CHAPTER 1

PROVISIONS, CONTINGENCIES AND OTHER LIABILITIES

Problems

1-1. The following shall result in the recognition of liabilities

a, c, e, g, h, i, m, n, o, p

1-2. Case 1 – None

Case 2 – P800,000
Case 3 – P400,000
Case 4 – P350,000
Case 5 - P100,000 = (1M x 10%) + (200,000 x 30%) – 60,000
Case 6 - None

1-3. (Garfield Company)

(a) B = 8,000,000 x 8% = P640,000

(b) B = 8% (8000,000 – B )
B = 640,000 - .08B
B = 640,000/1.08 = P592,593

(c) B = .08 (8,000,000 – T )

T = .30 (8,000,000 – B )
B = .08 {8,000,000 - .30 (8,000,000 – B ) }
B = .08 {8,000,000 – 2,400,000 + .30B}
B = 448,000 + .024B
B = 448,000/0.976 = P459,016

(d) B = .08 {8,000,000 – B – T }

T = .30 (8,000,000 – B)
B = .08{8,000,000 – B - .30 (8,000,000 – B)}
B = .08 {8,000,000 – B – 2,400,000 + .30B}
B = 448,000 - .056B
B = 448,000/1.056 = P424,242

1-4. (Arthur Corporation)

a. Bonus to sales manager = .08 x 3,000,000 = P240,000

Bonus to each sales agent = .06 x 3,000,000 = P180,000

b. Total Bonus = .36 {3,000,000 – B – T )

T = .30 {3,000,000 – B }
B = .36 {3,000,000 – B - .30 (3,000,000 – B)}
B = .36 {3,000,000 – B – 900,000 + .30B}
B = 756,000 - .252B
B = 756,000/1.252 = 603,834 (total)
B (Each): 603,834 / 3 = P201,278

c. B = .32 {3,000,000 – B }
B = 960,000 - .32B
B = 960,000/1.32 = 727,273 (total)
B (Sales Manager): 727,273 x 12/32 = P272,727
B (Each Sales Agent): 727,273 x 10/32 = P227,273

1-5. (Cleveland, Inc.)

B = .06 {9,000,000 – B – T }
T = .30 (9,000,000 – B)

B = .06 (9,000,000 – B - .30 (9,000,000 – B ) }

B = .06 { 9,000,000 – B – 2,700,000 + .30B }
B = 378,000 - .042B
B = 378,000 / 1.042 = 362,764

T = .30 (9,000,000 – 362,764) = P2,591,171

1-6. (Jackson Company)

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 Chapter 1 – Provisions, Contingencies and Other Liabilities

2019 2020 2021

Sale of product

Accts. Receivable/Cash 1,000,000 2,500,000 3,500,000

Sales 1,000,000 2,500,00 3,500,000
0
Accrual of repairs

Warranty Expense 60,000 150,000 210,000

Warranty Liability 60,000 150,00 210,000
0
Actual repairs

Warranty Liability 8,000 38,000 112,500

Cash/ AP, etc. 8,000 38,000 112,500

1-7. (Filmore Company)

(a)
2019 2020
Warranty Liability, January 1 P 0 P187,200
Warranty expense (8% x 4,200,000)/(8% x 6,960,000) 336,000 556,800
Actual repair costs incurred (148,800) (180,000)
Warranty liability, December 31 P187,200 P564,000
(b)

On 2019 sales (4,200,000 x 5% x ½) P105,000

On 2020 sales [(1/2 of 3%) + 5%] x 6,960,000 452,400
Predicted warranty liability at December 31, 2020 P557,400

1-8. (Johnson Company)

2019 2020
(a) Cash 720,000 864,000
Unearned Revenue from Warranty Contracts 720,000
864,000

Cost of Warranty Contracts 25,000 100,000

Cash, Materials, etc. 25,000
100,000

Unearned Revenue from Warranty Contracts 72,000 266,400

Revenue from Warranty Contracts 72,000 266,400
20% x ½ x 720,000 = 72,000

20% x ½ x 720,000 = 72,000

30% x ½ x 720,000 = 108,000
20% x ½ x 864,000 = 86,400
Total for 2020 266,400

(b) Unearned Revenue from Warranty Contracts, Dec. 31, 2019

(720,000 – 72,000) 648,000
Unearned Revenue recorded during 2020 864,000
Revenue recognized during 2020
(266,400)
Unearned Revenue from Warrant Contracts, Dec. 31, 2020 1,245,600
or
From 2019 contracts 720,000 x 65% 468,000
From 2020 contracts 864,000 x 90% 777,600
Total 1,245,600

(c) 2019 2020

Revenue from warranty contracts - see (a) 72,000 266,400
Cost of warranty contracts 25,000 100,000
Profit from warranty contracts 47,000 166,400

1-9. (Tyler Corporation)

(a) Premium Inventory 225,000

Cash/Accounts Payable 225,000
1,500 x 150

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 Chapter 1 – Provisions, Contingencies and Other Liabilities

(b) Cash/Accounts Receivable 15,000,000

Sales 14,062,500

Unearned Revenue for Premium Claims 937,500

Basis of allocation of sales price of main product

Selling price of main product 15,000,000
Selling price of premium
(1,000,000 x 40%)/100 = 4,000 x 250 1,000,000
Total 16,000,000

Allocation of sales price

To main product 15,000,000 x (15M/16M) 14,062,500
To premium 15,000,000 x (1M/16M) 937,500
Total 15,000,000

(c) Cash 50,000

Unearned Revenue for Premium Claims 234,375
Sales 284,375
1,000 x 50 = 50,000
937,500 x (1,000/4,000) = 234,375

1-10. (Polk Company)

(a) Basis of allocation of sales price of main product

Selling price of main product 300,000 x 30 9,000,000
Selling price of premium
(300,000 x 30%)/20 = 4,500 x 40 180,000
Total 9,180,000

Allocation of sales price

To main product 9,000,000 x (9M/9.180M 8,823,529
To premium 9,000,000 x (180,000/9,180,000) 176,471
Total 9,000,000

Unearned revenue for unredeemed coupons before redemption 176,471

Reduction resulting from redemption
176,471 x (4,000/4,500) 156,863
Unearned revenue for unredeemed coupons, December 31, 2020 19,608
or 176,471 x (500/4,500)

(b) Additional sales upon redemption (see above) 156,863

1-11. (Taylor Company)

NOTE: Please provide the sales price of the main product of P500, missing in the problem.
(1) 2019
Total sales price of main product (140,000 units x P500) P70,000,000
Total sales price of premiums
(40,000 + 30,000)/5 = 14,000 units x P150 2,100,000
Total (basis of allocation) P72,100,000

Allocation:
Main (70/72.1) x 70M P67,961,165
Premium (2.1/72.1) x 70M 2,038,835
Total P70,000,000

Provision for unredeemed coupons at the end of 2019

2,038,835 x (6,000*/14,000) P 873,786
*(30,000/5)

2020
Total sales price of main product (200,000 x P500) P100,000,000
Total sales price of premiums
(90,000-30,000+80,000)/5 = 28,000 units x P150 4,200,000
Total (basis of allocation) P104,200,000

Allocation:
Main (100/104.2) x 100M P 95,969,290
Premium (4.2/104.2) x 100M 4,030,710
Total P100,000,000

Provision for unredeemed coupons at the end of 2020

4,030,710 x (16,000*/28,000) P 2,303,263

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 Chapter 1 – Provisions, Contingencies and Other Liabilities

*(80,000/5)

(2) 2019 2020

Sales of main product P67,961,165 P95,969,290
Redemption of premiums
Cash received
8,000 x 50 400,000
18,000 x 50 900,000
2,038,835 x (8,000*/14,000) 1,165,049
2,038,835 x (6,000/14,000) 873,786
4,030,710 x (12,000**/28,000) ____________ 1,727,447
Total revenue P69,526,214 P99,470,523
*40,000/5 = 8,000 premiums
**(90,000-30,000)/5 = 12,000 premiums

1-12. (Van Department Store)

(a)
Allocation of original consideration received:
Sales revenue (98% x P5,000,000) P4,900,000
Liability for Customer Loyalty Awards (2% x P5,000,000) P 100,000
Revenue in 2019 as a result of redemption
100,000 x 25/90 P 27,778

Revenue in 2020 as a result of redemption

Total accumulated revenue from redemption as of 12/31/20
(100,000 x 60/95) P 63,158
Less revenue earned in 2019 27,778
Revenue in 2020 as a result of redemption P 35,380

(b)
Liability as of 12/31/19 (100,000 – 27,778) P 72,222
Liability as of 12/31/20 (100,000 – 63,158) P 36,842

1-13. (Pierce Corporation)

Cash 2,000,000
Unearned Revenue from Gift Certificates Outstanding 2,000,000

Unearned Revenue from Gift Certificates Outstanding 1,280,000

Sales 1,280,000

Note: The gift certificates estimated to expire is recognized as revenue at the date of actual
expiration.

1-14. (Buchanan Company)

Cash 3,000,000
Unearned Revenue from Gift Certificates Outstanding 3,000,000

Unearned Revenue from Gift Certificates Outstanding 2,750,000

Sales 2,750,000

Unearned Revenue from Gift Certificates Outstanding 150,000

Revenue from Forfeited Gift Certificates 150,000

1-15. (Lincoln Company)

Refundable Deposits, January 1, 2020 P250,000

Deposits received during the year 200,000
Deposits refunded during the year (267,000)
Deposits forfeited during the year (100,000 – 82,000) (18,000)
Refundable Deposits, December 31, 2020 P165,000

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 Chapter 1 – Provisions, Contingencies and Other Liabilities

1-16. (Grant Publication)

(a)
Subscriptions sold in 2017 and 2018
(5,000,000 + 4,500,000) P9,500,000
Expired subscriptions in
2017 P1,000,000
2018 (2,800,000 + 1,200,000) 4,000,000 5,000,000
Unearned subscriptions, January 1, 2019 P4,500,000

(b) 2019
Cash 5,500,000
Unearned Subscription Revenue 5,500,000

Unearned Subscription Revenue 5,000,000

Subscription Revenue 5,000,000
1,200,000 + 2,000,000 + 1,800,000

2020
Cash 7,000,000
Unearned Subscription Revenue 7,000,000

Unearned Subscription Revenue 5,700,000

Subscription Revenue 5,700,000
1,300,000 + 2,400,000 + 2,000,000

(c) 2019 2020

Unearned Subscription Revenue, January 1 P4,500,000 P5,000,000
Subscription received during the year 5,500,000 7,000,000
Subscription revenue for the year (5,000,000) (5,700,000)
Unearned Subscription Revenue, December 31 P5,000,000 P6,300,000

1-17. (Coolidge Company)

Accounts Payable P 270,000

Mortgage Notes Payable 1,300,000
Current portion of Bank Notes Payable 100,000
Interest Payable 7,500
Liability for Damages 750,000
Value Added Tax Payable 288,000
Income Tax Payable 315,000
SSS Premiums Payable (45,000 + 50,000) 95,000
Philhealth Contributions Payable (22,000 + 28,000) 50,000
Pag-ibig Contributions Payable (18,000 + 20,000) 38,000
Withholding Tax Payable 120,000
Total current liabilities, December 31, 2020 P3,333,500

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 Chapter 1 – Provisions, Contingencies and Other Liabilities

MULTIPLE CHOICE QUESTIONS

Theory

MC1 B MC8 D
MC2 A MC9 B
MC3 D MC10 A
MC4 C MC11 A
MC5 B MC12 B
MC6 D MC13 D
MC7 B MC14 D

Problems

MC15 B Midpoint (5M + 6.5M)/2 P5,750,000

MC16 C P5,500,000

MC17 A Accrued salaries payable, 12/31/19 P 130,000

Salaries expense during the year 1,630,000
Salaries paid during the year (1,560,000)
Accrued salaries payable, 12/31/20 P 200,000

MC18 B Accrued electricity expense (1/2 x 8,500) 4,250

Accrued telephone bill 2,500
Total accrued liabilities P6,750

MC19 D Unearned service contract revenue, January 1 P1,080,000

Cash receipts from service contracts sold 1,920,000
Service contract revenue recognized during the year (1,560,000)
Unearned service contract revenue, December 31, P1,440,000
2020

MC20 C Unearned revenue from 2018 sales (67.5% x 2,100,000) P1,417,500

Unearned revenue from 2019 sales (92.5% x 2,730,000) 2,525,250
Unearned revenue, December 31, 2019 P3,942,750

MC21 D From 2018 contracts 2,100,000 x ½ x (35% + 50%) P892,500

From 2019 contracts 2,730,000 x ½ x (15% + 35%) 682,500
From 2020 contracts 2,475,000 x ½ x 15% 185,625
Revenue from service contracts recognized in 2020 P1,760,625

MC22 B Revenue from service contracts sold in 2020 realized

in 2021 2,475,000 x ½ x (15% + 35%) P618,750

MC23 A From 2018 contracts (2,100,000 x ½ x 50%) P 525,000

From 2019 contracts (2,730,000 x ½ x 67.5%) 1,842,750
From 2020 contracts (2,475,000 x 92.5%) 2,289,375
Unearned revenue from service contracts, December 31, P4,657,125
2020

MC24 D Warranty contracts (500 x 2,250) P1,125,000

Earned during 2020 (1,125,000 x ½ x 30%) 168,750
Unearned revenue from service contracts at Dec. 31, 2020 P 956,250

Revenue earned from service contracts P168,750

Cost of servicing contracts 95,000
Profit from service contracts P 73,750

MC25 (20,000 X 75%)/20 = 750 premiums x 300 = 225,000

225,000/12,225,000 P220,859

MC26 (500/750) x 220,859 P147,239

MC27 D Deferred revenue from gift certificates outstanding

1,000 x 750 P750,000

MC28 B Accrued biweekly salaries (3/10 x 1,125,000) P337,500

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 Chapter 1 – Provisions, Contingencies and Other Liabilities

Accrued overtime pay 63,000

Accrued salaries, July 31, 2020 P400,500

MC29 B Est. number of coupons to be redeemed (80% x 500,000) 400,000

Number of coupons already processed 300,000
Estimated unredeemed coupons 100,000
Cost per premium (50 + 5 – 40) P 15.00
Estimated liability for unredeemed coupons P1,500,000
MC30 A Estimated total number of premiums
60% x 3,000,000 = 1,800,000; 1,800,000/10 180,000
Number of premiums already distributed 42,000
Estimated outstanding premiums 138,000
Cost per premium (40,000/80,000) P0.50
Estimated cost of potential prizes outstanding P69,000

MC31 A Estimated total coupons (400,000 x 70%) 280,000

Coupons redeemed 100,000
Outstanding coupons 180,000
Estimated outstanding premiums (180,000/5) 36,000
Cost per premium P20.00
Estimated liability for premiums outstanding P720,000

MC32 B Estimated value of redemptions (720,000 x 50%) P360,000

Amount already disbursed for redemptions 300,000
Liability for unredeemed coupons, December 31, P 60,000
2020

MC33 D Warranty expense for 2020 (24,000 units x P300) P7,200,000

MC34 C Total warranty expense P7,200,000

Less warranty costs paid 1,700,000
Estimated liability for warranty P5,500,000

MC35 D 1,500 x 4% P60,000

MC36 C B = .45 {2,000,000 – B - .30 (2,000,000 – B)} P479,087

MC37 C Total Bonus = .35 {2,000,000 – B) = 518,519

Bonus to Sales Manager (518,519 x 15/35) P222,222
Bonus to Each Sales Agent (518,519 x 1/35) P148,148

MC38 B Bonus
B = .10 {2,500,000 - .30 x (2,500,000 – B)} P180,412

MC39 C Outstanding subscriptions expiring in 2021, 2022

and 2023: (600,000 + 900,000 + 400,000) P1,900,000

MC40 A Magazine subscriptions received in advance before P2,400,000

adjustments
Unearned subscriptions as of December 31, 2020 1,900,000
Magazine subscriptions revenue for year 2020 P 500,000

MC41 D Cash payment P3,800,000

Carrying amount of patent transferred 2,000,000
Total payment P5,800,000
Accrued loss reported on December 31, 2019 5,000,000
Decrease in profit at December 31, 2020 P 800,000

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 CHAPTER 2
SHAREHOLDERS’ EQUITY

Problems

2-1. (Gallery Company)

 Cash (20,000 x 500) 10,000,000

Ordinary Share Capital 10,000,000

 Legal Expense/Professional Fees 150,000

Ordinary Share Capital (250 x 500) 125,000

Share Premium - Ordinary 25,000

 Land 5,000,000

Building 3,000,000
Ordinary Share Capital (12,500 x 500) 6,250,000
Share Premium - Ordinary 1,750,000

 Cash (6,500 x 550) 3,575,000

Ordinary Share Capital (6,500 x 500) 3,250,000

Share Premium - Ordinary 325,000

 Cash (20,000 x 550 x 25%) 2,750,000

Subscription Receivable (20,000 x 550 x 75%) 8,250,000

Subscribed Ordinary share (20,000 x 500) 10,000,000
Share Premium - Ordinary 1,000,000

 Cash (12,000 x 550 x 75%) 4,950,000

Subscription Receivable 4,950,000

 Subscribed Ordinary Share 6,000,000

Ordinary Share Capital 6,000,000

2-2.
a. Cash (10,000 x 200) 2,000,000
Ordinary Share Capital (10,000 x 150) 1,500,000
Share Premium - Ordinary 500,000

Share Premium-Ordinary 60,000

Promotions and Advertising Expense 25,000
Cash 85,000

b. Land (3,500 x 560) 1,960,000

Ordinary Share Capital (3,500 x 200) 700,000
Share Premium – Ordinary 1,260,000

c. Cash 18,000,000
Preference Share Capital 2,500,000
Ordinary Share Capital 10,000,000
Share Premium – Preference 2,000,000
Share Premium – Ordinary 3,500,000
MV: Pref – 5,000 x 800=4M
 Chapter 2 – Shareholders’ Equity

Ord – 100,000 x 120 = 12M

Allocation:
Pref: 18M x 4/16 = 4.5M
Ord: 18M x 12/16 = 13.5M

d. Subscription Receivable 450,000

Cash 150,000
Subscribed Ordinary Share 500,000
Share Premium – Ordinary 100,000

e. Land 5,000,000
Cash 40,000
Donated Capital 4,960,000

2-3. (Blazing Red Corporation)

Contributed Capital
10% Preference Share Capital, cumulative and non-participating, P100 par
30,000 shares authorized; 12,000 shares issued and outstanding P1,200,000
Ordinary Share Capital, P10 par, 100,000 shares authorized, 40,000
shares 400,000
issued, 39,000 shares outstanding
Share Premium – Preference 300,000
Share Premium –Ordinary 140,000
Total Contributed Capital P2,040,000
Retained Earnings
Appropriated for Treasury Share P 18,000
Unappropriated 332,000 350,000
Treasury Shares, 1,000 ordinary shares, at cost ( 18,000)
Total Shareholders’ Equity P2,372,000

The total amount of P2,372,000 may also be obtained without necessarily preparing
the shareholders’ equity in good format (if not required) as follows:

Issue of 30,000 ordinary shares P 380,000

Issue of preference shares in exchange of equipment 1,500,000
Subscriptions for 10,000 ordinary shares at 16 160,000
Purchase of 1,000 treasury shares at 18
(18,000)
Retained earnings 350,000
Total shareholders’ equity, December 31, 2020 P 2,372,000

2-4. (Millenniun Company)

(a)
(1) Treasury Shares 140,000
Cash 140,000

(2) Cash 60,000

Treasury Shares 56,000
Paid in Capital from Treasury Share 4,000

(3) Cash 65,000

Paid in Capital from Treasury Shares 4,000
Retained Earnings 1,000
Treasury Shares 70,000

(4) Ordinary Share Capital 10,000

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 Chapter 2 – Shareholders’ Equity

Share Premium - Ordinary 3,000

Retained Earnings 1,000
Treasury Shares 14,000

(b) Total Shareholders’ Equity, December 31, 2019 P2,200,000

(1) Purchase of treasury shares (10,000 x 14) (140,000)
(2) Sale of treasury shares (4,000 x 15) 60,000
(3) Sale of treasury shares (5,000 x 13) 65,000
Profit for the year 280,000
Dividends declared (200,000)
Total Shareholders’ Equity, December 31, 2020 P2,265,000

The total shareholders’ equity may also be obtained by determining the balance of the
shareholders’ equity accounts, as follows:

Ordinary share capital, P10 par (99,000 shares issued and outstanding) P 990,000
Share premium - ordinary 297,000
Retained Earnings 978,000
Total shareholders’ equity, December 31, 2020 P2,265,000

2-5. (Consuelo Enterprises)

(a) Preference Share Capital (4,000 x 20) 80,000

Share Premium – Preference (4,000 x 1.60) 6,400
PIC from Retirement of Preference Shares 2,400
Cash (4,000 x 21) 84,000

(b) Preference Share Capital (4,000 x 20) 80,000

Share Premium – Preference (4,000 x 1.60) 6,400
Retained Earnings 17,600
Cash (4,000 x 26) 104,000

Average preference share premium per share: 160,000/100,000 shares =

1.60

2-6. (Concepcion Enterprises, Inc.)

(a) Preference Share Capital (10,000 x 20) 200,000

Share Premium – Preference (10,000 x 1.60) 16,000
Retained Earnings 84,000
Ordinary Share Capital (10,000 x 30) 300,000

(b) Preference Share Capital (10,000 x 20) 200,000

Share Premium – Preference (10,000 x 1.60) 16,000
Ordinary Share Capital (5,000 x 30) 150,000
Share Premium – Ordinary 66,000

2-7. (Red Stone Company)

(a) Retained Earnings (10,000 shares x P20) 200,000

Share Dividends Distributable 100,000
Share Premium - Ordinary 100,000

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 Chapter 2 – Shareholders’ Equity

Share Dividends Distributable 100,000

Ordinary Share Capital 100,000

(b) Retained Earnings (30,000 x 10) 300,000

Share Dividends Distributable 300,000

Share Dividends Distributable 300,000

Ordinary Share Capital 300,000

(c) Memo: Effected a 2 for 1 stock split on 100,000 shares P100 par previously
issued and outstanding.
2-8. (Dark Red Company)

Capital structure:
Preference Ordinary
Number of shares outstanding 20,000 250,000
Total par value P2,000,000 P2,500,000

(a) Preference share is non-cumulative and non-participating

2018 Preference Ordinary

Current preference dividends (9% x 2,000,000 = P0
180,000; dividends declared were P150,000 only. P 150,000
Dividend per share P7.50 P0

2019
Current preference dividends (9% x 2,000,000) P 180,000
Excess (240,000 – 180,000) P80,000
Dividend per share P9.00 P0.32

2020
Current preference dividends (9% x 2,000,000) P 180,000
Excess (540,000 – 180,000) P360,000
Dividend per share P9.00 P1.44

(b) Preference share is cumulative and non-participating.

2018 Preference Ordinary

Current on preference is P180,000 P150,000
Arrears, end (P180,000 – 150,000 = 30,000) P0
Dividend per share P7.50 P0

2019
Arrears, beginning P 30,000
Current year 180,000
Total P210,000 P210,000
Excess to ordinary = 260,000 – 210,000 P50,000

Dividend per share P10.50 P0.20

2020
Current year P180,000
Excess – to ordinary = 540,000 – 180,000 P360,000
Dividend per share P9.00 P1.44

(c) Preference share is cumulative and fully participating

2018 Preference Ordinary

Current dividends:
9% x 2,000,000 = P180,000 P 150,000 P0
Arrears, end = 180,000 – 150,000 = 30,000

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 Chapter 2 – Shareholders’ Equity

Dividend per share P 7.50 P0

2019
Arrears, beginning P 30,000
Current on preference 180,000 P 210,000
To ordinary: initial limit 9% x P2,500,000
= P225,000, but remaining is only P50,000
Total dividends P210,000 P50,000
Dividend per share P10.50 P 0.20

2020 Preference Ordinary

Current dividends:
9% x 2,000,000 P 180,000
9% x 2,500,000 P 225,000
Excess: P135,000 x 2.0/4.5 60,000
135,000 x 2.5/4.5 75,000
Total P240,000 P300,000
Dividend per share P12.00 P1.20

2-9. (Red Violet Company)

Capital structure:
Preference Ordinary
Number of shares outstanding 20,000 250,000
Total par value P2,000,000 P2,500,000

(a) Preference is participating up to 14%.

Preference Ordinary
Arrears, January 1 P 50,000
Current dividends:
9% x P2,000,000 180,000
9% x P2,500,000 P225,000
Excess divided by total par
155,000/4,500,000 = 3.44%, which is less
than the limit of additional 5%; therefore full
excess is prorated.
P155,000 x 2M/4.5M 68,889
P155,000 x 2.5M/4.5M 86,111
Total P298,889 P311,111
Dividend per share P14.94 P1.24

(b) Preference is participating up to 12%.

Arrears, January 1 P 50,000

Current dividends:
9% x P2,000,000 180,000
9% x P2,500,000 P225,000
Excess divided by total par
155,000/4,500,000 = 3.44%, which exceeds
the additional limit of 3%; therefore, additional
to preference is limited to 3%; remainder goes
to ordinary 60,000
3% x P2,000,000
P155,000 – 60,000 95,000
Total P290,000 P320,000
Dividend per share P14.50 P1.28

2-10. (Red Mama Company)

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 Chapter 2 – Shareholders’ Equity

Retained Earnings 500,000

Share Dividends Distributable 500,000
50% x 100,000 x 10 = 500,000

Share Dividends Distributable 500,000

Ordinary Share Capital 450,000
Fractional Share Warrants Outstanding 50,000

Fractional Share Warrants Outstanding 50,000

Ordinary Share Capital 40,000
PIC from Unexercised Fractional Share Warrants 10,000
2-11. (Red Ball Corporation)

2020
Oct. 31
Financial Assets at FV through Profit or Loss 10,000
Unrealized Gain on Financial Assets at FVPL 10,000
10,000 shares x (15 – 14)

Retained Earnings 150,000

Property Dividends Payable 150,000
10,000 shares x 15

Financial Assets at FV through Profit or Loss 20,000

Unrealized Gain on Financial Assets at FVPL 20,000
10,000 shares x (17 – 15)

Retained earnings 20,000

Property Dividends Payable 20,000

2021
Feb. 28
Retained Earnings 30,000
Property Dividends Payable 30,000

Property Dividends Payable 200,000

Financial Assets at FV through Profit or Loss 170,000
Gain on Disposal of Financial Assets at FVPL 30,000

2-12. (Red Chili Company

2020
Oct. 1 Depreciation Expense 33,750
Accumulated Depreciation – Equipment 33,750
450,000/10 x 9/12

Retained Earnings 190,000

Property Dividends Payable 190,000

Assets Held for Distribution 180,000

Accumulated Depreciation – Equipment 270,000
Property, Plant and Equipment 450,000
Cost P450,000
Acc. Depr. 450,000/10 x 6 270,000
Carrying value P180,000
FV (because it is higher)
P190,000

Dec. 31 Impairment Loss 20,000

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 Chapter 2 – Shareholders’ Equity

Assets Held for Distribution 20,000

180,000 – 160,000 = 20,000

Property Dividends Payable 30,000

Retained Earnings 30,000
190,000 – 160,000 = 30,000 decrease

2021
Jan. 31 Retained Earnings 15,000
Property Dividends Payable 15,000
175,000 – 160,000 = 15,000 increase

Jan. 31 Property Dividends Payable 175,000

Assets Held for Distribution 160,000
Gain on Disposal of Assets 15,000

2-13. (Red Ribbon Corporation)

Total Preference Ordinary Treasury Shares

Shareholders’ Shares Shares Number
Equity issued issued of Cost
Shares
12/31/19 balances P16,500,000 30,000 100,000
2020 transactions:
a) 4,000 x 280 (1,120,000) (4,000)
b) 8,000 x 75 (600,000) 8,000 P640,000
c) 2:1 share split 100,000 8,000
d) 6,000 x 45 270,000 (6,000) (240,000)*
e) 4,000 x 46 4,000
f) 2,000 x 48 96,000 (2,000)
g) Dividends (812,000)
h) Profit 2,000,000
12/31/20 balances P16,334,000 26,000 200,000 12,000 P400,000
*P640,000 x 6,000/16,000 = 240,000

(a) Number of preference shares issued and outstanding 26,000

(b) Number of ordinary shares issued 200,000
Number of ordinary shares outstanding (200,000 – 12,000) 188,000
(c) Cost of remaining treasury shares acquired by purchase
P400,000
(d) Amount of total dividends (26,000 sh x P200 x 12%) + (188,000 x 1)
P812,000
(e) Total shareholders’ equity, December 31, 2020 P16,334,000

2-14. (Red Heart Corporation)

(a)
2020
June 15 Cash 6,000,000
Ordinary Share Capital 5,000,000
Share Premium – Ordinary 1,000,000

Sept. 30 Retained Earnings (80,000 x 5% x 110) 440,000

Share Dividends Distributable (4,000 x 100) 400,000
Share Premium – Ordinary 40,000

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 Chapter 2 – Shareholders’ Equity

Nov. 10 Share Dividends Distributable 400,000

Ordinary Share Capital 400,000

Dec. 31 Income Summary 1,175,000

Retained Earnings 1,175,000

2021
Mar. 1 Treasury Share (3,000 x 95) 285,000
Cash 285,000

May 1 Cash (1,500 x 120) 180,000

Treasury Share (1,500 x 95) 142,500
Pain in Capital from Treasury Shares 37,500

Aug. 10 Issued 82,500 rights to shareholders entitling

holders to purchase 2 additional shares for
P125 per share.

Sept. 15 Cash (30,000 x 125) 3,750,000

Ordinary Share Capital (30,000 x 100) 3,000,000
Share Premium – Ordinary 750,000

Oct. 31 Cash (80,000 x 125) 10,000,000

Ordinary Share Capital (80,000 x 100) 8,000,000
Share Premium – Ordinary 2,000,000

Dec. 10 Retained Earnings 962,500

Dividends Payable (192,500 x 5) 962,500

Dec. 20 Ordinary Share Capital (1,000 x 100) 100,000

Share Premium – Ordinary (1,000 x 10)* 10,000
Paid in Capital from Treasury Shares 15,000
Treasury Share 95,000
*Share premium/share
300,000/30,000 = 10

Dec. 31 Income Summary 1,200,000

Retained Earnings 1,200,000

(b)
Shareholders’ Equity
Ordinary Share Capital, P100 par, 193,000 shares
issued; 500 shares in the treasury P19,300,000
Share Premium - Ordinary 4,080,000
Paid in Capital from Treasury Shares 52,500
Retained Earnings 1,422,500
Treasury Shares (47,500)
Total Shareholders’ Equity, December 31, 2021 P24,807,500

2-15. (Red Carpet Company)

(a) Total lump sum price is P147,000 (1,500 x 98), allocated as follows:

Securities Market value Allocation Allocated Price

Preference 90 147,000 x 90/100 132,300

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 Chapter 2 – Shareholders’ Equity

Warrant 10 147,000 x 10/100 14,700

Entry Cash 147,000

Preference Share Capital (1,500 x 30) 45,000
Share Premium – Preference 87,300
Share Warrants Outstanding 14,700

(b) Cash (600 x 40) 24,000

Share Warrants Outstanding 11,760
Ordinary Share Capital 6,000
Share Premium – Ordinary 29,760

2-16. (Red Hot Company)

(a) Value of each option P8

Number of shares granted x 30,000
Total value assigned to share options P240,000
Required service period  3 years
Annual compensation expense P 80,000
(b)
2020
Jan. 1 Memo: Granted share options to selected
senior employees for the purchase of 30,000
ordinary shares at P35 per share, from January
1, 202 to December 31, 2023.

Dec. 31 Compensation Expense 80,000

Share Options Outstanding 80,000

2021
Dec. 31 Compensation Expense 80,000
Share Options Outstanding 80,000

2022
Dec. 31 Compensation Expense 80,000
Share Options Outstanding 80,000

2023
Dec. 31 Share Options Outstanding (28,000 x 8) 224,000
Cash (28,000 x 35) 980,000
Ordinary Share Capital (28,000 x 20) 560,000
Share Premium - Ordinary 644,000

2-17. (Fire Red Company)

2020
Jan. 2 Memo: granted 50,000 share options to certain officers for the purchase of the
company’s P100 par ordinary shares at P280 per share.
Dec. 31 Compensation Expense 900,000
Share Options Outstanding 900,000
(45,000 x 60)  3 years
2021
June Memo: 6,000 share options were cancelled.

Dec. 31 Compensation Expense 860,000

Share Options Outstanding 860,000
(50,000-6,000) x 60 x 2/3 = 1,760,000
1,760,000 – 900,000 = 860,000
2022
August Memo: 1,500 share options were cancelled.

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 Chapter 2 – Shareholders’ Equity

Dec. 31 Compensation Expense 790,000

Share Options Outstanding 790,000
Total accrued compensation expense
(44,000 – 1,500) x 60 2,550,000
Less: previously accrued 1,760,000
Compensation expense 790,000

2023 Cash (42,500 x 280) 11,900,000

Share Options Outstanding (42,500 x 60) 2,550,000
Ordinary Share Capital (42,500 x 100) 4,250,000
Share Premium – Ordinary 10,200,000

2-18. (Red Fox Corporation)

(a) Compensation Expense

2020 200 – 10 – 15 = 175 employees x 100 options=17,500
17,500 x 32 = 560,000; 560,000 x 1/3 186,667

2021 200–10–12–5=173 employees x 100 options=17,300

17,300 x 32 x 2/3 = 369,067; 369,067 – 186,667 182,400

2022 200-10-12-8=170 employees x 100 options=17,000

17,000 x 32 = 544,000; 544,000 – 369,067 174,933

(b)

2023 Cash (140 x 100 x 220) 3,080,000

Share Options Outstanding (14,000 x 32) 448,000
Ordinary Share Capital (14,000 x 200) 2,800,000
Share Premium - Ordinary 728,000

2024 Cash (10 x 100 x 220) 220,000

Share Options Outstanding (1,000 x 32) 32,000
Ordinary Share Capital (1,000 x 200) 200,000
Share Premium – Ordinary 52,000

Share Options Outstanding (2,000 x 32) 64,000

PIC from Forfeited Share Options 64,000

2-19. (Cherry Red Company)

(a)
2020
Jan. 1 Memo: Granted 10,000 share options for the purchase of P100 par ordinary
shares at P120 per share. The options vest once the market price of ordinary
shares reached P200, up to Dec. 31, 2021. Options expire at the end of 2022.

Dec. 31 Compensation Expense 66,667

Share Options Outstanding 66,667

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 Chapter 2 – Shareholders’ Equity

(10,000 x 20) / 3 years

2021
Dec. 31 Compensation Expense 133,333
Share Options Outstanding 133,333
(10,000 x 20) - 66,667

2022 Cash (10,000 x 120) 1,200,000

Share Options Outstanding 200,000
Ordinary Share Capital (10,000 x 100) 1,000,000
Share Premium-Ordinary 400,000
(b)
2020
Jan. 1 Memo: Granted 10,000 share options for the purchase of P100 par ordinary
shares at P120 per share. The options vest once the market price of ordinary
shares reached P200 up to December 31, 2022. Options expire at the end of
2023.

Dec. 31 Compensation Expense 66,667

Share Options Outstanding 66,667
(10,000 x 20) / 3 years

2021
Dec. 31 Compensation Expense 66,667
Share Options Outstanding 66,667

2022
Dec. 31 Compensation Expense 66,666
Share Options Outstanding 66,666

2023 Cash (8,000 x 120) 960,000

Share Options Outstanding (80% x 200,000) 160,000
Ordinary Share Capital (8,000 x 100) 800,000
Share Premium-Ordinary 320,000

Share Options Outstanding (20% x 200,000) 40,000

PIC from Forfeited Share Options 40,000
(c) If the stock price reached P200 by June 2023, the same entries will be made for
year 2020 through 2022, as given in (b) The recorded share options, however,
will be cancelled at the end of 2023, as the options already expire.
2023
Dec. 31 Share Options Outstanding 200,000
PIC from Forfeited Share Options 200,000

2-20. (Red Day Company)

(a)
2020
Jan. 1 Granted 80 share options to each of 400 employees for the purchase of
P100 par ordinary shares at P140 per share. Options shall vest in 2020 if
earnings increase by 15%, or at the end of 2021 if average annual
earnings for 2020 and 2021 increased by 12%.

Dec. 31 Compensation Expense 352,000

Share Options Outstanding 352,000
400 x 80 x 22 = 704,000
704,000/2 = 352,000

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 Chapter 2 – Shareholders’ Equity

2021
Dec. 31 Compensation Expense 352,000
Share Options Outstanding 352,000

2022 Cash (32,000 x 140) 4,480,000

Share Options Outstanding 704,000
Ordinary Share Capital (32,000 x 100) 3,200,000
Share Premium – Ordinary 1,984,000

(b) The full amount of P704,000 is recognized as compensation expense

since the options vest already in 2020.

2-21. (Bloody Red Company)

2020
Jan. 1 Memo: Issued to its CEO share options for the purchase of ordinary shares at a
strike price of P50. The options are exercisable beginning January 1, 2023 and
expire on December 31, 2024. The number of share options will be based on
the level of sales for 2022.

Dec. 31 Compensation Expense 150,000

Share Options Outstanding 150,000
15,000 sh x 30 x 1/3
2021
Dec. 31 Compensation Expense 150,000
Share Options Outstanding 150,000
15,000 sh x 30 x 2/3 300,000
Less: previously accrued 150,000
Compensation expense 150,000

2022
Dec. 31 Compensation Expense 240,000
Share Options Outstanding 240,000
18,000 sh x 30 x 3/3 540,000
Less: previously accrued 300,000
Compensation expense 240,000

2-22. (Striking Red Company)

(a)
2020
Dec. 31 Compensation Expense 66,667
Share Appreciation Rights Payable 66,667
10,000 x (140 – 120) x 1/3

2021
Dec. 31 Compensation Expense 133,333
Share Appreciation Rights Payable 133,333
10,000 x (150 – 120) x 2/3 = 200,000
200,000 – 66,667 = 133,333
2022
Dec. 31 Compensation Expense 250,000
Share Appreciation Rights Payable 250,000
10,000 x (165 – 120) = 450,000
450,000 –200,000 = 250,000

(b) (1) Assuming that the rights were exercised on January 1, 2023, when the market
price is P165.

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 Chapter 2 – Shareholders’ Equity

2023
Jan. 1 Share Appreciation Rights Payable 450,000
Cash 450,000

(b) (2) Assuming that the rights were exercised on December 31, 2022, when the
market price is P172.

2023
Dec. 31 Share Appreciation Rights Payable 450,000
Compensation Expense 10,000 (172 – 165) 70,000
Cash 10,000 x (172-120) 520,000

2-23. (Red Bull Corporation)

(a) Liability at December 31, 2020 P 89,333

December 31, 2021 P208,000
December 31, 2022 P394,000

(b)
2020
Dec. 31 Compensation Expense 89,333
Share Appreciation Rights Payable 89,333
10,000 x 26.80 x 1/3

2021
Dec. 31 Compensation Expense 118,667
Share Appreciation Rights Payable 118,667
10,000 x 31.20 x 2/3 = 208,000
208,000 – 89,333 = 118,667

2022
Dec. 31 Compensation Expense 186,000
Share Appreciation Rights Payable 186,000
10,000 x 39.40 = 394,000
394,000 –208,000 = 194,000

2023 Share Appreciation Rights Payable 394,000

Compensation Expense 56,000
Cash 10,000 x (165-120) 450,000

2-24. (Ruby Red Company)

(a) Fair value of the equity alternative (4,000 shares x 150) P600,000
Fair value of debt component (3,600 shares x 158) 568,800
Fair value of equity component, January 1, 2019 P 31,200

(b) 2020: 3,600 x 160=576,000; 576,000/3 P192,000

31,200/3 10,400
Total compensation expense P202,400

2021: 3,600 x 165 x 2/3 = 396,000

396,000 – 192,000 P204,000
31,200/3 10,400
Total compensation expense P214,400

2022: 3,600 x 168 = 604,800

604,800 – 396,000 P208,800
31,200/3 10,400
Total compensation expense P219,200

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 Chapter 2 – Shareholders’ Equity

2023: 2,700 x (172-168) P 10,800

(c)
2020
Jan. 1 Granted each of the four executives the right to choose either 1,000
ordinary shares or to receive cash payment equal to 900 shares,
conditional upon the completion of three years of service.

Dec. 31 Compensation Expense 202,400

Share Options Outstanding 10,400
Share Appreciation Rights Payable 192,000

2021
Dec. 31 Compensation Expense 214,400
Share Options Outstanding 10,400
Share Appreciation Rights Payable 204,000

2022
Dec. 31 Compensation Expense 219,200
Share Options Outstanding 10,400
Share Appreciation Rights Payable 208,800

2022
Dec. 31 Share Options Outstanding ¼ x 31,200 7,800
Share Appreciation Rights Payable 151,200
Cash 151,200
PIC from Unexercised Share Options 7,800
31,200 / 4 = 7,800
604,800 / 4 =151,200
2023
Dec. 31 Compensation Expense 10,800
Share Appreciation Rights Payable 10,800
900 x 3 x (172 – 168)

31 Share Options Outstanding (31,200 x ¾) 23,400

Share Appreciation Rights Payable 464,400
Ordinary Share Capital (3,000 x 100) 300,000
Share Premium – Ordinary 187,800

2-25. (Red Santa Company)

Appropriated Unappropriated
Retained Earnings, January 1, 2020 P 4,000,000 P9,000,000
2020 Transactions
(1) Understatement of 2019 (140,000)
depreciation(200,000x70%)
(2) Dividends
On Preference: 200,000 x P100 x 8% (1,600,000)
On Ordinary: 300,000 x P5 (1,500,000)
(3) Retirement of preference shares 10,000 (150 – (200,000)
130)
(4) Release of appropriation (4,000,000) 4,000,000
(5) 45,000/300,000 = 15% bonus issue
45,000 x P150 (6,750,000)
(6) Appropriation for bond redemption 2,000,000 (2,000,000)
(7) Profit for the year _____________ 3,000,000
Balance, December 31, 2020 P2,000,000 P3,810,000
Total Retained Earnings, (P2,000,000 unavailable for
dividends) P5,810,000

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 Chapter 2 – Shareholders’ Equity

2-26. (Red Hat Company)

Retained earnings balance as of December 31, 2020

3,900,000 – 600,000 – 240,000 P 3,060,000
Total shareholders’ equity as of December 31, 2020
6,000,000 + 8,000,000 + 3,060,000
P17,060,000

(a) Preference Ordinary

Par value of preference share P6,000,000
Dividends in arrears (6,000,000 x 9% x 3 yrs.) 1,620,000
Excess to ordinary (17,060,000 – 7,620,000) P9,440,000
Total equity P7,620,000 P9,440,000
Divide by the number of shares outstanding 60,000 800,000
Book value per share P 127 P 11.80

(b) Preference Ordinary

Liquidation value (60,000 shares x P105) P6,300,000
Dividends in arrears (P6,000,000 x 9% x 3 yrs.) 1,620,000
Excess to ordinary (17,060,000 – 7,920,000) P9,140,000
Total equity P7,920,000 P9,140,000
Divide by the number of shares outstanding 60,000 800,000
Book value per share P132 P11.425

2-27. (Red, Inc.)

Retained Earnings 300,000

Inventory 300,000

Land 1,500,000
Buildings 1,875,000
Machinery and Equipment 350,000
Accum. Depreciation – Buildings 875,000
Accum. Depreciation – Machinery & Equipment 150,000
Revaluation Surplus 3,700,000

Revaluation Surplus 2,300,000

Retained Earnings 2,300,000

2-28. (Skinny Red Company)

(a) Retained Earnings 400,000

Accumulated Depreciation 75,000
Current Assets 100,000
Building 375,000

Ordinary Share Capital 6,000,000

Ordinary Share Capital 4,000,000
Share Premium - Ordinary 2,000,000

Share Premium - Ordinary 1,400,000

Retained Earnings 1,400,000

(b)
Skinny Red Company
Statement of Financial Position

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 Chapter 2 – Shareholders’ Equity

Current Assets P 400,000 Liabilities P1,000,000

Land 1,500,000 Ordinary Share 4,000,000
Building 4,625,000 Share Premium 600,000
Accumulated Depreciation ( 925,000) ___________
Total P5,600,000 Total P5,600,000

MULTIPLE CHOICE QUESTIONS

Theory

MC1 B MC6 C MC11 C MC16 C MC21 D

MC2 C MC7 C MC12 C MC17 A MC22 B
MC3 D MC8 B MC13 C MC18 A MC23 A
MC4 D MC9 B MC14 A MC19 D MC24 C
MC5 D MC10 B MC15 C MC20 D MC25 C

Problems

MC26 C Reissue price (3,000 x 50) P150,000

Cost of treasury shares reissued (3,000 x 36) 108,000
Paid in capital from treasury shares P 42,000

MC27 B Preference Share Capital P230,000

Ordinary Share Capital 525,000
Subscribed Ordinary Share 5,000
Total legal capital P760,000

MC28 B Fair value of preference shares without warrants

4,000 x 110 P440,000
Total par of preference shares (4,000 x 100) 400,000
Share Premium – Preference P 40,000

MC29 D

MC30 D Number of shares issued after the split (60,000 x 2) 120,000

Number of shares reacquired after the split (5,000 x 2) 10,000
Number of shares outstanding, December 31, 110,000
2020

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 Chapter 2 – Shareholders’ Equity

MC31 D Number of ordinary shares issued (125,000 x 3) P375,000

MC32 A Number of ordinary shares issued 375,000

Treasury shares held (12,000 x 3) + 5,000 41,000
Number of ordinary shares outstanding 334,000

MC33 C Amount recorded is equal to the par value

(100% bonus issue) 600,000 x P5 P3,000,000

MC34 B Preference share capital, December 31, 2019 P1,000,000

Total par of preferred shares issued in 2020 (10,000 x P20) 200,000
Retirement of preferred shares (2,000 x 20) (4,000)
Preference share capital, December 31, 2020 P1,160,000

MC35 A Ordinary share capital, December 31, 2019 P7,000,000

Issue of ordinary shares in 2019 (35,000 x 70) 2,450,000
Ordinary share capital, December 31, 2020 P9,450,000

MC36 B Average premium per share of preference share

(400,000/50,000) or (28 – 20) P8
Number of preference shares retired 2,000
Decrease in Share Premium-Preference upon P16,000
retirement

MC37 C Original par value of ordinary P70

Revised par after 2-for-1 split 35
Reduction in par value P35
MC38 B Number of treasury shares after 2-for-1 split
and after reissue of 5,000 shares 5,000
Revised cost per share after split (80/2) P40
Cost of remaining treasury shares P200,000

MC39 B Total par of the fractional warrants issued (600 x 10) P6,000
Total par of the fractional warrants exercised
600 x 60% x 10 3,600
Total par of the fractional warrants forfeited P2,400

MC40 D Reduction in retained earnings (dividends declared)

on April 1, 2020 P100,000
Accrued interest to December 31, 2020
100,000 x 10% x 9/12 P 7,500

MC41 C Total issue price of bonds P2,120,000

Amount allocated to bonds without warrants (2,000 x 1,040) 2,080,000
Amount allocated to equity P 40,000

MC42 B Retained earnings desired to be capitalized P945,000

Divided by the market value per share P70
Number of shares to be declared as bonus issue 13,500
Percentage of bonus issue (13,500/90,000) 15%

MC43 D Preferred dividends

Arrears P 80,000
Current dividends (2M x 8%) 160,000 P240,000
Ordinary dividends (300,000 – 240,000) P 60,000

MC44 D Dividends in arrears and current year dividends

(3M x 5% x 2 years) P300,000
Dividends paid in 2020 (100,000)
Dividends in arrears, end of 2020 (disclosure) P200,000

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 Chapter 2 – Shareholders’ Equity

MC45 B Shares issued, December 31, 2020 (100,000 + 10,000) 220,000

x2
Less treasury shares (5,000 – 1,000) x 2 8,000
Outstanding shares 212,000

MC46 A Preferred Ordinary

Arrears on preferred P24,000
Current on preferred (400,000 x 12%) 48,000
Current on ordinary (200,000 x 12%) P24,000
Balance of 12,000 divided ratably
12,000 x 4/6; 12,000 x 2/6 8,000 4,000
Totals P80,000 P28,000
Number of shares outstanding ÷ 4,000 sh ÷ 20,000 sh
Dividend per share P20.00 P1.40

MC47 A Retained earnings before dividends and net loss P8,000,000

10% bonus issue (100,000 x 10% x 70) (700,000)
Net loss for the year (1,200,000)
Retained earnings, December 31, 2020 P6,100,000

MC48 A Par value after the 5-for-2 split (15 x 2) / 5 P6.00

MC49 B Ordinary dividends (25,000 x 40) P1,000,000

Preferred dividends (2.5M x 10% 250,000
Dividend goal P1,250,000

MC50 C Issue of ordinary shares (40,000 x 105) P4,200,000

Purchase of treasury shares (600 x 110) (66,000)
Resale of treasury shares (400 x 95) 38,000
Profit after tax 830,000
Dividends paid (200,000)
Total shareholders’ equity, December 31, 2020 P4,802,000

MC51 C Total shareholders’ equity, December 31, 2019 P5,520,000

Retirement of preference shares (1,000 x 25) (25,000)
Purchase of treasury shares (2,000 x 85) (170,000)
Reissue of treasury shares (800 x 50) 40,000
Profit for the year 900,000
Total shareholders’ equity, December 31, 2020 P6,265,000

MC52 D Cost of remaining treasury shares

2,000 x 2 = 4,000; 4,000 – 800 = 3,200; 3,200 x P136,000
42.50

MC53 A Total fair value of options (20,000 x 9) = 180,000

Compensation expense for 2020 (July 1-December 31)
180,000/2 years) x 6/12( P45,000

MC54 D Intrinsic value of options (50-20) x 3,000 shares= 90,000

Compensation expense for 2020 (90,000/3 years) P30,000

MC55 C Estimated fair value of options that will be exercised

4.5M x 95% 4,275,000
Vesting period ÷ 3 years
Compensation expense in 2020 P1,425,000

MC56 B Revised estimate in 2021 (4.5 M x 94% x 2/3) P2,820,000

Compensation expense recognized in 2020 1,425,000

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 Chapter 2 – Shareholders’ Equity

Compensation expense in 2021 P1,395,000

MC57 B Liability for share appreciation rights, December 31,

2020 (200 x 300 x 4)/2 P120,000

MC58 D Total liability for share appreciation rights, 12/31/21

200 x 300 x 7 x 90% P378,000
Liability recognized in 2020 120,000
Liability for share appreciation rights, December 31, P258,000
2021

MC59 B Total shareholders’ equity P3,600,000

Liquidation value of preference shares (140 x 5,000 (700,000)
shares)
Equity identified with ordinary P2,900,000
Outstanding ordinary shares ÷ 50,000
Book value per ordinary share P58.00

MC60 B Book value per ordinary share

3,150,000/50,000 shares 63.00

MC61 B Total shareholders’ equity P3,150,000

Liquidation value of preference shares (5,000 x 120) (600,000)
Equity related to ordinary shares P2,550,000
Outstanding ordinary shares ÷ 50,000
Book value per ordinary share P51.00

MC62 B RE = 1,000,000; cumulative dividends in arrears =

5,000,000 x 8% x 3 years = 1,200,000, but dividends are
limited to the extent of RE balance of P1,000,000; Thus,
equity of ordinary share is 13,500,000 – 5,000,000 –
1,000,000 = 7,500,000; 7,500,000/ 750,000 shares P10.00
MC63 C Total shareholders’ equity P13,500,00
Liquidation value of preferred shares
50,000 x 106 5,300,000
Dividends in arrears (400,000 x 3 years)
= 1,200,000; but limited only to the
extent of retained earnings balance 1,000,000 6,300,000
Equity related to ordinary shares P7,200,000
Outstanding ordinary shares ÷ 750,000 sh
Book value per ordinary share P9.60

MC64 D Share premium before quasi reorganization

200,000 x (22 – 20) P400,000
Share premium resulting from recapitalization
200,000 x (20 – 15) 1,000,000
Write off of deficit (950,000)
Share premium after the quasi-reorganization P450,000

26
 CHAPTER 3
LEASES

Problems

3-1. (Generous, Inc.)

(a) Cash payment P 260,000

Present value of remaining payments (260,000 x 3.2397) 842,322
Present value of guaranteed residual value (200,000 x 0.6499) 129,980
Capitalized cost of right-of-use equipment/automobiles P1,232,302

(b) Lease liability at January 1, 2020 after the first payment

842,322 + 129,980 P972,302

(c)
Amortization Table
Total Annual Interest Reduction in Lease
Date Payment Expense Principal Obligation
01/01/20 260,000 - 260,000 972,302
01/01/21 260,000 87,507 172,493 799,809
01/01/22 260,000 71,983 188,017 611,792
01/01/23 260,000 55,061 204,939 406,853
01/01/24 260,000 36,617 223,383 183,470
12/31/24 200,000 16,530* 183,470 -
*Adjusted; difference is due to rounding off.
(d)

2020
Jan. 1 Right-of-Use Automobiles 1,232,302
Lease Liability 972,302
Cash 260,000

Dec. 31 Interest Expense 87,507

Lease Liability 87,507

31 Depreciation Expense 206,460

Accumulated Depreciation 206,460
(1,232,302-200,000)/5
2021
Jan. 1 Lease Liability 260,000
Cash 260,000

Dec. 31 Interest Expense 71,983

Lease Liability 71,983

31 Depreciation Expense 206,460

Accumulated Depreciation 206,460
(e)
Dec. 31 Accumulated Depreciation (206,460 x 5) 1,032,300
Interest Expense 16,532*
Lease Liability 183,470
Right-of-Use Automobiles 1,232,302
*adjusted; balancing figure
 Chapter 3 – Leases

(f)
Dec. 31 Impairment Loss 50,000
Accumulated depreciation 1,032,300
Interest Expense 16,532
Lease Liability 183,470
Right-of-Use Automobiles 1,232,302
Cash 50,000

3-2. (Diana Corporation)

(a) Cash paid at commencement P 86,680

PV of remaining lease payments (86,680 x 3.1699) 274,767
Initial direct cost 10,000
PV of estimated restoration costs (20,000 x 0.6209) 12,418
Capitalized cost of the right-of-use asset P383,865

(b)
Amortization Table
Total Annual Interest Reduction in Lease
Date Payment Expense Principal Obligation
01/01/20 - 287,185
01/01/21 86,680 28,719 57,961 229,224
01/01/22 86,680 22,922 63,758 165,466
01/01/23 86,680 16,547 70,133 95,333
01/01/24 86,680 9,533 77,147 18,186
12/31/24 20,000 1,814* 18,186 -
*Adjusted; difference is due to rounding off.

(c)

2020
Jan. 1 Right-of-Use Equipment 383,865
Cash (86,680 + 10,000) 96,680
Lease Liability (274,767 + 12,418) 287,185

Dec. 31 Interest Expense 28,719

Lease Liability 28,719

31 Depreciation Expense 76,773

Accumulated Depreciation 76,773
383,865/5 years

2021
Jan. 1 Lease Liability 86,680
Cash 86,680

Dec. 31 Interest Expense 22,922

Lease Liability 22,922

31 Depreciation Expense 76,773

Accumulated Depreciation 76,773

(d)
Statement of Financial Position 2020 2021

Property, Plant and Equipment

Leased Machine P383,865 P383,865
Accumulated Depreciation 76,773 153,546

28
 Chapter 3 – Leases

Current Liabilities
Lease Liability P86,680 P86,680

Noncurrent liabilities:
Lease Liability P200,505 P142,544

Income Statement
Interest Expense P 28,715 P 22,922
Depreciation Expense 76,773 76,773

3-3. (Riza, Inc.)

(a) 1,011,840/135,000 = 7.4951 PV of an annuity due for 12 periods

From Table VI across 12 periods, 7.4951 is under 10% interest rate.

(b) Amortization Table

Total Annual Interest Reduction in Lease
Date Payment Expense Principal Obligation
12/31/20 135,000 - 135,000 876,840*
12/31/21 135,000 87,684 47,316 829,524
12/31/22 135,000 82,952 52,048 777,476
12/31/23 135,000 77,748 57,252 720,224
*1,011,840 – 135,000 = 876,840

(c) Depreciation expense for 2020 (1,011,840 – 40,000) / 15 years P64,789

(d)
12/31/20 Right-of-Use Equipment 1,011,840
Cash 135,000
Lease Liability 876,840

12/31/21 Lease Liability 47,316

Interest Expense 87,684
Cash 135,000

Depreciation Expense 64,789

Accumulated Depreciation 64,789

(e) Lease Obligation as of December 31, 2020:

Current portion P 47,316
Noncurrent portion 829,524

3-4. (Shirley Corporation)

(a) Payment at commencement P150,000
PV of Lease Liability (150,000 x 3.0373) 455,595
PV of bargain purchase option (240,000 x 0.5674) 136,176
Total capitalized cost P741,771
(b)
Amortization Table
Total Annual Interest Reduction in Lease
Date Payment Expense Principal Obligation
01/01/20 - 591,771
01/01/21 150,000 71,013 78,987 512,784
01/01/22 150,000 61,534 88,466 424,318
01/01/23 150,000 50,918 99,082 325,236
01/01/24 150,000 39,028 110,972 214,264
12/31/23 240,000 25,736* 214,264 -
*Adjusted; difference is due to rounding off.

29
 Chapter 3 – Leases

(c) Depreciation expense for 2020 (741,771 / 15 years) P49,451

(d)
2020
Jan. 1 Right-of-Use Machinery 741,771
Lease Liability 591,771
Cash 150,000

Dec. 31 Interest Expense 71,013

Lease Liability 71,013

31 Depreciation Expense 49,451

Accumulated Depreciation 49,451

2021
Jan. 1 Lease Liability 150,000
Cash 150,000

Dec. 31 Interest Expense 61,534

Lease Liability 61,534

31 Depreciation Expense 49,451

Accumulated Depreciation 49,451

(e)
Dec. 31 Interest Expense 25,736
Lease Liability 214,264
Accumulated Depreciation 247,255
Machinery (742,771 – 247,255) 494,516
Right-of-Use Machinery 741,771
Cash 240,000

(f)
Dec. 31 Interest Expense 25,736
Lease Liability 214,264
Accumulated Depreciation 247,255
Loss on Failure to Exercise BPO 254,516
Right-of-Use Machinery 741,771
(Loss = 494,514-240,000)

3-5. (Prince of Wales, Inc.)

(a) Cash paid P 700,000

PV of future payments (700,000 x 5.7590) 4,031,300
Capitalized cost of the building P4,731,300

(b) Annual depreciation = P4,731,300/10 P 473,130

(c)
2020
July 1 Right-of-Use Building 4,731,300
Taxes and Insurance Expense 50,000
Cash 750,000
Lease Liability 4,031,300

Dec. 31 Interest Expense 201,565

Lease Liability 201,565

31 Depreciation Expense 236,565

Accumulated Depreciation – RoU Building 236,565

30
 Chapter 3 – Leases

Dec. 31 Prepaid Taxes and Insurance 25,000

Taxes and Insurance Expense 25,000

2021
July 1 Lease Liability 498,435
Interest Expense 201,565
Taxes and Insurance Expense 50,000
Cash 750,000

Dec. 31 Interest Expense 186,721

Lease Liability 186,721
4031,300 – (700,000 – 403,130) x 10% x 6/12

31 Depreciation Expense 473,130

Accumulated Depreciation – RoU Building 473,130

3-6. (Joy Company)

(a)
2020
Aug. 1 Finance Lease Receivable 605,000
Equipment for Lease 480,000
Discount on Finance Lease Receivable 125,000

1 Discount on Finance Lease Receivable 1,900

Cash 1,900

1 Cash 100,000
Finance Lease Receivable 100,000

Dec. 31 Discount on Finance Lease Receivable 15,912

Interest Revenue 15,912
381,900 x 10% x 5/12

2021
Aug. 1 Discount on Finance Lease Receivable 22,278
Cash 100,000
Interest Revenue (38,190 x 7/12) 22,278
Finance Lease Receivable 100,000

Dec. 31 Discount on Finance Lease Receivable 13,370

Interest Revenue (32,090 x 5/12) 13,370

Partial Amortization Table

Periodic Reduction in Balance of
Date Payment Interest Principal Principal
08/01/20 - - 481,900
08/01/20 100,000 - 100,000 381,900
08/01/21 100,000 38,190 61,810 320,090
08/01/22 100,000 32,090 67,910 252,180

(b) As of December 31, 2020:

Total Current Non-current
Finance Lease Receivable P505,000 P100,000 P405,000
Discount on Finance Lease Rble 107,188 22,278 84,910
P397,812 P 77,722 P320,090
Current portion:
Principal due in 2021 P 61,810
Accrued interest, 12/31/20 (38,190 x 5/12) 15,912
Total P 77,722

31
 Chapter 3 – Leases

3-7. (Jane Company)

(a) Right-of-Use Asset 9,306,400

Cash 1,000,000
Lease Liability (1.0M x 9.3064) – 1.0M 8,306,400

(b) Interest Expense 415,320

Lease Liability 415,320
8,306,400 x 5%

Depreciation Expense 775,553

Accumulated Depreciation 775,553
9,306,400/12

(c) Right-of-Use Asset 597,060

Lease Liability 597,060

Lease Liability 1,080,000

Cash 1,080,000

Partial Amortization Table for 3 years

Periodic Reduction in Balance of

Date Payment Interest Principal Principal
01/01/Y1 - - 8,306,400
01/01/Y2 1,000,000 415,320 584,680 7,721,720
01/01/Y3 1,000,000 386,086 613,914 7,107,806
01/01/Y4 1,000,000 355,390 644,610 6,463,196

PV of revised liability before this payment

Revised lease payment, starting beginning of Y4 1,080,000
1,000,000 x 135/125 = 1,080,000
PV of 8 future payments at 5%
1,080,000 x 6.4632 6,980,256
Total 8,060,256
CV of lease liability, beg of 4th year
7,107,806 + 355,390 7,463,196
Adjustment 597,060
(or 80,000 x 7.4632 = 597,056)

At end of year 4

Interest Expense 349,013

Lease Liability 349,013
6,980,256 x 5%

Depreciation Expense 844,096

Accumulated Depreciation 844,096
9,306,400- (775,533 x 3) + 617,060
9 = 844,096

Revised Amortization Table, year 4

Periodic Reduction in Balance of

Date Payment Interest Principal Principal
Revised LL 8,060,256
01/01/Y4 1,080,000 6,980,256
01/01/Y5 1,080,000 349,013 730,987 6,249,269

32
 Chapter 3 – Leases

3-8. (Jackie Chan and Chris Tucker)

Annual Lease Payment:

Fair value of asset P600,000
PV of BPO (40,000 x .6209) 24,836
PV of periodic payment P575,164
PV factor (Annuity due for 5 years at 10%) ÷4.1699
Periodic payment P137,932

Amortization Table
Periodic Reduction in Balance of
Date Payment Interest Principal Principal
Jan. 1, 2020 600,000
Jan. 1, 2020 137,932 137,932 462,068
Jan. 1, 2021 137,932 46,207 91,725 370,343
Jan. 1, 2022 137,932 37,034 100,898 269,445

Depreciable cost = P600,000 – P20,000 = P580,000

2020 Depreciation = P580,000 x 6/21 = P165,714

2021 Depreciation = P580,000 x 5/21 = 138,095

(a) Books of Chris Tucker

2020
Jan. 1 Right-of-Use Equipment 600,000
Lease Liability 462,068
Cash 137,932

Dec 31 Interest Expense 46,207

Lease Liability 46,207

31 Depreciation Expense – RoU Equipment 165,714

Accum. Depr. – RoU Equipment 165,714

2021
Jan. 1 Lease Liability 137,932
Cash 137,932

Dec 31 Interest Expense 37,034

Lease Liability 37,034

Depreciation Expense – RoU Equipment 138,095

Accum. Depr.– RoU Equipment 138,095

(b) Books of Jackie Chan

2020
Jan. 1 Finance Lease Receivable 729,660
Equipment for Lease 600,000
Discount on Finance Lease Receivable 129,660
(137,932 x 5) + 40,000 = 729,660

1 Cash 137,932
Finance Lease Receivable 137,932

Dec 31 Discount on Finance Lease Receivable 46,207

Interest Revenue 46,207

33
 Chapter 3 – Leases

2021
Jan. 1 Cash 137,932
Finance Lease Receivable 137,932

Dec 31 Discount on Finance Lease Receivable 37,034

Interest Revenue 37,034

3-9. (Ben Ten and Ironman)

(a) Direct finance lease

(The cash price equals the carrying value of the asset; hence, there is no gross profit).

(b) The rate is approximately 8%. The PV factor is P539,730/80,000 = 6.7466; in line 9
(which is 8 annual payments of P80,000 + 1 payment for guaranteed residual value of
same amount), the corresponding interest rate is 8%.

Partial Amortization Table

Periodic Reduction in Balance of
Date Payment Interest Principal Principal
April 1, 2020 P539,730
April 1, 2020 80,000 80,000 459,730
April 1, 2021 80,000 36,778 43,222 416,508
April 1, 2022 80,000 33,321 46,679 369,829

(c) Books of Ironman (Lessee)

2020
Apr. 1 Right-of-Use Equipment 539,730
Cash 80,000
Finance Lease Liability 459,730

Dec. 31 Interest Expense 27,584

Lease Liability 27,584
36,778 x 9/12

Dec. 31 Depreciation Expense 43,100

Accumulated Depreciation 43,100
(539,730-80,000)/8 = 57,466
57,466 x 9/12 = 43,100

2021
Apr. 1 Interest Expense (36,778 x 3/12) 9,194
Lease Liability (43,222 + 27,584) 70,806
Cash 80,000

Dec. 31 Interest Expense 24,991

Lease Liability 24,991
33,321 x 9/12

31 Depreciation Expense 57,466

Accumulated Depreciation 57,466
(539,730-80,000)/8 = 57,466

34
 Chapter 3 – Leases

(d) Books of Ben Ten (Lessor)

2020
Apr. 1 Finance Lease Receivable 720,000
Discount on Finance Lease Receivable 180,270
Equipment for Lease 539,730
(80,000 x 8) + 80,000 GRV = 720,000

1 Cash 80,000
Finance Lease Receivable 80,000

Dec. 31 Discount on Finance Lease Receivable 27,584

Interest Revenue 27,584

2021
Apr. 1 Cash 80,000
Finance Lease Receivable 80,000

1 Discount on Finance Lease Receivable 9,194

Interest Revenue 9,194

Dec. 31 Discount on Finance Lease Receivable 24,991

Interest Revenue 24,991
32,893 x 9/12

(e) The asset shall be recorded at P496,512 which is 80,000 x 6.2064.

Depreciation for 2020 = 496,512/8 x 9/12 = 46,548

(f) No difference in journal entries. To the lessor, under the direct finance lease, it does not
matter whether the residual value is guaranteed or unguaranteed.

3-10. (Prudent Company)

(a) Sales price P1,011,840

Cost of machine 784,500
Gross profit P 227,340

(b) Gross investment (135,000 x 12) P1,620,000

Sales 1,011,840
Total financial revenue over the lease term P 608,160

(c) Interest revenue for 2020

(1,011,840 – 135,000) x 10% x 6/12 P 43,842

(d) Finance Lease Receivable (1,620,000 – 135,000) P1,485,000

Less Discount on Finance Lease Receivable (608,160-43,842) 564,318
Net Finance Lease Receivable, December 31, 2020 P 920,682

3-11. (Glad Manufacturing Company)

(a)
2020
Apr. 1 Finance Lease Receivable 1,500,000
Cost of Sales 893,350
Discount on Finance Lease Receivable 426,380
Sales 1,026,970
Finished Goods Inventory 940,000

35
 Chapter 3 – Leases

175,000 x 8 = 1,400,000
1,400,000 + 100,000 = 1,500,000
940,000–(100,000 x 0.4665)=893,350
175,000 x 5.8684 = 1,026,970
100,000 x 0.4665 = 46,650
1,026,970 + 46,650 = 1,073,620
1,500,000 – 1,073,620 = 426,380

1 Cash 175,000
Finance Lease Receivable 175,000

Dec. 31 Discount on Finance Lease Receivable 67,397

Interest Revenue 67,397
89,862 x 9/12

2021
Jan. 1 Interest Revenue 67,397
Discount on Finance Lease Receivable 67,397

Apr. 1 Cash 175,000

Discount on Finance Lease Receivable 89,862
Finance Lease Receivable 175,000
Interest Revenue 89,862

Dec. 31 Discount on Finance Lease Receivable 61,011

Interest Revenue 61,011
81,348 x 9/12

Partial Amortization Table

Periodic Reduction in Balance of
Date Payment Interest Principal Principal
April 1, 2020 P1,073,620
April 1, 2020 175,000 175,000 898,620
April 1, 2021 175,000 89,862 85,138 813,482
April 1, 2022 175,000 81,348 93,652 719,830

*The compound entry may also be presented in separate entries as follows:

Apr. 1 Finance Lease Receivable 1,400,000

Sales 1,026,970
Discount on Finance Lease Receivable 373,030

1 Cost of Sales 940,000

Finished Goods Inventory 940,000

1 Finance Lease Receivable 100,000

Cost of Sales 46,650
Discount on Finance Lease Receivable 53,350

(b) (i) Sales P1,026,970

Cost of Sales (940,000 – 46,650) 893,350
Gross profit on sales P 133,620

(ii) Interest Revenue for 2020 (see journal entries) P 67,397

(c) Sales (1,026,970 + 46,650) P1,073,620

Cost of sales (cost of the asset) P 940,000

36
 Chapter 3 – Leases

3-12. (Ruby Company and Emerald Company)

a. Manufacturer’s or dealer’s lease, because FV exceeds CV. The difference represents gross
profit, which characterizes a dealer’s or manufacturer’s lease.

b. Present value of MLP (850,365 x 4.60478) (Adjusted) P3,915,747

Present value of residual value (166,300 x .50663) 84,253
Total present value P4,000,000
Carrying value of leased asset 3,200,000
Gross Profit P 800,000
Lease arrangement cost ( 85,000)
Interest income (377,956 x 3/12) 94,489
Total income in 2019 P 809,489

c. Books of Ruby Company (Lessor)

Amortization Table
Periodic Reduction in Balance of
Date Payment Interest Principal Principal
Oct. 1, 2020 4,000,000
Oct. 1, 2020 850,365 850,365 3,149,635
Oct. 1, 2021 850,365 377,956 472,409 2,677,226
Oct. 1, 2022 850,365 321,267 529,098 2,148,490

2020
Oct. 1 Finance Lease Receivable (850,365 x 6) + 166,300 5,268,490
Cost of Goods Sold (3,200,000 – 84,253) 3,115,747
Inventory 3,200,000
Sales 3,915,747
Discount on Finance Lease Receivable 1,268,490
Oct. 1 Selling Expense 85,000
Cash 85,000

1 Cash 850,365
Finance Lease Receivable 850,365

Dec. 31 Discount on Finance Lease Receivable 94,489

Interest Revenue 94,489
377,956 x 3/12

2021
Oct. 1 Cash 850,365
Finance Lease Receivable 850,365

Dec. 31 Discount on Finance Lease Receivable 363,784

Interest Revenue 363,784
(377,956 – 94,489) + (321,267 x 3/12)

(d) Books of Emerald Company (Lessee)

Amortization Table
Periodic Reduction in Balance of
Date Payment Interest Principal Principal
Oct. 1, 2020 3,065,382
Oct. 1, 2021 850,365 367,846 482,519 2,582,863
Oct. 1, 2022 850,365 309,944 540,421 2,042,442

2020
Oct. 1 Right-of-Use Equipment 3,915,747
Lease Liability 3,065,382
Cash 850,365

37
 Chapter 3 – Leases

Dec 31 Interest Expense 91,962

Lease Liability 91,962
367,846 x 3/12

31 Depreciation Expense – RoU Equipment 163,156

Accumulated Depreciation – RoU Equipment 163,156
3,915,747/6 = 652,625; 652,625 x 3/12

2021
Oct. 1 Interest Expense (367,846 – 91,962) 275,884
Lease Liability (482,519 + 91,962) 574,481
Cash 850,365

Dec.31 Interest Expense 77,846

Lease Liability 77,846
309,944 x 3/12

31 Depreciation Expense – RoU Equipment 652,625

Accumulated Depreciation – RoU Equpment 652,625

3-13. (Metro Industrial Company and Western Company)

(a) Sales = (99,046 x 3.1699) + (80,000 x.6830) P368,606

(b) Sales P368,606

Cost of equipment sold (300,000)
Selling expense (15,000)
Interest income (368,606 x 10%) 36,861
Total profit from lease P 90,467

(c) Depreciation expense recorded by Western

(368,606 – 80,000) / 4 = P 72,152

3-14. (Technocraft Company and Marina Sands)

(a)
PV of Periodic Payments (1,328,622 x 8.1078) P10,772,200
PV of GRV (2,000,000 x .6139) 1,227,800
Total PV = Sales P12,000,000
Cost of audio system (9,000,000)
Commission and other lease costs (100,000)
Interest revenue (533,569 + 493,816) 1,027,385
Profit for 2019 P3,927,385
Amortization Table
Periodic Reduction in Balance of
Date Payment Interest Principal Principal
1/1/2020 P12,000,000
1/1/2020 P1,328,622 --- P1,328,622 10,671,378
7/1/2020 1,328,622 P533,569 795,053 9,876,325
1/1/2021 1,328,622 493,816 834,806 9,041,519
7/1/2021 1,328,622 452,076 876,546 8,164,973
1/1/2022 1,328,622 408,249 920,373 7,244,600

(b) Interest Expense for 2020 (533,569 + 493,816) P 1,027,385

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 Chapter 3 – Leases

(c ) Carrying value of equipment

Cost P12,000,000
Accumulated depreciation
(12,000,000 – 2,000,000) x 2/5 (3,200,000)
Carrying value, December 31, 2021 P 8,800,000

(d) Interest revenue for 2020 P1,027,385

(e) Current Assets:

Finance Lease Receivable, net
834,806 + 876,546 P1,711,352
Interest Receivable 493,816

Non-current Assets
Finance Lease Receivable, net P8,164,973

3-15. (Hope Manufacturing Company)

(a) Lessor’s Books (Hope Manufacturing Co.)

2020
Jan. 1 Machinery for Lease 2,200,000
Cash 2,200,000

1 Cash 600,000
Rent Revenue 400,000
Unearned Rent Revenue 200,000
2 M/5 = 400,000
2 M x 30% = 600,000

1 Machinery for Lease 60,000

Cash 60,000

Dec. 31 Depreciation Expense 212,000

Accumulated Depreciation 200,000
Machinery for Lease 12,000
(2.2 M – 200,000)/10 200,000
60,000 / 5 years 12,000
Total 212,000

2021
Jan. 1 Cash 400,000
Rent Revenue 400,000
2,000,000 x 20%

Dec. 31 Depreciation Expense 212,000

Accumulated Depreciation 200,000
Machinery for Lease 12,000

(b)
Statement of Comprehensive Income
(In profit or loss section)
Rent Revenue P400,000
Depreciation Expense 212,000

Statement of Financial Position

Machine for Lease, net of Accum. Depreciation 2,048,000
Unearned Rent Revenue 200,000

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 Chapter 3 – Leases

3-16. (Faith Company and Love Corporation)

a. Monthly rental payment 12,000

No. of payments (12-2 mos free) x 10
Total payments 120,000
Rent Expense for 2020 (120,000 x 4/12) P40,000

Rent Expense for 2021 (120,000 x 8/12) P80,000

(b) Faith Company

2020
Nov. 1 Rent Expense 12,000
Cash 12,000

Dec. 1 Rent Expense 12,000

Cash 12,000

Dec. 31 Rent Expense (40,000 – 24,000) 16,000

Rent Payable 16,000

2021
Jan. 1 Rent Payable 16,000
Rent Expense 16,000

(monthly entry from Jan. 1 to Aug. 1)

Rent Expense 12,000
Cash 12,000

Love Corporation
2020
Nov. 1 Cash 12,000
Rent Revenue 12,000

Dec. 1 Cash 12,000

Rent Revenue 12,000

Dec. 31 Rent Receivable 16,000

Rent Revenue 16,000
(40,000 – 24,000)

2021
Jan. 1 Rent Revenue 16,000
Rent Receivable 16,000

(monthly entry from Jan. 1 to Aug. 1)

Cash 12,000
Rent Revenue 12,000

3-17. (Provident Company)

Lessor’s Books (Provident Company)

2020
July 1 Equipment for Lease 1,500,000
Cash 1,500,000

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 Chapter 3 – Leases

Oct. 1 Cash 54,000

Rent Revenue 54,000

1 Cash 30,000
Rent Revenue 30,000

Nov. 1 Cash 30,000

Rent Revenue 30,000

Dec. 1 Cash 30,000

Rent Revenue 30,000

31 Rent Revenue 49,500

Unearned Rent Revenue 49,500
54,000 x 33/36 = 49,500

Dec. 31 Depreciation Expense 75,000

Accumulated Depreciation 75,000
(1,500,000/10) x 6/12

3-18. (Legend Company)

Cash 550,000
Right-of-Use Machinery 432,568
Machinery 500,000
Gain on Sale Leaseback 26,973
Lease Liability 455,595

Net cash received (700,000 – 150,000) P550,000

Present value of lease payments (150,000 x 4.0373) P605,595
Lease liability after 1st payment (605,595 – 150,000) P455,595
Fair value of right transferred
(700,000 - 605,595) P 94,405
Carrying amount of rights retained
(605,595/700,000) x 500,000 P432,568
Carrying amount of right transferred
(500,000 - 432,568) P 67,432
Total gain (700,000 – 500,000) P200,000
Recognized gain:
(94,405/700,000) x 200,000
or
(67,432/500,000) x 200,000 P 26,973

Gain may also be computed as:

Selling price P700,000
Fair value of asset retained 605,595
Fair value of asset transferred P 94,405
Carrying amount of rights transferred 67,432
Gain on sale leaseback P 26,973

3-19. (Legrand Company)

January 1, 2020

Cash (700,000 – 150,000) 550,000

Right-of-Use Machinery 439,484
Machinery 500,000
Gain on Sale Leaseback 33,889
Lease Liability 455,595

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 Chapter 3 – Leases

December 31, 2020

Interest Expense 54,671

Lease Liability 54,671
455,595 x 12%

Depreciation Expense – RoU Machinery 87,897

Accum. Depr. – RoU Machinery 87.897
439,484/5 years

Net cash received (700,000 – 150,000) P550,000

Present value of lease payments (150,000 x 4.0373) P605,595
Lease liability after 1st payment (605,595 – 150,000) P455,595
Fair value of rights retained (605,595 + 80,000) P685,595
Fair value of right transferred
(780,000 – 685,595) P 94,405
Carrying amount of rights retained
(685,595/780,000) x 500,000 P439,484
Carrying amount of right transferred
(500,000 - 439,484) P 60,516
Total gain (780,000 – 500,000) P280,000

Recognized gain:
(60,516/500,000) x 280,000
or
(94,405/780,000) x 280,000 P 33,889

Gain may also be computed as:

Selling price P700,000
Present value of liability 605,595
Fair value of asset transferred P 94,405
Carrying amount of rights transferred 60,516
Gain on sale leaseback P 33,889

3-20. (Legit Company)

January 1, 2020

Cash 550,000
Right-of-Use Machinery 427,381
Machinery 500,000
Gain on Sale Leaseback 21,786
Lease Liability 455,595

December 31, 2020

Interest Expense 54,671

Lease Liability 54,671
455,595 x 12%

Depreciation Expense – RoU Machinery 85,476

Accum. Depr. – RoU Machinery 85.476
427,381/5 years

Net cash received (700,000 – 150,000) P550,000

Present value of lease payments (150,000 x 4.0373) P605,595
Lease liability after 1st payment (605,595 - 150,000) P455,595
Fair value of rights retained (605,595 - 50,000) P555,595

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 Chapter 3 – Leases

Fair value of right transferred

(650,000 - 555,595) P 94,405
Carrying amount of rights retained
(555,595/650,000) x 500,000 P427,381
Carrying amount of right transferred
(500,000 - 427,381) P 72,619
Total gain (650,000 – 500,000) P150,000

Recognized gain:
(72,619/500,000) x 150,000
or
(94,405/650,000) x 150,000 P 21,786

Gain may also be computed as:

Selling price P700,000
Present value of liability 605,595
Fair value of asset transferred P 94,405
Carrying amount of rights transferred 72,619
Gain on sale leaseback P 21,786

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 Chapter 3 – Leases

MULTIPLE CHOICE QUESTIONS

Theory

MC1 C MC6 C MC11 A MC16 D

MC2 D MC7 C MC12 C MC17 C
MC3 B MC8 D MC13 C MC18 C
MC4 D MC9 B MC14 A MC19 A
MC5 D MC10 B MC15 A MC20 C

Problems

MC21 C Annual rental P 900,000

Amortization of lease bonus (500,000/5 years) 100,000
Rental revenue for 2020 P1,000,000

MC22 C Total rental for the 5 year period P540,000

Term of the lease ÷ 5 years
Rental revenue for 2020 P108,000

MC23 C Present value of liability (240,000 x 3.433) 823,920

Interest Expense for 2020 (823,920 x 14% x 6/12) P 57,674

MC24 B Lease liability, July 1, 2020 P823,920

Amortization of discount in 2020 (see No. 23) 57,674
Lease Liability, December 31, 2020 P881,594

MC25 C Total payments for the lease term P3,600,000

Lease term ÷ 3 years
Rent revenue for fiscal year ending June 30, 2021 P1,200,000

MC26 B Rent revenue for 2 years (3,600,000 x 2/3) P2,400,000

Rental collections for 2 years (600,000 + 900,000) 1,500,000
Accrued rent receivable, June 30, 2022 P 900,000

MC27 B Cost of the right-of-use asset (500,000 x 4.61) P2,305,000

MC28 D Lease Liability, December 31, 2020 (2,305,000 – 500,000) P1,805,000

Lease payment, December 31, 2021 500,000
Interest expense (1,805,000 x 12%) 216,600
Reduction in lease liability in 2021 283,400
Lease Liability, December 31, 2021 P1,521,600

MC29 A Depreciation Expense for 2021 (2,305,000/6 years) P384,167

MC30 B Cost of right-of-use asset (400,000 x 5.95) P2,380,000

MC31 D Depreciation Expense for 2020 (2.4M – 200,000)/8years P275,000

MC32 D PV of annual payments (1,742,174 x 3.48685) P6,074,699

PV of guaranteed residual value (1,200,000 x 0.68301) 819,612
Cost of the leased machine P6,894,311

MC33 C Depreciation Expense for year 2020

(6,894,311 – 1,200,000)/4 years P1,423,578

MC34 A Cost of the leased machine (1,742,174 x 3.48685) P6,074,699

MC35 D Depreciation Expense for year 2020 (6,074,699/4 years) P1,518,675

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 Chapter 3 – Leases

MC36 D Cost of leased machine P6,245,450

Less accumulated depreciation
(6,245,450 – 80,000)/6 years = 1,027,575
1,027,575 x 4 years 4,110,300
Carrying value of leased asset, December 31, 2023 P2,135,150
Bargain purchase option (250,000)
Loss from failure to exercise the option P1,885,150

MC37 A Gross lease receivable (100,000 x 6) P600,000

MC38 D Interest Revenue for 2020

100,000 x 4.8 = 480,000; 480,000 – 100,000 = 380,000
380,000 x 10% x 5/12 P15,833

MC39 C Cash selling price of leased equipment P3,520,000

Cost of equipment 2,800,000
Profit on sale P 720,000

MC40 A Interest Revenue for 2020

3,520,000 – 600,000 = 2,920,000
2,920,000 x 10% x 6/12 P146,000

MC41 B Gross profit on sale (400,000 – 300,000) – 15,000 P 85,000

Interest revenue (400,000 x 10%) 40,000
Profit, inclusive of interest P125,000

MC42 D Net investment in the lease, January 1, 2020 P400,000

Lease payment (excluding executory costs) 108,951
Interest revenue (see no. 41) 40,000
Reduction in net investment in 2020 68,951
Net investment in the lease, December 31, 2020 P331,049

MC43 A Annual payment (323,400/4.312) 75,000

Total payments for the lease term (75,000 x 5) P375,000
Fair value of the equipment 323,400
Total interest revenue over the lease term P51,600

MC44 D PV of annual payments (30,000 x 3.1699) 95,097

PV of guaranteed residual value (5,000 x 0.683) 3,415
Lease liability, January 1, 2019 98,512
Reduction in lease liability, December 31, 2019
30,000 – (98,512 x 10%) 20,149
Lease liability, December 1, 2019 78,363
Interest Expense for 2020 (78,363 x 10%) P7,836

MC45 C Annual Depreciation Expense (98,512 – 5,000)/4 years P23,378

MC46 D Annual payment for two years (30,000 x 2) P60,000

Guaranteed residual value 5,000
Required disclosure in the notes P65,000

MC47 A Initial direct costs increase the net investment in lease

recorded by the lessor.
Although an unguaranteed residual value is considered by the
lessor and not by the lessee, the terms of the lease already
indicated that the residual value is guaranteed.

MC48 A This excess over the limited hours should be accrued by the
end of 2021, even if payment would be made at January 1,
2022.

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 Chapter 3 – Leases

MC49 C 500,000 x 3.1699 = 1,584,950 Lease Liability

2,200,000 – 1,584,950 = 615,050 FV of right transferred
(1,584,950/2,200,000) x 1,700,000 = 1,224,734 CV retained
1,700,000 – 1,224,734 = 475,266 CV transferred
615,050 – 475,266 = 139,784 Gain 139,784

MC50 A See MC49

Right of use asset (CV retained) 1,224,734
Lease liability 1,584,950

MC51 A 500,000 x 3.1699 = 1,584,950 Lease Liability

1,584,950 – 200,000 = 1,384,950
2,200,000 – 1,384,950 = 815,050 FV of right transferred
(1,384,950/2,200,000) x 1,700,000 = 1,070,189 CV retained
1,700,000 – 1,070,189 = 639,811 CV transferred
815,050 - 629,811 = 185,239 Gain 139,784

MC52 D See MC51

Right of use asset (CV retained) 1,070,189
Lease liability 1,584,950

MC53 A 500,000 x 3.1699 = 1,584,950 Lease Liability

1,584,950 + 300,000 = 1,884,950
2,200,000 – 1,884,950 = 315,050 FV of right transferred
(1,884,950/2,200,000) x 1,700,000 = 1,456,522 CV retained
1,700,000 – 1,456,522 = 243,448 CV transferred
315,050 – 243,448 = 71,602 Gain 71,602

MC54 A See MC53

Right of use asset (CV retained) 1,456,522
Lease liability 1,584,950

MC55 A 1,584,950 x 10% 158,495

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 CHAPTER 4
INCOME TAXES

Problems

4-1. 1. C 6. D 11. C
2. D 7. C 12. B
3. B 8. A 13. D
4. B 9. A
5. D 10. C

4-2. (Carlos Corporation)

(a) a. Permanent difference - Nontaxable

b. Permanent difference - Nondeductible
c. Neither a permanent nor a temporary difference
d. Temporary difference – Taxable temporary difference
e. Temporary difference – Taxable temporary difference
f. Temporary difference – Deductible temporary difference
g. Temporary difference – Deductible temporary difference

(b) Pretax financial income P10,000,000

Add Nondeductible expenses (b) 400,000 400,000
Less Nontaxable income (a) (2,000,000)
Financial income subject to tax P 8,400,000
Add Future deductible amounts (f + g) 750,000 + 400,000 1,150,000
Less Future taxable amounts (d + e) 1,500,000 + 1,000,000 ( 2,500,000)
Taxable income P7,050,000
(c and d)

Income Tax Expense – Current 2,115,000

Income Tax Payable 2,115,000
30% x 7,050,000

Income Tax Expense – Deferred 750,000

Deferred Tax Liability 750,000
30% x 2,500,000

Deferred Tax Asset 345,000

Income Tax Expense – Deferred 345,000
30% x 1,150,000

or one compound entry may be made as follows:

Income Tax Expense – Current 2,115,000

Income Tax Expense – Deferred 405,000
Deferred Tax Asset 345,000
Income Tax Payable 2,115,000
Deferred Tax Liability 750,000

(e) Income tax expense:

Current P2,115,000
Deferred (750,000 – 345,000) 405,000
Total income tax expense P2,520,000

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 Chapter 4 - Income Taxes

4-3. (Luzon Corporation)

(a) Pretax financial income P3,000,000

Future taxable amount (1,800,000)
Taxable income P1,200,000

Current income tax expense (30% x 1,200,000) P 360,000

Deferred tax liability, December 31, 2020

(1,800,000 x 30%) P 540,000

(b) Income Tax Expense – Current 360,000

Income Tax Expense – Deferred 540,000
Income Tax Payable (30% x 1.2M) 360,000
Deferred Tax Liability (30% x 1.8M) 540,000

4-4. (Visayas Corporation)

(a) Pre tax financial income P2,000,000

Future deductible amount 1,550,000
Taxable income P3,550,000

Current income tax expense (30% x 3,550,000) P1,065,000

Deferred tax asset, December 31, 2020

(1,550,000 x 30%) P 465,000

(b) Income Tax Expense-Current 1,065,000

Deferred Tax Asset 465,000
Income Tax Payable 1,065,000
Income Tax Benefit-Deferred 465,000

4-5. (Mindanao Corporation)

Income Tax Expense – Current 1,560,000

Deferred Tax Asset 600,000
Deferred Tax Liability 185,000
Income Tax Expense – Deferred (Benefit) 415,000
Income Tax Payable 1,560,000
30% x 5,200,000 = 1,560,000
30% x 2,000,000 = 600,000
(30% x 500,000) + (35% x 100,000) = 185,000

4-6. (Samar, Inc.)

Income Tax Expense – Current (30% x 2,000,000) P 600,000

Income Tax Expense – Deferred (267,000 – 72,000) 195,000
Income Tax Expense – Total P 795,000

Income Tax Payable (see above) P 600,000

Deferred Tax Asset (30% x 240,000) P 72,000

Deferred Tax Liability (530,000 + 360,000) x 30% P 267,000

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 Chapter 4 - Income Taxes

4-7. (Bohol Company)

Taxable income P12,000,000

Future deductible amount:
Book depreciation in excess of tax depreciation (430,000)
Nontaxable income:
Interest on government securities 450,000
Pretax financial income P12,020,000

4-8. (Wall Services)

(a) Schedule of reversal of the temporary differences

2021 140,000 x 32% P 44,800
2022 320,000 x 34% 108,800
2023 240,000 x 36% 86,400
Total P240,000

Pretax financial income P2,200,000

Add nondeductible expenses 400,000
Less nontaxable revenues (140,000)
Financial income subject to tax P2,460,000
Future taxable amounts (700,000)
Taxable income P1,760,000
Tax rate x 30 %
Income tax payable P 528,000

Deferred tax liability (see above) P 240,000

(b) Income Tax Expense – Current 528,000

Income Tax Payable 528,000

Income Tax Expense – Deferred 240,000

Deferred Tax Liability 240,000

(c) Income from continuing operations before income tax P2,200,000

Income Tax Expense:
Current P528,000
Deferred 240,000 768,000
Profit P1,432,000

4-9. (Daniel Company)

(a)
Straight Line SYD Difference
2020 500,000 800,000 (300,000)
2021 500,000 600,000 (100,000)
2022 500,000 400,000 100,000
2023 500,000 200,000 300,000

Carrying Amount Tax Base Difference

12/31/2020 1,500,000 1,200,000 300,000
12/31/2021 1,000,000 600,000 400,000
12/31/2022 500,000 200,000 300,000
12/31/2023 0 0 0

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 Chapter 4 - Income Taxes

2020 2021 2022 2023

Taxable income 800,000 890,000 1,200,000 1,500,000
Future taxable amount 300,000 100,000
Additional taxable amount
(reversal) ( 100,000) (300,000)
Pretax accounting income 1,100,000 990,000 1,100,000 1,200,000

(b) Deferred tax liability at the end of each year is as follows:

2020 300,000 x 30% P 90,000

2021 400,000 x 30% 120,000
2022 300,000 x 30% 90,000
2023 0 0

Journal entries to record income tax:

December 31, 2020

Income Tax Expense (30% x 800,000) 240,000

Income Tax Payable 240,000

Income Tax Expense-Deferred 90,000

Deferred Tax Liability 90,000

December 31, 2021

Income Tax Expense – current (30% x 890,000) 267,000

Income Tax Payable 267,000

Income Tax Expense – Deferred 30,000

Deferred Tax Liability 30,000
120,000 – 90,000 = 30,000

December 31, 2022

Income Tax Expense – Current 360,000

Income Tax Payable 360,000
30% x 1,200,000

Deferred Tax Liability 30,000

Income Tax Expense-Deferred (Benefit) 30,000
90,000 – 120,000 = 30,000 decrease

December 31, 2023

Income Tax Expense – Current 450,000

Income Tax Payable 450,000
30% x 1,500,000

Deferred Tax Liability 90,000

Income Tax Expense-Deferred (Benefit) 90,000
0 – 90,000 = 90,000 Decrease

(d)
2020 2021 2022 2023
Income Tax Expense:
Current P 240,000 P 267,000 P 360,000 P 450,000
Deferred (Benefit) 90,000 30,000 ( 30,000) (90,000)
Total Income Tax Expense P 330,000 P 297,000 P 330,000 P 360,000

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 Chapter 4 - Income Taxes

(e)
2020 2021 2022 2023
Income before income tax P1,100,000 P 990,000 P1,100,000 P1,200,000
Less income tax expense
(see d) 330,000 297,000 330,000 360,000
Net income P 770,000 P 693,000 P 770,000 P 840,000

4-10. (Jude Company)

(a) Future taxable amount

Carrying amount of inventories > Tax Base P 100,000
Carrying amount of building & equipment > Tax Base 1,800,000
P 1,900,000
Future Deductible Amount
Carrying amount of accounts receivable < Tax Base P 200,000
Carrying amount of warranty > Tax Base 800,000
Carrying amount of unearned rent > Tax Base 500,000
P 1,500,000

(b) Income Tax Payable (5,000,000 X 30%) P 1,500,000

Deferred Tax Assets (1,500,000 x 30%) P 450,000
Deferred Tax Liability (1,900,000 x 30%) P 570,000

(c) Income Tax Expense-Current 1,500,000

Income Tax Payable 1,500,000
Income Tax Expense-Deferred 75,000
Deferred Tax Asset 75,000
450,000 – 525,000
Deferred Tax Liability 830,000
Income Tax Benefit-Deferred 830,000
1,400,000 – 570,000

4-11. (Emenem Company)

(a) Income Tax Expense – current 900,000

Income Tax Payable 900,000
30% x 3,000,000

Deferred Tax Asset 90,000

Income Tax Expense – Deferred 60,000
Deferred Tax Liability 150,000
30% x 800,000 = 240,000
240,000 – 150,000 = 90,000
30% x 1,500,000 = 450,000
450,000 – 300,000 = 150,000

(b) 1. Current income tax P 900,000

Deferred income tax 60,000
Total income tax expense P 960,000

2. Taxable income P3,000,000

Future taxable amount
1,500,000 – (300,000/30%) 500,000
Future deductible amount
800,000 – (150,000/30%) (300,000)
Accounting profit subject to tax P3,200,000

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 Chapter 4 - Income Taxes

3. Accounting profit subject to tax P3,200,000

Non-taxable revenue 200,000
Non-deductible expense (600,000)
Accounting profit before income tax P2,800,000

4-12. (Capetown Company)

Tax rate (180,000/600,000) = 30%

Income Tax Expense – current 300,000

Income Tax Payable 300,000
30% x 1,000,000

Deferred Tax Asset 60,000

Income Tax Benefit – Deferred 60,000
End (30% x 800,000) 240,000
Beg 180,000
Increase 60,000

4-13. (Conchita Corporation)

(a) Deferred tax liability, 12/31/2020

2M x 30% P600,000

(b) Income Tax Expense:

Current P900,000
Deferred (decrease in DTLiability) (40,000)
Total income tax expense P860,000

(c) Income Tax Expense – Current 900,000

Income Tax Payable 900,000
3M x 30%

Deferred Tax Liability 40,000

Income Tax Expense – Deferred 40,000
Beg. 640,000
End, revised due to
change in tax rate 600,000
Decrease in DTL 40,000

4-14. (Britanny Company)

(a) Income Tax Expense – Current

3M x 30% P900,000
Previous payment in 2020 500,000
Income Tax Payable, 12/31/2020 P400,000

(b) Income Tax Expense – Current 400,000

Income Tax Payable 400,000

Deferred Tax Liability 30,000

Deferred Tax Asset 30,000
DTL, 12/31/20 (400,000 x 30%) 120,000
DTL, 1/1/20 150,000
Decrease in DTL 30,000

DTA, 12/31/20 (200,000 x 30%) 60,000

DTA, 1/1/20 90,000
Decrease in DTA 30,000

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 Chapter 4 - Income Taxes

(c) Total income tax expense

Current P900,000
Deferred -0-
Total income tax expense P900,000

Pretax profit P2,800,000

Income tax expense 900,000
Profit P1,900,000

4-15 (Persistent Company)

(a) Income Tax Expense – Current 700,000

Income Tax Payable 700,000

Deferred Tax Asset 100,000

Income Tax Benefit – Deferred 100,000

(b) Income Tax Expense – Current 700,000

Income Tax Payable 700,000

MULTIPLE CHOICE QUESTIONS

Theory

MC1 C MC6 D MC11 D MC16 C

MC2 A MC7 C MC12 C MC17 D
MC3 A MC8 D MC13 A MC18 B
MC4 A MC9 C MC14 D MC19 B
MC5 C MC10 C MC15 C MC20 D

Problems

MC21 B Deferred Income Tax Asset

3.6 M x 6/12=1.8M; 1.8M x 35% P630,000

MC22 B Future taxable amount (2.M – 1.2M) P800,000

MC23 B Future taxable amounts (2021-2023) 2,000,000

Future taxable amount (2024) 1,000,000
Deferred tax asset, December 31, 2020
2.M x 30% 600,000
1M x 35% 350,000 P950,000

MC24 D Current income tax expense (10M x 30%) P3,000,000

MC25 C Deferred Income Tax Expense

30% x (8M – 4M) P1,200,000

MC26 B Deferred tax asset (30% x 700,000) + (35% x 1,400,000 P700,000

Deferred tax liability (30% x 500,000) + (35% x 1,000,000) 500,000
Net deferred tax asset (has right to set off) P200,000

MC27 C Deferred Income Tax Asset, December 31, 2020

1,200,000 – 750,000 = 450,000; 450,000 x 35% P157,500

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 Chapter 4 - Income Taxes

MC28 B Income Tax Payable, end of 2020

30 x 1,500,000 P450,000

MC29 D Deferred Income Tax Asset, December 31, 2020

30% x 6M P1,800,000

MC30 C Deferred Income Tax Liability, December 31, 2020 (all

noncurrent) 30% x 9M P2,700,000

MC31 D Difference in depreciation (42,000/30%) P140,000

Depreciation expense for financial reporting purposes 600,000
Depreciation Expense in the tax return P740,000

MC32 C Deferred Income Tax Liability

30% x (250,000 – 100,000) P45,000

MC33 D Pretax accounting profit P5,000,000

Nontaxable life insurance proceeds (900,000
Warranty expense incurred but unpaid (1,200,000
Impairment loss on goodwill 200,000
Taxable income P5,500,000
Income tax rate 30%
Income Tax Payable P1,650,000

MC34 C Current income tax payable, December 31, 2020

200,000 – 40,000 = 160,000; 160,000 x 30% P48,000

MC35 B Deferred Income Tax Liability, December 31, 2020

(150,000 + 150,000) x 35% 105,000
150,000 x 30% 45,000 P150,000

MC36 B Deferred Income Tax Liability, December 31, 2020

95,000 x 38% P36,100

MC37 D Current income tax payable (6.5M x 30%) P1,950,000

Income tax payments (900,000)
Income Tax Payable, December 31, 2020 P1,050,000

MC38 C Future taxable amount P2,600,000

Future deductible amount 1,400,000
Net future deductible amount P1,200,000
Income tax rate in 2021 38%
Deferred portion of income tax expense P456,000

MC39 D Given P750,000

MC40 D Pretax financial income P2,000,000

Current income tax rate 30%
Income Tax Expense for 2020 P 600,000
or
Current income tax expense (3M x 30%) P900,000
Less deferred income tax benefit (5M – 4M) x 30% (300,000)
Income Tax Expense P600,000

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 Chapter 4 - Income Taxes

MC41 C See MC42

MC42 C Pretax financial income P1,000,000

Future deductible amount (accrued warranty costs) 1,200,000
Future taxable amount (accrual basis profit>cash basis) (5,000,000)
Operating loss carryforward (for tax purposes) (P2,800,000)
Increase in deferred tax liability (5M x 30%) P1,500,000
Less increase in deferred tax asset
Warranty costs (1.2M x 30%) P360,000
Operating loss carryforward
(2.8M x 30% x 40% 336,000 696,000
Income Tax Expense for 2020 P 804,000

MC43 D Difference in the amount of depreciation (172,500/30%) P 575,000

Depreciation expense recognized in the books 3,000,000
Depreciation Expense in the tax return P3,575,000

MC44 D Pretax financial income P1,800,000

Excess of tax depreciation over book depreciation (80,000)
Excess of income from installment for tax purposes over
financial income 60,000
Taxable income P1,780,000
Income tax rate 30%
Current income tax liability, December 31, 2020 P 534,000

MC45 B Pretax profit P2,000,000

Excess of rent income per books (240,000 – 140,000) (100,000)
Tax depreciation in excess of book depreciation
(560,000 – 440,000) (120,000)
Nondeductible life insurance premiums (assumes that the
company is the beneficiary 180,000
Taxable profit P1,960,000
Income tax rate 30%
Income tax payable, December 31, 2020 P 588,000

MC46 A Pretax accounting profit P5,000,000

Non-taxable interest (500,000)
Non-deductible life insurance premiums 200,000
Future taxable amount (2,800,000 – 1,000,000) 1,800,000
Future deductible amount (10M – 6M) (4,000,000)
Taxable income P2,500,000
Income tax rate 30%
Income Tax Payable P 750,000

MC47 A Pretax accounting income P5,000,000

Restructuring charge recognized in the books but not
deductible for tax purposes 400,000
Unrealized gain on FA at FVPL recognized in the books (600,000)
Taxable income P4,800,000
Income tax rate 30%
Current income tax expense P1,440,000

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 CHAPTER 5
EMPLOYEE BENEFITS

Problems

5 – 1. (Red Hot Company)

(a) Liability for Compensated Absences, December 31, 2019

6 x 420 = P2,520

(b) Employee Benefit Expense for Sick Leave and Vacation Leave
Sick Leave 5 x P450 P2,250
10 x 420 4,200
2 x 400 800
2 x 380 760 P8,010
Vacation Leave 12 x P450 P5,400
12 x 420 5,040
2 x 400 800
5 x 380 1,900 13,140
Total employee benefit expense for 2020 P21,150

(c) Liability for Compensated Absences 2,520

Employee Benefit Expense – Compensated Absences 10,280
Cash 12,800
Sick leave (as computed above) 8,010
Vacation leave 7 x 450 3,150
3 x 420 1,260
1 x 380 380 4,790
Total amount paid for compensated absences 12,800

(d) Employee Benefit Expense – Compensated Absences 10,870

Liability for Compensated Absences 10,870

Liability for Compensated Absences, December 31, 2020

Employee Unused Vacation Days Rate Amount

A. B. Santos 12-7 5 P450 P2,250
C. D. Garcia 12+6 -3 15 420 6,300
E. F. Cruz 2 2 400 800
G. H. Buen 5–1 4 380 1,520
Total P10,870

5-2. (Green Grass Corporation)

(a) Total payment in 2020

35 x 12 x 450 P189,000
25 x 10 x 450 112,500 P301,500
Liability, beginning of 2020 (13-10) x 20 x 450) (27,000)
Liability, end of 2020 (12 – 10) x 40 x 450) 36,000
Sick leave expense in 2020 P310,500

(b) P36,000 (see above)

(c) Liability for Compensated Absences 27,000

Compensated Absences 27,000
Reversing entry

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 Chapter 5 – Employee Benefits

Compensated Absences 301,500

Cash 301,500
Payments during the year

Compensated Absences 36,000

Liability for Compensated Absences 36,000
Year-end accrual

5-3. (McKinley Company)

(a) Vacation earned for work in 2020 P400,000

Adjustment for 10% salary increase on unused vacation at
beginning of year 10% x (500,000 – 300,000) 20,000
Vacation pay expense for year 2020 P420,000

(b) Liability for accumulated vacations, 12/31/19 P500,000

Vacations taken during 2020 (300,000)
Vacation pay expense for 2020 420,000
Liability for accumulated vacations, 12/31/20 P620,000

5-4. (Blue Jeans Company)

(a) Retirement Benefit Expense (Required Contribution)

(P6M x 8%) + (P35M - P10M) x 5% = P1,730,000

(b1) Retirement Benefit Expense 1,730,000

Prepaid Retirement Benefit Cost 70,000
Cash 1,800,000

(b2) Retirement Benefit Expense 1,730,000

Cash 1,500,000
Accrued Retirement Benefit Cost 230,000

5-5. (Yellow Ribbon Trading Company)

Defined Benefit Cost Benefit Liability (Asset)

Other
Profit or Comprehensive Benefit
Loss Income Obligation Plan Assets
Beginning balances P3,000,000 P2,600,000
Current service cost P1,000,000 1,000,000
Interest cost
10% x 3,000,000 300,000 300,000
10% x 2,600,000 (260,000) 260,000
Actuarial gain or loss
Benefit obligation 100,000 100,000
Plan assets
300,000 -260,000 (40,000) 40,000
Benefits paid (350,000) (350,000)
Contributions 900,000
Ending balances 1,040,000 60,000 4,050,000 3,450,000

(a) Net Prepaid/Accrued Benefit Cost, December 31, 2019

P3,000,000 – P2,600,000 P 400,000

(b) Retirement benefit expense in 2020 P 1,040,000

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 Chapter 5 – Employee Benefits

(c) Defined benefit cost taken to OCI P 60,000

(d) Retirement Benefit Expense 1,040,000

Remeasurement of Defined Benefit Asset/
Liability – OCI 60,000
Cash 900,000
Defined Benefit Liability/Asset 200,000

(e1) Benefit Obligation P4,050,000

(e2) Plan Assets P3,450,000

(f) Net defined benefit liability/asset:

Beginning balance (liability) P 400,000
Underfunding (see entry d) 200,000
Ending balance (liability) P 600,000

Reconciled with the memorandum records:

Defined benefit obligation P4,050,000
Plan assets 3,450,000
Net liability P 600,000

5-6. (Midnight Black Company)

Defined Benefit Cost Benefit Liability (Asset)

Other
Profit or Comprehensive Benefit
Loss Income Obligation Plan Assets
Balances, beginning 1,350,000 1,250,000
Service cost 2,000,000 2,000,000
Interest cost
9% x 1,350,000 121,500 121,500
9% x 1,250,000 (112,500) 112,500
Actuarial loss
On benefit 50,000 50,000
obligation
On plan assets 2,000 (2,000)
Past service cost 300,000 300,000
Benefits paid (120,000) (120,000)
Contributions 2,360,000
Balances, end 2,309,000 52,000 3,701,500 3,600,500

(a) Retirement Benefit Expense 2,309,000

Remeasurement of Defined Benefit
Liability/Asset 52,000
Cash 2,360,000
Defined Benefit Liability/Asset 1,000

(b) Defined benefit liability, beginning

(1,350,000 – 1,250,000) P100,000
Underfunding 1,000
Defined benefit liability, end P101,000
or
Benefit obligation P3,701,500
Less plan assets 3,600,500
Defined benefit liability, end P 101,000

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 Chapter 5 – Employee Benefits

5-7. (Brown Cup Company)

Defined Benefit Cost Benefit Liability (Asset)

Other
Profit or Comprehensive Benefit
Loss Income Obligation Plan Assets
Beginning balances 8,200,000 8,500,000
Current service cost 1,200,000 1,200,000
Interest cost
10% x 8,200,000 820,000 820,000
10% x 8,500,000 (850,000) 850,000
Actuarial gain or loss
On Benefit (40,000) (40,000)*
Obligation
On Plan Assets
780,000-850,000 70,000 (70,000)
Contribution 1,500,000
Ending balances 1,170,000 30,000 10,180,000 10,780,000
*Squeezed

(a) Defined benefit asset, January 1, 2020

P8,200,000 – P8,500,000 P300,000

(b) Actuarial gain or loss

(1) On plan assets (780,000 – 850,000) P70,000 loss
(2) On benefit obligation (squeezed, see above) P40,000 gain

(c) Defined Benefit Cost

In profit or loss P1,170,000
In other comprehensive income P 30,000

(d) Retirement Benefit Expense 1,170,000

Remeasurement of Defined Benefit
Asset/Liability – OCI 30,000
Defined Benefit Liability/Asset 300,000
Cash 1,500,000

(e) Defined Benefit Asset:

Beginning balance P300,000
Overfunding (1,500,000 – 1,200,000) 300,000
Ending balance – asset P600,000

(f) Remeasurement of Defined Benefit

Asset/Liability – OCI 50,000
Defined Benefit Asset/Liability 50,000

5-8. (White Flower Company)

(a) Fair value of plan asset, ending P4,950,000

Fair value of plan assets, beginning P4,600,000
Contributions to the plan 500,000
Benefits paid (700,000)
Balance, before actual return 4,400,000
Actual return on plan assets P 550,000

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 Chapter 5 – Employee Benefits

(b) Actual return P 550,000

Expected return based on interest rate of 10%
10% x P4,600,000 460,000
Actuarial gain taken to OCI P 90,000

5-9. (Orange Gem Company)

(a) Worksheet

Defined Benefit Cost Benefit Liability (Asset)

Other
Profit or Comprehensive Benefit
Loss Income Obligation Plan Assets
Beginning balances 9,000,000 8,000,000
Current service cost 1,000,000 1,000,000
Interest cost
10% x 9,000,000 900,000 900,000
10% x 8,000,000 (800,000) 800,000
Actuarial gain/loss
Benefit obligation (50,000)* (50,000)*
Plan assets
(640,000-800,000) 160,000 (160,000)
Benefits paid (600,000) (600,000)
Contributions 2,000,000
Past service cost 800,000 800,000
Ending balances 1,900,000 110,000 11,050,000 10,040,000
*squeezed

(b) Retirement Benefit Expense 1,900,000

Remeasurement of Defined Benefit
Liability/Asset – OCI 110,000
Defined Benefit Liability/Asset 2,010,000

Defined Benefit Liability/Asset 2,000,000

Cash 2,000,000

(c) Defined Benefit Liability, December 31, 2018

(9,000,000 – 8,000,000) P1,000,000
Underfunding (2,010,000 – 2,000,000) 10,000
Defined benefit liability, December 31, 2019 P1,010,000

(d) Benefit obligation, end P11,050,000

Plan assets, end 10,040,000
Defined benefit liability, end P 1,010,000

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 Chapter 5 – Employee Benefits

5-10. (Global Financing Company)

(a) Worksheet

Defined Benefit Cost Benefit Liability (Asset)

Other
Profit or Comprehensive Benefit
Loss Income Obligation Plan Assets
Beginning balances 5,300,000 5,500,000
Current service cost 1,000,000 1,000,000
Interest cost
10% x 5,300,000 530,000 530,000
10% x 5,500,000 (550,000) 550,000
Benefits paid (300,000) (300,000)
Contributions 1,000,000
Actuarial gain/loss
Benefit obligation 70,000 70,000*
Plan asset (50,000) 50,000*

Ending balances 1,900,000 110,000 6,600,000 6,800,000

*squeezed

Surplus, end (6,800,000 – 6,600,000) 200,000

Ceiling, end (given) 180,000
Excess of surplus over ceiling, end 20,000
Adjustment
in profit or loss (200,000 – 100,000) x 10% 10,000
in other comprehensive income 10,000

(b)
Retirement Benefit Expense 980,000
Re-measurement of Defined Benefit
Liability/Asset-OCI 20,000
Defined Benefit Liability/Asset 1,000,000

Defined Benefit Liability/Asset 1,000,000

Cash 1,000,000

Retirement Benefit Expense 10,000

Re-measurement of Defined Benefit
Liability/Asset – OCI 10,000
Defined Benefit Liability/Asset 20,000

(c)
Defined Benefit liability/Asset
Beg.balance 200,000 : Current service cost 1,000,000
Contributions 1,000,000 : Adjustment 20,000
1,200,000 : 1,020,000

(d)
Present value of reduction in future contributions
(1,200,000 – 1,020,000) P180,000

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 Chapter 5 – Employee Benefits

MULTIPLE CHOICE QUESTIONS

Theory

MC1 C MC6 D MC11 D MC16 A

MC2 A MC7 A MC12 D MC17 B
MC3 B MC8 A MC13 A MC18 D
MC4 A MC9 A MC14 C MC19 D
MC5 D MC10 A MC15 B MC20 B

Problems

MC21 B Current service cost P140,000

Interest cost on plan assets (9% x 3M) (270,000)
Interest cost on benefit obligation (9% x 3.2M) 288,000
Retirement benefit expense P158,000

MC22 D Actuarial loss on plan assets (270,000 – 185,000) P85,000

Actuarial loss on benefit obligation (given) 20,000
Defined benefit cost taken to OCI P105,000

MC23 C Defined benefit liability, beginning (3.2M – 3M) P200,000

Defined benefit cost (158,000 + 105,000) P263,000
Contributions to the fund 204,000
Underfunding 59,000
Defined benefit liability, ending P259,000

MC24 A Fair value of plan assets, beginning P2,500,000

Contributions to the fund 800,000
Benefits paid (340,000
Fair value of plan assets, ending before actual return P2,960,000
Fair value of plan assets, ending (given) (3,200,000)
Actual return on plan assets P 240,000

MC25 B Actuarial loss on plan assets (10% x 2.5M) – 240,000 P 10,000

MC26 B Retirement benefit liability, January 1, 2020 (5M – 3.8M) P1,200,000

MC27 A Full amount of past service cost is recognized as expense P580,000

MC28 A Actuarial gain or loss is taken to other comprehensive

income, not in profit or loss P-0-

MC29 B Current service cost P600,000

Past service cost 580,000
Net interest cost 12% x (5M – 3.8M) 144,000
Retirement benefit expense for the year P1,324,000

MC30 C Fair value of plan assets, January 1 P3,800,000

Actual return on plan assets 550,000
Contributions to the fund 750,000
Fair value of plan assets, December 31 P5,100,000

MC31 D Benefit obligation, January 1 P5,000,000

Interest cost (12% x 5M) 600,000
Current service cost 600,000
Past service cost 580,000
Actuarial gain on benefit obligation (70,000)
Benefit obligation, December 31 P6,710,000

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 Chapter 5 – Employee Benefits

MC32 B Retirement benefit cost taken to P/L P1,324,000

Actuarial gain on plan assets (550,000-456,000) (94,000)
Actuarial loss on benefit obligation (70,000) P1,160,000
Contributions to the fund 750,000
Underfunding P410,000

MC33 D Benefit obligation, end P6,710,000

Plan assets, end 5,100,000
Defined benefit liability, December 31, 2020 P1,610,000
or
Defined benefit liability, January 1 (5M-3.8M) P1,200,000
Underfunding 410,000
Defined benefit liability, December 31, 2020 P1,610,000

MC34 C Benefit obligation, January 1 P4,600,000

Interest cost (10% x 4.6M) 460,000
Benefits paid (390,000)
Actuarial gain on benefit obligation (32,500 + 8,500*) (41,000)
*Plan assets before actuarial loss
5,035,000 + 503,500 + 425,000
– 390,000 5,573,500
Plan assets, end 5,565,000
Actuarial loss on plan assets 8,500
Benefit obligation, December 31 before service cost P4,629,000
Benefit obligation, December 31, as reported 5,629,000
Service cost P1,000,000

MC35 A Expected return on plan assets (10% x 5,035,000) P503,500

Actuarial loss 8,500
Actual return on plan assets P495,000

MC36 A Current service cost P1,000,000

Net interest cost 10% x (5,035,000 – 4,600,000) (43,500)
Retirement benefit cost taken to P?L P956,500
Net actuarial gain (32,500)
Total retirement benefit expense for the year P924,000

MC37 A Current service cost is fully funded; so, the underfunding

arises from past service cost (600,000 – 240,000) P360,000

MC38 C Benefit obligation, January 1 P4,400,000

Interest cost (12% x 4.4M) 528,000
Current service cost 1,480,000
Actuarial gain on benefit obligation (200,000 – 150,000) (50,000)
Payments to retirees (600,000)
Benefit obligation, December 31 P5,758,000

MC39 D Past service cost P2,400,000

Current service cost 300,000
Contributions to the fund (2,500,000)
Liability relating to the retirement benefit cost P 200,000
&
MC40 C 4,200,000 – 3,300,000 = 900,000 asset; however, the asset
amount is limited by the present value of future refunds and
reductions in future contributions of P500,000; so the
defined benefit asset will be shown at P500,000 only.

MC41 D Current service cost P2,000,000

Past service cost 1,300,000
Net interest cost 10% x (12M – 10M) 200,000
Retirement benefit cost taken to P&L P3,500,000

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 Chapter 5 – Employee Benefits

MC42 C Actual return on plan assets 1,500,000

Actuarial gain on plan assets 500,000
Expected return 1,000,000
Rate of return (1M/10M) = 10% 10%

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