Noncurrent Liabilities | PROBLEMS

Problem 1 | Analysis of Amortization Schedule

LARIO COMPANY issued 10-year bonds on January 1, 2018 company's year-end is December 31,
and financial statement prepared annually. The amortization and interest schedule reflects the bond
issuance and the subsequent interest payments and charges.

AMORTIZATION SCHEDULE
Amount
Date Interest Paid Interest Expense Carrying Value
Unamortized
01/01/18 P28,253 P471,747
12/31/18 P 55,000 P56,610 26,643 473,357
12/31/19 55,000 56,803 24,840 475,160
12/31/20 55,000 57,019 22,821 477,179
12/31/21 55,000 57,261 20,560 479,440
12/31/22 55,000 57,533 18,027 481,973
12/31/23 55,000 57,837 15,190 484,810
12/31/24 55,000 58,177 12,013 487,987
12/31/25 55,000 58,558 8,455 491,545
12/31/26 55,000 58,985 4,470 495,530
12/31/27 55,000 59,470* --- 500,000
* Adjustment due to rounding.

1. The bonds were issued at

a. A premium
b. A discount
c. Face value
d. Par value
2. What amortization method is used in the amortization schedule presented?
a. Straight-line method
b. Bonds outstanding method
c. Effective Interest method
d. Declining balance method
3. What is the nominal (stated) interest rate of the bonds issued on January 1, 2018?
a. 11%
b. 12%
c. 10%
d. 6%
4. What is the is the effective interest rate of the bonds issued on January 1, 2018?
a. 11%
b. 12%
c. 10%
d. 6%
 Issue Price - Maturity Value
(P28,253)
(P471,747 – P500,000)

Stated or Nominal Interest Rate

11%
(P55,000/P500,000)

Effective Interest Rate

12%
(P56,610/P471,747)

Explanation

A discount bond is a bond that is issued for less than its par—or face—value. Discount bonds
may also be a bond currently trading for less than its face value in the secondary market. Since the
issue price (P471,747) is less than the maturity value (or face value) of P500,000 on December 31,
2027, the bonds were sold at a discount of P28,253.
The amortization schedule presents an increasing interest charge which characterizes the
effective interest method of amortizing bond premium or discount. Under the straight-line method,
the annual interest would have been P57,825.30. This is so derived from subtracting the
amortization of discount P2,825.30 (P28,253/10) from interest payment of P55,000.
The effective interest method is used to discount, or write off, a bond. The amount of the bond
discount is amortized to interest expense over the bond's life. As a bond's book value increases, the
amount of interest expense increases.

Problem 2 | Debt Classification

Boomerang, Inc. is a manufacturer and retailer of household furniture. Your audit of the
company’s financial statements for the year ended December 31, 2018 discloses the following debt
obligations of the company at the end of its reporting period. Boomerang’s financial statements are
authorized for issuance on March 6, 2019.
1. A P150,000 short-term obligation due on March 1, 2019. Its maturity could be extended to March
1, 2021, provided Boomerang agrees to provide additional collateral. On February 12, 2019, an
agreement is reached to extend the loan’s maturity to March 1, 2021.
2. A short-term obligation of P3,600,000 in the form of notes payable due February 5, 2019. The
company issued 75,000 ordinary shares for P36 per share on January 25, 2019. The proceeds
from the issuance plus P900,000 cash, were used to fully settle the debt on February 5, 2019.
3. A long-term obligation of P2,500,000 due December 1, 2028. On November 10, 2018,
Boomerang breaches a covenant on its debt obligation and the loan becomes payable on demand.
An agreement is reached to provide a waiver of the breach on December 11, 2018.
4. A long-term obligation of P4,000,000. The loan is maturing over 4 years in the amount of
P1,000,000 per year. The loan is dated September 1, 2018, and first maturity date is September 1,
2019.
5. A debt obligation of P1,000,000 maturing on December 31, 2021. The debt is callable on demand
by the lender at any time.
What amount of noncurrent liabilities should be reported on the December 31, 2017, statement of
financial position?
a. P3,000,000
b. P5,500,000
c. P6,500,000
d. P7,500,000

3. Long-term Obligation due December 1, 2028 P2,500,000

4. Long-term Obligation – Noncurrent Portion 3,000,000
Total Noncurrent Liabilities P5,500,000

Explanation

The P150,000 short-term obligation due on March 1, 2019 still forms part of current
liabilities despite the agreement of extending the loan’s maturity to March 1, 2021 since such
agreement was reached beyond the reporting date which was on February 12, 2019.
P3,600,000 notes payable is appropriately classified as a short-term obligation since it is due
within one year from the end of the reporting date, specifically on February 5, 2019.
Regardless of the breach of contract on its debt obligation making it payable on demand, the
P2,500,000 due December 1, 2028 still stands since a waiver agreement was reached within the
year 2018. Hence, it should still be classified as a long-term obligation.
The noncurrent portion of the loans payable of P4,000,000 shall be classified as noncurrent
liabilities. Such loan is maturing in 4 years having September 1, 2019 as the first maturity date.
Accordingly, the P4,000,000 shall be divided by 4 to arrive at the noncurrent portion of the loan
and multiplied by three, that is, P3,000,000.
Despite having a maturity beyond one year, December 31, 2021, the P1,000,000 debt
obligation shall be classified as current since it is callable on demand.

Problem 3 | Bond redemption Prior to Maturity Date

The long-term debt section of ELMO COMPANY's state financial position as of December 31,
2017, included 9% bonds payable of P400,000, less unamortized discount of P32,000. Further
examination revealed that these bonds were issued to yield 10%. The amortization of the bond discount
was recorded using effective interest method. Interest was paid on January 1 and July 1 of each year. On
July 1, 2018, Elmo retired the bonds at 105 before maturity.

What is the amount of loss to be recognized on the retirement of bonds?

a. P52,400
b. P20,000
c. P51,600
d. P0

Effective interest (P400,000 - P32,000 = P368,000 x 10% x 12) P18,400

Nominal interest (P400,000 x 9% X 12) 18,000
 Discount amortization, Jan. 1, 2018 - July 1, 2018 P400
Retirement price (P400,000 x 105%) P420,000
Carrying value of bonds: Face value – Unamortized Discount
(P400,000 – (P32,000 – P400)) 368,400
Loss on retirement of bonds P51,600

Explanation

Difference between the old debt’s net carrying value and the amounts used for the payoff
should be recognized as a gain or loss. First, the balance of your bonds payable account, which is
the amount you would have had to pay on the bonds’ maturity date had you not retired them must
be determined from your accounting records. Next, determine either the unamortized amount of
bond premium or the unamortized amount of bond discount from your accounting records. A bond
premium or discount is the amount bondholders either overpaid or underpaid, respectively,
depending on market interest rates, to initially buy the bonds. The unamortized amount is the
amount that is still in your accounting records. Add the unamortized amount of bond premium to
your bonds payable balance to calculate the bonds’ net carrying value. Alternatively, subtract the
unamortized amount of bond discount from your bonds payable balance to calculate the bonds’ net
carrying value. Subtract the total amount you paid to retire the bonds from the bonds’ net carrying
value. A positive result represents a gain, while a negative result represents a loss.

Problem 4 | Classification of Debt

At December 31, 2018, Kisu Company liabilities include the following:
1. P10 million of 10% notes are due on March 31, 2023. The financing agreement contains a covenant
that requires Kisu to maintain current Assets at least equal to 200% of it’s current liabilities. As of
December 31, 2018, Kisu has breached this loan covenant. On February 10 2019, before Kisus’s
financial statements are authorized for issue, Kisu obtained a period of grace from Mayumi Bank
until January 31, 2020, having convinced the bank that the company’s normal 3 to 1 ratio of current
Assets to current liabilities will be reestablished during 2019.
2. P15 million of no cancelable 12% bonds were issued at face value on September 30, 1997. The bonds
mature on August 31, 2019, Kisu expects to have sufficient cash available to redeem the bonds
maturity.
3. P20 million of 10% bonds were issued at face value on June 30, 1999. The bonds mature on June 30,
2028, but bondholders have the option to call (demand payment on) the bonds in June 30, 2019.
However, the call option is not expected to be exercised, given prevailing market conditions.
What portion of Kisu Company’s debt should be reported as current liability
a. P10 million
b. P30 million
c. P45 million
d. P0

Explanation
 a. The P10 million notes shall be classified as a current liability despite having a maturity beyond
twelve months after the end of the reporting period due to the breach of loan covenant.
Moreover, the period of grace was given by the bank only after Kisu’s reporting date. Hence, as
of December 31, 2018, Kisu does not have an unconditional right to defer settlement of its
liability for at least 12 months from the end of the reporting period.
b. P15 million non-cancellable bonds are payable in the succeeding year, August 31, 2019. As of
the end of the reporting period, no long-term refinancing has been made by Kisu.
c. P20 million Callable bonds is a current liability. By definition, these bonds are callable or
payment is demandable by the creditor in the succeeding year. Kisu does not have an
unconditional right to defer its settlement beyond 12 months from the end of the reporting
period even if the debt is not expected to be called.

Problem 5 | Convertible Debt Issue

On January 1, 2018, DIAS COMPANY issued 3-year, 4,000 convertible bonds at face value of
P1,000 per bond. Interest is to be paid annually in arrears at the stated coupon rate of 6%. Each bond
convertible, at the holder's option, into 200 P2 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 privilege
was 9%. On the same date, one ordinary share was P3. The bonds were converted on December 31, 2019.

The following present value factors are obtained from the present value tables:
6% 9%
Present value of 1 for 3 periods 0.83962 0.77218
Present value of an ordinary annuity of 1 for 3 periods 2.67301 2.53130
Present value of an annuity due of 1 for 3 periods 2.83339 2.75911

1. The liability component of the convertible debt is

a. P4,000,000
b. P3,696,232
c. P1,600,000
d. P3,730,242
2. The equity component of the convertible debt is
a. P303,768
b. P1,973,621
c. P1,600,000
d. P2,400,000

Present value of principal (P4,000,000 x 0.77218)

P3,088,720
Present value of interest payments (P4,000,000 x 6% = P240,000 x
607,512
2.53130)
Liability component of convertible debt P3,696,232
 Proceeds P4,000,000
Less: Liability component 3,696,232
Equity component of convertible debt P 303.768

Explanation

A convertible bond is a compound financial instrument that has liability and equity
components. Such components should ho classified separately on an entity's statement of financial
position. The separation is made at the time the instrument is issued and is not subsequently
revised. An equity instrument evidences a residual interest in the assets of an entity after deducting
all of its liabilities. Thus, when the initial carrying amount of a compound financial instrument is
allocated to its equity and liability components, the equity component is assigned the residual
amount after deducting from the fair value of the instrument as a whole (i.e., the net proceeds from
the issue) the amount separately determined for the liability component.
In the case of convertible bonds, the amount allocated to the liability component is the fair
value of the bonds without the conversion privilege. In the absence of the fair value without the
conversion privilege, the sum of the present value of the face amount of the bonds and the present
value of future interest payments discounted using the effective interest rate is assigned to the
liability component. On the conversion date, the carrying amount of the bonds converted is used to
measure the ordinary shares issued. No gain or loss is recognized.

Problem 6 | Deferred Income Tax Asset and Liability

At December 31, 2017, GALILEE CORPORATION had a temporary difference (related to
depreciation) and reported a related deferred tax liability of P60,000 on its statement of financial position.
A December 31, 2018, Galilee has four temporary differences. Al analysis of these reveals the following:
Future Taxable
(Deductible) Amounts

Temporary Difference 2018 2019 Later Year

1. Use of straight-line depreciation for accounting purposes
160,000 220,000 760,000
and accelerated depreciation for tax purposes
2. Rent collection in advance; recognized when earned for
(380,000) -
accounting purposes and when received for tax purposes

3. Various expenses accrued when incurred for accounting (90,000) - -

purposes; recognized for tax purposes when paid

4. Recognition of gain on installment sales during the

276,000 210,000 -
period of sale for accounting purposes and during the
period of collection for tax purposes
(34,000) 430,000 760,000
 Assume that the company has income taxes of P435,000 due per the tax return for 2018. The
installment receivable collectible in 2020 is classified as noncurrent. The enacted tax rate is 30% for all
periods.
1. What amount of deferred tax asset should be shown on Galiliee's statement of financial position at
December 31, 2018?
a. P114,000
b. P514,800
c. P141,000
d. P27,000
2. What amount of deferred tax liability should be shown on Galiliee's statement of financial position at
December 31, 2018?
a. P342,000
b. P456,000
c. P141,000
d. P487,800

Future Taxable Deferred Tax

Temporary Difference Tax Rate
(Deductible) Amounts Asset Liability

Depreciation P1,140,000 30% P342,000

Unearned rent (380,000) 30% P114,000
Accrued expenses (90,000) 30% 27,000
Installment sale 486,000 30% 145,800

Totals P141.000 P487.800

Explanation

PAS 12 requires that a deferred tax liability is recorded in respect of all taxable temporary
differences that exist at the year-end. The temporary differences result in a deferred tax asset
arising (or where the entity has other larger temporary differences that create deferred tax
liabilities, a reduced deferred tax liability).
The deferred tax asset includes 30% of both the rent collection in advance which is recognized
when earned for accounting purposes and when received for tax purposes (P380,000) and the
various expenses accrued when incurred for accounting purposes and recognized for tax purposes
when paid (P90,000). On the other hand, the deferred tax liability includes 30% of the cumulative
depreciation using straight-line method for accounting purposes and accelerated depreciation for
tax purposes (P160,000 + P220,000 + P760,000 = P1,140,000) and the cumulative installment sale
recognized sales during the period of sale for accounting purposes and during the period of
collection for tax purposes (P276,000 + P210,000 = P486,000).
 Problem 7 | Deferred Income Tax Asset and Liability
KAMPESCA, INC., in its first year of operations, has the following differences between the carrying
value and tax base of its assets and liabilities at the end of 2018:
Carrying Value Tax Base
Equipment (net) P800,000 P680,000
Estimated warranty liability 400,000 0

Kampesca estimates that the warranty liability will be settled in 2019.

The difference in equipment (net) will result in taxable amounts as shown below:

Year Amount
2019 40,000
2020 60,000
2021 20,000

The company has taxable income of P1,040,000 for 2018. The income tax rate is 30%.

1. What amount of deferred tax liability should be reported in Kampesca's statement of financial position
at December 31, 2018?
a. P36,000
b. P30,000
c. P24,000
d. P84,000
2.What amount of deferred tax asset should be reported in Kampesca's statement of financial position at
December 31, 2018?
a. P156,000
b. P0
c. P120,000
d. P84,000

Deferred tax liability, December 31, 2018

P36,000
(P40,000 + P60,000 + P20,000 = P120,000 x 30%)

Deferred tax asset, December 31, 2018

P120,000
(P400,000 x 30%)

Explanation
 Deferred tax liabilities arise on taxable temporary differences such as those temporary
differences that result in tax being payable in the future as the temporary difference reverses.
Temporary differences result in a deferred tax asset arising (or where the entity has other larger
temporary differences that create deferred tax liabilities, a reduced deferred tax liability). The
deferred tax liability includes 30% of the taxable net difference in equipment from 2019 to 2021.
Deferred tax asset then includes 30% of the carrying value of estimated warranty liability of
P400,000.
Problem 8 | Bonds Payable
Atimonan Company is selling audio and video appliances. The company’s fiscal year ends on
March 31. Atimonan issues 6,000,000, 12% bonds, on October 1, 2004 at 96. The bonds will mature on
October 1, 2014. Interest is paid semi-annually on October 1 and April 1. Atimonan uses the straight-line
method to amortize bond discount.
1. What is the adjusted unamortized bond discount as of March 31, 2010?
a. P132,000
b. P108,000
c. P240,000
d. P120,000
2. What is the adjusted bonds payable as of March 31, 2010?
a. P360,000
b. P300,000
c. P180,000
d. P0

Bond discount, 10/1/04 (6,000,000 x .04) P240,000

Discount amortization, 10/1/04 to 3/31/10 (240,000 x 5.5/10) 132,000
Bond discount, 3/31/10 P 108,000

Bond interest payable, 10/1/04 to 3/31/10

P360,000
(6,000,000 x 12% x 6/12)

Explanation

In cases where bond is sold at a discount, the amount of the bond discount must be amortized
to interest expense over the life of the bond. Since the debit amount in the account Discount on
Bonds Payable will be moved to the account Interest Expense, the amortization will cause each
period's interest expense to be greater than the amount of interest paid during each of the years that
the bond is outstanding. The preferred method for amortizing the bond discount is the effective
interest rate method or the effective interest method. Under the effective interest rate method, the
amount of interest expense in a given accounting period will correlate with the amount of a bond's
book value at the beginning of the accounting period. This means that as a bond's book value
increases, the amount of interest expense will increase.
 Problem 9 | Bonds Payable
On January 1, 2009, Perez Corporation issued 5,000 of its 5-year, 1,000 face value, 11% bonds
dated January 1 at an effective annual interest rate (yield) of 9%. Interest is payable each December 31.
Perez Corporation uses effective interest method of amortization. On December 31, 2010, the 3,000
bonds were extinguished early through acquisition in the open market by Perez for 2,970,000 plus
accrued interest.

1. What was the issue price of the bonds on January 1, 2009?

a. P5,388,835
b. P4,630,655
c. P5,282,135
d. P5,000,000
2. The carrying amount of the bonds payable on December 31, 2009 is
a. P4,755,930
b. P5,453,840
c. P5, 323,830
d. P5,000,000

PV of Principal (5,000,000 x 0.6499) P3,249,500

PV of Interest ((5,000,000 x 11%) x 3.8897) 2,139,335
Issue Price P5,388,835

Carrying amount, 1/1/09 P5,388,835

Less: Premium amortization for 2009
Nominal interest (5,000,000 x 11%) P550,000
Effective interest (5,388,835 x 9%) 484,995 65,005
Carrying amount, 12/31/09 P5,323,830

Explanation

The issue price of a bond is based on the relationship between the interest rate that the bond
pays and the market interest rate being paid on the same date. To calculate the issue price,
determine the interest paid by the bond; find the present value of the bond; calculate present value
of interest payments; and finally calculate bond price, which is the sum of the present value of the
bond repayment that is due at its maturity, and the present value of the related stream of future
interest payments.
Here, the present value of the principal is calculated by multiplying P5,000,000 by the present
value factor of 0.6499 and the present value of the interest is calculated by multiplying the nominal
interest rate of 11% by the face amount P5,000,000 and by the present value factor of 3.8897. The
carrying amount at the end of the year 2009 (P5,323,830) is calculated by using the issue price as
the base amount and thereby deducting the premium amortization which is the excess of nominal
interest (5,000,000 x 11% = P550,000) over the effective interest (5,388,835 x 9 = P484,995).
 Problem 10 | Non-current Liabilities
You were able to obtain the following from the accountant for Agdangan Corp. related to the company’s
liabilities as of December 31, 2010.
Accounts Payable 650,000
Notes Payable – Trade 190,000
Notes Payable – Bank 800,000
Wages and Salaries Payable 15,000
Interest Payable ?
Mortgage Notes Payable – 10% 600,000
Mortgage Notes Payable – 12% 1,500,000
Bonds Payable 2,000,000

The following additional information pertains to these liabilities:

a. All trade notes payable are due within 6 months from the end of the reporting period.
b. Bank notes payable include two separate notes payable to Allied Bank
1. A 300,000, 8% note issued March 1, 2008, payable on demand. Interest is payable every
six months.
2. A 1-year, 500,000, 11 ½% note issued January 2, 2010. On December 30, 2010,
Agdangan negotiated a written agreement with Allied Bank to replace the note with a 2-
year, 500,000, 10% note to be issued January 2, 2011. The interest was paid on December
31, 2010.
c. The 10% mortgage note was issued October 1, 2007, with a term of 10 years. Terms of the note
give the holder the right to demand immediate payment if the company fails to make a monthly
interest payment within 10 days of the payment is due. As of December 31, 2010, Agdangan is
three months behind in paying its required interest payment.
d. The 12% mortgage was issued May 1, 2004, with the term of 20 years. The current principal
amount due is 1,500,000. Principal and interest payable annually on April 30. A payment of
220,000 is due April 30, 2011. The payment includes interest of 180,000.
e. The bonds payable is 10-year, 8% bonds, issued June 30, 2001. Interest is payable semi-annually
every June 30 and December 31.

What is the total noncurrent liabilities as of December 31, 2010?

a. P1,760,000
b. P3,960,000
c. P2,560,000
d. P1,960,000

Notes Payable – Bank P500,000

Mortgage Note Payable – 12% (1,500,000 – 40,000) 1,460,000
Total Noncurrent Liabilities, 12/31/10 P1,960,000

Explanation
 PAS 1 (Presentation of Financial Statements) states if an entity expects, and has the discretion,
to refinance or roll over an obligation for at least twelve months after the reporting period under an
existing loan facility with the same lender, on the same or similar terms, it classifies the obligation
as non-current, even if it would otherwise be due within a shorter period. The 500,000 note payable
to bank will be classified as noncurrent because it was refinanced on a long-term basis as of
December 31, 2010. Likewise, a portion of the mortgage notes payable 12% is still classified as a
noncurrent liability since it has a term of 20 years. The current portion must be deducted. The
payment due on April 30, 2011 of P220,000 minus the interest of P180,000 included is a current
liability. Then, the excess of P1,500,000 over the derived amount of P40,000, that is, P1,460,000 is
included in the noncurrent liabilities to be reported as of December 31, 2010.