 8,525,000


a.) 2,082,500 c.) 2,306,500
b.) 1,732,500 d.) 1,956,500

Answer is a,a,b
Solution:

Cost of good sold ( 8,500,000)
Initial direct cost ( 500,000)
Gross profit on sale 5,875,000

Gross rentals (2,500,000 x 10) 25,000,000
Present value of rentals – equal to sale price 14,875,000
Unearned Interest Income – January 1, 2016 10,125,000

Present value of rentals 14,875,000
Advance rental payments on January 1, 2016 2,500,000

Interest Income for 2016 ( 12,375,000 x 14%) 1,732,500

HunterXHunter Company used leases as a method of selling products. In 2016, the entity completed construction of a passenger ferry.

On January 1, 2016, the ferry was leased to the OnePunch-Ferry Line on a contract specifying that ownership of the ferry will transfer to the lessee at the end of the lease period. Annual lease payments do not include executor costs.

Original cost of the ferry 8,000,000
Fair value of ferry at lease date 12,555,000
Lease payments payable in advance 1,500,000
Estimated residual value 2,000,000
Implicit interest rate 12%
Date of first lease payment January 1, 2016
Lease term 20 years
Present value of an annuity due of
1 at 10% for 20 periods 8.37
Present value of 1 at 12% for 20 periods 0.10

a.) 17,445,000 c.) 19,445,000
b.) 19,245,000 d.) 22,000,000

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

a,) 1,506,600 c.) 1,326,600
b.) 1,524,600 d.) 1,350,600

Answer is a,b,c
Solution:

Gross rentals (1,500,000 x 20) 30,000,000
PV of fair value of asset (1,500,000 x 8.37) 12,555,000
Unearned interest income – January 1, 2016 17,445,000

Fair value of asset – sales revenue 12,555,000
Cost of goods sold 8,000,000
Gross profit on sale 4,555,000

PV of rentals equal to the fair value of asset 12,555,000
Payment on January 1, 2016 – all applicable to principal 1,500,000
Lease receivable – January 1, 2016 11,055,000

Interest income for 2016 (11,055,000 x 12%) 1,326,600

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

What amount of gross profit on sale should be recognized for 2016?

a.) 200,000 c.) 80,000
b.) 180,000 d.) 0

Answer is b
Solution:

Sales revenue 1,500,000
Cost of goods sold ( 1, 200,000)
Legal fees – initial direct cost ( 100,000)
Gross profit on sale 200,000

PotPot Company used leases as a means of marketing its products. On January 1, 2016, PotPot leased an equipment to Pess Company for P500,000 per year for 10 years, payable on December 31 of each year. The cost of the equipment is P2,000,000 and the fair value is P3,072,500 on January 1, 2016 using an implicit rate of 10%.

The fair value of the equipment approximated the present value of rentals. At the expiration of the lease, title to the equipment passes to Pess Company.

What is the interest income for 2016?

a.) 200,000 c.) 307,250
b.) 192,750 d.) 257,250

Answer is c
Solution:

Interest income for 2016 (10% x 3,072,500) 307,250

SALES AND LEASEBACK

Reddit Company sold an item of plant and machinery on January 1, 2015 for P5,200,000 which is equal to fair value. The carrying amount of the asset was P3,500,000. The entity leased the item back on that date for remaining useful life of 5 years. Lease payments are P1,540,000 on January 1 each year.

Q1: What is the gain on disposal to be recognized for 2015?
a.) 400,000 c.) 700,000
b.) 340,000 d.) 0

Q2: What is the total finance charge over the lease term?

a.) 2,500,000 c.) 700,000
b.) 1,700,000 d.) 0
Answer is b,a
Solution:

Carrying Amount (3,500,000)
Deferred Gain – January 1, 2015 1,700,000

Realized gain on disposal for 2015 (1,700,000 / 5) 340,000

Gross rentals (1,540,000 x 5) 7,700,000
Present value of rentals equal to fair value of asset 5,200,000
Total finance charge 2,500,000

On January 1, 2015, Senyora Company sold equipment to an unaffiliated entity for P5,700,000. The equipment had a carrying amount of P4,500,000 and a remaining life of five years. On the same date, the entity leased back the equipment at P1,350,000 per year payable in advance for a 5-year period. The lessor's implicit interest rate in the lease is 10%. The entity used the double declining balance method of depreciation.

What is the unearned income on the sale and leaseback on December 31, 2015?

a.) 1,200,000 c.) 720,000
b.) 960,000 d.) 0

Answer is c
Solution:

Unearned income – January 1, 2015
(5,700,000 – 4,500,000) 1,200,000
Realized in 2015 (40% x 1,200,000) ( 480,000)
Unearned income – December 31, 2015 720,000

On June 30, 2015, KangKong Company sold equipment for P4,650,000. The equipment had a carrying amount of P4,050,000 and a remaining useful life of 10 years. That same day, the entity leased back the equipment at P45,000 per month for 5 years with no option to renew the lease or repurchase the equipment.

What amount should be reported as rent expense for 2015?

a.) 540,000 c.) 270,000
b.) 600,000 d.) 300,000

Answer is c
Solution:

Rent Expense – July to December 2015 (45,000 x 6) 270,000

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

What is the rent expense for the year ended December 31, 2015?

a.) 70,000 c.) 54,000
b.) 72,000 d.) 64,000

Answer is b
Solution:

Rent Expense – July to December 2015 (12,000 x 6) 72,000

On January 1, 2015, Pedro Penduko Company sold a machine and immediately leased it back at an annual rental that was determined to be sufficiently lower than market rent. The following data relate to the sale and leaseback transaction:

Sale price below fair value 5,000,000
Fair value of machine 7,500,000
Carrying amount of machine 6,500,000
Remaining life of machine 10 years
Lease term 2 years

What total amount of loss should be recognized in the income statement for 2015?

a.) 1,500,000 c.) 750,000
b.) 1,000,000 d.) 500,000

Answer is c
Solution:

Carrying amount of machine 6,500,000
Deferred Loss on sale and leaseback (1,500,000)

Amortization of deferred loss for 2015
(1,500,000 / 2 years) 750,000

On December 31, 2015, Star Apple Company sold a machine with 12-year useful life to another entity and simultaneously leased It back for one year.

Carrying Amount 3,300,000
Present value of reasonable lease rentals
(P30,000 for 12 months @ 12%) 341,000

What revenue from the sale should be reported in 2015?

a.) 341,000 c.) 41,000
b.) 300,000 d.) 0

Answer is b
Solution:

Gain on sale and leaseback 300,000

On December 31, 2015, The Flash Company sold land with a cost of P4,500,000 to The Arrow Company for P5,700,000 when the land's fair value was P5,450,000. The Flash Company immediately entered into a cancelable lease agreement to use the land for 2 years at an annual rental of P40,000.

Q1: What amount of profit should The Flash record on the sale of land for 2015?
a.) 950,000 c.) 650,000
b.) 1,800,000 d.) 725,000

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

Answer is a,c

Solution:

a. Fair Value of Land 5,450,000
Cost of Land 4,500,000
Outright gain in 2015 950,000

b. Sale Price 5,700,000
Fair Value of Land 5,450,000
Deferred Gain – December 31, 2015 250,000

On December 31, 2015, Cornetto Company sold an equipment with remaining life of 12 years for P3,600,000. The entity immediately leased the equipment back for 3 years at annual rental of P60,000. The carrying amount of the equipment was P3,500,000 and the fair value was P3,300,000

What amount should be recognized as deferred gain on sale and leaseback on December 31, 2015?

a.) 800,000 c.) 300,000
b.) 500,000 d.) 0

Answer is c

Solution:

Fair Value of equipment 3,300,000
Deferred gain – December 31, 2015 300,000

SALES AND LEASEBACK (LESSOR AND LESSEE)

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

Profit on Sale
Interest Revenue
a
1, 987,650
87,650
b
1, 987,750
148, 500
c
1, 987,650
225, 000
d
1, 987,680
2, 475, 000

Present Value of an Annuity of 1 in advance 12% for 11 periods 6.6502
Answer is b
Solution:
Profit (Selling Price vs. Carrying Amount)

Selling Price:
750,000 X 6 .6502 = P4,987,650
Carrying Amount:
(3,000,000)
Profit on Sale P1, 987,650

Interest Revenue
Cash Selling Price:
3,225, 000
Advance Payment
750, 000
Interest Revenue P 2, 475, 000 x 12%x 6/12 = 148, 500

Hitachi Company, a dealer in machinery and equipment, leased equipment to Konoha Company on July 1, 2014. The lease is appropriately accounted for as a sale By Hitachi Company and as a purchase by Konoha Compnay. The lease term and its useful life is ten years expiring on June 30, 2024. The first payment of the ten annual payments was made on July 1,2014.

Hitachi had purchased the equipment for P 1, 337,500 on July 1, 201, and established a list selling price of P 1, 687,500 on the equipment.

The present value on July 2, 2015 of the rent payments over the lease term discounted at 12% was P 1, 582, 500.

What amount of profit on sale and interest revenue should be recorded for the year ended on December 31, 2014, respectively?

Profit on Sale
Interest Revenue
a.
245, 000
337, 500
b.
245, 000
79, 950
c.
245, 000
82, 500
d.
245, 000
250, 000

Answer is b
Solution:
Present Value of Rentals
1, 582, 500
Cost of Equipment
1, 337, 500

Profit on Sale

245, 000

Present Value- July 1, 2014

1, 582, 500
Less: Advance Payment on July 1, 2014
250, 000

Lease Receivable

1, 332, 500

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

159, 900

Interest Income x 6/ 12

79, 950

Tuwan Company adopted the policy of leasing as the primary method of selling its products. The entity's main product is a small helicopter. Tuwan Company constructed such product to Divergent Company at a cost of P 8, 500, 000.

The term of the lease provided for annual payment of P 2, 500, 000 in advance over ten years with the ownership transferring to the lessee at the end of the lease period. It is estimated that the product will have a residual value of P 1, 600, 000 at that date.

The lease payment began January 1, 2016. Tuwan Company incurred initial direct cost of P 500, 000 in financing the lease agreement with Divergent. The sale price of the product is P 14, 875, 000.

Financing the construction was at 14% for ten periods is 5.95.

Q1: What is the gross profit on sale that should be recognized by Tuwan Company?

a.
875, 000.
b.
5, 875, 000
c.
8, 520, 000.
d.
8, 560, 000

a.
375, 000
b.
600, 000
c.
10, 125, 000
d.
875, 000.

a.
1, 732,000
b.
14, 875, 000
c.
875, 000.
d.
12, 375, 000

Answer is b,c,a
Solution:

Question 1

Sales Price
14, 875, 000
Cost of Goods Sold
8, 500, 000
Initial Direct Cost
500, 000

Gross Profit on Sale

5, 875, 000

Question 2

Gross rentals
25, 000, 000
Present value of rentals
14, 875, 000
Unearned Interest Income
10, 125, 000

Question 3

Present Value of rentals
14, 875, 000
Advance Rental Payment
2, 500, 000
Lease Receivable
12, 375, 000
Interest Income
1, 732,000

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

Q1: What amount of gain on disposal should be recognized on the 2016 income statement?

a.
200, 000
b.
250, 000
c.
150, 000
d.
390, 000

Q2: What is the total finance charge over the lease term?

a.
2,900, 000
b.
200, 000
c.
750, 000
d.
350, 000

Answer is c,d
Solution:
:
Question 1

Fair Value

P 2,900, 000
Carrying Amount
2,200, 000

Profit on Sale

750, 000
/5
150, 000

Question 2

Gross Investment (650, 000 x 5)
3, 250, 000
Net Investment
2, 900, 000

Total Finance Charge

350, 000

EJ Company sold a machine to Malasa Company and simultaneously leased it back for one year: The entity provided the following information at this date:

Sale price 460, 000
Carrying Amount 390, 000
Present Value of reasonable rent rentals
(P 30,000 for 12 months at 12%) 341, 000
Estimated remaining useful Life 12 years

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

A
60, 000
B
49, 000
C
70, 000
D
79, 000

Solution:

Sale Price
460, 000
Carrying Amount
Gain from Sale
390, 000
70, 000

On December 31, 2015 Roselle Company sold an equipment with useful life with useful life of ten years and simultaneously leased back the equipment for two years.

Sale Price above fair value 8,500, 000
Fair Value of equipment on date of sale 6,900, 000
Carrying Amount 5, 000, 000

What amount of gain should be reported in 2015?

A
900, 000
B
1, 900, 000
C
1, 600, 000
D
160, 000

Solution:

Fair Value of Equipment
6,900, 000

Carrying Amount
5, 000, 000

Outright Gain
1, 900, 000

On December 31, 2015 Laxus Company sold land with a cost of P 2, 750, 000 to Mira Jane Company for P 2, 300, 000 when the land's fair value was P 3, 000, 000. Laxus Company immediately entered into a cancelable lease agreement to use the land for two years at an annual rental of P 20,000.

What amount of profit should Laxus Company record on the sale of land for 2015?
A
900, 000
B
350, 000
C
600, 000
D
250, 000

Solution:

Fair Value of Equipment

3,000, 000

Carrying Amount
2, 750, 000

Outright Gain
250, 000

INCOME TAX

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

Tax Return Accounting Record
Rent income 80,000 150,000
Depreciation 290,000 250,000
Premiums on officers' life insurance 100,000
Income tax rate 30%

What is the current provision for income tax for 2015?

a. 471,000 c. 513,000
b. 447,000 d. 417,000

Answer is b
Solution:

Pretax accounting income 1,500,000
Premium on officers' life insurance – non-deductible 100,000

Accounting income subject to tax 1,600,000
Rent income – temporary difference ( 70,000)
Depreciation – temporary difference ( 40,000)
Taxable income 1,490,000

Current provision for income tax (1.490,000 x 30%) 447,000

During the current year, Diane Company reported accounting income of P10,000,000 before income tax. The entity revealed the following information for the current year:

Interest income on government bonds 800,000
Depreciation claimed on tax return in excess of
depreciation per book 1,400,000
Warranty expense on the accrual basis 700,000
Actual warranty payment 400,000
Income from instalment sale reported for tax
Purposes in excess of income recognized per book 300,000
Income tax rate 30%

What is the current tax liability at year-end?

a. 2,310,000 c. 2,070,000
b. 2,940,000 d.2,520,000

Answer is d
Solution:

Accounting income 10,000,000
Interest income on government bonds (800,000)
Depreciation claimed on tax return in excess of
depreciation per book (1,400,000)
Warranty expense on the accrual basis 700,000
warranty payment (400,000)
from instalment sale reported for tax
Purposes in excess of income recognized per book 300,000

Current tax liability (30% x 8,400,000) 2,520,000

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

Fabs Company is determining the amount of the pretax accounting income for the current year by making adjustment to taxable income from the income tax return. The tax return showed taxable income of P5,000,000 on which a tax liability of P1,300,000 has been recognized.

The entity provided the following items that may be required to determine pretax accounting income form the amount of taxable income:

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

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

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

What is the pretax accounting income for the current year?

a. 5,400,000 c. 5,100,000
b. 5,200,000 d. 5,300,000

Answer is a
Solution:

Excess tax depreciation (600,000 – 500,000) 100,000
Goodwill impairment loss ( 400,000)
Interest income on treasury bills 700,000
Pretax accounting income 5,400,000

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

Shaw Company prepared the following reconciliation of the financial income and taxable income for 2016:

Pretax financial income 7,000,000
Permanent difference ( 600,000)
Temporary difference capitalized interest
for book and expensed for tax ( 300,000)

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

What amount should be reported as deferred tax liability on December 31, 2016?

a. 90,000 c. 120,000
b. 180,000 d. 0

Answer is b
Solution:

Deferred tax liability – 12/31/2016 (600,000 x 30%) 180,000

The permanent difference has no deferred tax consequence.

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

Q1: What is the income tax payable on December 31, 2016?

a. 250,000 c. 480,000
b. 280,000 d. 450,000

Q2: What is the total income tax expense that is reported in the 2016 income statement?

a. 540,000 c. 450,000
b. 480,000 d. 528,000

Answer is d,d
Solution:

Income tax before tax and depreciation 3,000,000
Tax depreciation for 2016 ( 500,000)

Current tax expense (30% x 2,500,000) 750,000
Payment during 2016 ( 300,000)

Income tax payable – December 31, 2016 450,000

Income before tax and depreciation 3,000,000
Financial depreciation (1,500,000 – 300,000 / 5) ( 240,000)
Accounting Income 1,760,000

Total income tax expense (30% x 1,760,000) 528,000

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

What is the tax base for the intangible asset on December 31, 2014?

a. 60,000 c. 640,000
b. 700,000 d. 0

Answer is d
Solution:

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

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

Q1: What is the current tax expense for 2014?

a. 3,240,000 c. 2,040,000
b. 1,080,000 d. 2,640,000

Q2: What is the net deferred tax expense for 2014?

a. 1,620,000 c. 870,000
b, 1,480,000 d. 1,000,000

Answer is b,c
Solution:

Accounting income 6,500,000
Future taxable amount
(1,500,000 + 1,700,000 + 1,700,000) (4,900,000)
Future deductible amount 2,000,000

Current tax expense (30% x 3,600,000) 1,080,000

Increase in deferred tax liability (30% x 4,900,000) 1,470,000
Increase in deferred tax asset (30% x 2,000,000) ( 600,000)

Net deferred tax expense 870,000

At year-end, Alas Company has revalued a property and has recognized the increase in the revaluation in the financial statements. The carrying amount of the property was P10,000,000 and the revalued amount was P14,000,000. However, the tax base of the property was only P8,000,000. The income tax rate is 30%.

What is the deferred tax asset or liability at year-end?

a. 1,200,000 asset c. 1,200,000 liability
b. 1,800,000 asset d. 1,800,000 liability

Answer is d
Solution:

Future taxable amount (14,000,000 – 8,000,000) 6,000,000

Deferred tax liaibilty (30% x 6,000,000) 1,800,000

SHAREHOLDERS' EQUITY AND RETAINED EARNINGS

Legit company had sufficient retained earnings as 2015 as a basis for dividends but was temporarily short of cash. The entirt declared a dividend of P1,000,000 on April 1,2015, issued promissory notes to the shareholders lieu of cash. The noted, which were dated April 1,2015,had a maturity date of march 31,2016 and a 10% interest rate.
How should the scrip dividend and related interest be accounted for?
Retained Earnings 1,000,000
Interest Expense 75,000

Interest Expense 75,000

Retained Earnings 75,000
Interest Expense 1,000,000

Interest Expense 1,000,000
Retained Earnings 75,000

Answer is a
Solution:

Interest Expense(1,000,000 x10% x9/12) 75,000

At the beginning of the current year Mr. Crabs company declared a 10 stock dividend. The Market Price of the entity's 30,000 oustanding shares of P20 par value was P90 per share on the date. The stock dividend was distributed on July 1 when the market price was P100 per share.
What amount should be credited to share premium for stock dividend?
270,000 c. 60,000
210,000 d. 330,000

Answer is b
Solution:
Market Value on date of declaration
( 10%x 30,000= 3,000 shares x90) 270,000
Par value of shares issued as dividends(3,000 x 20) 60,000
210,000

Wews Company declared a 5% stock dividend on 100,000 issued and outstanding shares of P20 par value, which had a fair value of P50 per share before the stock dividends wad declared. The stock dividend was distributed 60 days after.the declaration date.
What is the increase in current liabilities as a result of the stock dividend declaration?
150,000 c. 100,000
50,000 d. 0

Answer is d
Solution:
Retained Earnings(5,000x 50) 250,000
Stock dividend payable(5,000 x20) 100,000
Share Premium 150,000

The directors of parokya ni edgar company whose P50 par value share capital is currently selling at P60 per share have decided to issue a stock dividend. The selling price is not expected to be affected by the stock dividend. The entity which has an authorization for 1,000,000 shares, had issued 500,000 shares, of which 100,000 shares are now held as treasury.
In order to capitalize P2,400,000 of retained earnings, what percentage should be declared as a stock dividend by the directors?
8% c. 10%
9% d. 11%

Answer is c
Solution:
Shares to be issued as dividend (P2,400,000/P60) 40,000
Outstanding Shares (500,000-100,000) 400,000
Percentage of Stock Dividend (40,000/400,000) 10%

Kenneth Company Provided the following information on January 1,

Share Capital, 250,000 shares authorized:
100,000 shares issued and outstanding 3,000,000
Share Premium 4,000,000

The entity declared a 10% dividends on April 1, 2015 when the market value of the share was P70. The stock dividend was issued on July 1,2015 when the market value of the share was P100. The share has a par value of P30. The entity sustained a net loss of P1,200,000 for 2015.
What amount should be reported as retained earnings on December 31,2015?
6,100,000 c. 8,000,000
1,200,000 d. 700,000

Answer is a
Solution:
Retained Earnings -Jan. 1 , 2015 8,000,000
Stock dividend declared April 1,2015 ( 700,000)
Net loss ( 1,200,000)
Retained Earnings - Dec. 31,2015 6,100,000

Angela Company issued 1,000 shares with P5 par to Ken as compensation for 1,000 hrs of legal services performed. Ken usually bills P160 per hour of the services. On that date of issuance, the share was trading on a public exchange at P140.
By what amount should the share premium account increase as a result of the transaction?
135,000 c. 22,400
140,000 d. 160,000

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

At the beginning of the current year, Jane Company a closely- held entity, issued 6% bonds with a maturity value of P6,000,000, together with 10,000 ordinary shares of P50 of par value, for a combined cash amount of P11,000,000. If the bonds were issued separately, they would have sold for P4,000,000 on an 8% yield to maturity basis.
What amount should be reported for share premium on the issuance of the ordinary shares?
7,000,000 c. 6,500,000
11,000,000 d. 600,000

Answer is c
Solution:
Cash Received 11,000,000
Less: Market value of bonds 4,000,000
Residual Amount 7,000,000
Less: Par Value 500,000
Share Premium 6,500,000

During the current year, Bev Company received a donation of 2,000 shares with P50 par value from a shareholder. On that date, the sharr market value was P350. The shares were originally issued for P250 per share.
What is the decrease in shareholders equity as a result of the donation?
100,000 c. 87,500
500,000 d. 0

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

During the current year, James company declared a 1 for 5 reverse share split when the market valur of share was P100. Prior to the split, the entity had 100,000 shares of P10 par value issued and outstanding.
After the split, what is the par value of the share?
P100 c. P50
P20 d. P90

Answer is c
Solution:
New Par Value(10 x 5) P50

Beck Company issued 200,000 ordinary share when it began operations in 2014 and issued an additional 100,000 shares in 2015. Thr entity also issued preference shares convertible into 100,000 ordinary shares. In 2015, the entity purchased 75,000 ordinary shares to be held in treasury.
On December 31,2015 , how many ordinary shares were outstanding?
300,000 c. 225,000
100,000 d. 75,000

Answer is c
Solution:
Total ordinary shares issued (200,000 + 100,000) 300,000
Treasury shares ( 75,000)
Ordinary Shares Outstanding 225,000

SHARE BASED COMPENSATION

On January 1,2015, Lynx Company granted Chrome,the president, compensatory share options to buy 15,000 ordinary shares of P10 par value. The options call for a price of P30 per share and are exercisable in 3years following on the grant date. Chrome exercised the options on December 31,2015. The market price of the share was P60 on January 1,2015, and P70 on December 31,2015. The fair value of the share option id P60 o the grant date.
What is the net increase in the shareholders equity as a result of the grant and exercise of the options?
a. 150,000 c. 450,000
b. 300,000 d. 600,000

Answer is c
Solution:
Cash (15,000 x 30) 450,000
Share options outstanding 750,000
Ordinary share capital (15,000 x 10) 150,000
Share premium 1,050,000

On January 1,2015, Rain company granted 50 shar options each to 200 employees, conditional upon the employee's remaining in the entity's employ during thr vesting period. The share options vest at the end of a three-year period. On grant date, each share option has fair value of P30. The par value per share is P100 and the option price isP120.
On December 31,2016, 20 employees have left and it is expected that on the basis of a weighted average probability, a further 15 employees will leave before the end of the three-year period.
What is the compensation expense for 2016?
a. 100,000 c. 65,000
b. 247,500 d. 300,000

Answer is c
Solution:
2015
Fair value of share options (200 x 50 x 30) 300,000
Compensation expense for 2015 (300,000/3) 100,000
2016
Number of employees 200
Employees who left in 2016 (20)
Employees expected to leav (15)
Employees entitled to share options 165
Fair value of share options (165 x 50 x30) 247,500
Cumulative compensation expense
for 2015 And 2016 (247,500/3 x 2) 165,000
Compensation expense recognized in 2015 (100,000)
Compensation expense in 2016 65,000

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

a. 2,160,000 c. 5,400,000
b 2,700,000 d. 0

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

Reid company granted 20,000 share options to each of its 8 directors on January 1,2015. The options vest on january 1,2019. The fair value of each option on January 1,2015 isP60 and it is anticipated that all of the share options will vest on January1,2019.
What amount should be reported as increase in expense and equity for the year ended December 31,2015?
a. 2,400,000 c. 2,500,000

b. 9,600,000 d. 3,200,000

Answer is a
Solution:
Fair value of share options (20,000 x 8 x 60) 9,600,000
Compensation expense for 2015 (9,600,000/4) 2,400,000
5. Hitler company issued fully paid shares to 200 employees on December 31, 2015. Normally, shares issued to employees vest over a two-year period but these shares have been given as a bonus to the employees because of their exceptional performance during the year. The shares have a market value of P500,000 on December 31, 2015 and an average fair value of P600,000 for the year. What amount should be expensed for this share-based payment transaction?
a. 600,000 c. 300,000
b. 500,000 d. 250,000

Answer is b
Solution:

FAIR VALUE of share options December 31,2015 500,000
Santa company granted 150 share appreciation rights to each of the 800 employees in January 2015. The entity estimated that 85% of the awards will vest on December 31,2017. The fair value of each share appreciation right on december 31,2015 is P15.
What is the accrued liability on december 31,2015?
a. 1,530,000 c. 150,000
b. 510,000 d. 10,200

Answer is b
Solution:
Total compensation (150 x 800 x 15 x 85%) 1,530,000
Accrued compensation (1,530,000/3) 510,000
On January 1,2015, drusty company granted Lox,the president, 25,000 share appreciatiob rights for past services. These rights are exercisable immediately and expire on January 1,201. On exercise, Lox is entitled to receive cash in excess of the market price on the exercise date over the market price on the grant date. Lox did not exercise any of the rights during 2015. The market price of drusty's share was P60 on January 1,2015 and P80 on December 31,2015.
As a result of the appreciation rights, what amount should be recognized as compensation expense for 2015?
a. 0 c. 250,000
b. 150,000 d. 500,000

Answer is d
Solution
Market price dec - jan (80-60) P20
Compensation for 2015 (25,000 x 20) 500,000
Valix company has granted share options to employees with a fair value of 7,500,000. The options vest in four years. The Monte Carlo model was used to value the options.
On January 1,2015, which is the date of the grant, the estimated employees leaving the entity during the vesting period is 15%
What is the compensation expense for 2015?
a. 1,593,750 c. 1,395.570
b. 1,953,750 d. 1,593,705

Answer is a
Solution
(7,500,000 x 85% / 4) 1,593,750
On January 1,2015 Lexy Company granted share options to each of the 350 employees working in the sales department.
The share options vest at the end of a three year period provided that the employees remain in the entity's employ and provided the volume of sales will increase by more than 10% per year. The fair value of each share option on grant date is P50.
If the sales increase by more than 10%, each employee will receive 150 share options.
If the sales increased by more than 15% each employee will receive 300 share options.
On December 31,2015 the sales increased by more than 10% but not more than 15% and no employees left.
On December 31,2015 the sales increased by more than 15% and no employees have left.
What amount should be recognized as compensation expense for 2016?
a. 2,625,000 c. 5,250,000
b. 875,000 d. 3,500,000

Answer is a
Solution
2015
Fair Value of share options (350 x 150 x 50) 2,625,000
Compensation expense 2015 (2,625,000/3) 875,000

2016
Fair value of share options (350 x 300 x 50) 5,250,000
Cumulative compensation expense (5,250,000/3 x2) 3,500,000
Compensation expensed recognized in 2015 (875,000)
Compensation expense 2016 2,625,000

LOL company granted 18,000 share appreciation rights which entitled key employees to receive cash equal to the difference between P30 and the market price of the share on the date each right is exercised. The service period is 2015 to 2017 and the rights are exercisable in 2018. The market price of the share was P38 and P42 on December 31,2015 and 2016, respectively.
What amount should be reported as liability under the share appreciation rights on December 31,2016?
a.0 c. 72,000
b. 144,000 d. 216,000

Answer is b
Solution
Fair value of share appreciation right (42-30) 12
Accrued compensation december 31,2016
(18,000 x 12 = 216,000/3 x2) 144,000

LIABILITIES & EQUITY ALASTOY BSA 2-

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