Noncurrent Liabilities - PROBLEMS: B. A Discount
Noncurrent Liabilities - PROBLEMS: B. A Discount
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.
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.
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.
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.
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.
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
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.
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
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
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
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.
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
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.