Liabilities With Answer For Students
Liabilities With Answer For Students
Problem 1
These were noted in the following accounts of Faithful Inc. for the year ended December 31, 2019.
Accounts Balance Notes
Accounts Payable, trade P 170,000 The amount is net of P 30,000 accounts with debit balance
Notes Payable, trade 70,000 The notes are all with 5 months term, bearing interest at 15%, P 50,000 of
the notes is dated September 1, while the rest are dated November 3
Advances from Customers 100,000 The goods pertaining to these advances will be delivered in 2020
Container Deposit 50,000 This is an amount received from customers for returnable containers
Notes Payable - BPI 200,000 This is a five year note and are being paid off at the rate of P 4,000 per
month inclusive of interest
Dividend in arrears on 20,000 The company is yet to declare dividends since its last declaration and
Cumulative Preferred stock distribution in 2020.
Share Dividend Payable on 37,200
Ordinary Shares
Liabilities under guarantee 45,000 This pertains to Faithful guarantees its employee’s bank loan. As per past
agreement experience, employees unlikely default on their loan payments
Convertible Bonds 1,000,000 P 1,000 bond is convertible to 10 ordinary shares. Amount due on
December 31, 2022
Notes Payable - Officers 40,000 This is due in six months
Salaries and Wages Payroll for the period December 16, 2019 to January 15, 2020 amounted
to P 68,000
Notes Receivable 30,000 This note has been discounted in the bank on a without recourse basis,
where the company received P 24,000
Output VAT 246,000 Input VAT on purchases and other operating expenses amounted to P
164,000
Accounts Receivable 215,000 The account is net of P 12,300 customer credit balances
Cash in Bank 115,000 The company’s bank balances include BPI – P 125,000; PNB – P 55,000 and
in BDO an overdraft with the balance
Common Stock Warrants 250,000
Outstanding
Common Stock Option 150,000
Outstanding
Estimated Warranty Cost for 46,000 This pertains to warranty costs on goods sold in 2018 and 2019
goods sold
Installment Notes Payable 75,000 This is for the equipment purchases, only one-third is due in 2020
Provision for Losses A manufacturing equipment exploded during the year injuring an
employee where he filed claims on November 3. There has been no
resolution for the case as of the balance sheet date but the company
lawyer believed that it is probable that the company is liable between P
25,000 and P 75,000.
Deferred Tax Liability 150,000 This refers to the cumulative temporary difference on taxable and financial
income which will reverse evenly over the next year.
Problem 2
The following information in 2019 were available with regards to the currently maturing obligations of Batangas Inc.
who follows the calendar year financial statements reporting in.
a. Short term Notes Payable of P 1 Million due February 7, 2020 – On January 15, 2020, the company issued
bonds with a face value of P 900,000 at 96; brokerage and other cost of issuance were P 3,450. On January 22,
2020, the proceeds from the bond issuance plus additional cash held by the company were used to liquidate the
P 1 Million of short-term notes.
b. Notes Payable of P 500,000 due June 1, 2020 – On February 2,2020, Batangas entered an agreement with
National Life Insurance Co. where by National will lend Batangas P 400,000 payable in 5 years at 14% the
proceeds of which is intended to be used to partly refinance the said notes. The money will be available to the
company on May 20, 2020.
c. Notes Payable of P 500,000 due June 15, 2020 – At December 31, 2019 Batangas signed an agreement to
borrow up to P 500,000 to refinance the note on a long-term basis. The financing agreement called for
borrowings not to exceed 80% of the value of the collateral. At the date of issue of the December 31, 2019
financial statements, the value of the collateral was P 600,000 and was not expected to fall below this amount
during 2020.
Assuming that the financial statements of Batangas were authorized to issue on March 31, 2020.
4. How much liabilities above are short term as of the balance sheet date?
a. P 1,500,000 b. P 1,520,000 c. P 1,980,000 d. P 2,000,000
5. How much liabilities above are long term as of the balance sheet date?
a. P 2,000,000 b. P 1,500,000 c. P 980,000 d. P 480,000
ANSWER IN PROBLEM 2
Current Long Term PARTICULARS
a. 1,000,000 Not Refinance on a long term basis as of BS date – Current
b. 500,000 Not Refinance on a long term basis as of BS date - Current
c. 20,000 480,000 Refinance on a long term basis as of BS date ( 600,000 x .80)=480,000
total 1,520,000 480,000 ( 480,000 will be long term and the balance of P 20,000 will be current)
Problem 3
Raid Inc., a manufacturer of heavy machinery, grants a 2-year warranty on its products. The Estimated Liability for
Product Warranty account shows the following entries for the year:
Beginning balance P 225,000
Provision during the year (quarterly accrual) 200,000
Total 425,000
A review of the company’s policy of accounting for warranties revealed that based on the company’s past experience,
warranty claims average 5% on net sales. Moreover, the company provides for a quarterly accrual of the estimated
warranties expenditure based on rough estimates.
6. What is the correct balance of the estimated liability for product warranty at the end of the year?
a. P 164,500 b. P 264,500 c. P 355,000 d. P 364,500
Beginning Balance 225,000
+ Warranty Expense (7,250,000 – 150,000) x 5% 355,000
Less: Actual Warranty (415,500)
Warranty Liability Balance 164,500
Problem 4
San Mateo Corporation began operation on January 2, 2019 with 250 employees. The company provides its employees 2
weeks paid sick leave and 2 weeks paid vacation leave for every operating year. Per company policy, employees are
allowed to carry over accumulated leaves for the current period over the next year only. The same shall be forfeited if
not availed of over the said period allowed.
On December 31, 2019, records show that there are 55 employees who are yet to avail of any leaves, while there are 25
employees who have remaining 2 weeks unused vacation and sick leaves combined. Employees had an average daily
wage rate of P 250 for a 5-day weekly operation in 2019.
On December 31, 2020, records show that 925 days of vacation and sick leaves carried over from the last operating
period were exercised and paid in 2020. In addition, there are 30 employees who have 6 weeks accumulated unused sick
leaves and vacation leaves combined; 25 employees who have 3 weeks accumulated unused sick leaves and 2 weeks
vacation leaves; 30 employees who have 3 weeks accumulated unused sick leaves and unused vacation leaves
combined; 10 employees who have 1 week accumulated unused sick leave and 1 week vacation leaves. Employees had
an average daily wage rate of P 275 for a 5-day weekly operation in 2020.
7. How much liability for compensated absences should be included as current liabilities as of December 31, 2019?
a. P 570,625 b. P 453,750 c. P 412,500 d. P 337,500
8. How much liability for compensated absences should be included as current liabilities as of December 31, 2020?
a. P570,625 b. P 453,750 c. P 412,500 d. P 337,500
ANSWER IN PROBLEM 4
Liability for Compensated Absences: Dec. 31, 2019
55 employees x 4 weeks x 5days 1,100
25 employees x 2 weeks x 5 days 250 1,350
Multiplied by Payment per Day 250
Liability, December 31, 2019 337,500
Note: Four weeks limit: 2 weeks VL and 2 weeks SL, since, only a year can be carried to the following year.
Problem 5
Climbing Company manufactures and sells air conditioning units with a 12-month warranty under which defective air
conditioning units will be replaced free of any charges.
The company started out in 2019 expecting a 10% of the sales to be returned. However, due to the innovations and
improvements made to the products during the year, the estimated percentage of returns increased to 15% on July 1. It
is assumed that no units sold during a given quarter are returned in that quarter. Each unit is stamped with a date at
time of sale so that the warranty may be properly administered. The following table of percentages indicates the pattern
of sales return during the 12-month period of warranty, starting the quarter following the sale of conditioning units.
Quarter following quarter of sale % of the total returns expected Gross Sales in 2019
First Quarter 40% P 16,200,000
Second Quarter 30% 14,850,000
Third Quarter 20% 12,000,000
Fourth Quarter 10% 8,100,000
The company also pays for the freight costs of the return and the delivery of the defective units returned and the new
replacement units, respectively. The freight costs were approximately 10% of the sales price of the air conditioning units
returned. The manufacturing cost of the air conditioning units are roughly 80% of the sales price. The returned units can
be salvaged at an estimated value of 15% of their sales price. Returned units on hand at December 31, 2019, were thus
valued in the inventory at 15% of their original sales price.
9. What is the total estimated returns for the year ended, December 31, 2019?
a. P 5,115,000 b. P 6,120,000 c. P 6,300,000 d. P 7,672,500
10. What is the warranty expense for the year ended, December 31, 2019?
a. P 4,590,000 b. P 4,896,000 c. P 5,508,000 d. P 6,120,000
11. What is the estimated warranty payable as at December 31, 2019?
a. P 2,176,875 b. P 2,205,900 c. P 2,322,000 d. P 2,612,250
ANSWER IN PROBLEM 5
Problem 6
The Manger Home Shopping carries a wide variety of promotion techniques to attract customers.
1. Kitchen and Home Appliances are sold in a one-year warranty for replacement of parts and labor. The estimated
warranty costs, based on past experience is 5% of sales.
2. The premium is offered on home furniture. Customer receive a coupon for each peso spent on home furniture.
Customers may exchange 2,000 coupons and P 50 for a rice cooker which the company purchased at P 340 for
each rice cooker and estimates that 60% of the coupons given to customers will be redeemed.
The company’s total sales for 2019 were P 115.2M – P 86.4M from kitchen and home appliances and P 28.8M from
home furniture. Replacement parts and labor for warranty work totaled P 2.624M during 2019. A total of 5,200 rice
cookers used in the premium programs were purchased during the year and there were 9,600,000 coupons redeemed in
2019.
The accrual method is used by the company to account for the warranty and premium costs for financial reporting
purposes. The balance of the accounts related to warranties and premiums on January 1, 2019, were as shown below:
Inventory of Premium Items P 340,000
Estimated liabilities for premiums 716,000
Estimated liabilities for warranties 2,176,000
Based on the information above, determine:
12. Promotional expenses related to premiums for the current year 2019?
a. P 1,392,000 b. P 1,632,000 c. P 2,505,600 d. P 2,937,600
13. Estimated liabilities for premiums as of December 31, 2019?
a. P 716,000 b. P 1,829,600 c. P 2,021,600 d. P 1,589,600
14. Estimated liabilities under warranties as of December 31, 2019?
a. P 2,624,000 b. P 3,872,000 c. P 4,320,000 d. P 5,312,000
ANSWER IN PROBLEM 6
Sales of Home Furniture 28,800,000
% of Redemption 60%
Coupons expected to be redeemed 17,280,000
No. of Coupons required for a premium 2,000
Number of Premium to be given away 8,640
Multiply by Estimated Net Cost ( P 340 -P 50 ) P 290 P 2,505,600 Premium Expense
Add: Premium Liability at the beg. of the year 716,000
Coupon Redeemed during the year (9,600,000/2,000) x P 290 (1,392,000)
Premium Liability of the end of the year 1,829,600 Premium Liability
Problem 7
Orange Appliance Center reports the following liability items in its balance sheet as of December 31, 2019:
Liability for unredeemed coupons P 109,750
Unearned Service Contracts 300,000
Accrued officer bonuses -
The liability for unredeemed coupons is in relation to discount coupons distributed by the company to customers who
may present the same within a stated expiration date to various company distributors to avail of them discount as
indicated in the face of the coupons. Distributors are reimbursed for the face value of coupons redeemed, plus 10% of
the coupon value for handling costs. The company honors requests for coupon reimbursements to distributors three
months after the expiration date. In Orange experience, 75% of the coupons issued ultimately are redeemed by
customers. The total face value of coupon issued during the year and expiring on December 31, 2019 amounted to P
250,000 while total payments to distributors as of the same date is at P 140,250. The total coupon value was set up as a
liability while the total payments were charged against the liability set-up. Aside from the company’s normal selling
operations, it also sells equipment service contracts agreeing to service equipment for a two-year period. Revenue from
service contracts is recognized as earned over the lives of the contracts. Additional information shows that Unearned
Service Contract revenue at January 1, 2019 is at P 300,000; cash Receipts from service contract sold is at P 490,000
recorded as revenue; service contract revenue actually realized is at P 430,000.
The company provides a special bonus for its executive officers based on 10% of its net income before bonus but after
income tax. Net income for the year before tax and before adjustments related to the previous information is at P
1,016,250. Assume income tax rate is 35%. Accrual is yet to be made on the bonuses.
15. What is the adjusted balance of the liability for unredeemed coupons?
a. P 134,750 b. P 109,750 c. P 66,000 d. P 47,250
16. What is the adjusted balance of the unearned service contract?
a. P 240,000 b. P 300,000 c. P 360,000 d. P 490,000
17. What is the adjusted balance of the accrued officer bonuses accounts?
a. P 61,032 b. P 67,358 c. P 90,909 d. P 100,000
ANSWERS IN PROBLEM 7
Total Face Value of Coupon Issued during the year P 250,000
Add: Handling Cost 10% 25,000
Total 275,000
Percentage Expected to be redeemed 75%
Required Estimated Expense 206,250
Actual Cost / Reimbursements to distributors (140,250)
Estimated liability of discount coupon, end 66,000
Problem 8
You are auditing the financial statements of Puerto Rico Inc. for the year ended, December 31, 2019. The liability portion
of the company’s balance sheet shows the following information:
Current Liabilities
Accounts Payable P 250,000
Warranty Liability 10,000
Non-Current Liability
Liability Under Finance Lease 540,000
Bonds Payable 851,706
Upon further investigation on the liability accounts, you discovered the following:
a. Accounts Payable
You rendered purchase cut-off on the company’s purchases transactions from December 15 to January 15. The
results of such cut-off are summarized below:
Receiving Report No. Amount Invoice Date Shipment Date Shipping Terms
2631 P 5,500 12/15.2019 12/15/2019 FOB SUPPLIER
2632 6,000 12/17/2019 12/20/2019 FOB SUPPLIER
2633 7,900 12/21/2019 12/21/2019 FOB BUYER
2635 8,900 12/26/2019 12/30/2019 FOB BUYER
2636 10,000 12/30/2019 12/30/2019 FOB SUPPLIER
2637 8,000 12/30/2019 01/02/2020 FOB SUPPLIER
2638 9,500 12/31/2019 12/31/2019 FOB BUYER
2639 10,500 01/02/2020 01/05/2020 FOB BUYER
2640 11,000 01/05/2020 01/10/2020 FOB SUPPLIER
2641 12,000 01/07/2020 01/11/2020 FOB SUPPLIER
2642 15,000 01/10/2020 01/15/2020 FOB BUYER
The inventory count procedures were done on December 31, 2019 and documents cut-off shows that the last
receiving report used and recorded for the current year by the company is RR number 2635. Receiving Report
number 2634 is for the shipment made on December 27, 2019. The related invoice amounting to P 12,500, was
misplaced and was recovered only on January 5, 2020 and was recorded on this date.
b. Warranty Liability
The company has two-year warranty on its products. The warranty estimated in the past years were at 5% of the
net sales. During the current year, because of increased returns, the company decided to increase warranty
estimates at 6% of its total net sales and one-third of the year following the year of sale. The summary of the
company’s total sales and actual warranty cost incurred for the past three years are presented below, assuming
that sales are evenly incurred throughout the year.
2017 2018 2019
Net Sales P 8,000,000 P 9,050,000 P 10,550,000
Actual Warranty Cost Paid 375,000 467,500 310,000
The company is yet to update its warranty liabilities as of December 31, 2019.
c. Other Accruals
You also conducted a search for unrecorded liabilities by reviewing the voucher register several days before and
after the balance sheet date. Your review is summarized below:
ANSWERS IN PROBLEM 8
a. Accounts Payable
You rendered purchase cut-off on the company’s purchases transactions from December 15 to January 15. The
results of such cut-off are summarized below:
Receiving Amount Invoice Date Shipment Shipping Terms
Report No. Date
2631 P 5,500 12/15.2019 12/15/2019 FOB SUPPLIER Okay = A/P
2632 6,000 12/17/2019 12/20/2019 FOB SUPPLIER Okay = A/P
2633 7,900 12/21/2019 12/21/2019 FOB BUYER Okay = A/P
2635 8,900 12/26/2019 12/30/2019 FOB BUYER CUT OFF on records. Okay = A/P
2636 10,000 12/30/2019 12/30/2019 FOB SUPPLIER Not Okay = A/P (Added)
2637 8,000 12/30/2019 01/02/2020 FOB SUPPLIER Not Recorded - Okay = No A/P
2638 9,500 12/31/2019 12/31/2019 FOB BUYER Not Recorded - Okay = No A/P
2639 10,500 01/02/2020 01/05/2020 FOB BUYER Not Recorded - Okay = No A/P
2640 11,000 01/05/2020 01/10/2020 FOB SUPPLIER Not Recorded - Okay = No A/P
2641 12,000 01/07/2020 01/11/2020 FOB SUPPLIER Not Recorded - Okay = No A/P
2642 15,000 01/10/2020 01/15/2020 FOB BUYER Not Recorded - Okay = No A/P
The inventory count procedures were done on December 31, 2019 and documents cut-off shows that the last
receiving report used and recorded for the current year by the company is RR number 2635. Receiving Report
number 2634 is for the shipment made on December 27, 2019. The related invoice amounting to P 12,500, was
misplaced and was recovered only on January 5, 2020 and was recorded on this date.
Note that our basis of A/P is the Shipping term vs. Shipment Date (For FOB Supplier or FOB Shipping Point) . Per
Record as of December, the cut-off is 2635, beyond that, it was assumed to be recorded January next period.
Unadjusted A/P 250,000
Add: Unrecorded (RR 2636)- In transit 10,000
Unrecorded 2634 12,500
ADJUSTED A/P 272,500
b. Warranty Liability
The company has two-year warranty on its products. The warranty estimated in the past years were at 5% of the
net sales. During the current year, because of increased returns, the company decided to increase warranty
estimates at 6% of its total net sales and one-third of the year following the year of sale. The summary of the
company’s total sales and actual warranty cost incurred for the past three years are presented below, assuming
that sales are evenly incurred throughout the year.
2017 2018 2019
Net Sales P 8,000,000 P 9,050,000 P 10,550,000
Actual Warranty Cost Paid 375,000 467,500 310,000
The company is yet to update its warranty liabilities as of December 31, 2019.
c. Other Accruals
You also conducted a search for unrecorded liabilities by reviewing the voucher register several days before and
after the balance sheet date. Your review is summarized below:
Additional Accruals:
Voucher (see above) P 23,600
Accrued Interest on Finance Lease (see table in d below) 76,467
Accrued Interest on bonds (unpaid nominal) (see e below) 24,000
Additional Accrual 124,067
e. Bonds Payable
The company issued P 800,000 of a 12% face value bonds for P 851,706. The bonds were dated and issued on
April 1, 2019, are due March 31, 2023, and pay interest semiannually on September 30 and March 31. The
company sold the bonds to yield 10%.
Problem 9
The following schedule of liabilities were provided to you by the accountant of Delight Inc. in line with your audit of its
various liabilities as of and for the period ended December 31, 2019:
Accounts Payable (Note 1) P 534,000
Premium Payable (Note 2) 242,000
10%, Bonds Payable (Note 3) 2,000,000
Lease Liability (Note 4) 3,000,000
Note 1. The purchases journal included the following transactions several days before and after December 31, 2019.
December 2019 Purchase Journal
Purchase Invoice Date Receiving Report Number/Date Amount Terms
December 26, 2019 1012 / December 30, 2019 P 50,000 FOB Destination
December 28, 2019 1014/ January 2, 2020 40,000 FOB Shipping Point
December 30, 2019 1015/ January 2, 2020 35,000 FOB Destination
December 30, 2019 1017/ January 4, 2020 25,000 FOB Shipping Point
January 2020 Purchase Journal
Purchase Invoice Date Receiving Report Number/Date Amount Terms
December 29, 2019 1013 / December 30, 2019 P 65,000 FOB Destination
December 30, 2019 1016/ January 3, 2020 40,000 FOB Shipping Point
January 2,2020 1018/ January 3, 2020 30,000 FOB Shipping Point
Note 2. The Premium Payable balance was the accrued amount in December 31, 2018 for a promotional program of the
company which started in 2018. For every 5 product labels the customer surrenders plus P 50, the customer received a
specially designed wall clock which the company purchases at a cost of P 160 per unit. Details about the said
promotional program in 2018 and 2019 are as follows:
2018 2019
Sales in Units 50,000 60,000
Premiums Purchased in Units 3,000 6,000
Inventory of Premiums at the end of each year 1,200 2,100
The company estimates that from the labels issued with product sold, 40% shall be presented for the said promotional
plan redemption.
Note 3. The 10% convertible bonds payable maturing on December 31, 2020, were issued on January 1, 2018 at P
2,050,000. The prevailing market rate of interest for similar securities at the time without conversion option was at 12%.
The issuance was recorded as debit to cash for the proceeds and credit to bonds payable at face value with the
difference being charged to interest expense. The bonds were convertible to ordinary shares on the basis of P 1,000
bonds to ten, P 50 par value ordinary shares. Interest are payable on the bonds annually every December 31. On
December 31, 2019 after the payment of the annual interest which was recorded appropriately, half of the bonds were
converted to ordinary shares. The conversion is yet to be recorded by Delight Inc.
Note 4. The lease liability is for a five-year lease agreement for an equipment of Joy Corporation on January 1, 2019. The
equipment which had a useful life of 10 years had a fair value on January 1, 2019 at P 2,400,000. There is no provision
for transfer ownership to Delight nor is there any agreement for a bargain purchase option at the end of the lease term.
The lease agreement requires Delight to pay P600,000 annually starting December 31, 2019. The implicit lease rate
known to both parties was at 8% while the incremental borrowing rate is 10%. The lease was recorded by the company
as a debit to Equipment and credit to Lease Liability at P 3,000,000, which is the total payment to be made for the lease.
The company is yet to record the first lease payment made on December 31, 2019.
ANSWERS IN PROBLEM 9
Note 1. The purchases journal included the following transactions several days before and after December 31, 2019.
December 2019 Purchase Journal
Purchase Invoice Date Receiving Report Amount Terms AUDIT NOTES
Number/Date
December 26, 2019 1012 / December 30, P 50,000 FOB Destination Okay – December RR
2019
December 28, 2019 1014/ January 2, 2020 40,000 FOB Shipping Point Okay- Dec Invoice
December 30, 2019 1015/ January 2, 2020 35,000 FOB Destination To be deducted, recorded
in Dec. but received Jan.
December 30, 2019 1017/ January 4, 2020 25,000 FOB Shipping Point Okay – Dec Invoice
January 2020 Purchase Journal
Purchase Invoice Date Receiving Report Amount Terms
Number/Date
December 29, 2019 1013 / December 30, P FOB Destination Added- Received Dec but
2019 65,000 recorded January
December 30, 2019 1016/ January 3, 2020 40,000 FOB Shipping Point Added- Invoice Dec,
recorded January
January 2,2020 1018/ January 3, 2020 30,000 FOB Shipping Point Okay Invoiced January,
recorded January
Note: In this problem, FOB Destination is based on RR Date, while FOB Shipping Point is based on Invoice Date.
Unadjusted balance P 534,000
RR # 1015 (35,000)
RR # 1013 65,000
RR # 1016 40,000
Adjusted Accounts Payable 604,000
Note 2. The Premium Payable balance was the accrued amount in December 31, 2018 for a promotional program of the
company which started in 2018. For every 5 product labels the customer surrenders plus P 50, the customer received a
specially designed wall clock which the company purchases at a cost of P 160 per unit. Details about the said
promotional program in 2018 and 2019 are as follows:
2018 2019
Sales in Units 50,000 60,000
Premiums Purchased in Units 3,000 6,000
Inventory of Premiums at the end of each year 1,200 2,100
The company estimates that from the labels issued with product sold, 40% shall be presented for the said promotional
plan redemption.
Note 3. The 10% convertible bonds payable maturing on December 31, 2020, were issued on January 1, 2018 at P
2,050,000. The prevailing market rate of interest for similar securities at the time without conversion option was at 12%.
The issuance was recorded as debit to cash for the proceeds and credit to bonds payable at face value with the
difference being charged to interest expense. The bonds were convertible to ordinary shares on the basis of P 1,000
bonds to ten, P 50 par value ordinary shares. Interest are payable on the bonds annually every December 31. On
December 31, 2019 after the payment of the annual interest which was recorded appropriately, half of the bonds were
converted to ordinary shares. The conversion is yet to be recorded by Delight Inc.
To get the Value of the bond at issuance, we will use the Residual Method as follows:
Total Proceeds at Issuance P 2,050,000
PV bonds without conversion (P 2M x .71178) P 1,423,560
(P 2M x .10 x 2.40183) 480,366 1,903,926
Bond Conversion Option 146,073
Note 4. The lease liability is for a five-year lease agreement for an equipment of Joy Corporation on January 1, 2019. The
equipment which had a useful life of 10 years had a fair value on January 1, 2019 at P 2,400,000. There is no provision
for transfer ownership to Delight nor is there any agreement for a bargain purchase option at the end of the lease term.
The lease agreement requires Delight to pay P600,000 annually starting December 31, 2019. The implicit lease rate
known to both parties was at 8% while the incremental borrowing rate is 10%. The lease was recorded by the company
as a debit to Equipment and credit to Lease Liability at P 3,000,000, which is the total payment to be made for the lease.
The company is yet to record the first lease payment made on December 31, 2019.
PV of Minimum Lease Payments (600,000 x PVA 8%(lower)5 years= P 600,000 x 3.993 = 2,395,626
Fair Value 2,400,000
So use the lower value of P 2,395,626, without any other components, this could be the value of Right to Use Asset
and the Initial Value of Lease Liability.
Date Nominal Interest Effective Interest Amortization Balance
01/01/2019 2,395,626
12.31.2019 600,000 191,650 (408,350) 1,987,276
Depreciation Expense of the Leased Asset = 2,395,626 / 5 years = P 479,125
Problem 10
You were assigned to audit the financial statements of People Corporation for the year ended December 31, 2019. The
liability portion of the company’s balance sheet shows the following information:
Non-Current Liabilities
Notes Payable P 7,195,000
Liability Under Capital Lease 2,240,000
Current Liabilities
Accounts Payable 1,840,500
Warranty Liability ( 42,500)
Deferred Tax Payable 250,000
Upon further investigation on the liabilities account, you discovered the following information:
a. The principal amount of the Notes Payable is P 8,000,000 and bears interest of 12% payable every March 31. The
note is dated April 1, 2017 and is due 5 years after its issuance. The prevailing market rate of interest when the
notes was issued was at 15%. The entry made by the client on April 1, 2017 was to debit cash and credit notes
payable for the cash consideration received. No other entry has been made since apart from the annual interest
payments every march 31, being debited to interest expense and credit to cash.
b. The capitalized lease is for eight-year period beginning December 31, 2016. Equal annual payments of P
1,200,000 are due on December 31 of each year beginning December 31, 2016. The implicit rate of the lease
known to People is 10%. The asset was recorded at the inception of the lease at the cash selling price of the
lease asset. The annual payments related to the lease transaction has been recorded by the company as debit to
Liability under Capital Lease account.
c. The result of the purchase cut-off on the company’s purchases transactions from December 15 to January 15
you have rendered is shown below:
Receiving Report No. Invoice Date Receiving Report Date Shipment Terms Amount
65212 12/15/2019 12/15/2019 FOB Shipping Point P 15,000
65213 12/17/2019 12/20/2019 FOB Shipping Point 16,000
65214 12/21/2019 12/21/2019 FOB Destination 17,500
65215 12/26/2019 12/30/2019 FOB Destination 20,000
65216 12/30/2019 01/02/2020 FOB Shipping Point 30,000
65217 12/30/2019 01/02/2020 FOB Shipping Point 28,000
65218 12/31/2019 01/03/2020 FOB Destination 19,000
65219 01/02/2020 01/05/2020 FOB Buyer 30,500
65220 01/05/2020 01/10/2020 FOB Shipping Point 41,000
65221 01/07/2020 01/11/2020 FOB Shipping Point 22,000
65222 01/10/2020 01/15/2020 FOB Destination 25,000
Investigation revealed that the last receiving report recorded in the voucher register was RR65220.
d. The company has a two-year warranty on its products. The warranty estimates in the past years were at 5% of
the net sales. During the current year, because of the increase returns, the company decided to increase
warranty estimates to 8% of its total net sales, 70% of which is expected to be incurred during the year of sales
and the balance on the year following the year of sale. Presented below are information relevant to your audit:
2017 2018 2019
Net Sales P 24,000,000 P 27,150,000 P 31,650,000
Actual Warranty Costs Paid 1,150,000 1,450,000 1,950,000
The company is yet to update its warranty liabilities as of December 31, 2019.
29. What is the correct balance of notes Payable as of December 31, 2019?
a. P 7,314,250 b. P 7,451,388 c. P 7,569,669 d. P 7,609,096
30. What was the initial amount debited to the asset account at the inception of the finance lease?
a. P 2,240,000 b. P 3,440,000 c. P 5,640,000 d. P 7,040,000
31. How much is the total non-current liabilities to be presented in the 2019 balance sheet?
a. P 8,389,565 b. P 10,550,813 c. P 10,800,813 d. P 11,370,709
32. What is the correct Accounts Payable as of December 31, 2019?
a. P 1,722,000 b. P 1,750,000 c. P 1,778,000 d. P 1,797,000
33. What is the correct Warranty Expense ins 2019?
a. P 582,000 b. P 1,582,500 c. P 1,950,000 d. P 2,532,000
34. How much should be presented as current liabilities in the balance sheet of People as of December 31, 2019?
a. P 2,289,500 b. P 3,871,896 c. P 3,109,396 d. P 5,539,500
ANSWERS IN PROBLEM 10
a. The principal amount of the Notes Payable is P 8,000,000 and bears interest of 12% payable every March 31. The
note is dated April 1, 2017 and is due 5 years after its issuance. The prevailing market rate of interest when the
notes was issued was at 15%. The entry made by the client on April 1, 2017 was to debit cash and credit notes
payable for the cash consideration received. No other entry has been made since apart from the annual interest
payments every march 31, being debited to interest expense and credit to cash.
PV of the Note:
PV of the Principal (P 8,000,000 x .4971 ) P 3,977,414
PV of Interest (P8,000,000 x .12 x 3.352) 3,218,069
PV of the Notes at Issuance 7,195,483
b. The capitalized lease is for eight-year period beginning December 31, 2016. Equal annual payments of P
1,200,000 are due on December 31 of each year beginning December 31, 2016. The implicit rate of the lease
known to People is 10%. The asset was recorded at the inception of the lease at the cash selling price of the
lease asset. The annual payments related to the lease transaction has been recorded by the company as debit to
Liability under Capital Lease account.
The Amount Initially Capitalized here is equal to (Ending balance + Total Payments)
Initial Amount of Capital Lease Liability = 2,240,000 + ( 1,200,000 x 4) = P 7,040,000
AND ALSO AMOUNT CAPITALIZED AS AN ASSET
DATE PAYMENTS EFFECTIVE AMORTIZATIO BALANCE
INTEREST N
BALANCE 7,040,000
12.31.2O16 1,200,000 (1,200,000) 5,840,000
12.31.2O17 1,200,000 584,000 (616,000) 5,224,000
12.31.2O18 1,200,000 522,400 (677,600) 4,546,400
12.31.2O19 1,200,000 454,640 (745,360) 3,801,040
12.31.2O20 1,200,000 380,104 (819,896) 2,981,144
Current Long Term
c. The result of the purchase cut-off on the company’s purchases transactions from December 15 to January 15
you have rendered is shown below:
Receiving Invoice Date Receiving Report Shipment Terms Amount
Report No. Date
65212 12/15/2019 12/15/2019 FOB Shipping Point P 15,000 OK= SP is Invoice date and
recorded in December
65213 12/17/2019 12/20/2019 FOB Shipping Point 16,000 OK= SP is Invoice date and
recorded in December
65214 12/21/2019 12/21/2019 FOB Destination 17,500 OK= D is RR date and
recorded in December
65215 12/26/2019 12/30/2019 FOB Destination 20,000 OK= D is RR date and
recorded in December
65216 12/30/2019 01/02/2020 FOB Shipping Point 30,000 OK= SP is Invoice and
recorded in December
65217 12/30/2019 01/02/2020 FOB Shipping Point 28,000 OK= SP is Invoice and
recorded in December
d. The company has a two-year warranty on its products. The warranty estimates in the past years were at 5% of
the net sales. During the current year, because of the increase returns, the company decided to increase
warranty estimates to 8% of its total net sales, 70% of which is expected to be incurred during the year of sales
and the balance on the year following the year of sale. Presented below are information relevant to your audit:
2017 2018 2019
Net Sales P 24,000,000 P 27,150,000 P 31,650,000
Actual Warranty Costs Paid 1,150,000 1,450,000 1,950,000
The company is yet to update its warranty liabilities as of December 31, 2019.
Problem 11
Angel Inc. had the following unadjusted liability balances as of December 31, 2019:
Accounts Payable P 540,000
Premium Payable 140,000
Deferred Taxes ( 42,000)
10% Bonds Payable 5,500,000
Audit Notes:
a. Accounts Payable is net of P 50,000 debit balance in one of the company’s suppliers accounts due to an
overpayment made. The agreement with the supplier calls for the supplier to deliver additional merchandise to
offset the overpayment. No deliveries made as of the balance sheet date.
b. The company started a promotional program in 2018 where an eco-friendly tote bag shall be given to customers
upon presenting 6 product labels plus P 5 cash. The following information are deemed relevant in relation to the
program.
2018 2019
Sales P 7,700,000 P 8,400,000
Total costs of Tote Bags Purchased ( P 25 each) 375,000 500,000
Tote Bags Actually distributed 9,000 19,000
Estimated tote bags to be distributed the following year 7,000 5,000
The balance of the premium liability account reflects the accrual at the end of the previous year (2018), no entry
had been made during the current year affecting the said account.
c. Deferred tax balance appearing above is the result of deferred tax credited by the premium liability in the
previous year which is tax deductible upon settlement. Adjustments are yet to be made to the said account to
reflect the movement of the account balance during the year. Moreover, another temporary difference arising
during the year created by the company’s excess tax depreciation over financial depreciation for the period
amounted to P 150,000. The income tax rate is at 30%.
d. The balance of the bonds payable account was the total proceeds from its issuance on January 1, 2019. The
bonds which shall mature on December 31, 2023 have a total face value of P 5,000,000 and are convertible into
ordinary shares at a rate of P 1,000 bonds to ten, P 50 par value ordinary shares. On the issuance date, the
effective yield rate on similar securities without the convertibility option was at 8% while each ordinary share was
selling at P 75 per share. The only other entry made by the client in relation to the bonds was the payment of
interest on December 31, as interests are payable annually every December 31.
35. What is the correct premium expense for 2019?
a. P 320,000 b. P 480,000 c. P 380,000 d. P 340,000
36. What is the total deferred tax liability as of December 31, 2019?
a. P 30,000 b. P 15,000 c. P 45,000 d. P 75,000
37. What is the total current liability to be reported in 2019 financial statements?
a. P 735,000 b. P 590,000 c. P 890,000 d. P 690,000
38. What is the correct credit to Shareholders’ account as a result of issuance of Bonds on January 2019?
a. P 100,729 b. P 399,271 c. P 168,787 d. P 500,000
39. Assuming that the bonds were converted on January 2, 2021, what is the total credit to share premium as the
result of the conversion?
a. P 2,761,439 b. P 2,831,213 c. P 2,931,213 d. P 2,858,439
40. Assuming that the bonds were retired on January 2, 2021 at 105, when the prevailing market rate of interest for
similar securities without conversion option is at 12%, how much should be reported in the profit or loss as a
result of the retirement?
36. Deferred tax balance appearing above is the result of deferred tax credited by the premium liability in the
previous year which is tax deductible upon settlement. Adjustments are yet to be made to the said account to
reflect the movement of the account balance during the year. Moreover, another temporary difference arising
during the year created by the company’s excess tax depreciation over financial depreciation for the period
amounted to P 150,000. The income tax rate is at 30%.
The Balance of Premium (5,000 units x P 20 x .30) is Deferred Tax Asset 30,000
Additional related to Depreciation - Deferred Tax Liability (150,000 x .30) 45,000
Note that the balance in Deferred Tax Liability is closed per our entry this year in no. 35 above
38– 40 The balance of the bonds payable account was the total proceeds from its issuance on January 1, 2019. The
bonds which shall mature on December 31, 2023 have a total face value of P 5,000,000 and are convertible into
ordinary shares at a rate of P 1,000 bonds to ten, P 50 par value ordinary shares. On the issuance date, the effective
yield rate on similar securities without the convertibility option was at 8% while each ordinary share was selling at P
75 per share. The only other entry made by the client in relation to the bonds was the payment of interest on
December 31, as interests are payable annually every December 31.
Conversion Entry:
Bonds Payable 5,000,000
Premium on Bonds Payable 257,710
Conversion Option 100,729
Ordinary Share Capital (5M/1,000=5,000 x 10 x P 50) 2,500,000
Share Premium Ordinary 2,858,439
Retirement Entry:
Get PV at 12% at n = 3 yrs. PV of P = 5M x .711780 = 3,558,901
PV of I (5M x .20 x 2.40183) =1,200,916
PV of bonds at 12% 4,759,817
Book Value (see Table) 5,257,710
Gain on retirement (Profit or loss) 497,893
Entry:
Bonds Payable 5,000,000
Premium on Bonds Payable 257,710
Conversion Option 100,729
Cash 4,759,817
Gain on Retirement 497,893
Share Premium – Conversion Option 100,729
Problem 12
In the course of your audit of Sunlight Corporation’s December 31,2020 liabilities, the following schedule is presented to
you by the accountant.
Accounts Payable P 225,000
Estimated Premium Liability ?
Estimated Warranties Payable 220,750
Accrued Salaries 240,400
Deferred Tax Liability 200,000
Notes Payable, 20% due 4/1/20 500,000
Interest Payable on Notes Payable 75,000
Serial bonds Payable,12% 1,000,000
TOTAL ?
Audit Notes:
a. The accounts payable balance is net of a P 35,000 advances made to a supplier for merchandise to be delivered
in 2021.
Moreover, the following summarizes the result of your purchases cut-off procedure. You have ascertained that
all related inventories were correctly accounted for.
Receiving Report Amount Suppliers’ Shipment Receiving Report Shipment Terms
(RR) Number Date Date
Last entries on the December 2020 Journal
0633 P 5,500 12/26/2020 12/28/2020 FOB Destination
0634 6,000 12/28/2020 01/02/2021 FOB Destination
0635 7,900 12/28/2020 12/30/2020 FOB Shipping Point
First entries on the January 2021 Journal
0636 8,900 12/28/2020 01/03/2021 FOB Shipping Point
0637 10,000 12/29/2020 12/31/2020 FOB Destination
0638 15,000 01/03/2021 01/01/2021 FOB Shipping Point
b. The company started a promotional program in 2020 whereby for every five product labels, customer
surrenders with P 25 cash, a customer shall receive a specially designed t-shirt. The company sold 40,000 units
of the product covered by the said promotional program and purchased 4,500 t-shirts in an anticipation of the
premium’s redemption which the company appropriately debited to premium inventory account upon purchase.
Each t-shirt costs P 95. The company estimates that 60% of the product labels accompanying sales shall
ultimately be presented for the redemption of the premium. 1,200 t-shirts remained on hand as of December
31, 2020. Actual redemption during the year were appropriately recorded while accrual at year end is yet to be
made.
c. The company has a two-year warranty on its products. The warranty estimate is at 8% of the peso sales. Two-
thirds of which is expected to be incurred in the year of sales and one-third on the year following the year of
sale. The summary of the company’s sales and actual warranty costs for the past three years are presented
below. (Assume sales were made evenly throughout the year)
2018 2019 2020
Net Sales P 4,000,000 P 4,525,000 P 5,275,000
Actual Cost Paid 127,500 233,750 285,250
The company is yet to update its warranty liabilities as of December 31, 2020.
d. The deferred tax liability is net of deferred tax asset of P 50,000, and has resulted from excess tax depreciation
over financial depreciation and is expected to be reversed the following year.
e. The 20% Notes Payable was to a bank and was originally dated April 1, 2018, three- year term and interest is
payable annually every April 1. On December 31, 2020, the company entered an agreement with the bank to
refinance the notes by issuing another 5-year note, the proceeds of which shall be used to refinance the
obligation maturing currently. As part of the agreement, the company if to offer an asset as a collateral of the
loan and that the loan will be set at 75% of the fair market value of the collateral, which has P 600,000 fair
market value at December 31, 2020. Due to the nature of the asset, the fair value of the collateral will not be
expected to change materially at any time up to the execution of the refinancing agreement.
f. The 12% bonds payable matures at the rate of P 200,000 annually every December 31. Interests are also payable
every December 31. The last P 200,000 bonds will be paid on December 31, 2026.
Problem 13
An excerpt of the Joint Company’s trial balance for the period ended December 31, 2021 revealed the following liability
balances:
Accounts Payable P 420,000
Provision for Warranties 273,000
Accrued Salaries Expense 770,000
Bonds Payable, 10% maturing December 31, 2024 2,000,000
Audit Notes:
a. Accounts Payable balance refers to the accounts of suppliers of the merchandise. A purchase cut-off procedure
was conducted to entries several days before and after the balance sheet date in the purchase journal. The
corresponding inventories were appropriately included/excluded in the count. The result of the cut-off
procedures are as follows:
December 2021 entries on the purchase journal
Receiving Receiving Amount Remarks
Report No. Report Date
2132 December 18 P 26,000 FOB Shipping Point
2133 December 22 40,000 FOB Destination
2134 December 28 19,000 FOB Destination (From a Consignor)
2135 January 2 24,000 FOB Destination (In Transit)
January 2022 entries on the purchase journal
Receiving Receiving Amount Remarks
Report No. Report Date
2817 December 31 P 25,000 FOB Destination
2818 January 2 23,000 FOB Destination (In Transit)
2819 January 3 41,000 FOB Shipping Point
b. The company’s inventories are covered by a two-year warranty program. Sales in 2020 and in 2021 covered by
the said warranty are 2,600 units and 3,200 units, respectively. The company estimates that 20% of the units
sold will be returned for repairs in the year of sale and 30% of the units sold will be returned for repairs on the
year following the year of sale. The company also estimates that the cost per unit returned for repairs will be P
300 for parts and labor. The balance in the provision for warranties account is the amount accrued in the prior
period. No entry has been made by the company during the year in relation to the warranty except for the
actual repair costs incurred during the year in the amount of P 388,000, which was charged to current years
warranty expense.
c. The accrued salaries expense included employee unused compensation absences amounting to P 560,000,
which was the accrued amount at the end of the prior year and employee incentive bonus amounting to P
210,000, which was 10% of the net income after 30% income tax and after bonus (before any adjustments)
As of December 31, 2020, the employees had an accumulated 1,750 days of unused vacation and sick leaves. In
2021, employee exercises 1,200 days from the leaves carried forward in the prior year. Additional 1,400 vacation
and sick leaves were earned by the employee in 2021. The average daily salary rate of employees increased by
10% during the year. The company estimates that from the cumulative unused employee leaves, only 80% shall
probably be exercised by the employees.
d. The bonds were issued on January 1, 2020 when the prevailing market rate was at 12%. The bonds pay interest
every December 31. The company recorded the bonds issuance by debiting cash for the cash consideration
received, crediting bonds payable account at face value. The difference was charged to interest expense. The
only other entry made by the client were the payment of annual interest on December 31, 2020 and 2021.
46. What is the adjusted Accounts Payable balance as of December 31, 2021?
a. P 402,000 b. P 400,000 c. P 425,000 d. P 401,000
47. What is the adjusted provision for warranties balance at December 31, 2021?
a. P 365,000 b. P 426,000 c. P 209,000 d. P 192,000
48. What is the correct accrued salaries expense related to the accrued compensated absences as of December 31,
2021? a. P 686,400 b. P 492,800 c. P 858,000 d. P 624,000
49. What is the correct carrying value of the bonds payable as of December 31, 2021?
a. P 1,903,927 b. P 1,878,506 c. P 1,932,398 d. P 1,964,286
50. What is the correct accrued salary expense related to the accrued bonus as of December 31, 2021?
a. P 195,227 b. P 196,890 c. P 197,234 d. P 198,765
ANSWERS TO PROBLEM 13
46.
Accounts Payable, unadjusted P 420,000 AJE # 1
RR 2134 Consigned Goods (19,000) Accounts Payable 18,000
RR 2135 In Transit – FOB Destination (24,000) Purchases 18,000
RR 2136 In Transit – FOB SP 25,000
Adjusted A/P 402,000 47.
AJE # 2 Provision for Warranties, beg P 273,000
Warranty Expense (365,000- 273,000) 92,000 Warranty Expense (3,200 u x .50 x P 300) 480,000
Warranty Liability Actual Warranty Costs (388,000)
92,000 Warranty Liability , end 365,000
48.
2020 Unused leaves earned 1,750
2020 Availed leaves (1,200)
2021Earned leaves 1,400
Accumulated leaves 1,950
Exercisable Rate .80
Leaves expected to be exercised in days 1,560
2021 Rate per day (P 400 x 1.10) P 440
Accrued Compensation absences P 686,400
2020 rate per day ( P 560,000 / (1750 x .8) = P 400
AJE # 3
Salary Expense (686,400 – 560,000) 126,400
Accrued Salary Payable 126,400
49.
PV of the bonds at issuance:
PV of P = 2,000,000 x .567426 = P 1,134,854
PV of I = 2,000,000 x .10 x 3.604776 = 720,955
PV of Bonds 1,855,809
50.
a. The accrued salaries expense included employee unused compensation absences amounting to P 560,000,
which was the accrued amount at the end of the prior year and employee incentive bonus amounting to P
210,000, which was 10% of the net income after 30% income tax and after bonus (before any adjustments)
Problem 14
You are auditing the financial statements of Labada, Inc., a company which carries a wide variety of laundry appliances
and supplies, for the year ended December 31, 2019. Information of the company’s varied liability accounts are as
follows:
a. Premium items are being offered to its Class A (residential use) washing machines and dryers. Customers shall
receive a coupon for each P 50 spent on Class A laundry appliance. Customers may exchange 400 coupons and a
P 1,000 for a dryer. Labada pays P 5,100 for each dryer and estimates that 60% of the coupons given to the
customers will be redeemed. A total of 4,500 dryers to be used on the premium program were purchased during
the year, and there were 1,680,000 coupons redeemed during the year.
b. Class B laundry appliances are sold with a two-year warranty for replacement of parts and labor. The estimated
warranty costs based on past experience is 1% of sales to be incurred in the year of sales and 2% of sales to be
incurred on the year following the year of sale. Replace parts and labor for warranty work totaled P 1,640,000
during 2019.
c. The company provides key employees 5% bonus based on the net income of the company after tax. The same is
yet to be accrued at year end.
d. Labada uses the accrual method to account for the warranty and premium cost for financial reporting purposes.
Labada sales in 2019 totaled P 280,000,000, 60% of which is attributed to Class A laundry appliance sales.
e. The company reported the following balances at year end.
Inventory of Premium Items P 1,530,000
Premium Expense 17,220,000
Warranty Expense 1,640,000
Net Income, before 35% income tax and before any adjustments 80,164,000
52.
Class B Sales = P 280,000,000 x .40= P 112,000,000
Warranty Rate (1%+2%) .03
Warranty Expense P 3,360,000
Actual Warranty Paid ( 1,640,000)
Warranty Liability 1,720,000
53.
Unadjusted Net Income P 80,164,000
Adjustment for Additional Premium Expense ( 3,444,000)
Adjustment for Additional Warranty Expense (3,360,000- 1,640,000) ( 1,720,000)
Adjusted Net Income before Tax 75,000,000
Problem 15
Mimi Inc. reported the following information in its long- term liability portion of the Statement of Financial Position for
the period ended, December 31, 2020:
12% Bonds Payable P 5,500,000
10% Notes Payable – Bank 2,500,000
Deferred Tax Liability, net 340,000
Audit Notes:
a. The bonds payable with a face value of P 5M was issued with a conversion option into 20,000, P 100 par value
ordinary shares at any time until its maturity on June 30, 2025. These were issued on June 30, 2020 when the
prevailing yield rate on similar debt security without conversion option was 10%. The company recorded the
transaction as debit to Cash and credit to Bonds Payable for the total consideration received. Interest are being
paid semi-annually every December 31 and June 30 and were recorded appropriately. No other entries were
made by the client affecting the carrying value of the bonds. Half of the bonds were retired on December
31,2021 at pa value. The prevailing yield rate on similar debt instruments without conversion option on this date
was 14%. The transaction is yet to be recorded at year end.
b. The 10% note payable to the bank is dated September 1, 2020 and is payable at the rate of P 500,000 annually
every September 1 of each year starting 2021. Interest is also payable every September 1.
c. The deferred tax liability at the beginning of the year resulted to the following cumulative temporary difference
as of December 31, 2020:
Cumulative temporary difference creating future taxable amount P 1,050,000
Cumulative temporary difference creating future deductible amount 200,000
At the end of the year the balances of cumulative temporary difference were:
Cumulative temporary difference creating future taxable amount P 1,550,000
Cumulative temporary difference creating future deductible amount 300,000
Income tax rate is at 40%.
57.
59.
Income before Tax 1,000,000
Cumulative temporary difference creating future deductible amount (300,000-200,000) 100,000
Cumulative temporary difference creating future taxable amount (1,550,000 – 1,050,000) (500,000)
Taxable Income 600,000
Tax Rate 40%
Current Tax Expense/ Income Tax Payable 240,000
60.
Cumulative temporary difference creating future taxable amount at year end (1,550,000 x 40%) = 620,000
61.
Bonds Payable (see table) 2,644,659
Notes Payable (long term) 1,500,000
Deferred Tax Liability 620,000
Total Long-Term Liability 4,764,659
Problem 16
On January 1, 2019, Kelly Corporation issued a 3-year, 4,000 convertible bonds at face value of P 1,000 per bond.
Interest is to be paid annually in arrears at a stated coupon rate of 6%. Each bond is convertible, at the holders’ option,
into 40, P10 par value ordinary shares at any time up to maturity. On the date of issuance, the prevailing market interest
rate for similar debt without the conversion option was 9%. On the same date, the market price of one common share
was P 12.
62. What is the equity component of the compound instruments?
a. P 110,091 b. P 211,093 c. P 303,755 d. P 388,766
63. What is the interest expense to be reported by Kelly’s income statement for the year ended December 31,
2021? a. P 303,113 b. P 332,662 c. P 341,002 d. P 350,092
64. What is the credit to share premium account assuming that 3,000 of the bonds were converted on January 1,
2021? a. P 1,510,432 b. P 1,945,248 c. P 2,017,432 d. 2,289,908
65. Assuming that on the issuance date, the company paid transactions costs totaling to P 151,469, and as a result,
the yield rate increased by 1.5%, what is the equity component of the compound instrument?
a. P 292,253 b. P 303,755 c. P 443,722 d. P 315,257
66. Using the assumption in the previous item, and assuming that 4,000 bonds were retired on January 1, 2021
when the prevailing yield rate on the bonds without conversion option was at 9% at P 4,000,000, what is the loss
to be reported in the income statement?
a. P 0 b. P 52,804 c. P 162,895 d. P 330,275
64.
Book Value of the Bonds P 3,889,909
Conversion Option 303,755
Total 4,193,664
Multiply Conversion Rate = 3/4 (3,000/4,000)
Book Value Converted 3,145,248
Par Value of Shares (3,000 x 40 x P 10) (1,200,000)
Share Premium P 1,945,248
65.
Proceeds (4,000 x P 1,000) - 151,469 = P 3,848,531
Present Value of Principal – 4,000 x P 1,000 x .741162 = 2,964,648
Present Value of Interest - 4,000 x P 1,000 x .06 x 2.465123 = 591,630 3,556,278
Conversion Option P 292,253
66.
Amortization Table Using 10.5% market value (9% + 1.5%)
DATE NOMINAL EFFECTIVE AMORTIZATION BALANCE
1.1.2019 3,556,278
1.1.2020 240,000 373,409 133,409 3,689,687
1.1.2021 240,000 387,417 147,417 3,837,104
1.1.2022 240,000 402,896 162,896 4,000,000
PV of bonds at 9% (Payment) P 3,889,909
PV of bonds at 10.5% ( Book Value 3,837,104
Loss in Profit or loss (52,805)