Total Liablities

PROBLEMS
Problem 1: (Liabilities - current & non-current) Matias Company provided the following information on December 31, 20x2:
Income taxes withheld from employees P900,000
Cash balance at First State Bank 2,500,000
Cash overdraft at Harbor Bank 1,300,000
Accounts receivable with credit balance 750,000
Estimated expenses of meeting warranties on merchandise previously sold 500,000
Estimated damages as a result of unsatisfactory performance on a contract 1,500,000
Accounts payable 3,000,000
Deferred serial bonds, issued at par and bearing interest at 12%, payable in semiannual installment of 5,000,000
P500,000 due April 1 and October 1 of each year, the last bond to be paid on October 1, 20x8. Interest is
also paid semiannually.
Stock dividend payable 2,000,000
Preference shares 1,000,000
Preference shares – redeemable, currently matured 100,000
Required: Compute the total current liabilities on December 31, 20x2.
Answer is 8,100,000.
Income taxes withheld from employees 900,000
Cash overdraft at Harbor Bank 1,300,000
Accounts receivable with credit balance 750,000
Estimated warranty liability 500,000
Estimated damages payable 1,500,000
Accounts payable 3,000,000
Accrued interest on bonds payable from October 1 to December 31, 20x2
(5,000,000 x 12% x 3/12) 150,000
Redeemable preference shares 100,000
Total current liabilities 8,200,000
Problem 2: (Refinancing agreement and Breach of loan agreement)
1. Katrina Corporation with a calendar-year accounting period issued a 10% , 3-year installment note to Vicky with a
maturity value of P6,000,000. The last installment is due on June 30, 20x9. Under the terms of the loan agreement, Katrina
Corporation has the discretion to roll over the obligation. In December, 20x8, because of financial difficulties,
management feels it cannot meet its last installment obligation and decides to exercise its discretion to roll over its
remaining liability to June 30, 20x10.. The agreement to roll- over was signed on January 18, 20x9. The financial statements
of 20x8 were authorized for issue on April 5, 20x9. How should Katrina report its remaining liability in the December 20x8
balance sheet?
a. Interest and remaining liability are reported as current
b. Interest as current liability, remaining liability as non-current
c. Interest as non-current, remaining liability as current
d. Both interest and remaining liability are reported as non-current
2. Assume the same facts as in No. 1, except that Katrina has no discretion to roll-over its obligation. How should Katrina report
its remaining liability on its December 31, 20x9 balance sheet?
a. Interest and remaining liability are reported as current
b. Interest as current liability, remaining liability as non-current
c. Interest as non-current, remaining liability as current
d. Both interest and remaining liability are reported as non-current
3. On December 31, 20x5, Nicole Corporation signed a 5-year, P5M 10% installment note to Kenneth, Inc. payable in equal
annual installments starting December 31, 20x6. In 20x8, Nicole experienced financial difficulty and was unable to pay the
interest and installment due.
On December 31, 20x8, Kenneth signed an agreement to provide Nicole a grace period of 12 months from the balance
sheet date within which to rectify the breach. The 20x8 financial statements were authorized for issue on March 20,
20x9. How should these facts be presented in the liability section of Nicole’s Dec. 31, 20x8 balance sheet?
Interest obligation Installment obligation Remainder of principal obligation

a. Current Current Current
b. Current Current Non-current
c. Current Non-current Non-current
d. Non-current Non-current Non-current
4. Refer to No. 3. Assume the same facts in the Nicole problem, except that no grace period is given by Kenneth. However,
on December 31, 20x8, Kenneth has agreed not to demand payment as a consequence of the breach of payment on the
interest and on the principal of the loan. The financial statements of 20x8 were authorized for issue on March 20, 20x9.
How should these facts be presented in the liability section of Nicole’s Dec. 31, 20x8 balance sheet?
Interest obligation Installment obligation Remainder of principal obligation
a. Current Current Current
b. Current Current Non-current
Notes payable and Debt Restructuring-Batch May 2020 Page 1 of 28

c. Current Non-current Non-current
d. Non-current Non-current Non-current
Problem 3: (Accounts payable)
Case 1: Epson Company’s accounts payable at December 31, 20x9 total P1,000,000 before any necessary year-end adjustments
relating to the following transaction:
 On December 27, 20x9 Epson wrote and issued checks to creditors total P350,000. The issuance of the check was recorded
on January 3, 20x10.
 On December 28, 20x9, Epson purchased and received goods for P150,000, terms 2/10, n/30. Epson records purchases and
accounts payable at net amounts. The invoice was recorded and paid January 3, 20x10.
 Goods shipped F. O. B. Destination on December 20, 20x9 from a vendor to Epson were received January 10, 20x10. The
invoice cost was P65,000. The purchase was recorded on January 20, 20x10.
Required: What amount should Epson report as total accounts payable at December 31, 20x9?
Accounts Payable, 12/31/10, before adjustments P 1,000,000
Unrecorded checks in payment to creditors (350,000)
Unrecorded purchases (150,000 x 98%) 147,000
Accounts Payable, 12/31/10, as adjusted P 797,000
Case 2: The balance in Gay Company’s accounts payable at December 31,20x9 was P1,500,000 before considering the following
information.
 Goods shipped F. O. B. shipping point on December 20, 20x9 from a vendor to Gay were lost in transit. Gay did not record
the invoice cost of P240,000. On January 6, 20x10, Gay filed a P240,000 claim against the common carrier.
 On December 27, 20x9, a vendor authorized Gay to return, for a full credit goods shipped and billed at P80,000 on
December 2, 20x9. Gay shipped the returned goods on December 27, 20x9. A credit memo for P80,000 was received and
recorded by Gay on January 6, 20x10.
Required: What amount should Gay report as total accounts payable at December 31, 20x9?
Accounts Payable, 12/31/10, before adjustments P1,500,000
Goods purchased FOB shipping point, lost in transit 240,000
Returned to supplier (80,000)
Accounts Payable, 12/31/10, as adjusted P1,660,000
Case 3: On August 1 of the current year, Steph Company recorded purchases of inventory of P800,000 and P1,000,000 under credit
terms of 2/15, net 30. The payment due on the P800,000 purchase was remitted on August 16. The payment due on the P1,000,000
purchase was remitted on August 31. Under the net method and the gross method, these purchases should be included at what
respective amounts in the determination of cost of goods available for sale?
Accounting for Purchases (Gross and Net Method)

Gross Net
Cash discounts Deducted from purchases /cost of Deducted from purchases / cost of
inventory when taken inventory whether taken or not
Cash discounts taken Deducted from purchases/cost of Not accounted for separately since already
inventory (purchase discounts) deducted from purchases
Cash discounts not taken Included in purchases/cost of inventory Reported as other expense (purchase
discounts lost)
Net method
Purchases (800,000 + 1,000,000) 1,800,000
Purchase discount taken (2% x 800,000) (16,000)
Purchase discount not taken (2% x 1,000,000) (20,000)
Net amount 1,764,000
Under the net method, the purchase discount is deducted from purchases regardless of whether taken or not taken.
Gross method
Purchases 1,800,000
Purchase discount taken (16,000)
Net purchases 1,784,000
Under the gross method, the purchases are recorded at gross and only the purchase discount taken is deducted from purchases
in determining cost of goods available for sale.
Case 4: The following transactions were completed by Megabytes Corporation during December 20x9:
Dec. 16 Purchased merchandise from Intel Company, P66,000, terms 2/10, n/30; FOB shipping point. The
company paid freight of P1,400.
19 Received goods from Celeron Corporation, P72,000; terms: 3/10, 2/15, n/30.
26 Paid the account with Intel Company in full.
31 Paid the account with Celeron Corporation in full.
Required:
a. Record the foregoing transactions in the books of Megabytes Corporation using
1. The gross method of recording purchases.
2. The net method of recording purchases.
b. Give the necessary adjustment on December 31 assuming that Megabytes uses the net method and assuming that the account
with Celeron is still unpaid at December 31.
Suggested Answer:
(a) (1) Gross Method

Dec. 16 Purchases 66,000
Freight in 1,400
Accounts Payable – Intel Company 66,000
Cash 1,400
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19 Purchases 72,000
Accounts Payable – Celeron Corporation 72,000
26 Accounts Payable- Intel Company 66,000

Purchase Discount (2% x 66,000) 1,320
Cash 64,680
31 Accounts Payable – Celeron Corporation 72,000

Purchase Discount (2% x 72,000) 1,440
Cash 70,560
(a) (2) Net Method

Dec. 16 Purchases 64,680
Freight in 1,400
Accounts Payable – Intel Company 64,680
Cash 1,400
19 Purchases 69,840
Accounts Payable – Celeron Corporation 69,840
26 Accounts Payable – Intel Company 64,680

Cash 64,680
31 Accounts Payable – Celeron Corporation 69,840

Purchase Discounts Lost 720
Cash 70,560
(b)
Dec. 31 Purchase Discounts Lost 720
Accounts Payable – Celeron Corporation 720
Problem 4: (Unearned income)
Case 1: (Unearned revenue – sales of goods) Black Company required advance payments with special orders for machinery
constructed to customer specifications. The entity provided the following information for the current year:
Customer advances - January 1 P1,180,000
Advances received with orders 1,840,000
Advances applied to orders shipped 1,640,000
Advances applicable to orders cancelled 500,000
Required: Compute for the current liability assuming:

a. The advance payments received are non-refundable
b. The advance payments received are refundable
a. P1,180,000 +P1,840,000-1,640,000-500,000 = P880,000

b. P880,000 + P500,000 = P1,380,000
Case 2: (Deferred revenue – sales of services) Dove Company sells equipment service contracts that cover a two-year period.
The sale price of each contract is P600. The past experience is that, of the total pesos spent for repairs on service contracts, 40% is
incurred evenly during the first contract year and 60% evenly during the second contract year. The entity sold 1,000
contracts evenly throughout 20x4. What amount should be reported as deferred service revenue on December 31, 20x4?
First contract year (40% x 600,000) 240,000

Second contract year (60% x 600,000) 360,000
Total contracts sold in 20x4 600,000
Since the contracts are sold evenly, only one-half of the 40% is earned in 20x4 and one-half will be earned in 20x5. One-half
of the 60% will be earned in 20x5 and one-half will be earned in 2016.
Thus, the deferred service contract revenue in December 31, 20x4 is computed as follows;
Total contracts sold (1,000 x 600) 600,000
Less: Contracts earned in 20x4 (240,000 x ½) 120,000
Deferred service revenue – December 31, 20x4 480,000
Service contract revenue earned in 20x5:

Remaining one-half of first contract year (240,000 x ½) 120,000
First one-half of the second contract year (360,000 x ½) 180,000
Total service contract revenue earned in 20x5 300,000
Case 3: (Unearned subscription –Monthly) ABC Co. sells monthly subscription for an industry publication. Subscription
received after the November 1 cut-off date are held for publication in the following year. Receipts during 20X1 for subscription were
made evenly. Information on subscriptions is shown below:
Unearned revenue-January 1, 20x1 P3,000
Receipts from subscription during 20x2 24,000
Required:
a. How much is the unearned revenue balance on December 31, 20X1?
b. How much is the revenue from subscription during 20X1?
a. 24,000 / 12 = 2,000 x 2 = P4,000

b. 3,000+24,000-4,000= P23,000
Case 4: (Unearned subscription – Semi-annual) Winn Co. sells subscriptions to a specialized directory that is published
semiannually and shipped to subscribers on April 15 and October 15. Subscriptions received after the March 31 and September 30
cutoff dates are held for the next publication. Cash from subscribers is received evenly during the year and is credited to deferred
subscription revenue. Data relating to 20x90 are as follows:
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Deferred subscription revenue, 1/1/20x90 P 750,000
Cash receipts from subscribers 3,600,000
In its December 31, 20x90, balance sheet, Winn should report deferred subscription revenue of:
Deferred
Subscription
Revenue
Begin balance, 1-1-90 P 750
Add: Cash receipts from subscribers 3,600
Subtotal 4,350
Less: Revenues earned from 10-1-89 to 9-30-90
Oct., Nov., Dec. 1989 collection (3 mos) (750)
Jan., Feb., Mar. 1990 (3 mos) (900)
Apr. to Sept. 1990 (6 mos) (1,800)
Ending balance, 12-31-90 P 900
Case 5: (Gift certificates) Mega Department Store sells gift certificates that expire one year after their issuance. Upon
redemption, the entity recognizes the unearned revenue as realized. Information for the current year is as follows:
Gift certificates payable, January 1 P260,000
Gift certificates sold 900,000
Gift certificates redeemed 780,000
Gift certificates expected not to be redeemed 40,000
Cost of goods sold 60%
Required: Prepare journal entries for the current year.
Journal entries
Cash 900,000
Gift certificates payable 900,000
Gift certificates payable 780,000

Sales 780,000
Gift certificates payable (P40+260) 300,000

Forfeited gift certificates 300,000
Problem 6: (Liability for deposits received)
Case 1: (Deposit for future subscription of shares of stock)

a. If the deposits are repayable in cash at any time prior to the approval of the amended articles, the deposits are classified
as_________.
b. In the absence of such provision, the deposits are classified as ________.
a. Liability
b. equity, preferably presented under contributed capital.
Case 2: (Deposits for returnable containers) Farr Company sells products with reusable, expensive containers. The customer is
charged a deposit for each container delivered and receives a refund for each container returned within two years after the year of
delivery.
The entity provided the following information for 20x4:
Containers held by customers on January 1, 20x4 from deliveries in:
20x2 P75,000
20x3 215,000 P290,000
Containers delivered in 20x4 390,000
Containers returned in 20x4 from deliveries in:
20x2 45,000
20x3 125,000
20x4 143,000 313,000
Required:
1. Prepare journal entries in 20x4 in connection with the containers.
2. Compute the liability for containers on December 31, 20x4.
1. Cash 390,000
Containers’ deposit 390,000
Cash 313,000
Containers 30,000
Containers’ deposit on January 1, 20x4 applicable to 20x2 deliveries 75,000

Less: Containers returned in 20x4 applicable to 20x2 deliveries 45,000
Balance – expired and no longer refundable 30,000
2. Containers’ deposit – January 1, 20x4 290,000

Add: Containers’ deposit in 20x4 390,000
Total 680,000
Less: Containers returned in 20x4 313,000
Containers not returned and expired 30,000 343,000
Containers’ deposit – December 31, 20x4 337,000
Case 3: ( Security deposits from a lease) Security deposits received from lessee in a lease agreement
a. If the deposit is _____, the amount shall be recognized as liability and its classification as to either current or non-current will be
dependent on its settlement date.
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b. If the deposit is _____, the amount shall be recognized as liability and will be recognized as income over the term of the lease.
a. refundable
b. Non-refundable
Case 4: (Deposits held under escrow agreement) Kevin Company, a realty entity, maintains escrow accounts and pays real
estate taxes for the mortgage customers. Escrow funds are kept in interest-bearing accounts. Interest, less a 10% service fee, is
credited to the mortgagee's account and used to reduce future escrow payments. The entity provided the following additional
information for 20x4:
Escrow accounts liability, January 1 P700,000
Escrow payments received 1,580,000
Real estate taxes paid 1,720,000
Interest on escrow funds 50,000
Required: What amount should be reported as escrow accounts liability on December 31, 20x4?
Escrow accounts liability – January 1 700,000

Add: Escrow payments received 1,580,000
Interest on escrow funds 50,000 1,630,000
Total 2,330,000
Less: Real estate taxes paid 1,720,000
Service fee (10% x 50,000) 5,000 1,725,000
Escrow accounts liability – December 31 605,000
PROBLEMS
Problem 1: (Provisions) The following situations relate to Washburn Company.

1. (Best estimate) In 20X1, Washburn Company received a court order requiring the cleanup of environmental damages
caused by one of Washburn’ s factory. Washburn has no other realistic alternative but to comply with the court order. Other
entities have incurred around P15,000,000 for similar cleanup; however, Washburn best estimate of the cost of cleanup is
P20,000,000.
2. (Expected value) Washburn provides a warranty with all its products it sells. It estimates that it will sell 1,200,000 units
of its product for the year ended December 31, 20x1, and that its total revenue for the product will be P100,000,000. It also
estimates that 60% of the product will have no defects, 30% will have major defects, and 10% will have minor defects. The cost
of a minor defect is estimated to be P5 for each product sold, and the cost for a major defect cost is P15. The company also
estimates that the minimum amount of warranty expense will be P2,500,000 and the maximum will be P12,000,000.
3. (Midpoint) Washburn is involved in a tax dispute with the tax authorities. The most likely outcome of this dispute is that
Washburn will lose and have to pay of not less than P100,000 but not more than P200,000. The probability of any amount
within the range is as likely as any other amount also within the range.
Instructions Prepare the journal entry to record provisions, if any, for Washburn at December 31, 20x1.
(1) Environmental cleanup cost P20M

Estimated liability for clean up cost P20M
(2) Warranty Expense* ........................................................................... 6,000,000

Warranty Liability ..................................................................... 6,000,000
*Expected warranty costs

% Units Cost per Total Costs
Unit
No defects 60% 720,000 P 0 P 0
Major defects 30% 360,000 15 5,400,000
Minor defects 10% 120,000 5 600,000
Total 100% 1,200,000 6,000,000
(3) Tax Expense..................................................................................... 150,000

Taxes Payable ......................................................................... 150,000
Problem 2: (Present Value)
Case 1: Bizarre Company gives warranties at the time of sale to purchasers of its product. The entity undertakes to make good, by
repair or replacement, manufacturing defects that become apparent within one year from the date of sale. Sales of P10,000,000
were made evenly throughout 20x3. The expenditures for warranty repairs and replacements for the products sold in 20x3 are
expected to be made 50% in 20x3 and 50% in 20x4. The 20x4 outflows of economic benefits related to the warranty will take place
on June 30,20x4.
The entity estimated that 95% of products sold require no warranty repairs, 3% of products sold require minor repairs costing 10%
of the sale price, and 2% of products sold require major repairs or replacement costing 90% of sale price.
The appropriate discount factor for cash flows expected to occur on June 30,20x4 is 0.95. An appropriate risk adjustment factor to
reflect the uncertainties in the cash flow estimates is an increment of 6% to the probability-weighted expected cash flows. What is
the warranty provision on December 31,20x3?
Minor repairs (3% x 10,000,000 = 300,000 x 10%) 30,000

Major repairs (2% x 10,000,000 = 200,000 x 90%) 180,000
Weighted probabilities 210,000
Multiply by risk adjustment factor (6% increase) 1.06
Adjusted cash flows 222,600
Paid in 20x3 (50%) (111,300)
Balance - December 31,20x3 111,300
Multiply by PV factor .95
Warranty provision - December 31,20x3 105,735
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Case 2: Hello Company gives warranties at the time of sale to purchasers of its product. Under the terms of the sale, the entity
undertakes to make good, by repair or replacement, manufacturing defects that become apparent within one year from the date of
sale.
On December 31,20x3, the entity appropriately recognized P50,000 warranty provision. The entity incurred and charged P140,000
against the warranty provision in 20x4. Out of the P140,000, an amount of P80,000 related to warranties for sales made in 20x4.
The increase during 20x4 in the discounted amount recognized as a provision on December 31,20x3 arising from the passage of time
is P2,000.
On December 31, 20x4, the entity estimated that it would incur expenditures in 20x5 to meet its warranty obligations on December
31, 20x4 as follows:
 5% probability of P400,000
 20% probability of P200,000
 50% probability of P 80,000
 25% probability of P 20,000
Assume for simplicity that the 20x5 cash flows for warranty repairs and replacements take place on June 30,20x5.
An appropriate discount rate is 10% per year. The PV of 1 at 10% for one year is 0.91 and the PV of 1 at 10% for 6 months is 0.95.
An appropriate risk adjustment factor to reflect the uncertainties in the cash flow estimates is an increment of 8% to the probability-
weighted expected cash flows.
Required: What is the warranty expense to be recognized in 20x4?
With Suggested Answer:
20x3
Warranty expense 50,000
Warranty liability 50,000
20x4
Finance cost 2,000
Cash 140,000
Warranty expense related to 20x4 sales 80,000

Warranty expense related to 20x3 sales (60,000 - 52,000) 8,000
Total warranty expense 88,000

Weighted probabilities:
5% x 400,000 20,000
20% x 200,000 40,000
50% x 80,000 40,000
25% x 20,000 5,000
Expected cash flows 105,000
Multiply by risk adjustment factor (100% + 8%) 1.08
Adjusted cash flows 113,400
Multiply by PV of 1 at 10% for 6 months .95
Present value of cash flows 107,730
Warranty cost paid related to 20x4 sales 88,000

Warranty liability related to 20x4 sales 107,730
Total warranty expense in 20x4 195,730
Problem 3: (Provision – Change in Estimate) In 20X4, ABC Co. recognized provision for a probable loss on pending lawsuit of
P10,000,000. The lawsuit remains unsettled in 20X5 necessitating a reassessment of the provision. ABC determined that the
probable loss on the pending lawsuit should be P14,000,000.
Required: Provide all necessary journal entries under the following independent assumptions:
a. The lawsuit was settled for P15,000,000 in 20X6.
b. The lawsuit was settled for P12,750,000 in 20X6.
c. ABC Co. won the lawsuit in 20X6.
20x4:
Loss on law suit P10M
Estimated liability P10M
20x5:
Loss on law suit P4M
Estimated liability P4M
a. Estimated liability P14

Loss on lawsuit 1
Cash P15
b. Estimated liability P14

Cash P12,750,000
Gain on settlement 1,250,000
c. Estimated liability P14

Gain on settlement P14
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Problem 4: (Future events, Future losses and Expected disposal of assets) Naga Company issued the 20x3 financial
statements on March 1,20x4. The following data are provided by the entity for the year ended December 31,20x3:
Amount owing to another entity for services rendered during December 20x3 P300,000
Estimated long service leave owing to employees in respect of past services 1,200,000
Estimated cost of relocating an employee from head office to a branch in another city (employee 100,000
will physically relocate in January 20x4)
Estimated cost of overhauling machine every 5 years (the machine is 5 years old on December 31, 150,000
20x3)
Estimated cost of cleaning up a site at the end of its life will be reduced by future changes in 500,000
technology, there is sufficient objective evidence that they will occur.
Estimated future losses 100,000
Expected disposal of assets 400,000
Required: What amount should be recognized as provision on December 31, 20x3?
Answer = 1,200,000+500,000 P1,700,000
A provision is a present obligation that is uncertain in amount or timing. The present obligation must be both probable and
measurable.
The amount owing to another entity is a present obligation but technically it is not a provision because the amount is certain.
Of course, it is an accrued liability.
The estimated cost of relocating the employee is a future cost because it is to be incurred in January 20x4. Thus, it is not
included in December 31,20x3 provision.
The estimated cost of overhaul is not a provision because there is no present obligation. The entity may decide to sell the
machine or not to repair it.
Problem 5: (Reimbursement) ABC Co. is engaged in logistic services. During the year, a warehouse was destroyed by fire. It
was estimated that ABC will probably pay around P50,000,000 in damages caused to the goods owned by customers that were
contained in the destroyed warehouse. The contents of the warehouse at any given point of time are insured for P20,000,000.
ABC’s claims for the insurance has been approved for payment by the insurance company.
December 31, 20x1

Loss on fire P50
Estimated liability on casualty P50
Insurance claims receivable P20

Gain on insurance P20
Notice that the claim for the reimbursement is recorded as a separate asset because it is virtually certain (i.e. approved for
payment) that the reimbursement will be received and it does not exceed the amount of provision. The provision may be
presented in the statement of profit or loss and other comprehensive income net of the reimbursement, i.e., net loss of P30M
(P50M loss minus P20M gain).
Problem 6: (Deductible clause) On January 1, 20x5, an explosion occurred at a Rex Company plant causing extensive property
damage to area buildings. By March 10, 20x6, claims had been asserted against Rex Company. The management and counsel
concluded that it is probable Rex Company will be responsible for damages, and that P2,500,000 would be a reasonable estimate of
its liability. The entity's P10,000,000 comprehensive public liability policy has a P1,500,000 deductible clause. The financial
statements were issued on March 31, 20x6.
Required:
a. How much should the event above be reported in Rex Company December 31, 20x4 financial statements?
b. How much should the event above be reported in Rex Company December 31, 20x5 financial statements?
a. Note disclosure only.
b. The amount of loss is P1,500,000 only because it is the extent of liability of Rex under the comprehensive insurance policy.
However, the amount of liability to be reported is equal to the total estimated amount.
PAS 37, par. 53, provides that the reimbursement claim shall be treated as a separate asset.
The amount of loss may be presented net of the amount recognized for a reimbursement.
Estimated liability 2,500,000

Extent of liability – deductible clause (1,500,000)
Insurance claim – reimbursement asset 1,000,000
Problem 7: (Onerous Contracts)
Case 1: (Onerous contract-purchase commitment) On January 1, 20X1, ABC Co. signed a three year, non-cancellable purchase
contract, which allows ABC Co. to purchase up to 60,000 units of a microchip annually from XYZ Co. at P25 per unit and guarantees
a minimum annual purchase of 15,000 units. At year-end, it was found out that the goods are obsolete. ABC had 10,000 units of
this inventory at December 31, 20X1, and believes these parts can be sold as scrap for P5 per unit.
Dec. 31 20x1
Loss on purchase commitment P600,000
Estimated liability on purchase commitment P600,000
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Guaranteed 15,000
Rem. Years (20X2 and 20X3) x2
Total goods to be accepted in future 30,000
(25-5) x 20
P600,000
Loss on decline of value inventory P200,000

Inventory P200,000
(10,000 x (25-5)
Case 2: (Onerous contract of lease) ABC Co. entered into a non-cancellable 10-year operating lease. Annual lease payment is
P100,000. At inception of lease, ABC paid P200,000 deposit to the lessor to be applied to the last two years of the lease. In
addition, ABC guarantees a 10% residual value of the leased property. On December 31, 20X1, ABC cancels the lease when the
remaining lease term is 6 years. ABC is obligated to pay the rentals for the remaining term of the lease but is uncertain as to
whether it will be held liable for the guarantee on the residual.
December 31, 20X1
Probable loss on lease cancellation P600,000

Deferred charges-prepaid rent P200,000
Estimated liability for probable loss on lease 400,000
Problem 8: (Restructuring provision) Hector Company decided on November 1,20x3 to restructure the entity's operations as
follows:
 Factory A would be closed down and put on the market for sale.
 Employees working in Factory A would be retrenched on November 30,20x3, and would be paid their accumulated
entitlements plus six months' wages.
 Some employees working in Factory A would be transferred to Factory B, which would continue operating.
On December 31,20x3, the following transactions and events had occurred:

 The retrenched employees have left and their accumulated entitlements have been paid. However, an amount of
P1,000,000, representing a portion of the six months' wages for the retrenched employees, has still not been paid.
 Costs of P300,000 are expected to be incurred in transferring the remaining employees to their new work in Factory B. The
transfer is planned for January 15,20x4.
 One employee, Juan Cruz, remains in order to complete administrative tasks relating to the closure of Factory A and the
transfer of employees to Factory B. Juan Cruz is expected to stay until January 31,20x4. His salary for January will be
P50,000 and his retrenchment package will be P150,000, all of which will be paid on the day he leaves. Juan Cruz would
spend 60% of his time administering the closure of Factory A, 30% on administering the transfer of employees to Factory B,
and the remaining 10% on general administration.
Required: What total amount should be recognized as restructuring provision on December 31,20x3?
Unpaid wages of retrenched employees 1,000,000

Retrenchment package of Juan Cruz 150,000
Salary for administering closure of Factory A (60% x P50.000) 30,000
Total restructuring provision 1,180,000
The amount of restructuring provision includes only direct expenditures arising from restructuring and not associated with the
ongoing activities of the entity. For example, salaries and benefits of employees to be incurred after operations cease and that
are associated with the closure of the operations are included in the restructuring provision.
The payment of P300,000 to be incurred in transferring the remaining employees to Factory B is not included in the
restructuring provision because it relates to continuing staff as part of ongoing activities.
The restructuring provision does not include cost of retraining or relocating continuing staff, and marketing or advertising
program because these relate to ongoing activities of the entity.
Problem 9: (Estimated Liabilities – After Sale Transactions)
Case 1: (Premium Liability)
Applicable standard: PAS 37 vs. PFRS 15

A customer option to acquire additional goods or services for free or at a discount is accounted for under PFRS 15 if the option
provides the customer a material right that the customer would not receive without entering into that contract.
A customer option that does not provide the customer with a material right is not accounted for under PFRS 15; and therefore,
accounted for in accordance with PAS 37
A. Edwards Co. includes one coupon in each bag of dog food it sells. In return for 4 coupons, customers receive a dog toy that the
company purchases for P1.20 each. Edwards's experience indicates that 60 percent of the coupons will be redeemed. During 20x5,
100,000 bags of dog food were sold, 12,000 toys were purchased, and 40,000 coupons were redeemed. During 20x6, 120,000 bags
of dog food were sold, 16,000 toys were purchased, and 60,000 coupons were redeemed.
Instructions Determine the premium expense to be reported in the income statement and the premium liability on the statement
of financial position for 20x5 and 20x6.
20x5 20x6
Premium expense P18,000 (1) P21,600 (3)
Premium Liability 6,000 (2) 9,600 (4)
(1) 100,000 × .6 = 60,000; 60,000 ÷ 4 = 15,000; 15,000 × P1.20 = P18,000.

(2) 40,000 ÷ 4 = 10,000; 15,000 – 10,000 = 5,000; 5,000 × P1.20 = P6,000.
(3) 120,000 × .6 = 72,000; 72,000 ÷ 4 = 18,000; 18,000 × P1.20 = P21,600.
Page 8 of 28
(4) 60,000 ÷ 4 = 15,000; 5,000 + 18,000 – 15,000 = 8,000; 8,000 × P1.20 = P9,600.
B. Cascade Company manufactures a special laundry soap. A towel is offered as a premium to customers who send in two proof-of-
purchase seals from the soap boxes and a remittance of P20. Distribution cost is P5 per towel. Data for the premium offer are.
20x4 20x5
Soap sales P2,500,000 P3,125,000
Towel purchases (P100 per towel) 175,000 200,000
Number of towels distributed as premium 1,000 1,800
Number of towels expected to be
distributed in subsequent period 600 800
Required:
1. Prepare journal entries for 20x4 and 20x5.
2. Statement classification of the account balances pertaining to the premium plan.
Requirement 1:
20x4 1. Cash 2,500,000
Sales 2,500,000
2. Premiums – towels 175,000

Cash 175,000
3. Cash (1,000 x 20) 20,000

Premium expense 80,000
Premiums – towels (1,000 x 100) 100,000
4. Premium expense (1,000 x 5) 5,000

Cash 5,000
5. Premium expense 51,000

Estimated premium liability (600 x 85) 51,000
20x5 1. Estimated premium liability 51,000

Cash 3,125,000
Sales 3,125,000
2. Premiums – towels 200,000

Cash 200,000
3. Cash (1,800 x 20) 36,000

Premiums – towels (1,800 x 100) 180,000
4. Premium expense (1,800 x 5) 9,000

Cash 9,000
5. Premium expense 68,000

Estimated premium liability (800 x 85) 68,000
Requirement 2: Statement Classification

20x3 20x4
Current asset:
Premiums – towels 75,000 95,000
Current liabilities
Estimated premium liability 51,000 68,000
Selling expense:
Premium expense 136,000 170,000
Case 2: (Rebates Liability) ABC Company offers a cash rebate of P10 on each P500 of baking pan sold during 20X6. Customer
must fill-up a rebate form and mail it to ABC. ABC will then mail to customers the approved rebate form which can be used in future
purchases to ABC. Based on entity’s experience, only 20% of customers mail in the rebate form.
During 20X6, 500,000 packages of baking pans are sold and 85,000 rebates form were mailed to customers.
Required: Determine the amount of liability to be reported on December 31, 20X6.
500,000 forms = 500,000 packages x 1 form

1 pack
Rebates expense = 500,000 forms x 20% x P10

1 form
P1,000,000
Rebates redeemed = 85,000 forms x P10

1 form
P850,000
Rebates liability = beginning + rebate expense P1,000,000 – rebates form mailed P850,000 = P150,000 Ending balance
Page 9 of 28
Case 3: (Warranties Liability)
Applicable standard PAS 37 vs PFRS 15

If a customer has the option to purchase a warranty separately (for example, because the warranty is priced or negotiated
separately), the warranty is accounted for in accordance with PFRS 15 Revenue from Contracts with Customers.
If a customer does not have the option to purchase warranty separately, the warranty is accounted for in accordance with PAS 37
Provisions, Contingent Liabilities and Contingent Assets unless the promised warranty provides the customer with a service in
addition to the assurance that the product complies with agreed – upon specification.
A. Miley Equipment Company sells computers for P1,500 each and also gives each customer a 2-year warranty that requires the
company to perform periodic services and to replace defective parts. During 20x1, the company sold 700 computers. Based on past
experience, the company has estimated the total 2-year warranty costs as P30 for parts and P60 for labor. (Assume sales all occur at
December 31, 20x1.)
In 20x2, Miley incurred actual warranty costs relative to 20x1 computer sales of P10,000 for parts and P18,000 for labor.
Instructions
(a) Under the expense warranty (accrual approach) treatment, give the entries to reflect the above transactions (accrual method)
for 20x1 and 20x2.
(b) Under the cash basis method (expense as incurred approach), what are the Warranty Expense balances for 20x1 and 20x2?
(c) The transactions of part (a) create what balance under current liabilities in the 20x1 statement of financial position?
(a) 20x1
Accounts Receivable ................................................................................... 1,050,000
Sales ............................................................................................ 1,050,000
Warranty Expense ...................................................................................... 63,000

Warranty Liability ........................................................................... 63,000
20x2
Warranty Liability ....................................................................................... 28,000
Inventory ...................................................................................... 10,000
Accrued Payroll .............................................................................. 18,000
(b) 20x1 P0.

20x2 P28,000.
(c) 20x1 Current Liabilities— Warranty Liability P31,500. (P63,000 / 2)

(The remainder of the P63,000 liability is a non-current liability.)
B. Packard Company started selling a new product that carried a two-year warranty against defects. Based upon the past
experience with other products, the estimated warranty costs related to peso sales were computed as follows:
First year of warranty 3%
Second year of warranty 5%
Total sales and actual warranty repairs for 20x8 and 20x9 are given below:
20x8 20x9
Sales P4,200,000 P6,960,000
Actual warranty expenditures 148,800 180,000
Required:
a. What amount should Packard report as its estimated warranty liability as of December 31, 20x9?
b. Based on the above data, assuming that the sales and repairs occur evenly throughout the year, how much would be the
predicted warranty expense covering 20x8 and 20x9 sales still under warranty?
20x9 20x1
Warranty Liability, January 1 P 0 P187,200
Warranty expense (8% x 4,200,000)/(8% x 6,960,000) 336,000 556,800
Actual repair costs incurred (148,800) (180,000)
Warranty liability, December 31 P187,200 P564,000
On 20x9 sales (4,200,000 x 5% x ½) P105,000

On 20x1 sales [(1/2 of 3%) + 5%] x 6,960,000 452,400
Warranty Liability, December 31, 20x1, as analyzed P557,400
Problem 10: (Guarantee for indebtedness of others) On January 1, 20X1, ABC Co. guaranteed a P1,000,000 loan by XYZ, Inc.
from a bank. On December 31, 20X1, XYZ defaulted on its loan and it became probable that ABC will be held liable to the bank for
the P1,000,000 loan taken by XYZ.
January 1, 20x1
No Entry
December 31, 20X1

Probable loss on guarantee P1,000,000
Estimated liability for guaranteed P1,000,000
Problem 11: (Contingent liabilities) Below are two independent situations.

1. In August, 20x0 a worker was injured in the factory in an accident partially the result of his own negligence. The worker has
sued Wesley Co. for P800,000. Counsel believes it is possible but not probable that the outcome of the suit will be unfavorable
and that the settlement would cost the company from P250,000 to P500,000.
Page 10 of 28
2. A suit for breach of contract seeking damages of P2,400,000 was filed by an author against Greer Co. on October 4, 20x0.
Greer's legal counsel believes that an unfavorable outcome is probable. A reasonable estimate of the award to the plaintiff is
between P600,000 and P1,800,000. No amount within this range is a better estimate of potential damages than any other
amount.
Instructions: Discuss the proper accounting treatment, including any required disclosures, for each situation. Give the rationale
for your answers.
1. Wesley Co. should disclose in the notes to the financial statements the existence of a possible contingent liability related to the
lawsuit. The note should indicate the range of the possible loss. The contingent liability should not be accrued because the loss
is possible, not probable.
2. The probable award should be accrued by a charge to an estimated loss and a credit to an estimated liability of P1,200,000.
Greer Co. should disclose the following in the notes to the financial statements: the amount of the suit, the nature of the
contingency, the reason for the accrual, and the range of the possible loss.
The accrual is made because it is probable that a liability has been incurred and a reasonable estimate can be made of the
obligation amount. The midpoint amount in the range of possible losses is used when no amount is a better estimate than any
other amount.
Problem 12: (Contingent Assets)
Case 1: Quinn is involved in a pending court case. Quinn’s lawyers believe it is probable that Quinn will be awarded damages of
P1,000,000. What is the entry to recognize the probable receipt of the awarded?
Quinn should not record the contingent asset until it’s realized. Usually, contingent assets are neither accrued nor disclosed. The
P1,000,000 contingent asset should be disclosed because its outcome is considered probable.
Case 2: In 20X1, there was a robbery in one of ABC’s branches. There has been a dispute on the P100,000 insurance claim that
ABC has presented to its insurance provider. On December 31, 20X1, the insurance company approved the payment of 80% of
ABC’s claim (i.e., P80,000). ABC received a letter that the settlement check for that amount had been mailed, but such check was
received only on January 5, 20X2. What is the entry to be made by ABC on December 31, 20X1?
December 31, 20X1

Claims receivable P80
Gain on settlement of insurance P80
Since the claim is virtually certain, it is not considered as a contingent asset. Thus, recognition of the approved payment is
appropriate.
Problem 13: (Decommissioning provision)
Case 1: On January 1, 20x0, Starexd Company purchased a mining site that will have to be restored to certain specifications when
the mining production ceases. The cost of the mining site is P8,000,000 and the restoration cost is expected to be P2,000,000. It is
estimated that the mine will continue in operation for 10 years.
The appropriate discount rate is 8%. The present value of 1 at 8% for 10 periods is 0.4632. On December 31, 20x9, the entity
contracted with another entity for the restoration of the mining site in accordance with specifications at a cost of P1,800,000.
Required:
1. Prepare journal entries in 20x0 to record the purchase of the mining site and the recognition of the decommissioning liability.
2. Prepare journal entry to record the settlement of the decommissioning liability on December 31, 20x9.
Requirement 1
20x0
Jan. 1 Mining site 8,000,000
Cash 8,000,000
1 Mining site 926,400
Decommissioning liability (2,000,000 x .4632) 926,400
Requirement 2
20x9
Dec. 31 Decommissioning liability 2,000,000
Cash 1,800,000
Gain on settlement of decommissioning liability 200,000
Case 2: On January 1, 20x4, Palmera Company purchased a gas detoxification facility for P9,000,000. The cost of cleaning up the
routine contamination caused by the initial location of gas on the property is estimated to be P1,500,000. This cost will be incurred in
10 years when all of the existing stockpile of gas is detoxified and the facility is decommissioned.
Additional contamination may occur in succeeding years that the facility is in operation. On January 1, 20x6, additional
contamination clean up cost is estimated at P200,000. The appropriate discount rate is 6%. The present value of 1 at 6% is 0.63 for
8 periods and 0.56 for 10 periods.
On December 31, 2023, the entity paid a contractor an amount of P2,000,000 for the decommissioning of the detoxification facility.
Required:
1. Prepare journal entries in 20x4 in relation to the detoxification facility and the decommissioning liability.
2. Prepare journal entries in 20x6 in relation to the detoxification facility and decommissioning liability.
3. Prepare journal entries on December 31, 20x13 to record the derecognition of the detoxification facility and the settlement of the
decommissioning liability.
Page 11 of 28
With Suggested Answer:
Requirement 1 (20x4)
Jan. 1 Detoxification facility 9,000,000
Cash 9,000,000
1 Detoxification facility 840,000

Decommissioning liability (1,500,000 x .56) 840,000
Dec. 31 Depreciation 984,000

Accumulated depreciation (9,840,000 / 10)) 984000
31 Interest expense 50,400

Decommissioning liability (6% x 840,000) 50,400
Requirement 2 (20x6)
Jan. 1 Detoxification facility 126,000
Decommissioning liability (200,000 x .63) 126,000
Dec. 31 Depreciation 999,750

Accumulated depreciation (9,840,000 / 10)) 999,750
Original cost 984,000

Additional cost (126,000 / 8) 15,750
Total depreciation 999,750
31 Interest expense 64,189

Decommissioning liability (6% x 840,000) 64,189
Original liability 840,000

Interest for 20x4 (6% x 840,000) 50,400
Carrying amount – 12/31/20x4 890,400
Interest for 20x5 (6% x 890,400) 53,424
Carrying amount – 12/31/20x5 943,824
Interest for 20x6 (6% x 943,824) 56,629

Interest for 20x6 on additional liability 6% x 126,000) 7,560
Total interest for 20x6 64,189
Requirement 3 (December 31, 20x13)

Dec. 31 Accumulated depreciation 9,966,000
Detoxification facility 9,966,000
Purchase price 9,000,000

Original decommissioning cost 840,000
Additional decommissioning cost 126,000
Total cost 9,966,000
31 Decommissioning liability 1,700,000

Loss on settlement of
decommissioning liability 300,000
Cash 2,000,000
Problem 15: (IFRS 15 Revenue from Contracts with Customers) (With Suggested Answers)
WARRANTIES
The guidance in IFRS 15 on warranties has been developed acknowledging the different types of warranties. Under IFRS 15,
warranties are grouped in two types: assurance and service. What distinguishes them is whether the warranty simply provides
assurance the product complies with agreed-upon specifications or whether it provides a service in addition to the assurance. If the
customer has the option to purchase the warranty, the warranty is a “service-type” warranty and will need to be accounted for as a
separate performance obligation.
If the customer does not have the option to purchase the warranty separately, then the warranty may not provide a distinct service
and may simply provide assurance regarding the existing product. An assessment is therefore required to determine whether the
customer is still receiving a service. Examples of factors to be considered in completing this assessment include:
• whether the warranty is required by law
• the length of the warranty coverage period
• the nature of the tasks the entity promises to perform.
If it is determined that no distinct service is provided, such warranties are referred to as “assurance-type” warranties. Such
warranties will be accounted for in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets.
Page 12 of 28
Case 1: (Identifying Performance Obligation) NN Computers manufactures and sells computers that include a warranty to
make good on any defect in its computers for 150 days (often referred to as an assurance warranty). In addition, it sells separately
on extended warranty. Which provides protection from defects for three years beyond the 150 days (often referred to as a service
warranty). In this case, two performance obligation exist, one related to the sale of the computer and the assurance warranty, and
the other to the extended warranty(service warranty).
Required:
1. Is this a one performance obligation or a separate performance obligation?
2. How about the extended warranty-one performance obligation or separate performance obligation?
Suggested Answer:
1. The sale of the computer and related assurance warranty are one performance obligation as they are interdependent
and interrelated with each other.
2. The extended warranty is separately sold and is not interdependent.
Case 2: A customer enters into a contract with a heavy duty machine manufacturer for the purchase of a tractor for P100,000. All
pieces of equipment sold by the manufacturer come with a one-year standard warranty that specifies the equipment will comply with
the agreed-upon specifications and will operate as promised for a one-year period from the date of purchase.
In signing this contract, the customer also requested to purchase an additional P2,000 two-year warranty commencing after the
expiry of the standard one year warranty.
Required: What are the two warranties in this contract?
Suggested Answer:
There are two warranties in this contract:

1. assurance-type warranty — for first year after purchase
2. service-type warranty — for two years after expiry of the initial standard warranty.
Given that the customer has the option of purchasing the additional warranty separately, this is a service-type warranty and is
accounted for as a separate performance obligation. Deferred revenue of P2,000 is recognized (as opposed to revenue being
recorded) until the performance obligation is satisfied. The assurance-type warranty is accounted for in accordance with IAS 37
Provisions, Contingent Liabilities and Contingent Assets
Case 3: JJ Company sold 2,400 units during 20x7 at a price of P14,400,000, with a warranty guarantee that the product was free of
any defects. The cost of unit sold is P9,600,000. The term of the assurance warranty is two years, with an estimated cost of
P72,000. In addition, JJ sold extended warranties related to 960 units for three years beyond the two-year period for P28,800.
Required:
1. Prepare the journal entries to record the revenue and liabilities related to the warranties.
2. Prepare the journal entries to record reduce inventory and recognize cost of goods sold.
Suggested Answer:
JJ Company sold 2,400 units during 20x7 at a total price of P14,400,000, with a warranty guarantee that the product was free of any
defects. The cost of each unit sold is P9,600,000. The term of the assurance warranty is two years, with an estimated cost of
P72,000. In addition, Jack sold extended warranties related to 800 units for three years beyond the two-year period for P28,800.
1. To record the revenue and liabilities related to the warranties:

Cash (P14,400,000 + P28,800). . . . . . . . . . . . . . . . . . . . . . . . 14,428,800
Warranty expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72,000
Warranty liability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72,000
Unearned Warranty Revenue . . . . . . . . . . . . . . . . . . . . . . . . 28,800
Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,000,000
Page 13 of 28
2. To reduce inventory and recognize cost of goods sold:
Cost of sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,600,000
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,600,000
ACCOUNTING FOR DISCOUNTS UNDER IFRS 15
Discounts are probably the most popular selling tool in business. Without a doubt, many companies discount the price for their
products or services in various forms, for example:
 Buy 1, get 1 free (and modifications),
 Get 10% off for purchases over P100 (and modifications),
 Gift vouchers,
Settlement discounts (bonus for early payment or for cash payment),
Sellers provide discounts
When a seller provides a discount, it directly affect the amount of his revenue. IFRS 15.47, specify that you should present the
revenue net of discounts. In other words, discounts reduce the amount of your revenue and do not represent cost of sales (or cost
of promotion etc.)
For example, when you sell a machine for P100 and you decide to provide a discount of 3%, then you present a revenue of P97, and
NOT the revenue of P100 and cost (of sales, marketing, whatever) of 3.
This rule seems very basic and very simple, yet its practical application can be challenging at some circumstances.
Case 1: (Discount Coupons) Imagine you run an e-shop with books. To support your sales, you send a discount coupon for P5
that your customers can use with every purchase over P100.
How should you account for the discount coupon?
Suggested Answer:
In this particular example, you don’t recognize a provision in your financial statements for a discount at the time of distributing a
coupon.
Why?
Because there’s no past event.
Remember, a customer would have to make a purchase over 100 and only then you have a liability to provide a discount of CU 5.
Instead, you simply recognize revenue net of CU 5 discount when a coupon is redeemed.
Case 2: Buy 1, get 1 free (or any free items) Instead of giving discount coupons, you promise to deliver a book “Thai cuisine”
for free with every purchase of “Thailand travel guide” for P50.
You normally sell Thai cuisine for P10, its cost in your inventory is P6 and the cost of Thailand travel guide is P35.
What do to now?
Suggested Answer:
Under IAS 18, you simply recognize revenue for both books of CU 50 and cost of sales of CU 41 (35+6).
Cost of free item is not a marketing or promotion cost in this case, because a free item increases revenues (supports spending).
Under IFRS 15, the accounting treatment is the same if both books are delivered at the same time.
However, if you deliver Thailand travel guide in September and Thai cuisine in October due to low stock, then you would need to split
the transaction price of P50 based on the relative stand-alone selling prices and recognize revenue accordingly.
More specifically:
 Total stand-alone selling prices: P50+P10 = P60
 Revenue allocated to Thailand travel guide: P50/P60*P50= P42 to be recognized in September.
 Revenue allocated to Thai cuisine: P10/P60*P50 = P8 to be recognized in October.
 Costs of sales are recognized accordingly.
Buyers get discounts
When buyers get discounts, it’s a totally different story.
We need to look at IAS 2 Inventories, IAS 16 Property, plant and equipment or other similar standards for guidance.
Both IAS 2 and IAS 16 prescribe that we should initially measure an item of PPE or inventories at its cost including purchase
price. And, it’s net of discounts.
you receive a discount as a reduction in the purchase price of inventories, then you should deduct it from their costs.
When discounts refund some selling expenses, then these discounts are not deducted from the costs of inventories, but treated
as income.
Another consideration might relate to settlement discounts, i.e. discounts received from quick payment. They should not be
treated as finance income, but again, they reduce the cost of inventories.
Case 1: (Rebates on inventories) Supermarket wants to purchase 1,000 Chocobars. What is their cost, based on the following
information:
 Sales price per unit: P5
 Volume discount per 1,000 units: 10%
 Settlement discount: 2% when paid within 30 days
 Contribution for leaflet printing costs: 1%
Page 14 of 28
Required:
a. Compute the cost of inventories
b. What about inventories received for free, what is the applicable standards?
Suggested Answer:
If the supermarket intends to pay within 30 days, then it should reduce costs of inventories by settlement discount, too.
Contribution for leaflet printing costs is clearly refunding some selling expenses and therefore it should be treated as income, not as
cost of inventories.
The costs of inventories is: CU 5*1 000 – CU 5*1 000*(10%+2%) = CU 4 400.
What about inventories received for free?
If a government (including governmental agencies) donated you some inventories, then you should apply the standard IAS 20
Accounting for Government grants and Disclosure of government assistance.
If you received some units of inventories for free as a “gift” with your purchase, then you should apply the standard IAS 2 –
i.e. measure inventories at cost.
GIFT CARDS
How are gift cards accounted for under IFRS 15?
As gift cards are sold, a contract liability is recognized and as customers redeem the cards for goods or services, revenue is
recognized because the related performance obligation has been satisfied.
Customers may not always exercise their contractual rights to redeem the gift cards in full. IFRS 15 refers to this unredeemed
amount (i.e., the unexercised rights) as “breakage”. If an entity expects to be entitled to such breakage amounts (i.e., customers
are not expected to exercise their rights in full), the entity recognizes breakage in revenue based on the pattern of recognition of the
goods and services transferred to the customers. To determine entitlement to such breakage amounts, entities should apply the
guidance related to constraining variable consideration (discussed in question 6). Specifically, breakage can only be recognized if it is
highly probable that recognizing breakage will not result in a significant reversal of the cumulative amount of revenue recognized.
If an entity does not have sufficient information to predict whether it will be entitled to such breakage amounts, breakage will only
be recognized as revenue when the likelihood of customers exercising the outstanding rights is remote.
PROBLEMS
Problem 1: (Noninterest-bearing note cash price equivalent) On December 31, 20x7, International Refining Company
purchased machinery having a cash selling price of P85,933.75. The company paid P10,000 down and agreed to finance the
remainder by making four equal payments each December 31 at the implicit interest rate of 12%.
Required: (Round off PV factors to 5 decimal places.)

(1) Determine the amount of the annual payments to be made under the financing agreement.
(2) Prepare the journal entry to record the acquisition of the machinery on December 31, 20x7.
(3) Prepare the journal entry at December 31, 20x8.
ANS:
(1)
The total cash price of the machinery is P85,933.75. The company paid P10,000 down, leaving a balance of P75,933.75 to finance.
This amount represents the present value of four payments of unknown amounts discounted at 12%. The problem can be solved by
dividing the amount to be financed, P75,933.75, by the factor for the present value of an annuity for 4 years at 12%:
P75,933.75  3.03735 = P25,000
(2)
The journal entry to record the acquisition of the machinery at December 31, 20x7, would be:
Machinery ................................. 85,933.75

Discount on Notes Payable ................. 24,066.25
Cash .................................... 10,000
Notes Payable ........................... 100,000
(3)
The journal entry at December 31, 20x8, would be:
Notes Payable ............................. 25,000.00

Interest Expense .......................... 9,112.05
Cash .................................... 25,000.00
Discount on Notes Payable ............... 9,112.05
Problem 2: (Short-term note, interest deducted in advance-Lump sum) On August 31, Jenks Co. borrowed and sign one-
year P160,000 note discounted (deducted in advance) at 9% by the bank.
Instructions
(1) Make the entry to record the notes payable at August 31.
(2) Prepare the adjusting entry at December 31, assuming straight-line amortization of the discount.
Answer
(1) Cash ............................................................................................. 145,600
Discount on notes payables ................................................................... 14,400
Notes Payable.......................................................................... 160,000
(2) Interest Expense [14,400 x 4/12]........................................................... 4,800

Discount on notes payable ........................................................ 4,800
Page 15 of 28
Problem 3: (Long-term note with reasonable interest-Compounded interest) On September 1, 20x9, the JFC issued a 9%
promissory note with face value of P6,949,800 for a piece of land. The principal and interest, compounded annually, are due August
31, 20x12.
Required:
1. Compute for the interest expense for year 20x9, 20x10 and 20x11.
2. At what amount should the notes payable, inclusive of accrued interest, be shown on December 31, 20x10 statement of
financial position?
3. How will the Note Payable and Interest Payable be shown on December 31, 20x10 statement of financial position? On
December 31, 20x11 statement of financial position?
4. Prepare the entries relating to the foregoing for years 20x9 through 20x12. (Prepare adjusting entries only at the yearend,
December 31)
(a) 20x9 20x10 20x11

6,949,800 x 9%= 625,482
625,482 x 4/12 208,494
625,482 x 8/12 416,988
6,949,800 x 1.09 = 7,575,282
7,575,282 x 9%= 681,775
681,775 x 4/12 227,258
681,775 x 8/12 454,517
7,575,282 x 1.09 = 8,257,057
8,257,057 x 9%= 743,135
743,135 x 4/12 _______ _______ 247,712
Totals 208,494 644,246 702,229
(b) Notes Payable 6,949,800

Accrued interest (208,494 + 644,246) 852,740
Total, December 31, 20x10 7,802,540
(c) Non-current Liabilities

Notes Payable 6,949,800
Accrued interest (208,494 + 644,246) 852,740
December 31, 20x10 7,802,540
Current Liabilities 6,949,800

Accrued interest 1,554,969
Total, December 31, 20x11 8,504,769
(d)
09/01/10 Land 6,949,800
12/31/10 Interest Expense 208,494

Interest Payable 208,494


12/31/13 Interest Expense (adjusted) 495,231

Interest Payable 1,554,969
Cash 9,000,000
Problem 4: (Noninterest – bearing note – Lump sum) On January 1, 20X1, an entity issues a 3-year, non-interest bearing,
note payable amounting to P1,600,000 in exchange for land. The principal on the note is due on December 31, 20X3. The
effective interest rate on January 1, 20X1 is 17%.
Required: Provide all the entries during the term of the note payable. (Round off PV factors to 5 decimal places.)
Cash flows 1,600,000

PV of 1 @17%, n=3 0.62437
Present value - 1/1/x1 998,992
Date Interest expense Discount Present value

1/1/x1 601,008 998,992
12/31/x1 169,829 431,179 1,168,821
12/31/x2 198,700 232,480 1,367,520
12/31/x3 232,478 1 1,599,999
1/1/x1
Page 16 of 28
Land 998,992
Discount on note payable 601,008
Note payable 1,600,000
12/31/x1
Interest expense 169,829
12/31/x2
12/31/x3

Cash 1,600,000
Problem 5: (Noninterest-bearing note – Installment) On January 1, 20X1, an entity issues a 3-year, noninterest-bearing, note
payable amounting to P1,200,000 in exchange for land. The principal on the note is due in three equal annual installments of
P400,000 payable every December 31. The effective interest rate on January 1, 20X1 is 17%.
Required: (Round off PV factors to 5 decimal places.)

a. Compute for current and noncurrent portions of the note payable on December 31, 20X1
b. Provide all the entries during the term of the note payable.
Requirement (a):
Cash flows 400,000
PV ord. annuity @17%, n=3 2.20958
Present value - 1/1/x1 883,832
Date Payments Interest expense Amortization Present value

1/1/x1 883,832
12/31/x1 400,000 150,251 249,749 634,083
12/31/x2 400,000 107,794 292,206 341,878
12/31/x3 400,000 58,119 341,881 (3)
Current portion, 12/31/x1: 292,206

Noncurrent portion, 12/31/x1: 341,878
Requirement (b):
1/1/x1
Land 883,832
12/31/x1
Note payable 400,000
Cash 400,000
12/31/x2
Cash 400,000
12/31/x3
Cash 400,000
Problem 6: (Noninterest-bearing note – Installment in advance) An entity issues the following notes payable on January 1,
20X1. P8,000,000 noninterest – bearing note payable due in five equal annual installments every January 1. The first installment is
due on January 1, 20X1. The effective interest rate on January 1, 20X1 is 15%.
Required: Compute for current and noncurrent portions of the note payable on December 31, 20X1. (Round off PV factors to 5
decimal places.)

1/1/x1 6,167,965
1/1/x1 1,600,000 - 1,600,000 4,567,965
1/1/x2 1,600,000 685,195 914,805 3,653,160
1/1/x3 1,600,000 547,974 1,052,026 2,601,134
1/1/x4 1,600,000 390,170 1,209,830 1,391,304
Page 17 of 28
1/1/x5 1,600,000 208,696 1,391,304 (0)
Problem 7: Note with below market interest (simple interest)- Principal and interest due in installment. On January 1,
20X1, ABC Co. issued a 3-year, 3%, P1,200,000 note payable in exchange for a machine. Principal is due in three equal annual
instalments. Interest on the outstanding principal balance are also due annually and are to be paid together with the periodic
payments on the principal. The prevailing interest rate for this type of note is 12%.
Required: Prepare all journal entries for 20X1, 20X2 and 20X3 (Round off PV factors to 5 decimal places.)
Suggested Answers
Date Principal + interest on Future cash flows PV factors Present value
outstanding balance
12/31/X1 400K +(1.2Mx3%) 436,000 .89286 P389,286
12/31/X2 400K +(800Kx3%) 424,000 .79719 338,010
12/31/X3 400K +(400Kx3%) 412,000 .71178 293,253
P1,020,549
Amortization table
1/1/20X1 1,020,549
1/1/20X2 436,000 122,466 313,534 707,015
1/1/20X3 424,000 84,842 339,158 367,857
1/1/20X4 412,000 44,143 367,857 0
January 1, 20X1
Machinery 1,020,549
December 31, 20X1

Cash 436,000
Discount not note payable 86,466
December 31, 20X2

Cash 424,000
December 31, 20X3

Cash 412,000
Problem 8: (Fair value option ) On January 1, 20x3, an entity borrowed from a bank P4,000,000 on a 12% 5-year interest
bearing note. The entity received P4,000,000 which is the fair value of the note on January 1, 20x3. Transaction cost of P 100,000
was paid by the entity. The fair value of the note payable was P3,500,000 on December 31, 20x3 and P3,800,000 on December 31,
20x4. The entity has elected irrevocably the fair value option for measuring the note payable.
Required: Prepare all journal entries for 20x3 and 20x4.
Jan. 1 Cash 4,000,000

Jan. 1 Transaction cost 100,000
Cash 100,000
Dec. 31 Interest expense (12% x 4,000^00) 480,000
Cash 480,000
Dec. 31 Note payable 500,000
Gain from change in fair value 500,000
Note payable -January 1, 20x3 4,000,000

Fair value-December 31, 20x3 3,500,000
Decrease in fair value of liability - gain 500,000
20x4
Dec. 31 Interest expense 480,000
Cash 480,000
Dec. 31 Loss from change in fair value 300,000

Note payable - December 31, 20x3 3,500,000

Fair value-December 31, 20x4 3,800,000
Increase in fair value of liability - loss 300,000
Explain the "initial measurement" of note payable.
Page 18 of 28
PFRS 9, paragraph 5.1.1, provides that a note payable shall be measured initially at fair value minus transaction costs that are
directly attributable to the issue of the note payable.
In other words, transaction costs are included in the measurement of note payable.
However, if the note payable is irrevocably designated at fair value through profit or loss, the transaction costs are expensed
immediately.
The "fair value" of the note payable is equal to the present value of the future cash payment to settle the note payable.
The term "present value" is the discounted amount of the future cash outflow in settling the note payable using the market rate
of interest.
Explain the "subsequent measurement" of note payable.
PFRS 9, paragraph 5.3.1, provides that after initial recognition, a note payable shall be measured either:
a. At amortized cost using the effective interest method.
b. At fair value through profit or loss if the note payable is designated irrevocably as measured at fair value through profit or
loss,
What is the "amortized cost" of note payable?
The amortized cost of note payable is the amount at which the note payable is measured initially minus principal repayment,
plus or minus the cumulative amortization using the effective interest method of any difference between the initial carrying
amount and maturity amount. Simply stated, the difference between the face amount and present value of the note payable is
amortized through interest expense using the effective interest method. Actually, the difference between the face amount and
present value is either discount or premium on the issue of note payable.
Explain the "fair value option" of measuring note payable.
PFRS 9, paragraph 4.2.2, provides that at initial recognition, a note payable may be irrevocably designated as at fair value
through profit or loss. In other words, under the fair value option, the note payable shall be measured initially at fair value and
remeasured at every year-end at fair value and any changes in fair value are recognized in profit or loss. There is no
amortization of transaction cost, discount and premium on note payable. As a matter of fact, interest expense is recognized
using the nominal or stated interest rate and not the effective interest rate.
Problem 9: (Loan payable) On January 1, 20X1, an entity obtains an 11%, P5,000,000 bank loan. The bank charges the entity
an 8.74% nonrefundable loan origination fee. The principal on the loan matures on December 31, 20X4 but interest is due annually
every December 31.
Required: (Round off PV factors to 5 decimal places)

a. Compute the initial carrying amount of the loan
b. Compute the effective interest rate on the loan
c. Compute the carrying amount of the loan on December 31, 20X1.
Requirement (a):
Loan payable 5,000,000
Transaction costs (5M x 8.75%) (437,000)
Carrying amount - 1/1/x1 4,563,000
Requirement (b):
Trial and error:
Working formula:
 (Principal: 5,000,000 x PV of 1 @ x%, n=4) + (Interest: 550,000 x PV ordinary annuity @ x%, n=4) = 4,563,000
First trial: @14%
 (Principal: 5,000,000 x PV of 1 @ 16%, n=4) + (Interest: 550,000 x PV ordinary annuity @ 16%, n=4) = 4,563,000
 (5,000,000 x 0.59208) + (550,000 x 2.91371) = 4,563,000
 (2,960,400 + 1,602,541) = 4,563,000
 4,562,941 = 4,563,000
If the difference of ₱60 is deemed immaterial then 14% is regarded as the effective interest rate.
Requirement (c):
1/1/x1 4,563,000
12/31/x1 550,000 638,820 88,820 4,651,820
12/31/x2 550,000 651,255 101,255 4,753,075
12/31/x3 550,000 665,430 115,430 4,868,505
12/31/x4 550,000 681,591 131,591 5,000,096
Problem 10: (Modification of Note under Different Circumstances) Freeze Corporation is having financial difficulty and
therefore has asked Manhattan National Bank to restructure its P3 million note outstanding. The present note has 3 years remaining
and pays a current rate of interest of 14%. The present market rate for a loan of this nature is 10%. The note was issued at its face
value.
Page 19 of 28
Instructions: Prepare below are three independent situations. Prepare the journal entry that Freeze would make for each of these
restructurings. (Round off PV factors to 4 decimal places)
(a) (Asset Swap) Manhattan National Bank agrees to accept land in exchange for relinquishing its claim on this note. The land has
a book value of P1,950,000 and a fair value of P2,400,000.
(b) (Equity Swap) Manhattan National Bank agrees to take an equity interest in Freeze by accepting ordinary shares valued at
P2,200,000 in exchange for relinquishment its claim on this note. The fair value of liability extinguished value at P2,500,000. The
ordinary shares have a par value of P1,000,000.
(c) (Modification of Terms) Manhattan National Bank agrees to modify the terms of the note, indicating that Freeze does not
have to pay interest on the note over the 3-year period.
(a) Note Payable....................................................................... 3,000,000

Land......................................................................... 1,950,000
Gain on Disposition of Real Estate........................... 450,000
Gain on Extinguishment of Debt................................ 600,000
Fair value of land.......................... P2,400,000

Book value of land........................ (1,950,000)
Gain on disposition of
real estate.................................. P 450,000
Note payable (carrying

amount).................................... P 3,000,000
Fair value of land......................... (2,400,000)
Gain on extinguishment of
debt...........................................P 600,000
(b) Note Payable............................................................ 3,000,000

Share Capital––Ordinary............................... 1,000,000
Share Premium––Ordinary............................ 1,200,000
Gain on Extinguishment of Debt.................... 800,000
Carrying amount of debt............. 3,000,000
Fair value of equity..................... (2,200,000)
Gain on Extinguishment
of Debt...................................... P 800,000
Under IFRIC 19, when equity instruments are issued to extinguish all or part of a financial liability, the equity instruments
issued shall be measured initially at the following in the order of priority.
a. Fair value of the equity instruments issued

b. Fair value of the liability extinguished
c. Carrying amount of the liability extinguished
The difference between the carrying amount of the liability and the initial measurement of the equity instruments issued shall
be recognized in profit or loss.
(c) Note Payable (Old)............................................................... 3,000,000

Gain on Extinguishment of Debt............................... 975,000*
Note Payable (New).................................................. 2,025,000
*Calculation of gain.
Pre-restructure carrying amount............................................ P 3,000,000
Less: Present value of restructuring cash flows:
Present value of P3,000,000 due in
3 years at 14%;
(P3,000,000 × .6750)................................................ 2,025,000
Debtor's gain on extinguishment............................................. P 975,000
PROBLEMS
Problem 1: ( Types of Bonds) Chicken Company reported the following noncurrent liabilities on December 31, 20x4:
Unsecured
9% registered bonds (P250,000 maturing annually beginning in 20x5) P2,750,000
11% convertible bonds, callable beginning in 20x5, due 20x6 1,250,000
Secured
12% guaranty security bonds, due 20x6 2,500,000
10% commodity backed bonds (P500,000 maturing annually beginning in 20x5) 2,000,000
Required: What total amount of serial bonds and debenture bonds should be reported?
Serial bonds Debenture bonds

9% registered bonds 2,750,000 2,750,000
11% convertible bonds 1,250,000
10% commodity backed bonds 2,000,000 .
Total 4,750,000 4,000,000
1. Term bonds are bonds with a single date of maturity.

2. Serial bonds are bonds with a series of maturity dates or bonds that mature by installments.
Page 20 of 28
3. Mortgage bonds are bonds secured by mortgage of real properties.
4. Collateral trust bonds are bonds secured by investments in stocks and bonds.
5. Debenture bonds are bonds without collateral security.
6. Registered bonds require the registration of the name of the bondholder on the books of the corporation. Consequently,
when the bondholder sells a bond, the old bond certificate is surrendered and a new bond certificate is issued to the buyer.
Interest is paid periodically to the bondholder of record.
7. Coupon or bearer bonds - The name of the bondholder is not registered. Accordingly, interest is paid periodically to the
bearer of the bond or the person submitting a detachable interest coupon.
8. Convertible bonds are bonds that can be exchanged for equity shares of the issuing entity.
9. Callable bonds are bonds that can be called in for payment before the date of maturity.
10. Guaranteed bonds are bonds issued whereby another party promises to make payment if the borrower fails to do so.
11. Junk bonds are high risk and high yield bonds issued by entities that are heavily indebted or otherwise in weak financial
position.
12. Commodity-backed bonds are bonds which are redeemable in terms of commodities such as oil or precious metals.
Problem 2 (Accounting for transactions costs): During the current year, Clean Company incurred the following costs in
connection with the issuance of bonds:
Promotion cost P200,000
Printing and engraving 150,000
Legal fees 800,000
Fees paid to independent accountants for registration information 100,000
Commissions paid to underwriter 900,000
Required: What total amount should be recorded as bond issue cost to be amortized over the term of the bonds?
Answer. All costs incurred.
Bond issue costs or "transaction costs" are incremental costs that are directly attributable to the issue of bonds payable. Such
costs include printing and engraving cost, promotion cost, legal and accounting fee, registration fee with regulatory authorities,
commission paid to agents and underwriters and other similar charges. Bond issue costs are not treated as outright expense
but amortized over the life of the bond issue in a manner similar to that used for discount on bonds payable. Bond issue costs
are conceived as cost of borrowing and therefore will increase interest expense. The amortization of bond issue costs is
recorded by debiting interest expense and crediting bond issue costs.
Problem 3 (With direct cost @ date of issuance): On January 1, 20x4, Casandra Company issued 3-year bonds with face value
of P5,000,000 at 99. The nominal rate is 10% and the interest is payable annually on December 31. The entity paid bond issue cost
of P150,000.
The PV of 1 at 11% for 3 periods is .7312, and the PV of an ordinary annuity of 1 at 11% for 3 periods is 2.4437. The present
value of the bonds using 11% is:
PV of principal (5,000,000 x .7312) P3,656,000
PV of annual interest payments (500,000 x 2.4437) 1,221,850
Total present value of bonds P4,877,850
The PV of 1 at 12% for 3 periods is .7118, and the PV of an ordinary annuity of 1 at 12% for 3 periods is 2.4018. The present
value of the bonds using 12% is:
PV of principal (5,000,000 x .7118) P3,559,000
PV of annual interest payments (500,000 x 2.4018) 1,200,900
Total present value of bonds P4,759,900
Required: What is the interest expense for 20x4 using the effective interest method?
Carrying amount of bonds (5,000,000 x 99% - 150,000)

Interest expense (4,800,000 x 11.66%) =P559,680
Let X = the effective rate
X = 4,800,000
11% = 4,877,850
12% = 4,759,900
This means that the effective rate is higher than 11% but lower than 12%. Thus, by interpolation, the interest differential is
determined as follows:
X – 11% 4,800,000 – 4,877,850 77,850
12% - 11% = 4,759,900 – 4,877,850 = 117,950 = .66
Thus, the effective rate is 11% plus the differential of .66 or 11.66%.
Problem 4: (Premium vs Discount amortization) ABC Corp. is authorized to issue P1,000,000 of 5-year bonds dated June 30,
20x9 with a stated interest rate of 10%. Interest on the bonds is payable semi-annually on June 30 and December 31. The company
uses the effective interest method of amortization. The bonds were sold to yield (a) 8% (b) 11%.
REQUIRED: Complete the table below. (Round off PV factors to 4 decimal places)
8% 11%
Bond issue price
Nominal Interest for 20x9
Interest expense (Effective Interest) in 20x9
Premium/Discount amortization in 20x9
Bond carrying value at December 31, 20x9
Nominal interest for 20x10
Interest expense for 20x10
Premium/Discount amortization in 20x10
Bond carrying value at December 31,20x10
Page 21 of 28
At 8% At 11%
Bond issue price 1,081,145 962,280
Nominal interest for 2010 50,000 50,000
Interest expense for 2010 43,246 52,925
Premium/discount amortization in 2010 6,754 2,925
Bond carrying value at December 31, 2010 1,074,391 965,205
Nominal interest for 2011 100,000 100,000
Interest expense for 2011 85,671 106,342
Premium/discount amortization in 2011 14,059 6,342
Bond carrying value at December 31, 2011 1,060,332 971,547
.6756 and 8.1109

.5854 and 7.5376
Problem 5: (Bond issue price and discount amortization) On June 1, 20x8, Jefferson Controls, Inc. issued P12,000,000 of 10
percent bonds to yield 12 percent. Interest is payable semiannually on May 31 and November 30. The bonds mature in 15 years.
Jefferson Controls, Inc. is a calendar-year corporation.
Required: (Round off PV factors to 4 decimal places)

(1) Determine the issue price of the bonds. Show computations.
(2) Prepare an amortization table through the first two interest periods using the effective-
interest method.
(3) Prepare the journal entries to record bond-related transactions as of the following dates:
(a) June 1, 20x8
(b) November 30, 20x8
(c) December 31, 20x8
(d) May 31, 20x9
ANS:
(1)
Calculation of bond sale price: i = 6% n = 30
Present value of face amount (P12,000,000  .1741) ..... P 2,089,200
Present value of interest (P600,000  13.7648) ......... 8,258,880
P10,348,080
(2)
Amortization table:
Interest Interest Amortization Carrying
Date Payment Expense of Discount Value
6/1/20x8 P10,348,080
11/30/20x8 P600,000 P620,885* P20,885 10,368,965
5/31/20x9 600,000 622,138** 22,138 10,391,103
Computations:
* P10,348,080  6% = P620,885
** P10,368,965  6% = P622,138
(3)
Journal entries:
(a)
6/1/20x8 Cash ........................... 10,348,080
Discount on Bonds Payable ...... 1,651,920
Bonds Payable .................. 12,000,000
(b)
11/30/20x8 Interest Expense ............... 620,885
Cash ......................... 600,000
Discount on Bonds Payable .... 20,885
(c)
12/31/20x8 Interest Expense
(P622,138  1/6 = P103,690) ... 103,690
Discount on Bonds Payable
(P22,138  1/6 = 3,690) ..... 3,690
Interest Payable
(P600,000  1/6) ............ 100,000
(d)
Page 22 of 28
Assuming no reversing entries:
5/31/20x9 Interest Expense ............... 518,448
Interest Payable ............... 100,000
Discount on Bonds Payable .... 18,448
Cash ......................... 600,000
Problem 6: (Issuance of bonds in between interest date) On September 1, 20X1, an entity issues bonds with face amount of
P8,000,000 for P9,105,022, including accrued interest. The bonds are dated January 1, 20X1 and pay annual interest of 11% every
December 31. The effective rate is 9%.
Required:
1. Compute for the initial carrying amount of the bonds.
2. Provide the entry on September 1, 20X1 to record the issuance of the bonds
3. Compute for the interest expense in 20X1.
Requirement (a):
Issue price 9,105,022
Accrued interest (8M x 11% x 8/12) ( 586,667 )
Carrying amount - 4/1/x1 8,518,355
Requirement (b):
4/1/x1
Cash 9,105,022
Bonds payable 8,000,000
Premium on bonds payable 518,355
Requirement (c):
(8,518,355 x 9% x 4/12) = 255,551
Problem 7: (Issue price of bonds – issuance in between interest date) ABC Co. is contemplating on issuing 12%, 3-year,
P1,000,000 bonds. Principal is due at maturity but interest is due annually at each year end. ABC determines that the current
market rate on January 1, 20X1 is 10%.
(Round Off PV factors to 6 decimal places)
Required: Compute for the estimated total proceeds from the issuance of the bonds on April 1, 20X1.
1,000,000 x .751315 = P751,315

120,000 x 2.486852 = P298,422
Total P1,049,737 (January 1, 20X1)
- 3 months interest
Premium Amortization
(1/1-3/30) 3,757
Carrying value P1,045,980 (April 1, 20X1)
+ 3 months accrued 30,000 (1M x 12% x 3/12)
Total issue price P1,075,980
Cash P1,075,980
Premium 45,980 (1,045,980 – 1M)
Interest expense or payable 30,000
Problem 8: (Retirement of bonds)
Case 1: (With direct cost @ date of retirement) On January 1, 20X1, an entity issues bonds with face amount of P5,000,000 for
P5,773,129. The bonds mature on December 31, 20X3 and pay annual interest of 14%. The effective interest rate is 8%.
On December 31, 20X2, after paying the annual interest, the entity retires the bonds at a call premium of P400,000. Cost incurred
that are directly attributable to the retirement amounted to P50,000. The entity is subject to an income tax rate of 30%.
Required: Compute for the gain or loss on the retirement of the bonds to be recognized in 20X2.
12/31/x2
Loss on derecognition 172,222
Cash (5M + 400,000+50,000) 5,450,000
Date Interest paid Interest expense Amortization Present value

1/1/x1 5,773,129
12/31/x1 700,000 461,850.33 238,150 5,534,979
12/31/x2 700,000 442,798.35 257,202 5,277,778
12/31/x3 700,000 422,222.22 277,778 5,000,000
What is the meaning of treasury bonds?
Page 23 of 28
Treasury bonds are an entity's own bonds originally issued and reacquired but not canceled.
Explain the accounting for treasury bonds.
When treasury bonds are acquired, the "treasury bonds account" is debited at face value and any related unamortized premium
or discount or issue cost is canceled. The difference between the acquisition cost and the carrying amount of the treasury
bonds is treated as gain or loss on acquisition of treasury bonds. Any accrued interest paid is charged to interest expense.
Treasury bonds are reported in the statement of financial position as a deduction from bonds payable.
What is meant by bond refunding?
Bond refunding is the floating of new bonds payable the proceeds from which are used in paying the original bonds payable.
Simply stated, bond refunding is the premature retirement of the old bonds payable through the issuance of new bonds
payable.
What is the treatment of bond refunding charges?
The refunding charges include the unamortized bond discount or premium, unamortized bond issue cost and redemption
premium on the old bonds being refunded. PFRS 9, paragraph 3.3.1, provides that bond refunding is an extinguishment of a
financial liability. Paragraph 3.3.3 further provides that the difference between the carrying amount of the financial liability
extinguished and the consideration paid shall be included in profit or loss. Accordingly, the refunding charges shall be
accounted for as loss on early extinguishment of debt.
Case 2: (Retirement price include accrued interest) Marie Company reported the following balances on December 31, 20x4:
Bonds payable P9,360,000
Interest payable 200,000
The bonds are retired on January 1, 20x5 for P8,360,000 includes payment for accrued interest.
Required: What amount should be reported as gain or loss on redemption?
8,360,000 – 200,000 – 9,360,000 = 1,200,000 gain
Case 3: (With Solution) On December 31,20x9 the Emerald Corporation issued five year, non-convertible P5,000,000 face value
12% bonds for P5,386,072, a price that yield 10%. Interest is payable semi-annually on June 1 and December 1.
On April, 20x12, the Emerald Corporation retired P2,000,000 of the bonds at 104 plus accrued interest. The accounting period for the
Emerald Corporation is the calendar year.
REQUIRED:
Determine the following:
(a.) Carrying value of the bonds on December 31, 20x10.
(b.) Interest expense for the year ended December 31, 20x10.
(c.) Carrying value of the bonds retired on April 1, 20x12.
(d.) Gain or loss on redemption of the bonds on April 1, 20x10.
(e.) Carrying value of the bonds on December 31, 20x12
(f.) Interest expense for the year ended December 31, 20x12 and for the year ended December 31, 20x13.
The following table may facilitate the computations required in this problem.
Interest Paid Interest Expense Premium Bond

Date Amortization Carrying Value
12/31/20x9 - - - 5,386,072
06/01/20x10 300,000 269,304 30,696 5,355,376
12/01/20x10 300,000 267,769 32,231 5,323,145
06/01/20x11 300,000 266,157 33,843 5,289,302
12/01/20x11 300,000 264,465 35,535 5,253,767
06/01/20x12 300,000 262,688 37,312 5,216,455
12/01/20x12 180,000 156,494 23,506 3,106,367
06/01/20x13 180,000 155,318 24,682 3,081,685
12/01/20x13 180,000 154,084 25,916 3,055,769
06/01/20x14 180,000 152,788 27,212 3,028,557
12/01/20x14 180,000 151,443* 28,557 3,000,000
*Adjusted; difference is due to rounding off.
(a) Carrying value, December 1, 20x10(see, table) 5,323,145

Amortization for one month (33,843 x 1/6) ____5,640
Carrying value, December 31, 20x10 5,317,505
(b) Interest Expense for year 20x10

January 1-June 1, 20x10 (269,304 x 5/6) 224,420
June 1-December 1, 20x10 267,769
December 1-31, 20x10 (266,157 x 1/6) _44,360
Total 536,549
(c) Carrying value of bonds retired on December 1, 20x12

5,253,767 x 2/5 2,101,507
Amortization through April 1, 20x12 (37,312 x 4/6 x 2/5) ____9,950
Carrying value of bonds retired on April 1, 20x12 2,091,557
(d) Carrying value of bonds retired 2,091,557
Page 24 of 28
Redemption price (2,000,000 x 1.04) 2,080,000
Gain on redemption of bonds 11,557
(e) Carrying value of remaining bonds, December 1, 20x12 3,106,367

Amortization through December 31, 20x12 (24,682 x 1/6) 4,114
Carrying value of remaining bonds, December 31, 20x12 3,102,253
(f) On bonds redeemed: 20x12 20x13

January 1-April 1, 20x13 (262,688 x 2/5 x 3/6) 52,538
On remaining bonds
January 1-June 1, 20x13 (262,688 x 3/5 x 5/6) 131,344
December 1-31, 20x13 (155,318 x 1/6) 25,886
January 1-June 1, 20x14 (155,318 x 5/6) 129,432
December 1-31, 20x14 (152,788 x 1/6) ______ 25,465
Interest Expense 366,262 308,981
Problem 9: (Serial Bonds) On January 1, 20x9, the Blue Sapphire Corporation issued P8,000,000 bonds. The bonds pay interest
annually at 12% on the outstanding bond balance. The face value of the bonds is payable in installments of P2,000,000 every
December 31, 20x9. The bonds were sold at a price that yields 8%.
REQUIRED: (Round off PV factors to 4 decimal places)

(a.) Determine the issue price of the bonds on January 1, 20x9.
(b.) Prepare an amortization table using the effective interest method.
(c.) Prepare the entries in the books of Blue Sapphire Corporation for years 20x9 and 20x10.
(a) Issue price of the bonds
Principal Due Interest Due Amount Due Present Value
Due Date PV Factor
12/31/x09 2,000,000 960,000 2,960,000 0.9259 2,740,664
12/31/x10 2,000,000 720,000 2,720,000 0.8573 2,331,856
12/31/x11 2,000,000 480,000 2,480,000 0.7938 1,968,624
12/31/x12 2,000,000 240,000 2,240,000 0.7350 1,646,400
Selling price of bonds P8,687,544
(b) Amortization Table
Principal Interest Effective Premium Carrying Value,
Due Due Interest Amortization end

Due Date
01/01/x9 8,687,544
12/31/x9 2,000,000 960,000 695,004 264,996 6,422,548
12/31/x10 2,000,000 720,000 513,804 206,196 4,216,352
Page 25 of 28
12/31/x11 2,000,000 480,000 337,308 142,692 2,073,660
12/31/x12 2,000,000 240,000 166,340* 73,660 -0-
*Adjusted; difference is due to rounding off.
(c)
01/01/20x09 Cash 8,687,544
Bonds Payable 8,000,000
Premium on Bonds Payable 687,544
12/31/20x09 Interest Expense 695,004

Cash 960,000

Cash 2,000,000
12/31/20x10 Interest Expense 513,804

Cash 720,000

Cash 2,000,000
Problem 10: (Convertible Bonds)
Case 1: (Conversion) On January 1, 20X1, an entity issues bonds with face amount of P5,000,000 for P5,200,000. The bonds
mature on December 31, 20X3 and pay annual interest of 12%. The bonds can be converted into 10,000 ordinary shares of the
entity with par value per share of P200. On January 1, 20X1, the bonds are selling at 101 without the conversion feature. The
effective interest rate on the bonds is 11.59%. All of the bonds are converted into ordinary shares on January 1, 20X3.
Requirements: Provide the entries:

a. On January 1, 20X1 to record the issuance of the convertible bonds.
b. On January 1, 20X3 to record the conversion of the bonds.
Suggested Answers:
Requirement (a):
1/1/x1
Cash 5,200,000
Premium on bonds payable [(5M x 101%) – 5M] 50,000
Share premium – conversion feature (squeeze) 150,000
Requirement (b):
1/1/x1 5,050,000
12/31/x1 600,000 585,295 14,705 5,035,295
12/31/x2 600,000 583,591 16,409 5,018,886
12/31/x3 600,000 581,689 18,311 5,000,575
1/1/x3
Ordinary share capital (10,000 sh. x ₱200) 2,000,000
Share premium 3,018,886
Share premium – conversion feature 150,000

Share premium 150,000
Case 2: (Retirement) Use the facts in the immediately preceding problem (Case 1). However, in this case, the entity retires the
bonds on January 1, 20X3 at a call premium of P200,000. Without the conversion feature, the bonds are selling on this date at 102.
Requirement: Provide the entry on January 1, 20X3 to record the retirement of the bonds.
Total retirement price (5M + 200K) 5,200,000

Fair value of bonds (5M x 102) (5,100,000)
Retirement price allocated to equity component 100,000

1/1/x1 5,050,000
Page 26 of 28
12/31/x1 600,000 585,295 14,705 5,035,295
12/31/x2 600,000 583,591 16,409 5,018,886
12/31/x3 600,000 581,689 18,311 5,000,575
1/1/x3
Loss on derecognition (squeeze) 81,114
Cash (allocation to debt component) 5,100,000
Share premium – conversion feature 150,000

Cash (allocation to equity component) 100,000
Case 3: (With direct cost @ date of conversion) On December 31, 20x3, Princess Company had outstanding 10%, P1,000,000
face amount convertible bonds payable maturing on December 31,20x16. Interest is payable on June 30 and December 31. Each
P1,000 bond is convertible into 50 shares of P10 par value. On December 31,20x3, the unamortized premium on bonds payable was
P60,000. On December 31,20x3, 400 bonds were converted when Princess's share had a market price of P24. The entity incurred
P4,000 in connection with the conversion. No equity component was recognized when the bonds were originally issued. What is the
share premium from the issuance of shares as a result of the bond conversion on December 31, 20x3?

Carrying amount 1,060,000
Carrying amount converted (400/1,000 x 1,060,000) 424,000
Par value of shares issued (400 x 50 x P10) 200,000
Conversion expenses (4,000)
Net share premium 220,000
Explain the accounting for the conversion of convertible bonds into share capital.
If bonds are converted into share capital of the issuing entity, the accounting problem is the measurement of the share capital
issued.
Application Guidance 32 of PAS 32 provides that on conversion of a convertible instrument at maturity, the entity derecognizes
the liability component and recognizes it as equity.
There is no gain or loss on conversion at maturity.
The reason is that the convertible bond is viewed in substance as an equity and the conversion is really an exchange of one
type of equity capital for another.
The conversion is not considered a significant economic transaction and therefore no gain or loss would be recognized.
Accordingly, the carrying amount of the bonds payable is the measure of the share capital issued because the carrying amount
is the "effective price" for the shares issued as a result of the conversion.
Any cost incurred in connection with the bond conversion shall be deducted from share premium, if any.
Otherwise, the cost incurred is treated as expense.
The carrying amount of the bonds payable is equal to the face value plus accrued interest if not paid, plus unamortized
premium or minus unamortized discount and bond issue cost.
Problem 11: (Bonds with detachable share warrants) On March 1, 20x9, Onyx issued P1,000,000 of its 10% non-convertible
bonds at 103, due February 28, 20x19. Each P1,000 bond was issued with 30 detachable share warrants, each of which entitles
the holder to purchase for P50, one ordinary share of Onyx, par value P25. If sold without the warrants, the bond would yield 12%.
REQUIRED:
(a.) Determine the amount assigned to the bonds and to the warrants on March 1, 20x9.
(b.) Compute Interest expense for 20x9.
(c.) Compute the carrying value of the bonds on December 31, 20x9.
(d.) Journalize the exercise of the warrants assuming that all warrants were exercised on June 30, 20x10.
Suggested Answers:
(a) Issue price of bonds with warrants (1,000,000 x 1.03) 1,030,000
Bond price without warrants
1,000,000 x 0.3220 322,000
100,000 x 5.6502 565,020 887,020
Value of share warrants 142,980
(b) Interest Expense for 20x9 (887,020 x 12% x 10/12 88,702

(c) Bond carrying value, March 1, 20x10 887,020
Amortization through December 31, 20x10
887,020 x 12% x 10/12 88,702
1,000,000 x 12% x 10/12 83,333 5,369
Bond carrying value, December 31, 20x10 892,389
(d) Cash (1,000 x 30 x 50) 1,500,000

Share Warrants Outstanding 142,980
Ordinary Share (30,000 x 25) 750,000
Page 27 of 28
Share Premium 892,980
Problem 12: (Fair value option) On January 1, 20x3, an entity issued bonds with face amount of P5,000,000 and 12% stated
interest rate for P5,379,100. The bonds are sold to yield 10%. Interest is payable annually on December 31. The entity paid bond
issue cost of P100,000. On December 31, 20x3, the fair value of the bonds is determined to be P5,300,000.
Required: Prepare the journal entries for 20x3 assuming the entity elects the fair value option of measuring the bonds payable.
Suggested Answer:
Jan. 1 Cash 5,379,100

1 Transaction cost 100,000
Cash 100,000
Dec. 31 Interest expense 600,000
Cash (12% x 5,000,000) 600,000
31 Bonds payable 79,100
Gain from change in fair value 79,100
Bonds payable-January 1, 2013 5,379,100
Fair value - December 31, 2013 5,300,000
Decrease in fair value of bonds - gain 79,100
Explain the subsequent measurement of bonds payable.
PFRS 9, paragraph 5.3.1, provides that after initial recognition, bonds payable shall be measured either:
a. At amortized cost, using the effective interest method
b. At fair value through profit or loss
Explain the "amortized cost" of bonds payable.
The "amortized cost" of bonds payable is the amount at which the bond liability is measured initially minus principal repayment,
plus or minus the cumulative amortization using the effective interest method of any difference between the initial amount and
the maturity amount. Simply stated, the difference between the face amount and present value of the bonds payable is
amortized using the effective interest method. Actually, the difference between the face amount and present value is either
discount or premium on the issue of the bonds payable. Accordingly, discount on bonds payable and bond issue cost are
presented as deduction from bonds payable and premium on bonds payable is an addition to bonds payable.
Explain the "fair value option" of measuring bonds payable.
PFRS 9, paragraph 4.2.2, provides that at initial recognition, bonds payable may be irrevocably designated as at fair value
through profit or loss. In other words, under the fair value option, the bonds payable shall be measured initially at fair value
and remeasured at every year-end at fair value and any changes in fair value are recognized in profit or loss. There is no more
amortization of bond issue cost, bond discount and bond premium. As a matter of fact, interest expense is recognized using
the nominal or stated interest rate and not the effective interest rate.
Page 28 of 28

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PROBLEMS

Required: Compute the total current liabilities on December 31, 20x2.

Problem 2: (Refinancing agreement and Breach of loan agreement)

interest and installment due.

Interest obligation Installment obligation Remainder of principal obligation

Notes payable and Debt Restructuring-Batch May 2020 Page 1 of 28

Problem 3: (Accounts payable)

Accounting for Purchases (Gross and Net Method)

(a) (1) Gross Method

26 Accounts Payable- Intel Company 66,000

31 Accounts Payable – Celeron Corporation 72,000

(a) (2) Net Method

26 Accounts Payable – Intel Company 64,680

31 Accounts Payable – Celeron Corporation 69,840

Problem 4: (Unearned income)

Required: Compute for the current liability assuming:

a. P1,180,000 +P1,840,000-1,640,000-500,000 = P880,000

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

Service contract revenue earned in 20x5:

a. 24,000 / 12 = 2,000 x 2 = P4,000

Gift certificates payable 780,000

Gift certificates payable (P40+260) 300,000

Problem 6: (Liability for deposits received)

Case 1: (Deposit for future subscription of shares of stock)

Containers’ deposit on January 1, 20x4 applicable to 20x2 deliveries 75,000

2. Containers’ deposit – January 1, 20x4 290,000

Escrow accounts liability – January 1 700,000

Problem 1: (Provisions) The following situations relate to Washburn Company.

(1) Environmental cleanup cost P20M

(2) Warranty Expense* ........................................................................... 6,000,000

*Expected warranty costs

(3) Tax Expense..................................................................................... 150,000

Problem 2: (Present Value)

Minor repairs (3% x 10,000,000 = 300,000 x 10%) 30,000

Required: What is the warranty expense to be recognized in 20x4?

With Suggested Answer:

Warranty expense related to 20x4 sales 80,000

Warranty expense 107,730

Warranty cost paid related to 20x4 sales 88,000

a. Estimated liability P14

b. Estimated liability P14

c. Estimated liability P14

Required: What amount should be recognized as provision on December 31, 20x3?

Answer = 1,200,000+500,000 P1,700,000

Required: Prepare journal entries for the current year.

December 31, 20x1

Insurance claims receivable P20

a. Note disclosure only.

Estimated liability 2,500,000

Problem 7: (Onerous Contracts)

Required: Prepare journal entries for the current year.

Loss on decline of value inventory P200,000

Required: Prepare journal entries for the current year.

December 31, 20X1

Probable loss on lease cancellation P600,000

On December 31,20x3, the following transactions and events had occurred:

Unpaid wages of retrenched employees 1,000,000

Problem 9: (Estimated Liabilities – After Sale Transactions)

The costs of inventories is: CU 51 000 – CU 51 000*(10%+2%) = CU 4 400.