A guide in applying auditing procedures to specific accounts of the financial statements.
TEACHERS MANUAL 2015 Edition By
DARRELL JOE O. ASUNCION, MBA, CPA RAYMUND FRANCIS A. ESCALA, MBA, CPA MARK ALYSON B. NGINA, CPA
Dear fellow teacher, This “Teacher’s Manual” should be used solely by the teacher and for classroom purposes only. This manual should NOT be reproduced either manually (e.g., printing or photocopy) or electronically (e.g., copying or uploading in the net) without our written consent (or the publisher’s written authorization). If you have comments, queries or suggestions, please do not hesitate to contact us at: Telephone: 074-2441894 Mobile No.: Darrell Joe O. Asuncion – 0923-424-8286 Raymund Francis A. Escala – 0917-715-1226 Mark Alyson B. Ngina – 0915-510-7281 Email ad:
[email protected]. Thanks and God bless. Sincerely, Darrell Joe O. Asuncion, MBA, CPA Raymund Francis A. Escala, MBA, CPA Mark Alyson B. Ngina, CMA, CPA
Table of Contents Chapter 25 INTRODUCTION To LIABILITIES ....................................................... 4 Chapter 26 FINANCIAL LIABILITIES AND DEBT RESTRUCTURING.........17 Chapter 27 LEASE ..........................................................................................................35 Chapter 29 SHAREHOLDERS' EQUITY...................................................................61 Chapter 30 BOOK VALUE AND EARNINGS PER SHARE .................................85 Chapter 32 STATEMENT OF FINANCIAL POSITION ........................................97 Chapter 33 STATEMENT OF CASH FLOWS....................................................... 112
Chapter 25: Introduction to Liabilities
CHAPTER 25: INTRODUCTION TO LIABILITIES Note to the professor: Page 902
910 925
Existing data: Illustration: Long-term debt falling due within one year Additional information no. 3 As of December 31, 2015, Rondo’s current ratio is 1.5:1. B
=
Change Rondo’s to Rajon’s Change 5.5 to 5.5M
10% x [(5.5 x (1-30%] 1 - 10% + [10% x (1-30%)]
Requirement No. 1 Warranty Sales in 2014 earned in 2015 (41% x 800 x P1,000) Warranty Sales in 2015 earned in 2015 (22% x 800 x P1,000) Total warranty sales revenue earned in 2015
Change to:
328,000
Change 800 to 900.
198,000 526,000
PROBLEM 25-1 Total Liabilities Total liabilities Current Accounts payable Loan payable – current portion Unearned rent income Income tax payable Dividends payable Total current liabilities
P 1,000,000 1,000,000 300,000 250,000 100,000 P 2,650,000
Non-current Bonds payable Discount on bonds payable Loan payable – non-current portion Deferred tax liability Total non-current liabilities Total liabilities
(
(B)
Below items shall be presented as part of entity’s assets: Current asset Advances to employees Non-current asset Cash surrender value of officers’ life insurance Patent
P 5,000,000 500,000) 1,500,000 15,000 P 6,015,000 P 8,665,000
P
45,000 75,000 50,000
Below item shall be disclosed in the notes to financial statements: Contingent liability P 500,000
4
Chapter 25: Introduction to Liabilities
PROBLEM 25-2 Current Liabilities Current liabilities Accounts payable – unadjusted Add/(Deduct): Adjustments Debit balances in suppliers’ accounts Postdated checks of Accounts payable – adjusted Credit balances in customers’ accounts Premiums payable Accrued expenses Total current liabilities
P 4,000,000
(A)
100,000 50,000 P 4,150,000 500,000 600,000 150,000 P 5,400,000
Below items shall be presented as part of entity’s non-current liabilities: Bonds payable 1,000,000 Premium on bonds payable 100,000 Mortgage payable 850,000 Deferred tax liability 200,000 Deferred revenue 175,000 Below item shall be presented as part of shareholders’ equity: Stock dividends payable PROBLEM 25-3 Refinancing Current liabilities 10% note payable, maturing 03/3 1/2015 Annual sinking fund requirement Total current liabilities
(C)
750,000
P10,000,000 500,000 10,500,000
Below items shall be presented as part of entity’s non-current liabilities: 12% note payable, maturing 06/30/2015 6,000,000 7% guaranteed debentures, due 2018 2,000,000 PROBLEM 25-4 Refinancing (A) The amount to be reported as current liabilities in 2014 is P2,000,000 since the refinancing agreement was completed after the reporting date. PROBLEM 25-5 Refinancing (A) The amount to be reported as current liabilities in 2014 is P2,000,000 since the grace period was granted after the reporting date. PROBLEM 25-6 Accounts payable Accounts payable Accounts payable – unadjusted Cost of goods lost in transit Cost of returned goods Accounts payable – adjusted
(B)
5
P 8,000,000 500,000 ( 200,000) P 8,300,000
Chapter 25: Introduction to Liabilities
PROBLEM 25-7 Accounts payable Amount of cash to eliminate accounts payable Accounts payable from: *Purchases through March 15 (gross)(P4,900,000 / 98%) Merchandise inventory at cost(P1,500,000 / 150%) Accounts payable (B)
P 5,000,000 1,000,000 P 6,000,000
*The amount was grossed-up since the entity is no longer entitled to cash discount. The liability as of March 15, 2014 has been outstanding for more than 10 days. PROBLEM 25-8 Bonus payable Amount of bonus Net income before bonus and income tax Less: Required income to earn bonus Basis of bonus Multiply by: Bonus rate Total current liabilities PROBLEM 25-9 Bonus payable Amount of bonus Net income before bonus and income tax Less: Required income to earn bonus Amount of income subject to bonus (125%) Less: Bonus (25%) (squeeze) Basis of bonus (100%) (P600,000/125%)
P 2,200,000 880,000 P 1,320,000 10% P 132,000
(C)
P 1,600,000 1,000,000 P 600,000 120,000 P 480,000
(D)
PROBLEM 25-10 Unearned Revenue Unearned revenue – gift certificates Unearned revenue 1,500,000 Gift certificate redeemed 4,000,000 5,000,000 Expired gift certificate 300,000 4,300,000 6,500,000 Balance, End (B) 2,200,000 6,500,000 6,500,000
Balance, Beg. Cash receipts from gift certificate sold
PROBLEM 25-11 Advances from Customers Unearned revenue – Advances from customers Unearned revenue 1,100,000 Advances applied to shipments 1,600,000 1,800,000 Orders cancelled 100,000
6
Balance, Beg. Advances received
Chapter 25: Introduction to Liabilities
Balance, End (C)
1,700,000 1,200,000 2,900,000
2,900,000 2,900,000
PROBLEM 25-12 Escrow Liability Deposits received – Escrow account Escrow liability 600,000 Cash payments nine months 4,200,000 4,500,000 4,200,000 5,100,000 Balance, End (C) 900,000 5,100,000 5,100,000 PROBLEM 25-13 Container’s Deposits Deposits received – Escrow account Liability for Deposits 100,000 Cash refunds for container returned in 2014 92,000 100,000 Balance, End (C)
92,000 108,000 200,000
Balance, Beg. Cash receipts for nine months
Balance, Beg. Cash deposits from deliveries
200,000 200,000
PROBLEM 25-14 VAT payable Provision - VAT payable VAT Payable Payment made
120,000
Balance, End (A)
120,000 180,000 300,000
120,000 84,000 96,000 300,000
Balance, Beg. For October For November For December
300,000
PROBLEM 25-15 Contingencies (C) Since the outcome of the lawsuit remains uncertain, disclosure of the contingency in the notes to financial statements would be the necessary. PROBLEM 25-16 Contingencies (B) Since it is probable that AAA will be liable to pay the P3,000,000 as supported by BBB’s filing of a petition for bankruptcy, AAA should accrue and disclose the provision for guarantee on a loan of P3,000,000.
7
Chapter 25: Introduction to Liabilities
PROBLEM 25-17 Premiums Payable Provision – Premiums liability Premiums liability **Coupons redeemed
50,000 50,000 Balance, End (D) 30,000 80,000 *(20,000 x 80%)/5 x (P30 + P5 - P10) **(10,000/5) x (P30 + P5 - P10)
80,000 80,000
**Balance, End
800,000 1,000,000
*Premiums expense
80,000
PROBLEM 25-18 Premiums Premiums liability (2014) **Balance, End 200,000 *Coupons redeemed
Balance, Beg.
1,000,000 1,000,000
Premiums liability (2015) 120,000 200,000
*Coupons redeemed
2,000,000 1,920,000 2,120,000 2,120,000 *Number of towels distributed x net cost of P40 **Number of towels yet to be distributed x net cost of P40
Balance, Beg. Premiums expense (squeeze)
Balance, Beg. Premiums expense (squeeze) (D)
The beginning balance of the 5,000 towels is included as part of the 50,000 towels distributed in 2015. If the actual towels distributed from 2015 is different from that was recorded as of the end of 2014, this is considered as a change in accounting estimate which should be taken into account during 2015 and for the succeeding accounting period. PROBLEM 25-19 Warranty Liability Warranties liability (2014) Actual expenditures 150,000 500,000 150,000 500,000 Balance, End 350,000 500,000 500,000
8
Balance, Beg. *Warranties expense
Chapter 25: Introduction to Liabilities
Warranties liability (2015) 350,000 Actual expenditures 550,000 600,000 550,000 950,000 Balance, End (A) 400,000 950,000 950,000 *Sales x Total estimated warranty cost of 10%
Balance, Beg. *Warranties expense
PROBLEM 25-20 Warranty Liability Warranties liability Actual expenditures Balance, End (C)
480,000 480,000
140,000 140,000 340,000 480,000
Balance, Beg. Warranties expense
480,000
PROBLEM 25-21 Warranty - Sales are Made Evenly Pattern of Realized Revenues: 2014 SALES From sales in: 2014 1st (40% x ½) 0.20 2nd (36% x ½) 3rd (24% x ½) Total 0.20 2015 SALES From sales in: 2015 1st (40% x ½) 0.20 2nd (36% x ½ 3rd (24% x ½) Total 0.20
2015 0.20 0.18 0.38 2016 0.20 0.18 0.38
2016
2017
0.18 0.12 0.30 2017
Total 0.40 0.36 0.24 1
0.12 0.12 2018
0.18 0.12 0.30
Requirement No. 1 (A) Warranty Sales in 2014 earned in 2015 (38% x 1,000 x P1,500) Warranty Sales in 2015 earned in 2015 (20% x 1,200 x P1,500) Total warranty sales revenue earned in 2015
Total 0.40 0.36 0.24 1
0.12 0.12
570,000 360,000 930,000
Notes: The 38% represents the realized revenue in 2015 from 2014 Sales. The 20% represents the realized revenue in 2015 from 2015 Sales. Requirement No. 2 (B) Total warranty sales revenue earned in 2015 (see No. 1) Expenses relating to computer warranties Profit from sales warranty
9
930,000 60,000 870,000
Chapter 25: Introduction to Liabilities
Requirement No. 3 (A) Unearned sales warranty from 2014 [(30% + 12% x 1,000 x P1,500)] Unearned sales warranty from 2015 [(100%-20%) x 1,200 x P1,500)] Total unearned sales warranty
630,000 1,440,000 2,070,000
Notes: The 30% and 12% represent the unrealized revenues in 2015 from 2014 Sales. The 20% represents the realized revenue in 2015 from 2015 Sales. So 100% minus 20% realized is equal to 80% unrealized revenue in 2015 from 2015 Sales. SUMMARY OF ANSWERS: 1. A 2. B 3. A PROBLEM 25-22 Refinancing 1. P2,000,000 (Letter B). The entire amount is payable within one year from the reporting date thus presented as current liability. 2. Nil (Letter A). Since both parties are financially capable of honoring the agreement’s provisions and the debtor has the discretion to refinance or roll over the loan for at least twelve months from December 31, 2014 the entire amount is treated as Noncurrent liability. 3. Nil (Letter A). Since the company entered into a refinancing agreement with a bank to refinance the loan on a long-term basis before the reporting date, the entire amount of liability is treated as noncurrent. 4. P2,000,000 (Letter B). Since the company entered into a refinancing agreement with a bank to refinance the loan on a long-term basis after the reporting date, the entire amount of liability is treated as current. PROBLEM 25-23 Obligations Payable on Demand, Breach of Loan Agreement 1. P2,000,000 (Letter C). Only if an enforceable promise is received by the end of the reporting period from the creditor not to demand payment for at least 12 months from the end of the reporting period that the note may be classified as noncurrent. 2. Nil (Letter A). The entire amount of loan is noncurrent liability since there was an agreement on the reporting date not to demand payment in order for the debtor to rectify the breach with 12 months from the reporting date. 3. P2,000,000 (Letter B). The entire amount of loan is current liability since the agreement not to demand payment happened after the reporting period.
10
Chapter 25: Introduction to Liabilities
PROBLEM 25-24 Contingencies 1. A 2. D 3. B 4. B 5. A (Amount of accrual is P2,040,000 using expected value method which is calculated as (P1.6M x 20 + (2M x 50%) + (2.4M x 30%) 6. A (Amount of accrual is P2,250,000 using midpoint of the range which is calculated as (P1.5M+3M)/2) PROBLEM 25-25 Contingencies 1. A 2. B (Disclose an amount of P1,500,000) 3. B (Disclose an amount of P1,500,000) 4. B (Disclose an amount of P1,000,000) 5. D 6. A (It is virtually certain that the company will be receiving the P1,5000,000.) PROBLEM 25-26 Bonus Computation 1.
Net income before bonus but before tax
B
= = =
NY 3,090,000 618,000
x x
BR 20%
2.
Net income after bonus but before tax NY B = BR x 100% + BR = 20% x 3,090,000 100% + 20% = 515,000
3.
Net income after bonus and tax B = BR X (NY – B – T) B = 20% x (3,090,000-B-(927,000-3.B) B = 20% x (3,090,000-B-927,000+.3B) B = 618,000-.2B-185,400+.06B 1B+.2B-.06B = 618,000-185,400 1.14B = 432,600 1.14 1.14 B = 379,474
11
Chapter 25: Introduction to Liabilities
T
B
= = = = = = =
30%
X (3,090,000 – B) 927,000-.3B
OR BR x [NY x (1-TR)] 1 + [BR x (1-TR)] 20% x (3,090,000 x (1-30%) 1+[20% x (1-30%)] 20% x (3,090,000 x 70%) 1+(20% x 70%) 20% x (2,163,000) 1.14 379,474
Where: NY = Net income before bonus and tax B = Bonus BR = Bonus Rate T = Tax TR = Tax Rate SUMMARY OF ANSWERS: 1. D 2. B 3. C PROBLEM 25-27 Question Nos. 1 and 2
Estimated liability from Warranties
Disbursement warranties Balance end
for
164,000 212,000
Total
44,800
Beginning balance
240,000
Warranty expense.
376,000
Warranty expense Divide by % age of warranty Sales from musical instruments and sound reproduction equipment (Question No. 1) Question No. 3 Premium expense = P2,000,000 =
X
1 coupon P2
200 coupons P63,000
12
240,000 4% 6,000,000
x
90%
P34-P20
Chapter 25: Introduction to Liabilities
Question No. 4
Inventory of Premium
Beg. Balance Net Purchases (6,500 x P34)
39,950 221,000
56,950 204,000
Total
Balance end Cost of issued premium (1.2M coupons.200 coupons x P34
260,950
Question No. 5 Estimated liability for Premiums Disbursement for premiums (1.2M coupons/200 coupons x P(34-P20) Balance end Total
84,000 23,800
44,800
Beginning balance
63,000
Premium expense.
107,800
SUMMARY OF ANSWERS: 1. A 2. A 3. C 4.
D
5.
D
PROBLEM 25-28 Refinancing of Loan, Notes Payable Interest and NonInterest Bearing Note to the Professor: This problem should be discussed after the discussion in Chapter 26. Question No. 1 Periodic payment-NP Delivery equipment (P2M/4) Multiply by PV of ordinary annuity Present value of NP-delivery equipment Amortization table: Payment Date 01/01/2015 12/31/2015 500,000 12/31/2016 500,000
500,000 3.0373 1,518,650
Interest Expense
Discount Amortization
182,238 144,107
317,762 355,893
Question Nos. 2 and 3 12% Note payable 10% note payable
Noncurrent 1,400,000 2,000,000
13
Current 700,000
Present value 1,518,650 1,200,888 844,995
Chapter 25: Introduction to Liabilities
Note payable-del. Equipment Total
844,995 4,244,995
355,893 1,055,893
Question No. 4 Accrued interest payable-12% Note payable =P2,100,000 x 12% x 8/12 =P168,000 Question No. 5 Interest expense: 12% Note payable 1/1-5/1 (2.8M x 12% x 4/12) 5/1-12/31 (2.1M x 12% x 8/12) 10% Note payable (2M x 10%) Note payable - Delivery. Equipment (see amortization table) Total SUMMARY OF ANSWERS: 1. A 2. B 3. B 4.
B
112,000 168,000 200,000 182,238 662,238 5.
C
PROBLEM 25-29 Warranty, Premiums and Bonus Note to the professor: The last sentence should be: Premium expense of P270,000 (not P120,000). Question No. 1 Warranty expense (P150 x 1,200) Less: Warranty paid Estimated Premiums payable
180,000 85,000 95,000
Question No. 2 Premium expense (P1,200,000 x 1 coupon/P1)/400 x 60% x (P45-P20) Less: Net cost of redeemed coupons (500,000/400)x( P45-P20) Estimated Premiums payable Question No. 3 Unadjusted net income Warranty expense under, Net income over (P180,000-P85,000) Premium expense over, Net income under (P270,000-P45,000) Adjusted Net income 4.
Net income after bonus but before tax NY B = BR x 100% + BR = 20% x 2,065,000
14
45,000 31,250 13,750 1,935,000 (95,000) 225,000 2,065,000
Chapter 25: Introduction to Liabilities
= 5.
344,167
100% + 20%
Net income after bonus and tax B = BR x (NY – B – T) T
=
B
=
TR
x (NY – B) OR BR x [NY x (1-TR)] 1 + [BR x (1-TR)]
Net income after bonus and tax B = BR X (NY – B – T) B = 20% x (2,065,000-B-(9619,500-3.B) B = 20% x (2,065,000-B-619,500+.3B) B = 413,000-.2B-123,900+.06B 1B+.2B-.06B = 413,000-123,900 1.14B = 289,100 1.14 1.14 B = 253,596 T
B
= = = = = = =
30%
X (2,065,000 – B) 619,500-.3B
OR BR x [NY x (1-TR)] 1 + [BR x (1-TR)] 20% x (2,065,000 x (1-30%) 1+[20% x (1-30%)] 20% x (2,065,000 x 70%) 1+(20% x 70%) 20% x (1,445,500) 1.14 253,596
Where: NY = Net income before bonus and tax B = Bonus BR = Bonus Rate T = Tax TR = Tax Rate SUMMARY OF ANSWERS: 1. A 2. C 3. C 4.
B
5.
C
15
Chapter 25: Introduction to Liabilities
PROBLEM 25-30 Comprehensive Question No. 1 (B) SSS Payable Philhealth payable Estimated liabilities under guarantee agreement Estimated warranties on goods sold Utilities payable Trade payables (170,000+30,000+20,000+12,000-8,000) Notes payable arising from purchase of goods Convertible bonds payable due July 1, 2014 Serial bonds payable (40,000 x 2) Accrued interest expense Advances from customers Unearned rent income Unearned interest on receivables Income taxes payables Cash dividends payable Property dividends payable Credit balance of notes payable Overdraft with PNB Container's deposit Loans payable-12% Financial liability designated as FVTPL Current liabilities
10,000 9,000 110,000 120,000 6,000 224,000 200,000 1,000,000 80,000 4,000 25,000 36,000 3,500 45,000 100,000 120,000 40,000 80,000 45,000 270,000 200,000 2,727,500
Question No. 2 (A) Deferred tax liability Notes payable Arising from 4-year bank loan Arising from advances by officers, dune in 3 years Serial bonds payable (800,000 minus (40,000 x 2) Security deposit received from lessee Loans payable-10% Total noncurrent liabilities
400,000 300,000 720,000 89,000 150,000 1,699,000
Question No. 3 (B) Total liabilities Current liabilities Total noncurrent liabilities Total liabilities
2,727,500 1,699,000 4,426,500
SUMMARY OF ANSWERS: 1. B 2. A 3. B
16
40,000
Chapter 26: Financial Liabilities and Debt Restructuring
CHAPTER 26 FINANCIAL LIABILITIES AND DEBT RESTRUCTURING Note to professor: Page 953
Existing data: Note: In amortizing these bonds, a new effective rate shall be computed thru interpolation. Refer to the previous chapter for sample computation of effective interest rate.
Change to; (Kindly delete the second sentence)
957
Note: Alternatively …. Total present value= P5,588,332
Total present value= P5,788,332
974
Requirement No. 2 Date on the third journal entry- Dec. 31, 2017 Fifth journal entry: Preference shares 150,000 Premium on redemption of bonds 30,000 Cash 180,000
975
Statement of Comprehensive Income (2015) Interest expense P23,580
986
To record transaction Note payable 1,600,000 Accrued interest payable 200,000 Land 1,500,000 Gain on extinguishment of debt 500,000
988
ILLUSTRATION: Modification of Terms Mandaue Company has an overdue notes payable to National Bank of P8,000,000 and recorded accrued interest of P640,000
Date on the third journal entry- Dec. 31, 2016 Fifth journal entry: Bonds payable 200,000 Premium on redemption of bonds 10,000 Cash 210,000 Should be P29,174
Change 500,000 300,000
to
Change P640,000 to P840,000
BONDS PAYABLE PROBLEM 26-1 Financial Liabilities at FVTPL (Interest Expense and Unrealized gains or losses) Question No. 1 Face value Multiply by: nominal rate Multiply by: months outstanding/12 Interest expense (A)
3,000,000 8% 12/12 P240,000
17
Chapter 26: Financial Liabilities and Debt Restructuring
Question No. 2 Fair value of the bonds Less: Carrying value Unrealized loss (or gain)-P&L
3,090,000 2,850,756 239,244
(B)
SUMMARY OF ANSWERS: 1. A 2. B PROBLEM 26-2 Unrealized Gain or Loss of FVTPL with Change Due To Credit Risk Question No. 1 Market price of the liability, end of the period Less: Fair value of liability using the sum observed interest rate and instrument specific IRR Unrealized loss (or gain)-OCI (B) Internal rate of return at the start of the period - yield or effective rate Less: Observed (benchmark) interest rate, date of inception Instrument specific IRR Observed (benchmark) interest rate, end of period Add: Instrument specific-IRR Discount rate Question No. 2 Market price of the liability, end of the period Less: Carrying amount of FVTPL Increase (or decrease) in FVTPL Less: Unrealized loss (or gain) in the OCI Unrealized loss (or gain) in the P&L Present value market rate of 8% Present value of Principal (2,000,000 X 0.6806 ) Add: Present value of interest payments (2,000,000 x 10% x 3.9927) Market price of the liability, end of the period Present value using 9% Present value of Principal (2,000,000 X 0.6499 ) Add: Present value of interest payments (2,000,000 x 10% x 3.8897 ) Fair value of liability using the sum observed interest rate and instrument specific IRR
18
2,159,740 2,077,740 82,000 10% 7% 3% 6.00% 3% 9.00%
2,159,740 2,000,000 159,740 82,000 77,740 1,361,200 798,540 2,159,740 1,299,800 777,940 2,077,740
Chapter 26: Financial Liabilities and Debt Restructuring
Journal entry end of the period is: Unrealized loss-OCI Unrealized loss-P&L Financial liability at FVTPL (Increase in FV of the liability)
82,000 77,740 159,740
SUMMARY OF ANSWERS: 1. B 2. C PROBLEM 26-3 Derecognition of Held for Trading Debt Securities Retirement Price Less: Carrying value Loss on sale (D)
3,120,000 3,090,000 30,000
PROBLEM 26-4 Financial Liabilities at Amortized Cost-Term Bonds Question No. 1 Present value of Principal (1,200,000 X 0.7513 ) Add: PV of interest payments (96,000 X 2.4869 ) Present value of the investment bonds Question No. 2 Amortization Table Interest Date payment 01/01/2015 12/31/2015 96,000 12/31/2016 96,000 12/31/2017 96,000
(C)
Interest expense 114,030 115,833 117,867
901,560 238,742 1,140,302
Premium Amortization (B)
18,030 19,833 21,835
Present value 1,140,302 1,158,333 1,178,166 1,200,000
SUMMARY OF ANSWERS: 1. C 2. B PROBLEM 26-5 Financial Liabilities at Amortized Cost-Serial Bonds Question No. 1
Interest Principal payment 400,000 96,000 400,000 64,000 400,000 32,000 Total PV of the bonds
Total payment 496,000 464,000 432,000
19
Preset value factor 0.9091 0.8264 0.7513 (A)
Total PV 450,914 383,450 324,562 P1,158,925
Chapter 26: Financial Liabilities and Debt Restructuring
Question No. 2 Date 01/01/2015 12/31/2015 12/31/2016 12/31/2017
Interest Payment
Interest Expense
Discount Amortization
Principal
96,000 64,000 32,000
115,892 77,882 39,301
19,892 13,882 7,301
400,000 400,000 400,000
Present value 1,158,925 778,817 392,699 -
SUMMARY OF ANSWERS: 1. A 2. A PROBLEM 26-6 Financial Liabilities at Amortized Cost-Term Bonds Issue Price (110% x 5,000 x P1,000) Less: Bond issue cost Net cash received from issuance
5,500,000 300,000 P5,200,000
(D)
PROBLEM 26-7 Financial Liabilities at Amortized Cost - Term Bonds with Transaction Costs Issue Price (5,000,000 x 98%) Less: Bond issue cost Present value on January 1, 2015 Add: Discount amortization Nominal interest (5M x 10%) Effective interest (4,760,000 x 12%) Carrying value – 12/31/2015
4,900,000 140,000 4,760,000 500,000 571,200 (D)
71,200 4,831,200
PROBLEM 26-8 Financial Liabilities at Amortized Cost - Term Bonds with Transaction Costs Issue Price (5,000,000 x 110%) Less: Bond issue cost Present value on January 1, 2015 Less: Premium amortization Nominal interest (5M x 8%) Effective interest (5,420,000 x 6%) Carrying value – 12/31/2015
5.500,000 80,000 5,420,000 400,000 325,200 (B)
74,800 5,345,200
PROBLEM 26-9 Bonds payable with warrants Market value of the bonds without the warrants
20
(B)
4,800,000
Chapter 26: Financial Liabilities and Debt Restructuring
PROBLEM 26-10 Bonds Payable with Warrants Present value of principal (8M x .61) Add: Present value of interest (8M x 6% x 7.72) Net cash received from issuance – initial carrying amount (B)
4,880,000 3,705,600 P8,585,600
Suggested Answer: B PROBLEM 26-11 Issuance of Convertible Bonds Total Proceeds (5M X 110%) Less: Present value of the bonds without conversion option Present value of Principal (5M x. 77) 3,850,000 Add: Present value of int. payments (5M x 6% x 2.53) 759,000 Residual amount allocated to Equity component (B)
5,500,000
4,609,000 891,000
PROBLEM 26-12 Issuance of Convertible Bonds Carrying amount of the bonds Less: Par value of issued shares (50,000 x P50) Share issue cost Total Add: Share Premium - conversion option Total Share Premium (C)
6,000,000 2,500,000 100,000 3,400,000 1,500,000 4,900,000
PROBLEM 26-13 Issuance of Convertible Bonds Question No. 1 Total Proceeds (P1,000 x 1,000) Less: Fair value of the bonds without conversion privilege Total Share Premium (A) Using 7.48% Present value of Principal (1,000,000 x 0.7 ) Add: Present value of interest payments (50,000 x 4 ) Total present value
1,000,000 900,000 100,000
700,000 200,000 900,000
Question No. 2 See amortization table below. Amortization Table Interest Date Payment 01/01/2015 12/31/2015 50,000
Interest Expense
Discount Amortization
67,320
17,320
21
Present value 900,000 917,320
Chapter 26: Financial Liabilities and Debt Restructuring
SUMMARY OF ANSWERS: 1. A 2. B PROBLEM 26-14 Retirement of Bonds Payable Suggested Answer: A PROBLEM 26-15 Conversion of Convertible Bonds Question No. 1 – Case No. 1 Nil. (A) No gain or loss on conversion of convertible bonds unless the conversion is induced by the company. The journal entry to record the transaction would then be: Bonds payable 1,500,000 Share premium-conversion option 60,000 Premium on bonds payable 52,049 Ordinary shares (20000 X 50 ) 1,000,000 Share Premium 612,049 Question No. 2 - Case No. 2 Fair value of liability Less: Carrying amount of the bonds payable Loss on settlement (conversion) of liability Fair value of liability Less: Total par value of the shares issued Share Premium
(B)
The journal entry to record the transaction would then be: Bonds payable 1,500,000 Loss on settlement of liability 47,951 Premium on bonds payable 52,049 Ordinary shares (20,000 X 50 ) Share Premium
1,600,000 1,552,049 47,951 1,600,000 1,000,000 600,000
1,000,000 600,000
SUMMARY OF ANSWERS: 1. A 2. B PROBLEM 26-16 INDUCED CONVERSION Face amount of debt securities converted Divide by: New conversion price Number of shares issued upon conversion Multiply by: Fair value of shares on the conversion date Fair value of shares converted
1,500,000 20 75,000 30 2,250,000
Face amount of debt securities converted
1,500,000
22
Chapter 26: Financial Liabilities and Debt Restructuring
Divide by: Old conversion price Number of shares issued under original conversion Multiply by: Fair value of shares on the conversion date Fair value of shares under original conversion
25 60,000 30 1,800,000
Fair value of shares converted Less: Fair value of shares under original conversion Debt conversion expense or loss on induced conversion (B)
2,250,000 1,800,000 450,000
Journal entry is: Bonds payable Debt conversion expense or loss on induced conversion Premium on bonds payable Ordinary shares (75,000 x 10 ) Share premium
1,500,000 450,000 52,049 750,000 1,252,049
PROBLEM 26-17 Interest-Bearing Note Suggested Answer: C PROBLEM 26-18 Non-Interest Bearing Note Note to the professor: The July 31, 2015 due date should be July 31, 2016 Principal Less: Discount on notes payable (2M x 10.8% x 12/12) Amortization (216,000/12 x 5) Carrying amount of the note payable
2,000,000 216,000 (90,000) (B)
126,000 1,874,000
PROBLEM 26-19 Interest-Bearing Note Suggested Answer: B PROBLEM 26-20 Interest-Bearing Note Suggested Answer: A PROBLEM 26-21 Loans Payable Principal Less: Direct origination fees paid (1.5M x 4%) Initial carrying amount of the loans payable
PROBLEM 26-22 Debt Restructuring
23
(D)
1,500,000 60,000 1,440,000
Chapter 26: Financial Liabilities and Debt Restructuring
Suggested Answer: D PROBLEM 26-23 Debt Restructuring Suggested Answer: D PROBLEM 26-24 Debt Restructuring SUMMARY OF ANSWERS: 1. C 2. B PROBLEM 26-25 Debt Restructuring Principal Add: Accrued interest – January 1, 2014 Accrued interest – 2014 Carrying amount of old liability Less: Present value of new liability Present value of principal (P4M x .6209) Present value of interest (P4M x .08 x 3.7908) Gain on extinguishment of liability (E)
P6,000,000 600,000 600,000 7,200,000 2,483,600 1,213,056
3,696,656 3,503,344
Suggested Answer: 3,503,344 (None of the choices given) COMPREHENSIVE PROBLEMS PROBLEM 26-26 Interest-Bearing Note – Lump Sum Question No. 1 Present value of Principal (1,200,000 x 0.7118 ) Add: Present value of interest payments (36,000 x 2.4018 ) Present value of the notes payable (A) Amortization Table: Interest Date Payment 01/01/2015 12/31/2015 36,000 12/31/2016 36,000 12/31/2017 36,000
Interest Expense
Discount Amortization
112,875 122,100 132,432
76,875 86,100 96,400
Question No. 2 Interest Expense (940,625 x .12) = P112,875 Question No. 3
24
(B)
854,160 86,465 940,625 Present value 940,625 1,017,500 1,103,600 1,200,000
Chapter 26: Financial Liabilities and Debt Restructuring
P1,017,500. See amortization table above.
(A)
Question No. 4 Nil. (A) The entire note payable is noncurrent liability. Question No. 5 Note to the professor: The requirement should be noncurrent portion of the note on December 31, 2016. The noncurrent portion as of December 31, 2016 is P1,103,600. See amortization table above. (D) SUMMARY OF ANSWERS: 1. A 2. B 3. A 4.
A
5.
D
PROBLEM 26-27 interest-bearing note – non-uniform installments Note to the professor: The principal should be P2,000,000 not P1,200,000. The interest is payable every December 31 while the principal shall be payable as follows: December 31, 2015 December 31, 2016 December 31, 2017
1,200,000 400,000 400,000
SOLUTION: Question No. 1 Interest Principal payment 1,200,000 60,000 400,000 24,000 400,000 12,000 Total PV of notes payable Amortization Table Date Date 01/01/2015 12/31/2015 60,000 12/31/2016 24,000 12/31/2017 12,000
Total payment 1,260,000 424,000 412,000
Preset value factor 0.8929 0.7972 0.7118 (E)
Interest Payment
Interest Expense
Principal Payment
210,759 84,851 44,079
150,759 60,851 32,062
1,200,000 400,000 400,000
Question No. 2 Interest expense (1,756,328 x .12)
Present Value 1,125,054 338,013 293,262 1,756,328
Present Value 1,756,328 707,088 367,938 -
P210,759
Question No. 3
25
(E)
Chapter 26: Financial Liabilities and Debt Restructuring
Carrying amount – December 31, 2015
P707,088
Question No. 4 Principal (payable Dec. 31, 2016 Less: Discount on notes payable Carrying amount-current liability Question No. 5 Principal (payable Dec. 31, 2016 Less: Discount on notes payable Carrying amount-noncurrent liability
(E)
P400,000 60,851 P339,149
(E)
P400,000 32,062 P367,938
(E)
SUMMARY OF ANSWERS BASED ON REVISED CHOICES: 1. D 2. D 3. C 4. C 5. C PROBLEM 26-28 Interest-Bearing Note –Uniform Installments Question No. 1 Interest Principal payment 400,000 36,000 400,000 24,000 400,000 12,000 Total PV of notes payable Amortization Table Interest Date Payment 01/01/2015 12/31/2015 36,000 12/31/2016 24,000 12/31/2017 12,000
Total payment 436,000 424,000 412,000
Preset value factor 0.8929 0.7972 0.7118 (A)
Present Value 389,304 338,013 293,262 1,020,579
Interest Expense
Amortization
Principal Payment
122,469 84,846 44,106
86,469 60,846 32,106
400,000 400,000 400,000
Present Value 1,020,579 707,048 367,894 -
Question No. 2 Interest expense (1,020,579 x .12)
P122,469
(B)
Question No. 3 Carrying amount – December 31, 2015
707,048
(A)
Question No. 4 Principal (payable Dec. 31, 2016 Less: Discount on notes payable Carrying amount-current liability
(B)
Question No. 5
26
P400,000 60,846 P339,154
Chapter 26: Financial Liabilities and Debt Restructuring
Principal (payable Dec. 31, 2016 Less: Discount on notes payable Carrying amount-noncurrent liability SUMMARY OF ANSWERS: 1. A 2. B 3. A 4.
B
5.
(A)
P400,000 32,106 P367,894
A
PROBLEM 26-29 Noninterest-Bearing Note – With Cash Price Equivalent Question No. 1 The carrying amount of the note on initial recognition is equal to its cash price equivalent of P994,760. (C) Coincidentally, the effective rate using the cash price equivalent is 12% and the amortization table is as follows: Amortization Table at 12% Principal Date payment 01/01/2015 12/31/2015 400,000 12/31/2016 400,000 12/31/2017 400,000
Interest expense
Amortization
99,476 69,424 36,340
300,524 330,576 363,660
Present value 994,760 694,236 363,660 -
Question No. 2 Interest expense (994,760x .12)
P99,476
(A)
Question No. 3 Carrying amount – December 31, 2015
P694,236
(A)
Question No. 4 Principal (payable Dec. 31, 2016 Less: Discount on notes payable Carrying amount-current liability Question No. 5 Principal (payable Dec. 31, 2016 Less: Discount on notes payable Carrying amount-noncurrent liability SUMMARY OF ANSWERS: 1. C 2. A 3. A 4.
B
5.
(B)
P400,000 69,424 P330,576
(C)
P400,000 36,340 P363,660
C
27
Chapter 26: Financial Liabilities and Debt Restructuring
PROBLEM 26-30 Noninterest-Bearing Note – Lump Sum Question No. 1 Present value of Principal (1,200,000 x 0.7118 ) Amortization Table Date Interest expense 01/01/2015 12/31/2015 102,499 12/31/2016 114,799 12/31/2017 128,542
(B)
854,160
Present value 854,160 956,659 1,071,458 1,200,000
Question No. 2 Interest expense (854,160 x .12)
P102,499
(B)
Question No. 3 Carrying amount – December 31, 2015
P956,659
(A)
Question No. 4 Nil. The entire note payable is noncurrent liability since it is due beyond 12 months from the reporting date. (B) Question No. 5 The total entire carrying amount of note payable is presented as noncurrent liability. See Question No. 4. (A) SUMMARY OF ANSWERS: 1. B 2. B 3. A 4.
B
5.
A
PROBLEM 26-31 Noninterest-Bearing Note – Installments Question No. 1 Present value of Principal (400,000 X 2.4018 ) Amortization Table Date Interest Payment 01/01/2015 12/31/2015 400,000 12/31/2016 400,000 12/31/2017 400,000
(D)
Interest expense
Amortization
115,286 81,121 42,873
284,714 318,879 357,127
Question No. 2 P115,286. See amortization table above.
28
960,720
Present value 960,720 676,006 357,127 (A)
Chapter 26: Financial Liabilities and Debt Restructuring
Question No. 3 P676,006. See amortization table above.
(A)
Question No. 4 Principal (payable Dec. 31, 2016 Less: Discount on notes payable Carrying amount-current liability Question No. 5 Principal (payable Dec. 31, 2016 Less: Discount on notes payable Carrying amount-noncurrent liability SUMMARY OF ANSWERS: 1. D 2. A 3. A 4.
B
5.
(B)
P400,000 81,121 P318,879
(C)
P400,000 42,873 P357,127
C
PROBLEM 26-32 Issuance, Retirement and Conversion of Non-Convertible Bonds Question No. 1 Present value of Principal (10,000,000 x 0.5674 ) Add: Present value of interest payments (10,000,000 x 10% x 3.6048 ) Present value of the bonds payable (D) Amortization Table Date Interest payment 01/01/2013 12/31/2013 1,000,000 12/31/2014 1,000,000
Interest expense
Discount Amortization
1,113,456 1,127,071
113,456 127,071
Question No. 2 Retirement Price Less: Carrying amount (9,519,327 x 1/2) Loss on retirement Question No. 3 Amortization table: Interest Date payment 12/31/2014 12/31/2015 500,000
(C)
5,674,000 3,604,800 9,278,800
Present value 9,278,800 9,392,256 9,519,327 P5,200,000 4,759,664 P440,336
(C) Interest expense
Amortization
571,160
(71,160)
29
Present value 4,759,663 4,830,823
Chapter 26: Financial Liabilities and Debt Restructuring
Question No. 4 Fair value of the ordinary shares issued (50 x 50,000) Less: Carrying amount of the liability (4,830,823 x 250/500) Loss on conversion (D)
P2,500,000 2,415,412 P84,588
Question No. 5 Fair value of the ordinary shares issued (50 x 50,000) Less: Total par value of the shares issued (40 x 50,000) Share Premium (B)
P2,500,000 2,000,000 P500,000
SUMMARY OF ANSWERS: 1. D 2. C 3. C 4.
D
5.
B
PROBLEM 26-33 Issuance, Retirement and Conversion of Convertible Bonds Question No. 1 Total Proceeds Less: Present value of the bonds without the conversion option Present value of Principal (5,000,000 x 0.5674 ) Present value of interest payments (500,000 x 3.6048 ) Residual amount to equity Amortization Table Date Interest payment 01/01/2014 12/31/2015 500,000 12/31/2016 500,000
P5,000,000 2,837,000 1,802,400 (C)
Interest expense
Discount Amortization
556,728 563,535
56,728 63,535
Question No. 2 Fair value of liability using current rate Less: Carrying amount (4,759,663 x ½) Loss on settlement of liability
(C)
4,639,400 P360,600
Present value 4,639,400 4,696,128 4,759,663 2,438,925 2,379,832 59,093
Present value using 11% for 3 periods Present value of Principal (2500000 x 0.7312 ) Add: Present value of interest payments (250000 x 2.4437 ) Present value of the bonds payable
1,828,000 610,925 2,438,925
Question No. 3 Retirement Price Less: Fair value of liability using current rate Decrease in equity
2,600,000 2,438,925 161,075
30
(C)
Chapter 26: Financial Liabilities and Debt Restructuring
Question No. 4 Interest expense is P556,728 based on the amortization table above. Question No. 5 Shares to be issued based on amended terms (2.5M/420) Less: Shares to be issued based on amended terms (2.5M/450) Incremental shares Multiply by: Fair value Debt settlement expense (C)
(E) P5,952 5,556 397 440 P174,680
(P174,680 or P174,240) SUMMARY OF ANSWERS: 1. C 2. C 3. C 4.
E
5.
C
PROBLEM 26-34 Redeemable Preference Shares and Debentures Present value of the redeemable preference shares Present value of Principal (15000 x 1.05 x 0.72161 ) Add: Present value of interest payments (1500 x 2.42308 ) Present value of the preference shares Amortization table: Date Interest Payment 01/01/2015 12/31/2015 1,500 12/31/2016 1,500 12/31/2017 1,500
Interest Expense
Amortization
1,723 1,749 1,778
223 249 246
11,365 3,635 15,000
Present value 15,000 15,223 15,472 15,718
Question No. 1 P1,723. See amortization table above.
(B)
Question No. 2 P1,749. See amortization table above.
(C)
Question No. 3 P1,778. See amortization table above.
(D)
Present value of the debentures Present value of Principal (20,000 x 1.02 x 0.53884 ) Add: Present value of interest payments (2400 x 3.5032 ) Present value of bonds payable
31
10,992 8,408 19,400
Chapter 26: Financial Liabilities and Debt Restructuring
Amortization Table Date Interest Payment 12/31/2017 12/31/2018 2,400
Interest Expense
Amortization
2,554
(154)
Present value 19,400 19,554
Question No. 4 P2,554. See amortization table above.
(B)
Question No. 5 P19,554. See amortization table above.
(B)
SUMMARY OF ANSWERS: 1. B 2. C 3. D 4.
B
5.
B
PROBLEM 26-35 Question No. 1 Accounts payable, unadjusted Good in transit FOB shipping point Undelivered check Accounts payable, adjusted
(D)
P1,350,000 75,000 60,000 P1,485,000
Question No. 2 14% Note payable (1,250,000 x 14%) 16% Note payable (3,000,000 x 16%) 10% Note payable (2,000,000 x 10% x 6/12) Interest expense (D)
P175,000 480,000 100,000 P755,000
Question No. 3 14% Note payable (1,250,000 x 14% x 3/12) 16% Note payable (3,000,000 x 16% x 9/12) 10% Note payable (2,000,000 x 10% x 6/12) Interest expense (C)
P43,750 360,000 100,000 P503,750
Question Nos. 4 and 5 Current 1,485,000 1,250,000
Accounts payable 14% Note payable 16% Note payable 10% Note payable Accrued interest payable Total
Noncurrent 3,000,000 2,000,000
503,750 P3,238,750 (C)
32
P5,000,000 (C)
Chapter 26: Financial Liabilities and Debt Restructuring
SUMMARY OF ANSWERS: 1. D 2. D 3. C 4.
C
5.
C
PROBLEM 26-36 (Comprehensive) Note to professor: The bonds will mature on July 1, 2022 instead of 2015. Question No. 1 Present value of Principal (10,000,000 X 0.3118 ) Add: Present value of interest payments (500,000 X 11.46992 ) Present value of the bonds payable (A) Question No. 2 April 1, 2014 July 1, 2014 October 1, 2014 January 1, 2015 Notes payable-current liability
3,118,000 5,734,960 8,852,960
P 400,000 600,000 300,000 300,000 P1,600,000
(B)
Question Nos. 3 and 4 Estimated liability from Warranties Disbursement for warranties Balance end (A)
358,000 342,000
Total
180,000
Beginning balance
520,000
Warranty expense (C)
700,000
Question No. 5 (a)
A B C Total
Fixed salary 10,000 14,000 18,000
(b)
( c)
Net Sales 200,000 400,000 600,000
Comm. Rate 4% 6% 6%
d=b x c Comm. Expense 8,000 24,000 36,000 (C)
E=d-a Accrued Salaries Payable 0 10,000 18,000 P28,000
Question Nos. 6 and 7 Int. payable - Bonds (10M x 10% x 3/12) Int. payable - Note payable Notes payable Estimated warranties payable Trade payable Sales commissions payable
33
Current 250,000 600,000 1,600,000 342,000 740,000 28,000
Noncurrent 5,400,000*
Chapter 26: Financial Liabilities and Debt Restructuring
Cash dividends payable (6M x P.2) Bonds payable Total
1,200,000 P4,760,000 (B)
8,970,751 P14,370,751** (C)
*(P7M-1.6M) ** or P14,370,783 which is the same as P8,952,185 x 100% +(Effective rate x months outstanding/12) minus payment Or [(P8,952,185 x 103%) - P250,000] Amortization Table Interest Date Payment 07/01/2012 01/01/2013 500,000 07/01/2013 500,000 01/01/2014 500,000 03/31/2014 250,000 (8,952,185 x 12% x 3/12) SUMMARY OF ANSWERS: 1. A 2. B 3. A 4.
C
Interest Expense
Amortization
531,178 533,048 535,031 268,566
31,178 33,048 34,999 18,566
5.
C
34
6
B
7
Present value 8,852,960 8,884,138 8,917,186 8,952,185 8,970,751
C
Chapter 27 – Lease
CHAPTER 27: LEASE Note to professor: Page 1015
SOLUTION: #6 Contingent rent: First P3,000,000 at 6% In excess of P3,000,000 at 5% Total Rental Expense – 2015
P 180,000 100,000
280,000 P 520,000
Change to: Contingent rent: First P1,500,000 to P3,000,000 at 6% P 90,000 In excess of P3,000,000 at 5% 100,000 190,000 Total Rental Expense – 2015 P 430,000 1017
Unguaranteed residual value: Lessee's point of view Guaranteed by a party other than the lessee or party related to the lessee Kindly change related to unrelated.
1030
Requirement No. 3 Lease receivable Less: Unearned interest income Present value of lease receivable
Current Asset 467,273 183,927 283,345
Noncurrent Asset 1,601,819 352,436 1,249,382
Kindly disregard this table. 1037
Journal entry No. 7 Expiration under Unguaranteed Residual Value Add: Expiration under Unguaranteed Residual Value: Fair value is less than the residual value
1040
2. To record the leaseback Equipment Cash
xx xx
Change Cash to Lease Liability 1043
Solution: Requirement No. 1 Gain on sale and leaseback= P80,000 Change P80,000 to P100,000
Page 1024 CASE NO. 2 Requirement No. 1 Amount to be capitalized as machinery Since the present value of minimum lease payments of P529,335 is higher than leased asset’s fair value of P515,000, the assets will be capitalized at P515,000. In addition, there is a need to compute for the new implicit rate using interpolation.
35
Chapter 27 – Lease
Recall the very basic principle in computing for present value that a lower rate will give higher present value. The previous implicit rate of 12% yielded a present value of P529,340 which is higher than P515,000. With that, the P515,000 fair value will mean higher effective rate. Applying trial and error, let us try 15%. Present value is as follows: Present value of periodic rent payment (P150,000 x 3.2832) Add: Present value of GRV (P30,000 x .5718) Total present value of minimum lease payment We can analyze the computation as follows: Gap Effective rate Present value differences 12% P 529,335 P 14,335 X? P 515,000 P 5,366 15% 509,634 Total gap difference P 19,701
492,480 17,154 509,634 Gap percentage 3%
Computation using the lower rate as a starting point: X
=
Lower rate + [(HR - LR)
X
=
12% + [(15% - 12%)
X
=
14.183%
x x
PV of LR - PV of X PV of LR - PV of HR 14,335 19,701
]
Computation using the higher rate as a starting point: PV of X - PV of HR X = Higher rate - [(HR - LR) x PV of LR - PV of HR X
=
15% - [(15% - 12%)
X
=
14.183%
x
5,366 19,701
]
Alternative computation: Using ratio and proportion, the computation is as follows: 12% - X = 529,340 - 515,000 12% - 15% 529,340 - 509,636 We can simplify the equation by isolating X 12% - X = (12%-15%) x (14,335/19,701) 12% - X = (-3%) x (14,335/19,701) 12% + (3% x (14,335/19,701)) = X .12 + (.021829) = X .14183 = X
36
]
]
Chapter 27 – Lease
Page 1031
Gross Investment or lease receivable = Total amount lessor receives = MLPs + URV PV of MLPs + PV of URV = PV of net investment Fair market value = Sales price = PV of MLPs = Sales Net cost = Cost of goods sold minus Present value of URV 0
Unearned interest revenue to be recognized as revenue using the effective interest method
Gross (dealer's) profit - recognize immediately (move bracket downwards)
PROBLEM 27-1 Unequal rental payments 2013 2014 2015 2016 Total rent Divide by: Number of years Rent expense per year
20,000 18,000 16,000 14,000 68,000 4 17,000
(C)
PROBLEM 27-2 Operating Lease - Unequal rental payments 07/01/2013 to 06/30/2014 07/01/2014 to 06/30/2015 07/01/2015 to 06/30/2016 Total divide by Rent income per year
60,000 90,000 210,000 360,000 3 120,000
Rent income to date (120,000 x 2) Less: Collection to date (60,000 + 90,000) Rent receivable (A)
240,000 150,000 90,000
37
Chapter 27 – Lease
PROBLEM 27-3 Operating Lease - Comprehensive Question No. 1 Periodic rent-one year
CASE NO. 1 (B)
360,000
CASE NO. 2 Question No. 2 Periodic rent-one year Amortization of lease bonus (200,000 / 4 ) Rent expense (C)
360,000 50,000 410,000
CASE NO. 3 Question No. 3 Total lease payments [4 X (12 – 7) X 30,000] Divide by: Lease term Rent expense per year (D)
1,230,000 4 307,500
Question No. 4 Total payments to date, 2015 (2 x (12 – 7) X 30,000 ) Less: Total expense to date, 2015 (307500 X 2 ) Accrued rent payable (B)
510,000 615,000 (105,000)
CASE NO. 4 Question No. 5 Total lease payments (25000 X 2 X 12 ) (30000 X 2 X 12 ) Divide by: Lease term Rent expense per year
600,000 720,000 (A)
Question No. 6 Total payments to date, 2015 Less: Total expense to date, 2015 (330,000 X 2 ) Accrued rent payable (C) CASE NO. 5 Question No. 7 Rent Revenue Less: Amortization of Direct Cost (60,000 / 4 ) Insurance and property tax expense on leased asset Depreciation of the leased asset Net income (A)
38
1,320,000 4 330,000
600,000 660,000 (60,000)
360,000 15,000 30,000 30,000 285,000
Chapter 27 – Lease
CASE NO. 6 Question No. 8 Period rent for one year Add: Contingent rent 1st [(3,000,000 – 1,000,000) x 8%] 160,000 2nd [(6,000,000 – 3,000,000) x 5%] 150,000 Total rent expense (A) SUMMARY OF ANSWERS: 1. B 2. C 3. D 6. C 7. A 8. A
4.
B
5.
360,000 310,000 670,000
A
PROBLEM 27-4 Finance Lease - Lease Liability The capitalized lease liability should be the annual lease payments less the executory cost (real estate taxes) times the present value factor for an ordinary annuity of 1 for nine years at 9%. The calculation would be: (P26,000 - 1,000) × 6.0 = P150,000. The real estate taxes are a period cost and should be charged to expense. Answer: A PROBLEM 27-5 (FINANCE LEASE WITH BARGAIN PURCHASE OPTION) Question No. 1 (A) Present value of periodic payment (100,000 x 4.1699) Add: Present value of bargain purchase option (30,000 x 0.6209) Present value of minimum lease payments Amortization Table Annual Date payment 12/31/2015 12/31/2015 100,000 12/31/2016 100,000 12/31/2017 100,000 12/31/2018 100,000 12/31/2019 100,000 12/31/2019 30,000
Interest expense
Amortization
33,562 26,918 19,610 11,571 2,723
100,000 66,438 73,082 80,390 88,429 27,277
Question No. 2 (B) P33,562. See amortization table above. Question No. 3 (C) P66,438. See amortization table above.
39
416,990 18,627 435,617
Present value 435,617 335,617 269,179 196,097 115,706 27,277 (0)
Chapter 27 – Lease
Question No. 4 (B) P269,179. See amortization table above. SUMMARY OF ANSWERS: 1. A 2. B 3. C
4.
B
PROBLEM 27-6 With Guaranteed Residual Value And Initial Direct Cost Note to the professor: The date for question Numbers 3 and 4 should be December 31, 2015 and not December 31, 2016. CASE NO. 1 Question No. 1 Present value of periodic payment (120,000 x 3.4869) Add: Present value of guaranteed residual value (30,000 x 0.683) Present value of minimum lease payments Add: Initial direct cost Cost of the Machinery (C) Amortization Table Annual Date payment 12/31/2015 12/31/2015 120,000 12/31/2016 120,000 12/31/2017 120,000 12/31/2018 120,000 12/31/2019 30,000
Interest expense
Amortization
31,892 23,081 13,389 2,720
120,000 88,108 96,919 106,611 27,280
418,428 20,490 438,918 20,000 458,918
Present value 438,918 318,918 230,810 133,891 27,280 -
Question No. 2 (B) P31,892. See amortization table above. Question No. 3 (C) P88,108. See amortization table above. Question No. 4 (B) P230,810. See amortization table above. CASE NO. 2 Question No. 5 Present value of periodic payment (120,000 x 3.4226) Add: Present value of guaranteed residual value (30,000 x 0.647) Present value of minimum lease payments = Fair value Add: Initial direct cost Cost of the Machinery (D)
40
410,712 19,410 430,122 20,000 450,122
Chapter 27 – Lease
Amortization Table: Effective rate = 11.50% Annual Interest Date payment expense Amortization 12/31/2015 12/31/2015 120,000 120,000 12/31/2016 120,000 35,664 84,336 12/31/2017 120,000 25,965 94,035 12/31/2018 120,000 15,151 104,849 12/31/2019 30,000 3,097 26,903
Present value 430,122 310,122 225,786 131,751 26,903 (0)
Question No. 6 (D) P35,664. See amortization table above. Question No. 7 (A) P84,336. See amortization table above. Question No. 8 (D) P225,786. See amortization table above. SUMMARY OF ANSWERS: 1. C 2. B 3. C
4.
B
5.
D
6.
D
7.
A
8.
D
PROBLEM 27-7 Finance Lease - Depreciation Question No. 1 Cost of the lease asset Less: Estimated residual value end of the useful life of the asset Depreciable cost Divide by: Useful life Depreciation (A)
438,918 50,000 388,918 10 38,892
Question No. 2 Cost of the lease asset Less: Gross amount of guaranteed residual value Depreciable amount Divide by: Lease term Depreciation (B)
438,918 30,000 408,918 4 102,230
PROBLEM 27-8 Computation of Periodic Lease Payments Fair value Less: Present Value of Guaranteed Residual Value Total Divide by: Present value of Annuity Due Periodic lease payments (B)
41
4,000,000 1,024,500 2,975,500 3.4869 853,337
Chapter 27 – Lease
PROBLEM 27-9 Direct Financing Lease - Lessor Question No. 1 Gross Investment: Total Periodic Lease Payment (914,585 x 5) Add Unguaranteed Residual value (URV) Less: Cost of the equipment Unearned interest income (A)
*4,572,927 300,000
4,872,927 4,000,000 872,927
*4,573,927 OR 4,573,925 Amortization Table Annual Date Collection 12/31/2015 12/31/2015 914,585 12/31/2016 914,585 12/31/2017 914,585 12/31/2018 914,585 12/31/2019 914,585 12/31/2020 300,000
Interest Income
Amortization
308,541 247,937 181,272 107,941 27,235
914,585 606,044 666,648 733,313 806,645 272,765
Present value 4,000,000 3,085,415 2,479,370 1,812,722 1,079,409 272,764 (0)
Question No. 2 (A) P308,541. See amortization table above. Question No. 3 (B) P606,044. See amortization table above. PROBLEM 27-10 Direct Financing Lease - With Initial Direct Cost Question No. 1 Gross Investment: Total Periodic Lease Payment (959,256 X 5) Add Unguaranteed Residual value (URV) Less: Cost of the equipment Unearned interest income (A)
*4,796,278 -
4,796,278 4,066,956 729,322
*4,796,278 OR *4,796,280 Amortization Table Annual Date Collection 12/31/2015 12/31/2015 959,256 12/31/2016 959,256 12/31/2017 959,256 12/31/2018 959,256 12/31/2019 959,256
Interest Income
Amortization
304,074 238,556 166,486 87,160
959,256 655,181 720,699 792,769 872,095
42
Present value 4,000,000 3,040,744 2,385,563 1,664,864 872,095 (0)
Chapter 27 – Lease
Question No. 2 (A) P304,074. See amortization table above. Question No. 3 (B) P655,181 See amortization table above. PROBLEM 27-11 Direct Financing Lease - Sale Of Leased Asset CASE NO. 1 Question No. 1 Gross Investment: Total periodic lease payments (6M X 5) Add: Residual Value Present value of the leased asset Present value of minimum lease payments (600,000 x 3.6048) Add: Present value of residual value (100,000 x .5674) Unearned interest income (A) Amortization Table Annual Date Collection 01/01/2015 12/31/2015 600,000 12/31/2016 600,000 12/31/2017 600,000 12/31/2018 600,000 12/31/2019 700,000
Interest Income
(B)
Question No. 4 Nil.
(A)
The journal entry is: Inventory Cash Lease receivable
2,219,620 2,000,000 40,000 179,620
90,000 10,000
43
56,740
333,646 373,683 418,525 468,767 624,999
Question No. 2 P226,317. See amortization table above.
100,000
3,100,000
2,162,880
Amortization
266,354 226,317 181,475 131,233 75,001
Question No. 3: Guaranteed Sales Less: Cost of goods sold Initial direct cost Dealer's profit
3,000,000 100,000
2,219,620 880,380
Present value 2,219,620 1,885,974 1,512,291 1,093,766 624,999 0
Chapter 27 – Lease
SUMMARY OF ANSWERS: 1. A 2. A 3. B
4.
A
CASE NO. 2 Question No. 1 Gross Investment: Total periodic lease payments (6M X 5) Add: Residual Value Present value of the leased asset Present value of minimum lease payments (600,000 x 3.6048) Add: Present value of residual value (100,000 x .5674) Unearned interest income (A) Question No. 2 Amortization Table Annual Date Collection 01/01/2015 12/31/2015 600,000 12/31/2016 600,000 12/31/2017 600,000 12/31/2018 600,000 12/31/2019 700,000
3,100,000
2,162,880 56,740
2,219,620 880,380
(A) Interest Income
Amortization
266,354 226,317 181,475 131,233 75,001
Question No. 3: Unguaranteed Sales Less: Net cost Cost of goods sold Less: Present value of URV Initial direct cost Dealer's profit (B) Question No. 4 P10,000.
333,646 373,683 418,525 468,767 624,999
2,000,000 56,740
90,000 10,000
4.
Present value 2,219,620 1,885,974 1,512,291 1,093,766 624,999 0
2,162,880
(B)
The journal entry is: Inventory Loss on sales type Lease receivable SUMMARY OF ANSWERS: 1. A 2. A 3. B
3,000,000 100,000
B
44
100,000
1,943,260 40,000 179,620
Chapter 27 – Lease
PROBLEM 27-12 Sales-Type Lease Net Selling Price Less: Present value of lease receivable Loss on sale (D)
200,000 227,436 (27,436)
PROBLEM 27-13 Sale and Leaseback as Finance Lease Sales Price Less: Carrying amount Deferred gain on sale
2,162,880 1,900,000 262,880
Answer A. Answer is zero, the gain on sale is to be deferred and amortize over the lease term PROBLEM 27-14 Sale and Leaseback as Operating Lease - Treatment of Gain Question No. 1 (B) Sales Price = Fair value Less: Carrying amount Gain on sale - recognize immediately
1,400,000 1,000,000 400,000
Question No. 2 (B) Sales price Less: Carrying amount Gain on sale - recognize immediately
1,400,000 1,000,000 400,000
Question No. 3 Sales price Less: Fair value Deferred Gain
1,400,000 1,100,000 300,000
Fair value Less: Carrying amount Outright gain
1,100,000 1,000,000 100,000
(D)
PROBLEM 27-15 Sale and Leaseback as Operating Lease - Treatment of Loss Question No. 1 (B) Sales Price = Fair value Less: Carrying amount Loss on sale - recognized immediately
900,000 1,000,000 (100,000)
45
Chapter 27 – Lease
Question No. 2 (B) Sales price Less: Carrying amount Loss on sale - recognized immediately
900,000 1,000,000 (100,000)
Question No. 3 (A) Nil. The entire loss is deferred since it will be compensated by below-market future rentals. COMPREHENSIVE PROBLEMS PROBLEM 27-16
CASE NO. 1 Question No. 1 (A) “Substantially all” test Present value of Periodic Payment (200,000 x 6.75902) % age
1,351,805 2,000,000
1,351,805
=68%
Not substantially all. Major part test % age
10 20
=50%
The lease term does not amount to major part of the economic life of the asset. Answer: Nil. The lease do not classify as finance lease. Question No. 2 Rent expense
(B)
Question No. 3 Nil.
(A)
Question No. 4 Nil.
(A)
P200,000
Question No. 5 (D) Depreciation expense overstated, net income understated Interest expense overstated, net income understated Rent expense understated, net income overstated Net income understated SUMMARY OF ANSWERS – CASE NO. 1: 1. A 2. B 3. A 4. A 5.
46
D
(115,181) (135,181) 200,000 (50,362)
Chapter 27 – Lease
Question No. 1 “Substantially all” test % age 1,351,805 =90% 1,500,000
CASE NO. 2 (B)
The lease is a finance lease. The cost of the leased asset is lower between the fair value and the present value of minimum lease payment which is P1,351,805. Amortization Table Annual Date Payment 12/31/2014 12/31/2014 200,000 12/31/2015 200,000 12/31/2016 200,000 12/31/2017 200,000
Interest Expense
Amortization
115,181 106,699 97,368
200,000 84,819 93,301 102,632
Question No. 2 (D) Depreciation expense (1,351,805/10) Interest expense Total lease- related expenses
Present value 1,351,805 1,151,805 1,066,986 973,684 871,052
135,181 115,181 250,362
Question No. 3 (C) P93,301. See amortization table above. Question No. 4 (B) P1,066,986. See amortization table above. Question No. 5 (A) Nil. The company did not commit any error. SUMMARY OF ANSWERS – CASE NO. 2: 1. B 2. D 3. C 4. B 5.
A
PROBLEM 27-17 Question No. 1 (B) Lease is a finance lease thus any gain should be deferred and amortize over the lease term. Selling Price Less: Carrying amount Deferred gain on sale and leaseback Less: Amortization in 2014 (29,695/10) Deferred gain on sale and leaseback, end
47
379,695 350,000 29,695 2,970 26,725
Chapter 27 – Lease
Question No. 2 (D) Interest expense Depreciation expense (379,695/10) Rent expense (5,000 x 12) Total lease related expenses Amortization Table Annual Date Payment 01/02/2015 01/02/2015 60,000 01/02/2016 60,000
38,363 37,970 60,000 136,333
Interest Expense
Amortization
38,363
60,000 21,637
Question No. 3 (C) Sale and leaseback as finance lease Lease liability, 01/02/2015 Add: Accrued interest Total lease-related liability
Present value 379,695 319,695 298,058
319,695 38,363 358,058
Question No. 4 (B) Amortization of deferred gain on sale and leaseback (see No. 1) Add: Gain on sale and leaseback as operating lease (P400,000P350,000) Total gain on sale and leaseback
2,970 50,000 52,970
Question No. 5 (B) The deferred gain on sale and leaseback should be recognized immediately. SUMMARY OF ANSWERS – CASE NO. 2: 1. B 2. D 3. C 4. B 5.
B
PROBLEM 27-18 Question No. 1 (C) Present value of Periodic Payment (50,000 x 4.0373) - LOWER Fair Value of the leased asset
201,865 P213,213
PAR. 20 OF PAS 17 States that: At the commencement of the lease term, lessees shall recognise finance leases as assets and liabilities in their balance sheets at amounts equal to the fair value of the leased property or, if lower, the present value of the minimum lease payments, each determined at the inception of the lease. The discount rate to be used in calculating the present value of the minimum lease payments is the interest rate implicit in the lease, if this is practicable to determine; if not, the lessee’s incremental borrowing rate shall be used. Any initial direct costs of the lessee are added to the amount recognized as an asset.
48
Chapter 27 – Lease
QUESTION NOS. 2-4 Amortization Table Annual Date Payment 12/31/2014 12/31/2014 50,000 12/31/2015 50,000 12/31/2016 50,000 12/31/2017 50,000 12/31/2018 50,000
Interest Expense
Amortization
18,224 14,411 10,140 5,361
50,000 31,776 35,589 39,860 44,639
Present value 201,865 151,865 120,089 84,499 44,639 0
Question No. 2 (D) P120,089. See amortization table above. Question No. 3 (C) P35,589. See amortization table above. Question No. 4 (C) P18,224. See amortization table above. Question No. 5 (A) Depreciation expense (201,865/5) SUMMARY OF ANSWERS: 1. C 2. D 3. C
4.
C
P40,373 5.
A
PROBLEM 27-19 Question No. 1 Annual lease payments
(A) = =
Annual lease payments
=
Fair market value – Present value of Unguaranteed Residual Value Annuity due 286,420 - (.5066 X 20,000) 4.6048 60,000
Question No. 2 (C) Total minimum lease payments(60,000 x 6) Add: Unguaranteed residual value Total lease receivable Less: Fair market value of the leased asset Total Financial revenue
49
360,000 20,000 380,000 286,420 93,580
Chapter 27 – Lease
Question No. 3 Amortization Table Annual Date Collection 01/01/2015 01/01/2015 60,000 12/31/2015 60,000
(A) Interest Income
Amortization
27,170
60,000 32,830
Present value 286,420 226,420 193,590
Question No. 4 (C) Present value of periodic lease payments (60,000 x 4.6048) Amortization Table Annual Date Collection 01/01/2015 01/01/2015 60,000 12/31/2015 60,000
Interest Income
Amortization
25,955
60,000 34,045
Depreciation expense (276,288/6) Add: Interest expense Total expenses
P 276,288 Present value 276,288 216,288 182,243
46,048 25,955 72,003
Question No. 5 (C) P182,243. See amortization table in No. 4. SUMMARY OF ANSWERS: 1. A 2. C 3. A
4.
C
5.
C
PROBLEM 27-20 Question No. 1 (B) Periodic rent (12,000 x 12) Amortization of lease bonus (300,000/6) Rent expense Question No. 2 (C) Periodic rent Contingent rent: 1st (4M x 4%) 160,000 2nd (6M-4M) x 5%) 100,000 Amortization of lease bonus (500,000/5) Total rent expense Question No. 3 Rent expense
=
(B) [(3 x 12)-6] x 10,000 3
50
144,000 50,000 194,000
480,000 260,000 100,000 840,000
Chapter 27 – Lease
Rent expense
=
100,000
Question No. 4 (B) Lease No. 1 (Rent expense overstated, asset understated) (P444,000-P194,000) Lease No. 2 (Rent expense overstated, asset understated) Asset understated Rent expense per year-Lease 3 Less: Payment (10,000 x 6 months) Accrued rent payable under, Liability understated
100,000 60,000 (40,000)
Question No. 5 (C) Lease no. 1 (Rent expense overstated, net income understated) Lease No. 2 (Rent expense overstated, net income understated) Lease No. 3 (Rent expense understated, net income overstated) (100,000-60,000) Net income understated SUMMARY OF ANSWERS: 1. B 2. C 3. B
4.
B
5.
(250,000) (400,000) (650,000)
(250,000) (400,000) 40,000 (610,000)
C
PROBLEM 27-21 Question No. 1 (B) The present value of annuity due of 12% for 10 periods can be computed as: [1 – (1+12%)-9] + 1 = 6.33 12% Annual rentals Executory costs Minimum lease payment Multiply by: Present value of annuity due Present value of minimum lease payments
P1,440,000 (49,410) P1,390,590 6.33 P8,802,438
Fair value of the property P8,800,000 (The difference is immaterial, implicit rate is 12% at P8.8M) Question No. 2 (D) [12/31/2014 balance x (1+Effective rate)] – annual payments = 12/31/15 balance [(P8,800,000 – P1,390,590) x 1.12%] - P1,390,590 = P6,907,949 The current portion as of 12/31/2015 can be computed as: (P6,907,949 - P1,390,590) x 12% = P561,636
51
Chapter 27 – Lease
Question No. 3 (B) 12/31/2015 balance – current portion(no.2) = Non-current portion = P6,907,949 - P561,636 = P6,346,313 Question No. 4 P8,800,000/10 = P880,000
(A)
Question No. 5 (A) Depreciation expense Interest expense (P8,800,000 – P1,390,590) x 12 Executory costs Total lease-related expenses SUMMARY OF ANSWERS: 1. B 2. D 3. B
4.
B
5.
P 880,000 889,129 49,410 P1,818,539
A
PROBLEM 27-22 Note to professor:
The fair value of the building on June 30, 2015 is P2,380,000. Mallig has the option to purchase the machine on June 30, 2025 (instead of 20 16) by paying ….
Question No. 1 07/01/2014 to 06/30/2015 07/01/2015 to 06/30/2016 07/01/2016 to 06/30/2017 Total Divide by: Number of years Rent expense per year
(E) 60,000 90,000 210,000 360,000 3 120,000
Rent expense to date (120,000 x 1) Less: Payment to date Accrued rent payable
120,000 60,000 60,000
Question No. 2 (B) Present value of Periodic Payment (400,000 x 5.9500) Fair value of leased asset
2,380,000 P2,380,000
Cost is equal to P2,380,000 (Fair value which is the same as the Present value of minimum lease payments.) Amortization Table Annual Date Payment 06/30/15 06/30/15 400,000 06/30/16 400,000
Interest Expense
Amortization
277,200
400,000 122,800
52
Present value 2,380,000 1,980,000 1,857,200
Chapter 27 – Lease
Question No. 3 (E) First lease (See No. 1) Second lease (see amortization table) Current liabilities
60,000 122,800 182,800
Question No. 4 (A) Rent expense (First lease) Interest expense Depreciation expense (2,380,000/10) Total lease-related expenses
120,000 277,200 238,000 635,200
SUMMARY OF ANSWERS: 1. E 2. B 3. E
4.
A
PROBLEM 27-23 Exercise of Guaranteed Residual Value Question No. 1 (C) Present value of periodic payment (120,000 x 3.4437) Add: Present value of bargain purchase option (30,000 x 0.6587) Present value of minimum lease payments Add: Initial direct cost Cost of the Machinery Question No. 2 Interest expense Executory cost Depreciation Total lease-related expenses Question Nos. 3 to 4 Amortization Table Annual Date Payment 12/31/2015 12/31/2015 120,000 12/31/2016 120,000 12/31/2017 120,000 12/31/2018 120,000 12/31/2019 30,000
(B)
413,244 19,761 433,005 20,000 453,005
34,431 20,000 105,751 160,182
Interest Expense
Amortization
34,431 25,018 14,570 2,977
120,000 85,569 94,982 105,430 27,023
Question No. 3 (C) P85,569. See amortization table above. Question No. 4 (B) P227,436. See amortization table above.
53
Present value 433,005 313,005 227,436 132,453 27,023 (0)
Chapter 27 – Lease
Question No. 5 (B) Gross amount of guaranteed residual value Less: Fair value Loss on finance lease Question No. 6 Zero
30,000 25,000 5,000
(A)
Question No. 7 (C) Cost of leased asset Less: Accumulated depreciation Carrying amount Add: Cash payment Total consideration Less: Lease liability Cost of equipment purchased SUMMARY OF ANSWERS: 1. C 2. B 3. C
4.
B
453,005 211,503 241,503 200,000 441,503 227,436 214,067 5.
B
6.
A
7.
C
PROBLEM 27-24 Direct Financing Lease Question No. 1 (C) Annual payment = P3,224,000 = P750,000 4.312 Total interest to be earned = [(P750,000 x 5) – P3,234,000] = P516,000 Question No. 2 (B) (P3,234,000 – P750,000) x 8% = P198,720 Question No. 3 (A) The PV annuity due of 12% over 8 years can be computed as: [1 – (1+12%) -7] + 1= 5.5638 12% The present value of 12% for 8 years can also be computed as: (1+12%)-8 = 0.4039 The total interest revenue is the difference the lease receivable and the present value of the minimum lease payments. Lease receivable (P959,500 x 8 + P400,000) Present value of the lease Unguaranteed residual value (P400,000 x 0.4039) P 161,560 Present value of lease payments (P959,500 x 5.5638) 5,338,466 Total interest over the lease term
54
P 8,076,000
5,499,966 P2,576,034*
Chapter 27 – Lease
Since the lease is a direct financing lease (meaning, present value of the minimum lease payments approximates the value of the property upon the commencement of the lease), this can be solved alternatively as: [(P959,500 x 8 + P400,000) – P5,500,000)] = P2,576,000 Question No. 4 (B) (P5,500,000 – P959,500) x 12% = P544,860 SUMMARY OF ANSWERS: 1. C 2. B 3. A
4.
B
PROBLEM 27-25 Sales-Type Lease Note to professor:
Tequila Sunrise Company leased equipment from Wasted Time Co. on July 1, 2015 for an eight-year period expiring June 30, 2023 (instead of 2014).
Question No. 1 (A) Lease receivable (P3,000,000 x 5 + P1,000,000) Present value of minimum lease payments: Rental (3.60 x P3,000,000) P10,800,000 Unguaranteed residual value (0.57 x P1,000,000) 570,000 Total unearned interest income Question No. 2 (B) Present value of minimum lease payments Cost of goods sold (P8,000,000 + P300,000)
(B) P 7,040,000 ( 5,600,000) P 1,440,000
Question No. 5 (B) P7,040,000 x 10% x 6/12 = P352,000 SUMMARY OF ANSWERS: 1. A 2. B 3. A
4.
B
5.
55
(11,370,000) P 4,630,000 11,370,000 (8,300,000) P3,070,000
Question No. 3 (A) P11,370,000 x 12% = P1,364,400 Question No. 4 Selling price Book value Gain on sale
P16,000,000
B
Chapter 27 – Lease
PROBLEM 27-26 Comprehensive Question No. 1 (C) Sales-type lease since Siegfried is a seller of computers and it qualifies as finance lease. Question No. 2 (A) Direct financing lease. The lease qualifies as finance lease on the part of the lessee. Amortization Table Annual Date Payment 1/1/2015 1/1/2015 2,466,754 6/30/2015 2,466,754 1/1/2016 2,466,754
Interest Expense
Amortization
876,662 797,158
2,466,754 1,590,092 1,669,596
Present value 20,000,000 17,533,246 15,943,154 14,273,558
Question No. 3 (A) P15,943,154. See amortization table above. Question No. 4 January 1 to June 30, 2015 June 30 to December 31, 2015 Total Interest income
(B) 876,662 797,158 1,673,820
This is P876,662 interest for the first six months: (P20,000,000 - lease payment of P2,466,754) x 5%, plus P797,158 for the second six months: (P20,000,000 lease payment of P2,466,754 - [P2,466,754 - 876,662]) x 5% SUMMARY OF ANSWERS: 1. C 2. A 3. A
4.
B
PROBLEM 27-27 Investment Property Note to the professor: Assume that the fair value of the land is material and not immaterial. Question No. 1 (A) Nil, since the property should be investment property and not property, plant and equipment. Present value of periodic payment (500,000 x 4.97) Add: Present value of bargain purchase option (400,000 x 0.40) Present value of Minimum lease payments Present value of minimum lease payments Less: Fair value of the land at the inception of the lease Cost of the building as investment property
56
2,485,000 160,000 2,645,000 2,645,000 200,000 2,445,000
Chapter 27 – Lease
Amortization Table Annual Date Payment 01/01/2015 12/31/2015 500,000 12/31/2016 500,000
Interest Expense
Amortization
317,400 295,488
182,600 204,512
Present value 2,645,000 2,462,400 2,257,888
Question No. 2 (C) P317,400. See amortization table above. Question No. 3 (C) P204,512. See amortization table above. Question No. 4 (C) P2,257,888. See amortization table above. Question No. 5 and 6 Total rent income (40,000 x 24) + (50,000 x 24) x 20 Divide by: Number of years Rent income per year
43,200,000 4 10,800,000
Periodic rent Add: Amortization of lease bonus (30,000 x 20)/4 Gross Rental income (No. 5) (A) Less: Expenses Amortization of initial direct cost (5,000 x 20)/4 Annual maintenance cost Interest expense Depreciation *(2,645,000-200,000/10) Net rental income (B) SUMMARY OF ANSWERS: 1. A 2. C 3. C
4.
C
5.
A
10,800,000 150,000 10,950,000 25,000 40,000 317,400 244,500 10,323,100
6.
B
PROBLEM 27-28 Question No. 1 (900,000+50,000+25,000)
(D)
Question No. 2 (D) Total warranty expense (1.4M x 12%) Less: Total actual expenditures Warranty liability end of 2015
P
975,000
P
168,000 63,000 105,000
P
57
Chapter 27 – Lease
Question No. 3 Legal services Add: Medical services Payroll (14,400/12 x 8) Royalties Total accrual
(C) P
P
Question No. 4 (D) Fair value (equal to present value MLP) Less: First payment Total Add: Interest accrued (420,000 x 9%) Total lease liability Question No. 5 (3,875,902 x 111%)-400,000 SUMMARY OF ANSWERS: 1. D 2. D 3. C
4,600 5,500 9,600 3,900 23,600
P
P
(A)
4.
490,000 70,000 420,000 37,800 457,800
P 3,902,251
D
5.
A
PROBLEM 27-29 Question No. 1 (C) Unadjusted balance – Accounts Payable 2 3 Adjusted balance
450,000 60,000 45,000 555,000
Question No. 2 (A) Units sold: October November December Total Multiply by Total failures expected Less: Failures already recorded: October sales November sales December sales Expected future failures Multiply by Estimated cost
32,000 28,000 40,000 100,000 2% 2,000 640 360 180
Warranty expense Estimated warranty liability
123,000 123,000
58
1,180 820 150 123,000
Chapter 27 – Lease
Question No. 3 (C) Notes payable is (200,000 x 3.6048) = 720,960 Amortization Table Annual Date Payment 01/01/2015 12/31/2015 200,000 12/31/2016 200,000
Interest Expense
Amortization
86,515 72,897
113,485 127,103
Question No. 4 (A) Present value of principal (4M x .6830) Present value of interest payments (480,000 x 3.1699) Total Present value Amortization Table Interest Date Payment 01/01/2015 12/31/2015 480,000 Question No. 5
Interest Expense
Premium Amortization
425,355
54,645
2,732,000 1,521,552 4,253,552 Present value 4,253,552 4,198,907
(D)
Present value of minimum lease payments (200,000 x 6.759) Amortization Table Annual Date Payment 01/01/2015 01/01/2015 200,000 12/31/2015 SUMMARY OF ANSWERS: 1. C 2. A 3. C
Present value 720,960 607,475 480,372
Interest Expense
Amortization
115,180 4.
A
5.
200,000
P1,351,800 Present value 1,351,800 1,151,800 1,266,980
D
PROBLEM 27-30 Note to professor:
By reason of financial difficulties, it is probable that Revo shall pay the P200,000 loan with only a 60% recovery anticipated from Innova (not Suzette) Company.
Question No. 1 (D) Zero, the two notes payable should be presented as noncurrent liabilities.
59
Chapter 27 – Lease
Question No. 2 (D) FINANCE LEASE: Amortization Table Annual Interest Date Payment Expense 12/31/2014 12/31/2014 60,000 12/31/2015 60,000 38,363 12/31/2016 60,000 35,767
Amortization 60,000 21,637 24,233
Present value 379,692 319,692 298,055 273,822
Answer: P273,822. Refer to amortization table above. Question No. 3 (B) Answer: P38,363. Refer to amortization table above. Question No. 4
(B)
Annual rent expense=P720,000/3=P240,000 Operating lease Date Expense 1/1-12/31/15 1/1-12/31/16 1/1-12/31/17
240,000 240,000 240,000
Expense To date 240,000 480,000 720,000
Payment to date 120,000 300,000 720,000
Accrued rent (Prepaid) 120,000 180,000 -
Question No. 5 (C) CONTINGENCIES Answer: P400,000 (P200,000+P200,000) 1.
Only a disclosure is necessary because it is not probable that the company will be liable, although the amount can be measured reliably.
2. Retained earnings Estimated liability for income tax
200,000
3. Accounts receivable – Innova Loss on guaranty Note payable – bank SUMMARY OF ANSWERS: 1. D 2. D 3. B
4.
200,000
120,000 80,000 200,000 B
5.
60
C
Chapter 29 – Shareholders’ Equity
CHAPTER 29: SHAREHOLDERS’ EQUITY Note to professor: Page 1099 1123
1125
1127
Existing data: To record cash collection Cash (250,000-62,500) P 62,500
Change to: Cash
If the shareholders opted to receive noncash, the journal entry is: Dividends payable 54,000 Loss on distribution of dividends (balancing figure) 4,000 Noncash (5 x 12,000) 60,000 Illustration: Treasury Stock as Share Dividend Ordinary share P50 par, 105,000 shares issued and Outstanding 5,050,000
e. On December 15, 2015, Roxas declared its first cash dividend to shareholders of P15 per share, payable on January 14, 2008
Page 1121 Existing Data: Journal entry on Feb. 15, 2015 Dividends payable Inventory Gain on distribution - prop. dividends Carrying amount of dividend payable = Fair value Less: Carrying amount of noncash assets Gain on distribution of prop. Dividends Change to: Dividends payable Inventory Gain on distribution - prop. dividends Carrying amount of dividend payable = Fair value Less: Carrying amount of noncash assets Gain on distribution of prop. Dividends
61
P 62,500
Change 4,000 to 6,000
Remove ‘and outstanding’ and change 5,050,000 to 5,250,000 Change 2008 to 2016.
780,000 600,000 180,000 780,000 600,000 180,000
780,000 700,000 80,000 780,000 700,000 80,000
Chapter 29 – Shareholders’ Equity
PROBLEM 29-1 Question No. 1 (A) Authorized ordinary shares at P10 stated value Less: Unissued ordinary shares Ordinary Shares issued
2,400,000 1,300,000 1,100,000
Question No. 2 (B) Authorized preference shares at P50 par value Less: Unissued preference shares Preference Shares issued
1,600,000 300,000 1,300,000
Question No. 3 (D) Share Premium on ordinary shares Share Premium conversion option-bonds payable Share premium on preference shares Gain on sale of treasury shares Ordinary share warrants outstanding Donated capital Ordinary shares options outstanding Total Share Premium
600,000 80,000 300,000 120,000 70,000 80,000 50,000 1,300,000
Question No. 4 (A) Ordinary Shares issued Preference Shares issued Subscribed Ordinary shares Subscription receivable – ordinary shares Subscribed Preference shares Subscription receivable – preference Total Share Premium Contributed Capital
1,100,000 1,300,000 400,000 (40,000) 120,000 (30,000) 1,300,000 4,150,000
Question No. 5 (C) Preference Shares issued Subscribed Preference shares Ordinary Shares issued Subscribed Ordinary shares Share Premium on ordinary shares Total Legal Capital
1,300,000 120,000 1,100,000 400,000 600,000 3,520,000
Question No. 6 (D) Contributed Capital Accumulated profits – unappropriated Unrealized increase in value of FVTOCI securities Reserve for bond sinking fund Revaluation surplus Total Shareholders' Equity
4,150,000 1,000,000 20,000 640,000 260,000 6,070,000
SUMMARY OF ANSWERS: 1. A 2. B 3. D
4.
A
5.
62
C
6.
D
Chapter 29 – Shareholders’ Equity
PROBLEM 29-2 1.
2.
3.
Cash (2,000 x P50) Share capital To record share issuance at a premium
100,000
Cash (5,000 x P60) Share capital (5,000 x P50) Share premium To record share issuance at a premium
300,000
Share premium Retained earnings Cash To record payment of share issue cost
50,000 20,000
Cash (4,000 x P40) Discount on share capital Share capital (4,000 x P50) To record share issuance at a discount
160,000 40,000
100,000
250,000 50,000
70,000
200,000
PROBLEM 29-3 1.
2.
3.
Machinery Share capital (2,500 x P50) Share premium To record share issuance for machinery
180,000 125,000 55,000
Patent (1,000 x P65) Share capital (1,000 x 50) Share premium To record share issuance for patent
65,000
Organization expense Share capital (400 x P50) Share premium To record share issuance for organization services.
40,000
50,000 15,000
20,000 20,000
PROBLEM 29-4 Loans payable - bank Share capital Share premium** Gain on settlement on liability To record issuance of shares for liability
150,000 100,000 40,000 10,000
*Computation of loss on extinguishment of liability Fair value of equity instruments issued (or if not reliably determinable, use the fair value of liability) (2,000 x P70) Less: Carrying amount of liability Gain on settlement of liability **Computation of increase in share premium Fair value of equity instruments issued (or if not reliably determinable, use the fair value of liability) (2,000 x P70) Less: Total par or stated value of equity issued (2,000 x P50) Share premium (or Discount)
63
140,000 150,000 10,000 140,000 100,000 40,000
Chapter 29 – Shareholders’ Equity
PROBLEM 29-5 1.
2.
Cash (2,500 x P216) Preference shares (2,500 x P200) Share premium-pref. share To record issuance of preference shares Cash (500 x P120) Ordinary shares (500 x P100) Share premium - ordinary shares To record issuance of ordinary shares
540,000 500,000 40,000 60,000 50,000 10,000
PROBLEM 29-6 Allocation of the lump-sum price: Preference shares (2,500 x P216) Ordinary shares (500 x 120) Total
Total Fair value 540,000 60,000 600,000
The transaction will then be recorded as follows: Cash Preference shares (2,500 x P200) Share premium-preference share (810,000-500,000) Ordinary shares (500 x 100) Share premium - ordinary share (90,000-50,000)
Fraction 54/60 6/60
Allocated proceeds 810,000 90,000 900,000
900,000 500,000 310,000 50,000 40,000
PROBLEM 29-7 Allocation of the lump-sum price: Total proceeds Less: Total fair value of preference shares (2,500 x P216) Amount allocated to the ordinary shares The transaction will then be recorded as follows: Cash Preference shares (2,500 x P200) Share premium-preference share (540,000-500,000) Ordinary shares (500 x P100) Share premium-ordinary share (360,000-50,000) To record issuance of preference and ordinary shares
900,000 540,000 360,000 900,000 500,000 40,000 50,000 310,000
PROBLEM 29-8 1.
2.
Subscription receivable (4,000 x P60) Subscribed share capital (4,000 x P50) Share premium To record subscriptions of share capital Cash (240,000 x 40%) Subscription receivable To record cash collection
240,000 200,000 40,000 96,000 96,000
64
Chapter 29 – Shareholders’ Equity
3.
Cash (240,000 x 60%) Subscription receivable To record cash collection
144,000 144,000
Subscribed share capital Share Capital (4,000 x 50) To record issuance of share certificate
200,000 200,000
PROBLEM 29-9 1.
2.
3.
Subscriptions receivable (5,000 x P60) Subscribed ordinary shares (5,000 x P50) Share premium-ordinary share To record subscriptions of 10,000 shares at P110
300,000
Cash (300,000 x 40%) Subscriptions receivable To record receipt of cash for subscriptions
120,000
Subscribed ordinary shares Share premium-ordinary share Subscriptions receivable (300,000 x 60%) Share premium forfeited down-payment
250,000 50,000
250,000 50,000
120,000
180,000 120,000
PROBLEM 29-10 Journal entries to record the transactions would be: To record the expenses incurred related to the auction Receivable from highest bidder P 10,000 Cash To record the collection from highest bidder Cash Subscription receivable Receivable from highest bidder To record the issuance of share capital Subscribed share capital (7,500 x P50) Share capital
P
10,000
300,000 290,000 10,000 375,000 375,000
PROBLEM 29-11 To record the expenses incurred related to the auction Receivable from highest bidder P 10,000 Cash P To record the acquisition of entity’s own shares Treasury shares Subscription receivable Receivable from highest bidder To record the issuance of share capital Subscribed share capital (7,500 x P50) 375,000 Share capital
65
10,000
300,000 290,000 10,000
375,000
Chapter 29 – Shareholders’ Equity
PROBLEM 29-12 1)
Treasury shares (15,000 x 24) Cash
360,000
2)
Cash (5,000 x P26) Treasury shares (5,000 x P24) Share premium-Treasury shares
130,000
3)
4)
5)
360,000 120,000 10,000
Cash (4,000 x 20) Share premium-Treasury shares Retained earnings Treasury shares (4,000 x 24)
80,000 10,000 6,000 96,000
Ordinary shares (6,000 x 20) Share premium (600,000/100,000) x 6,000 Share premium-Treasury shares Treasury shares (6,000 x P24) Memo entry: Received 5,000 shares from a stockholder as a donation. Cash (2,000 x 28) Donated capital
120,000 36,000
12,000 144,000
56,000 56,000
PROBLEM 29-13 Note to professor: Preference share P100 par, 20,000 shares issued and outstanding
3,000,000
Change ‘20,000’ to 30,000. a.
b.
Preference shares (3,000 x P100) Share Premium on Preference shares [(300,000/30,000) x 3,000] Accumulated profits (balancing figure) Cash (3,000 x P140)
300,000
Preference shares Share Premium on Preference shares Cash (95 x 3,000) Share premium retirement of shares (balancing figure)
300,000 30,000
30,000 90,000 420,000
285,000 45,000
PROBLEM 29-14 Note to professor: Preference share P100 par, 20,000 shares issued and outstanding
3,000,000
Change ‘20,000’ to 30,000. 1)
Preference shares (4,000 x P100) Share Premium on Preference shares [(300,000/30,000) x 4,000] Ordinary shares (4,000 x P50) Share premium-ordinary shares
66
400,000 40,000
200,000 240,000
Chapter 29 – Shareholders’ Equity
2)
Preference shares (4,000 x P100) Share Premium on Preference shares [(300,000/30,000) x 4,000] Accumulated profits Ordinary shares (4,000 x 5/1 x P50)
400,000 40,000 560,000 1,000,000
PROBLEM 29-15 1a.
1b.
2.
Ordinary shares (50,000 x P50) Share Premium on Ordinary shares Ordinary shares (50,000 x P40) Share premium-recapitalization
2,500,000 100,000
Ordinary shares Share Premium on Ordinary shares Accumulated profits Ordinary shares (50,000 x P140)
2,500,000 100,000 4,400,000
2,000,000 600,000
7,000,000
Ordinary shares ((P50-P40) x 50,000) Share premium-recapitalization
500,000 500,000
3. Share split Ordinary Share capital issued Subscribed share capital Total Less: Treasury shares Outstanding shares
Before 100,000 100,000 100,000
Multiply by 5/1 5/1 5/1 5/1 5/1
After 500,000 500,000 500,000
Par value per share
Before P50
multiply by 1/5
After P10
Memo entry: Changes:
increase number of shares Same SHE Decrease number in Par value
PROBLEM 29-16
Preference shares (2,000 x P80) Warrants (2,000 x P20) Total *(150 x 4,000)
CASE NO. 1 Total Fair value 160,000 40,000 200,000
Cash Preference Share capital (2,000 x P50) Share Premium (320,000 -100,000) Ordinary share warrants outstanding
Fraction
Allocated cost
80% 20%
320,000 80,000 400,000*
400,000 100,000 220,000 80,000
67
Chapter 29 – Shareholders’ Equity
When the warrants are exercised: Cash (1,000 x 80% x P40) Ordinary share warrants outstanding (80,000 x 80%) Ordinary Share capital (1,000 x 80% x P20) Share Premium –ordinary share
32,000 64,000 16,000 80,000
CASE NO. 2 Total proceeds Less: Total fair value of the preference shares (2,000 x P80) Value of the warrants Cash Preference Share capital (2,000 x P50) Share Premium (160,000-100,000) Ordinary share warrants outstanding
400,000 160,000 240,000 400,000 100,000 60,000 240,000
CASE NO. 3 Market value of ordinary shares Less: Option price/exercise price Intrinsic value of warrant Multiply: # of ordinary shares claimable under warrants Market value of share warrants
P
P
Total proceeds Less: Value of Share warrants Value assigned to Preference Share
50 40 10 1,000 10,000 400,000 10,000 390,000
Cash Preference Share capital (2,000 x P50) Share Premium (390,000-100,000) Ordinary share warrants outstanding
400,000 100,000 290,000 10,000
PROBLEM 29-17 Ordinary shares issued Less: Treasury shares Outstanding shares a.
40,000 2,000 38,000
Retained earnings (38,000 x P5) Dividends payable
b.
No formal accounting entry
c.
Dividends payable Cash
190,000 190,000 190,000 190,000
PROBLEM 29-18 Cash dividends for Preference Shares-Semi-annual Payment July 1:
Retained Earnings Dividends Payable (9,000 x P100 x 10% x 6/12) Dec. 31: Retained Earnings Dividends Payable (9,600 x P100 x 10% x 6/12)
45,000 45,000 48,000 48,000
68
Chapter 29 – Shareholders’ Equity
Computation of outstanding shares: July 1 Preference shares issued 10,000 Less: Treasury shares 1,000 Outstanding shares 9,000
December 31 Preference shares issued Less: Treasury shares (1,000-600) Outstanding shares
10,000 400 9,600
PROBLEM 29-19 Feb. 15, 2015
Retained earnings Dividends payable
450,000
Dec. 31, 2014
Retained earnings Dividends payable
150,000
Fair value, Dec. 31 Less: Previous Fair value Increase in dividends payable
600,000 450,000 150,000
Feb. 15, 2015
450,000 150,000
Dividends payable Retained earnings
60,000
Fair value, Feb. 15 Less: Previous Fair value Decrease in dividends payable
540,000 600,000 (60,000)
Dividends payable Inventory Gain on distribution - prop. dividends
540,000
Carrying amount of dividend payable = Fair value Less: Carrying amount of noncash assets Gain on distribution of prop. Dividends
540,000 500,000 40,000
60,000
500,000 40,000
PROBLEM 29-20 Nov. 1, 2015
Dec. 31, 2015
Feb. 15, 2016
Retained earnings Dividends payable
450,000
Equipment-noncurrent asset for distribution* Impairment loss (P500,000 – P450,000) Equipment
450,000 50,000
Retained earnings Dividends payable
150,000
Fair value, Dec. 31 Less: Previous Fair value Increase in dividends payable
600,000 450,000 150,000
450,000
500,000 150,000
Equipment-noncurrent asset for distribution** Gain on recovery of impairment loss
50,000
Dividends payable Retained earnings
60,000
50,000 60,000
69
Chapter 29 – Shareholders’ Equity
Fair value, Feb. `5 Less: Previous Fair value Decrease in dividends payable
540,000 600,000 (60,000)
Dividends payable Equipment-noncurrent asset for distribution Gain on distribution of prop. Dividends
540,000
500,000 40,000
Carrying amount of dividend payable = Fair value 540,000 Less: Carrying amount of noncash assets 500,000 Gain on distribution of prop. Dividends 40,000 *(Lower between P500,000 and P450,000) **(P800,000 minus P600,000) but the gain shall not exceed the amount of impairment loss of P100,000. Alternative Computation: *Computation of the impairment loss is as follows: Original carrying amount Less: Lower between these two amounts FV Less Cost To Distribute (FVLCTD) Original carrying amount Impairment loss
500,000 450,000 500,000
450,000 50,000
**Computation of the gain on reversal of the impairment loss is as follows: Lower between subsequent FVLTCD and original carrying amount Original carrying amount 500,000 FVLCTD, Dec. 31 600,000 500,000 Carrying amount at initial recognition 450,000 Gain on reversal 50,000
PROBLEM 29-21 Retained earnings Dividends payable
P
84,000 P
Supporting computation: Cash alternative (10 x 60% x P8,000) Non-cash alternative (10 x 40% x P9,000) Total dividends
84,000 P P
Date of payment: If the shareholders opted to receive cash, the journal entry is: a. Dividends payable Cash (10 X 8,000) Retained earnings (balancing figure)
84,000
If the shareholders opted to receive noncash, the journal entry is: b. Dividends payable 84,000 Loss on distribution of dividends (balancing figure) 6,000 Noncash (10 x 9,000)
70
48,000 36,000 84,000
80,000 4,000
90,000
Chapter 29 – Shareholders’ Equity
PROBLEM 29-22 Note to professor: Ordinary share P50 par, 53,000 shares issued and outstanding Remove ‘and outstanding’ Computation of outstanding shares: Ordinary shares issued Less: Treasury shares Outstanding shares 1)
2)
3) 4)
53,000 3,000 50,000
Accumulated Profits [(50,000) x 10% x P80] Share dividends payable [(50,000) x 10% x P50] Share premium on Ordinary shares
400,000
Accumulated Profits [(50,000) x 20% x P50] Share dividends payable [(50,000) x 20% x P50]
500,000
Capital Liquidated (P2 x 50,000 shares) Cash
100,000
Accumulated Profits Treasury shares
120,000
250,000 150,000
500,000 100,000 120,000
PROBLEM 29-23
Journal entries: 1/5 Cash (20,000 x P180) Ordinary shares (20,000 x P100) Share Premium-Ordinary 1/28
Treasury shares (6,000 x 200) Cash
3,600,000
1,200,000 1,200,000
2/2
Received 5,000 shares from shareholders as a donation.
2/14
Cash (6,000 x ½ x 220) Treasury shares (6,000 x ½ x 200) Share premium – treasury shares
2/14
660,000 600,000 60,000
Cash (5,000 x 220) Donated capital (Share Premium)
1,100,000
7/15
Equipment Preference shares (4,000 x P200) Share Premium-Preference
1,440,000
10/15
Subscriptions receivable (18,000 x P250) Subscribed ordinary shares (18,000 x P100) Share Premium-Ordinary
4,500,000
Cash (4,500,000 x 40%) Subscriptions receivable
1,800,000
11/15
2,000,000 1,600,000
1,100,000 800,000 640,000 1,800,000 2,700,000 1,800,000
71
Chapter 29 – Shareholders’ Equity
11/27
12/31
Cash (10,000 x P250 x 60%) Subscriptions receivable
1,500,000
Subscribed ordinary shares (10,000 x P100) Ordinary shares
1,000,000
Income summary Retained earnings
1,000,000
1,500,000 1,000,000 1,000,000
Retained earnings-unappropriated (1.2M600,000) Retained earnings appropriated for TS
600,000 600,000
Questions 1 to 3 * Beg bal Jan. 5 Jan. 28 Feb. 14 Feb. 14 July 15 Oct. 15 Nov. 15 Nov. 27 Dec. 31 Total
Pref. shares 1,400
Ord. shares 3,500 2,000
Share Premium 1,925 1,600
Retained earnings 4,500
1,800
1,000 2,200 (1)B
6,500 (2)B
Subs. Receivable 0
1,000 5,500
8,025 (3)A
(1,000)
4,500 (1,800) (1,500)
800
1,200
*in ‘000s
Question No. 4 (C) Retained earnings, total Outstanding balance of treasury stocks Retained earnings – unappropriated
P 5,500,000 ( 600,000) P 4,900,000
Question No. 5 (B) Preference shares Ordinary shares Subscribed ordinary shares Subscriptions receivable Share premium Retained Earnings Treasury stocks Total
P 2,200,000 6,500,000 800,000 (1,200,000) 8,025,000 5,500,000 ( 600,000) P21,225,000
SUMMARY OF ANSWERS: 1. B 2. B 3. A
4.
C
Treasury shares 0 1,200 (600)
60 1,100 640 2,700
800
Subs. Ord. share 0
5.
72
B
600
Chapter 29 – Shareholders’ Equity
PROBLEM 29-24
Beg. Balances 1. 2. 3. 4. 5. 6. 7. 8. Total
Pref. shares 400
*in ‘000s.
Ord. shares 200
Share Prem 250
4 2.5 152
50
Treasury shares
Question No. 3
219 2. (C)
408.5
(C)
Retained earnings (see table above) Less: Treasury shares Market value of share warrants
Question No. 5
Preference shares Ordinary shares Share premium Retained earnings-total Treasury shares Total shareholder’s equity
(171)
80 4. (B)
2,500 (128.6) 3,100.4
P P
(C)
SDP
136 (56)
19 450 1. (B)
Retained earnings 900
P
P
19 (19) 0
3,100,400 80,000 3,020,400 450,000 219,000 408,500 3,100,400 (80,000) 4,097,900
Journal entries:
1.
2. 3.
4.
Dividends payable Cash
120,000
Preference share dividend (4,000 x P10) Ordinary shares-dividends (40,000 x P2) Total dividends
40,000 80,000 120,000
Treasury shares (3,400 x 40) Cash
136,000
120,000
136,000
Land Treasury shares (1,400 x 40) Share Premium – Treasure shares
60,000
Cash (500 x 105) Preference shares (500 x 100) Share Premium – Preference shares
52,500
73
56,000 4,000 50,000 2,500
Chapter 29 – Shareholders’ Equity
5.
6. 7. 8.
Retained earnings (38,000 x 45 x 10%) Share dividends payable (38,000 x 5 x 10%) Share Premium
171,000 19,000 152,000
Ordinary Shares Issued Less: Treasury shares (3,400-1,400) Outstanding shares
40,000 2,000 38,000
Share dividends payable Ordinary shares
19,000 19,000
Income summary Retained earnings unappropriated
2,500,000 2,500,000
Retained earnings unappropriated Dividends payable
128,600 128,600
O/S outstanding (38,000 x 110%) Multiply by: Dividends per share Pref. dividends (450,000/100 x P10) Total SUMMARY OF ANSWERS: 1. B 2. C 3. C
4.
B
5.
74
41,800 P2
C
83,600 45,000 128,600
Adjusted balances
e. f.
b. g. c. d. g.
Beg. Balances a.
3,500
(500)
Pref. shares 4,000
2,520
250
1,350
Ord. Shares 840 80
-
Subs. Os 100 (80) (20)
-
Subs. Rec 52 (41.6) (10.4)
1,925.1
22.50 250
(6) 15.6 675
Share Prem 968
(280) 2,500 (16.5) 16,355
(425.5)
(423)
RE-unapp 15,000
16.50 16.50
RE Appr
16.50
(27.5)
Treas. Shares 44
Chapter 29 – Shareholders’ Equity
PROBLEM 29-25
75
Chapter 29 – Shareholders’ Equity
Question No. 5 Total shareholders’ equity
(D)
Preference shares Ordinary Shares Subscribed Ordinary shares Subscription Receivable Share Premium Retained Earnings - Unappropriated Retained Earnings - Appropriated Total Treasury Shares Shareholder’s Equity
3,500 2,520 1,925.1 16,355 16.50 24,316.60 (16.50) 24,300.10
Journal entries: a. Cash (8,000 x 13 x 40%) Subscription Receivable
b.
g. 4/30
c.
d.
g.
41,600 41,600
Subscription Ordinary Share (8,000 x 10) Ordinary shares
80,000
Subscription Ordinary Share (2,000 x 10) Share premium (3 x 2,000) Subs. Receivable (P13 x 2,000 x 40%) Share Premium - forfeited downpayment
20,000 6,000
80,000
10,400 15,600
Issued 92,000 share rights to existing shareholders Cash (67,500 x 2 x P15) 2,025,000 Ordinary shares (67,500 x 2 x P10) Share premium Retained earnings-unappropriated Dividends payable
423,000
O/S Issued (84,000 + 8,000+135,000) Less: Treasury shares Outstanding shares Multiply by: Dividend per share Pref. dividends (P100 x 10%/2 x 40,000) Total dividends
227,000 4,000 223,000 P1
Cash (2,500 x 20) Treasury shares (P44,000/4,000 x 2,500) Share premium – Treasury Shares
423,000
223,000 200,000 423,000
50,000 27,500 22,500
Pref. shares (5,000 x P100) Ordinary shares (5,000 x 5 x P10) Share premium – Ordinary Shares
500,000
Retained earnings-unappropriated Dividends payable
425,500
76
1,350,000 675,000
250,000 250,000 425,500
Chapter 29 – Shareholders’ Equity
e.
f.
O/S Issued (227,000+25,000) Less: Treasury shares (4,000-2,500) Outstanding shares Multiply by: Dividends per share Preference dividends (P100 x 10%/2 x 35,000) Total dividends
252,000 1,500 250,500 P1
Retained earnings - unappropriated Tax Rent income
280,000 120,000
Income summary Retained earnings-unappropriated
2,500,000
400,000 2,500,000
Retained earnings-unappropriated Retained earnings-appropriated SUMMARY OF ANSWERS: 1. C 2. D 3. D
4.
D
5.
250,500 175,000 425,500
16,500 16,500 D
PROBLEM 29-26 P/S Beg. Bal. a. c. d.
O/S 840
200
e.
7
S/P 420 4
200 1. (C)
847 2. (B)
RE Appr
T/S 44 (11)
(600) (100)
340 60 (42) 56
f. g. Adjusted bal.
RE-unapp 15,000
838 3. (E)
Question No. 5 (C) Total Shareholders’ Equity: Preference shares Ordinary Shares Share Premium Retained earnings -unappropriated Retained earnings - appropriated Total Treasury Shares Shareholders’ Equity
(326.80) 2,400 (33) 16,340.20 4. (E)
200 847 838 16,340.20 33 18,258.20 33 18,225.20
77
33 33
33
Chapter 29 – Shareholders’ Equity
SUMMARY OF ANSWERS: 1. C 2. B 3. E
4.
E
5.
C
PROBLEM 29-27 Journal entries: Jan. 4
Jan. 30
Mar. 2
May 7
June 15
July 2
Cash (30,000 x 18) Ordinary shares (30,000 x 10) Share Premium – Ordinary Shares
750,000
Dividends payable Cash
416,000
Preference dividends (8% x 1,200,000) Ordinary Shares (180,000-20,000) x 2 Total dividends
96,000 320,000 416,000
Cash (4,000 x 125) Preference shares (4,000 x 100) Share Premium – Preference Share
500,000
Cash (6,000 x 24) Treasury shares (6,000 x 21) Share Premium – Treasury Share
144,000
300,000 450,000 416,000
Memo: Effected a two for one share split. Ordinary Shares issued (180,000 +30,000) x 2/1 Less: Treasury shares (20,000-6,000) x 2/1 Outstanding shares
400,000 100,000 126,000 18,000 420,000 28,000 392,000
Retained earnings (5% x 392,000 x P14) Share dividends payable (5% x 392,000 x P5) Share Premium - Ordinary Shares
274,400
Aug. 3
Share dividends payable (5% x 392,000 x P5) Ordinary Shares
98,000
Oct. 1
Retained earnings (20,580 x 16) Dividends payable
Nov. 1
Retained earnings (20,580 x (18-16) Dividends payable Dividends payable (18 x 20,580) FVTOCI - at carrying value (15 x 20,580) Gain on distribution of property div. Unrealized gain-FVTOCI Retained earnings
Dec. 31
98,000 176,400 98,000 329,280 329,280 41,160 41,160 370,440
308,700 61,740
61,740 61,740
Retained earnings Dividends payable
539,600 539,600
Preference div (8% x 1,200,000 +400,000) Ordinary Shares issued (420,000 + 19,600) Less :Treasury shares Outstanding Ordinary Shares Multiply: Dividend per share
78
128,000 439,600 28,000 411,600 P1
411,600
Total
Dec. 31
‘000 Beg. Bal. Jan. 4 Mar. 2 May 7 July 2 Aug. 3 Oct. 1 Nov. 1
1,600
400
PS 1,200
2,198
98
OS 1,800 300
316
100
SP-PS 216
1,526.4
176.4
SP-OS 900 450
18
18
SP-TS
(329.28) (41.16) 61.74 (539.6) 2,250 3,427.3
(274.4)
RE 2,300
0
(61.74)
UG-AFS 61.74
294
(126)
TS 420
0
98 (98)
SDP
Chapter 29 – Shareholders’ Equity
Total dividends 539,600
Income Summary Retained earnings 2,250,000 2,250,000
79
Chapter 29 – Shareholders’ Equity
Question No. 4 (E) Retained earnings-total Less: Appropriated for Treasury shares Retained earnings-unappropriated
3,427,300 294,000 3,133,300
Question Nos. 3 and 5 Preference share Ordinary share Share Premium – Preference Share Share Premium – Ordinary Share Share Premium - Treasury Share Total Contributed capital or Paid-in capital (No. 3) Retained earnings Total Less: Treasury Shares Total Shareholders’ equity (No. 5) SUMMARY OF ANSWERS: 1. C 2. A 3. A
4.
E
5.
80
D
1,600,000 2,198,000 316,000 1,526,400 18,000 5,658,400 3,427,300 9,085,700 294,000 8,791,700
*in ‘000s 1/1 2/23 3/10 4/10 7/14 7/14 8/3 12/1 - Preferred Ordinary 12/31 Net income
SP-PS P 850 180
P1,030
Pref. shares P 2,000
280
P 2,280 P
136
14 12 40
Ord. shares P10 60
50 P 7,234
SP-OS P 470 2,230 3,520 546 468
P
40
(40)
80
Sub. OS P -
P800
(2,800)
3,600
Subs. Rec
1,280 P700
(228) (352)
Ret. Earnings P -
Chapter 29 – Shareholders’ Equity
PROBLEM 29-28
81
Chapter 29 – Shareholders’ Equity
Journal entries: Jan. 1 Land Organization expense Ordinary shares (1,000 x P100 Share Premium – Ordinary Shares
340,000 140,000 10,000 470,000
Feb. 23
Cash (20,000 x 150)-150,000 Preference shares (20,000 x P100) Share premium – Preference Shares
2,850,000
Mar. 10
Cash (6,000 x 390)-50,000 Ordinary shares (6,000 x P10) Share premium - Ordinary Shares
2,290,000
Apr. 10
Subscriptions receivable (8,000 x P450) Subs. Ordinary shares (8,000 x P10) Share premium - Ordinary Shares
3,600,000
Building Preference shares (2,800 x P100) Share Premium-PS (460,000-280,000) Ordinary shares (1,400 x P10) Share premium-OS (560,000-14,000)
1,080,000
Fair value of the building Less: Fair value of the ordinary shares (480,000/1,200 x 1,400) Value of the preference shares
1,020,000 560,000
July 14
July 14
Aug. 3
Cash Ordinary shares (1,200 x P10) Share Premium - Ordinary Shares Cash Subscriptions receivable
80,000 3,520,000 280,000 180,000 14,000 546,000
460,000 480,000 12,000 468,000 2,800,000
Retained earnings Dividends payable
40,000 40,000 580,000 580,000
Preference dividends (2,280,000 x 10%) Ordinary shares issued (136,000/10) Add: Subscribed ordinary shares Outstanding shares Multiply by: Dividend per share Total dividends Dec. 31
60,000 2,230,000
2,800,000
Subs. Ordinary shares (8,000 x ½ x P10) Ordinary shares Dec. 1
2,000,000 850,000
Dividends payable Cash
13,600 4,000 17,600 20
228,000
352,000 580,000
228,000 228,000
82
Chapter 29 – Shareholders’ Equity
Question No. 1
(B)
Question No. 2
(C)
Question No. 3
(C)
Question No. 4
(C)
Question No. 5 (B) (1,280,000-228,000-352,000) Net income (4,080,000-2,000,000-800,000)=1,280,000 Question No. 6 (C) Preference shares Ordinary shares Subscribed ordinary shares Less: Subscriptions receivable Paid in capital-Pref. shares Paid in capital-Ordinary shares Retained earnings Total shareholders’ equity
2,280,000 136,000 40,000 800,000
(760,000) 1,030,000 7,234,000 700,000 10,620,000
Note: Sec. 43 of the Corporation Code of the Philippines states that “ The board of directors of a stock corporation may declare dividends out of the unrestricted retained earnings which shall be payable in cash, in property, or in stock to all stockholders on the basis of outstanding stock held by them: Provided, That any cash dividends due on delinquent stock shall first be applied to the unpaid balance on the subscription plus costs and expenses, while stock dividends shall be withheld from the delinquent stockholder until his unpaid subscription is fully paid” Thus, the dividend on the subscribed share capital is paid to that shareholder because he was not yet declared delinquent by corporation.
SUMMARY OF ANSWERS: 1. B 2. C 3. C
4.
C
5.
B
6.
C
PROBLEM 29-29 Question No. 1 (C) Preference shares, beg. Additional issue (20,000 x P10) Total
P P
Question No. 2 (A) Ordinary shares, beg. Stock dividend (3,480 shares x P5)* Total
P P
83
800,000 200,000 1,000,000 200,000 17,400 217,400
Chapter 29 – Shareholders’ Equity
Outstanding shares, beginning Treasury shares acquisition Treasury shares re-issue Total outstanding shares Multiplied by: Dividend shares
40,000 (8,000) 2,800 34,800 10% 3,480
Question No. 3 (A) Share premium, beg. Premium on treasury share re-issue (100,000 – (2,800 x P20) Premium on preference share issue (P15 – P10) x 20,000 shares Premium on stock dividends (P12 – P5) x 3,480 shares Total share premium, end Question No. 4 (D) Retained earnings, beg. Add: Net Income Unadjusted Net Income Overstatement in operating expenses Less: Dividends Stock dividends (3,480 x P12) Cash dividends* Retained earnings, adjusted Retained earnings, appropriated for treasury shares Retained earnings, appropriated for plant expansion Retained earnings, unappropriated * Cash dividends Preferred stock dividends (80,000 + 20,000) x P1 Ordinary shares (34,800 + 3,480) x P.50 Total cash dividends
* Computation of the Cash dividends Preferred stock dividends (80,000 + 20,000) x P1 Ordinary shares (34,800 + 3,480) x P.50 Total cash dividends
D
P
2,400,000
1,780,000 100,000 41,760 119,140
1,880,000 (160,900) 4,119,100 (104,000) (1,200,000) P 2,815,100 P
P
100,000 19,140 119,140
P ( P
160,000 56,000) 104,000
P
100,000 19,140 119,140
P
Computation of the net income: Net Income Unadjusted Net Income Overstatement in operating expenses Adjusted net income
4.
P
P
384,000 44,000 100,000 24,360 552,360
P
Question No. 5 (B) Treasury shares acquired (8,000 x P20) Treasury shares reissued (2,800 x P20) Treasury shares, end
SUMMARY OF ANSWERS: 1. C 2. A 3. A
P
P
P P
5.
84
B
1,780,000 100,000 1,880,000
Chapter 30 – Book Value and Earnings Per Share
CHAPTER 30: BOOK VALUE AND EARNINGS PER SHARE Note to professor: Page 1164
Existing data: P5,000,000 + [(4,000,000 x 10% x Diluted 9/12) x (1-30%)] = EPS 105,000 shares* Illustration: ….The prevailing interest rate of bonds is 12% and the principal amount is due on April 1, 208….
1167
2.b Total weighted average of ordinary shares – 15,000
1169
3. Compute for the incremental shares using the following formula: Option shares xxx Add: Assumed treasury shares xxx Incremental shares xxx
1171
Option shares Add: Assumed treasury shares Incremental shares
20,000 16,000 4,000
Change to: Change 105,000 to 120,000. Change 208 to 2019. Change to 115,000 Change ‘add’ to Less.
Change ‘add’ to Less.
PROBLEM 30-1 One Class of Shares Total shareholders' equity Add: Subscription receivable Total SHE excluding subscription receivable Divided by: Ordinary shares outstanding* Book value per share
16,220,000 1,200,000 17,420,000 200,000 87.10
(A)
Shares issued Add: Subscribed shares (P1,000,000 / P50 par) Less: Treasury shares Ordinary shares outstanding
200,000 20,000 20,000 200,000
PROBLEM 30-2 Two Classes of Shares - Preference and Ordinary Shares Preference shares: Preference share capital issued Add: Subscribed preference shares Total Less: Treasury shares at par Shares outstanding and total par value
Shares 12,500 12,500 12,500
85
Total par value P5,000,000 P5,000,000 P5,000,000
Chapter 30 – Book Value and Earnings Per Share
Ordinary shares: Ordinary share capital issued Add: Subscribed ordinary shares Total Less: Treasury shares at par Shares outstanding and total par value
Shares 75,000 75,000 75,000
Total shareholders' equity Less: Par value of outstanding preference shares Par value of outstanding ordinary shares Excess over par
Total par value P3,000,000 P3,000,000 P3,000,000 15,000,000 5,000,000 3,000,000 7,000,000
CASE NO. 1 Question No. 1 & 2 Balances Preference dividend (5,000,000 x 8% x 4) Balance to ordinary shares Total shareholders’ equity Divide by: Outstanding shares Book value per share
Excess over par P7,000,000
Preference shares P5,000,000
(1,600,000) 5,400,000
1,600,000
Ordinary shares P3,000,000
6,600,000 12,500 P528.00
5,400,000 8,400,000 75,000 P112.00
Excess over par P7,000,000
Preference shares P5,000,000
Ordinary shares P3,000,000
(1,600,000)
1,600,000
(250,000) 5,150,000
250,000
CASE NO. 2 Question No. 3 & 4 Balances Preference dividend (5,000,000 x 8% x 4) Liquidation premium [(P420P400) x 12,500] Balance to ordinary shares Total shareholders’ equity Divide by: Outstanding shares Book value per share
6,850,000 12,500 P548.00
5,150,000 8,150,000 75,000 P108.67
Excess over par P7,000,000
Preference shares P5,000,000
Ordinary shares P3,000,000
(400,000) 6,600,000
400,000
CASE NO. 3 Question No. 4 & 5 Balances Preference dividend (5,000,000 x 8% x 1) Balance to ordinary shares Total shareholders’ equity
5,400,000
86
6,600,000 9,600,000
Chapter 30 – Book Value and Earnings Per Share
Divide by: Outstanding shares Book value per share
12,500 P432.00
75,000 P128.00
Excess over par P7,000,000
Preference shares P5,000,000
Ordinary shares P3,000,000
(1,600,000)
1,600,000
CASE NO. 4 Question No. 7 & 8 Balances Preference dividend (5,000,000 x 8% x 4) Ordinary dividend (3,000,000 x 8% x 1) Balance for participation Preference (5/8 x 5,160,000) Balance to ordinary shares Total shareholders’ equity Divide by: Outstanding shares Book value per share SUMMARY OF ANSWERS: 1. A 2. A 3. B
(240,000) 5,160,000 (3,225,000) 1,935,000
240,000 3,225,000 9,825,000 12,500 P786.00
4.
D
5.
C
6.
B
7.
1,935,000 5,175,000 75,000 P69.00 D
8.
PROBLEM 30-3 Book Value per Share Preference shares: Preference share capital issued Add: Subscribed preference shares Total Less: Treasury shares at par Shares outstanding and total par value
Shares 40,000 40,000 40,000
Total par value P4,000,000 P4,000,000 P4,000,000
Ordinary shares: Ordinary share capital issued Add: Subscribed ordinary shares Total Less: Treasury shares at par Shares outstanding and total par value
Shares 26,000 26,000 1,000 25,000
Total par value P1,040,000 P1,040,000 40,000 P1,000,000
Total shareholders' equity Less: Par value of outstanding preference shares Par value of outstanding ordinary shares Excess over par
87
11,970,000 4,000,000 1,000,000 6,970,000
C
Chapter 30 – Book Value and Earnings Per Share
CASE NO. 1 Question No. 1 & 2 Balances Preference dividend (4,000,000 x 8% x 4) Balance to ordinary shares Total shareholders’ equity Divide by: Outstanding shares Book value per share Question No. 3 & 4 Balances Preference dividend (4,000,000 x 8% x 4) Liquidation premium [(P105-P100) x 40,000] Balance to ordinary shares Total shareholders’ equity Divide by: Outstanding shares Book value per share
Excess over par P6,970,000
Preference shares P4,000,000
(1,280,000) 5,690,000
1,280,000
Ordinary shares P1,000,000
5,280,000 40,000 P132.00
5,690,000 6,690,000 25,000 P267.60
Excess over par P6,970,000
Preference shares P4,000,000
Ordinary shares P1,000,000
(1,280,000)
1,280,000
(200,000) 5,490,000
200,000
CASE NO. 2
5,480,000 40,000 P137.00
5,490,000 6,490,000 25,000 P259.60
Excess over par P6,970,000
Preference shares P4,000,000
Ordinary shares P1,000,000
(320,000) 6,650,000
320,000
CASE NO. 3 Question No. 5 & 6 Balances Preference dividend (4,000,000 x 8% x 1) Balance to ordinary shares Total shareholders’ equity Divide by: Outstanding shares Book value per share Question No. 7 & 8 Balances Preference dividend (4,000,000 x 8% x 1) Balance to ordinary shares Total shareholders’ equity
4,320,000 40,000 P108.00
6,650,000 7,650,000 25,000 P306.00
Excess over par P6,970,000
Preference shares P4,000,000
Ordinary shares P1,000,000
(320,000) 6,650,000
320,000
CASE NO. 4
4,320,000
88
6,650,000 7,650,000
Chapter 30 – Book Value and Earnings Per Share
Divide by: Outstanding shares Book value per share
Balances Preference dividend (4,000,000 x 8% x 1) Ordinary dividend (1,000,000 x 8% x 1) Balance for participation Preference (4/5 x 6,570,000) Balance to ordinary shares Total shareholders’ equity Divide by: Outstanding shares Book value per share SUMMARY OF ANSWERS: 1. B 2. C 3. B
40,000 P108.00
25,000 P306.00
Excess over par P6,970,000
Preference shares P4,000,000
Ordinary shares P1,000,000
(320,000)
320,000
(80,000) 6,570,000 (5,256,000) 1,314,000
80,000 5,256,000 9,576,000 40,000 P239.40
4.
B
5.
C
6.
A
7.
1,314,000 2,394,000 25,000 P95.76
D
8.
D
PROBLEM 30-4 Weighted Average with Bonus Issue Outstanding Date Shares Fraction 01/01/2015 200,000 x 120% 240,000 12/12 03/01/2015 15,000 x 120% 18,000 10/12 07/01/2015 (10,000) (10,000) 6/12 10/01/2015 4,000 4,000 3/12 Weighted average outstanding shares (A)
Average 240,000 15,000 (5,000) 1,000 251,000
PROBLEM 30-5 Weighted Average with Share Split Outstanding Date Shares Fraction 01/01/2015 220,000 x 4/1 880,000 12/12 03/01/2015 12,000 x 4/1 48,000 10/12 04/01/2015 9,000 9,000 9/12 10/01/2015 6,000 6,000 3/12 Weighted average outstanding shares (A)
89
Average 880,000 40,000 6,750 1,500 928,250
Chapter 30 – Book Value and Earnings Per Share
PROBLEM 30-6 Basic Earnings per Share Question No. 1 (B) Basic EPS = [P3,000,000 / 40,000] = P75 per share Question No. 2 (C) Basic EPS = [P3,000,000 - (10,000 x 10% x P50)]/40,000= P73.75 per share Question No. 3 (C) Basic EPS = [P3,000,000 - (10,000 x 10% x P50)]/40,000= P73.75 per share PROBLEM 30-7 Basic Loss per Share Question No. 1 (B) Basic LPS = [P2,000,000 / 30,000] = P66.67 per share Question No. 2 (C) Basic LPS = [P2,000,000 + (5,000 x 10% x P100)]/30,000= 68.33 per share Question No. 3 (D) Basic LPS = [P2,000,000 + (60,000)]/30,000= P68.67 per share PROBLEM 30-8 Basic and Diluted EPS with Convertible Bonds Payable Question No. 1 Basic EPS = P3,000,000 / 120,000 = P25 per share Question No. 2 P3,000,000 + [(P1,800,000 x 10%) x (1 – 30%)] Diluted = EPS 129,000 shares * Diluted EPS = P24.23 per share Weighted average of actual ordinary shares Add: Weighted average of potential ordinary shares from assumed conversion (1,800 x 5 x 12/12) Total weighted average of ordinary shares
120,000 9,000 129,000
Question No. 3 P3,000,000 + [(P1,800,000 x 10% 8/12) x (1 – 30%)] Diluted = EPS 126,000 shares * Diluted EPS = P24.48 per share Weighted average of actual ordinary shares Add: Weighted average of potential ordinary shares from assumed conversion (1,800 x 5 x 8/12) Total weighted average of ordinary shares Question No. 4 Basic EPS
=
P3,000,000 123,750*
90
120,000 6,000 126,000
Chapter 30 – Book Value and Earnings Per Share
=
P24.24
Weighted average of actual ordinary shares Add: Issuance of shares related to conversion (1,800 x 5 x 5/12) Total weighted average of actual ordinary shares issued Add: Assumed converted ordinary shares x months outstanding (1,800 x 5 x 7/12) Total weighted average outstanding ordinary shares
120,000 3,750 123,750 5,250 129,000
Question No. 5 P3,000,000 + [(P1,800,000 x 10% x 7/12) x (1 – 30%)] 129,000 shares * Diluted EPS = P23.83 per share Diluted EPS
=
SUMMARY OF ANSWERS: 1. A 2. D 3. B
4.
D
5.
B
PROBLEM 30-9 Basic and Diluted EPS with Convertible Bonds Payable Question No. 1 Basic EPS = P4,000,000 / 200,000 = P20 per share Question No. 2 P4,000,000 + [(P1,123,910 x 10% x 8/12) x (1 – 30%)] 210,000 shares* Diluted EPS = P19.30 per share Diluted EPS
=
Weighted average of actual ordinary shares Add: Weighted average of potential ordinary shares from assumed conversion(15,000 x 8/12) Total weighted average of ordinary shares
200,000 10,000 210,000
PROBLEM 30-10 Basic and Diluted EPS with Convertible Preference Shares Question No. 1 Basic EPS Basic EPS
P4,000,000 - [5,000 x P100 x 10%] 200,000 shares = P19.75 per share =
Question No. 2 Diluted EPS Diluted EPS
P4,000,000 225,000 shares* = P17.78 per share
=
*[200,000 + (5 x 5,000 x 12/12)]
91
Chapter 30 – Book Value and Earnings Per Share
Question No. 3 Diluted EPS Diluted EPS
P4,000,000 218,750 shares = P18.29 per share
=
*[200,000 + (5 x 5,000 x 9/12)] Question No. 4 Basic EPS Basic EPS
P4,000,000 – (5,000 x P100 x 10% x 9/12)] 206,250 shares = P19.21 per share =
*[200,000 + (5 x 5,000 x 3/12)] Question No. 5 Diluted EPS Diluted EPS
P4,000,000 225,000 shares = P17.78 per share
=
*[200,000 + (5 x 5,000 x 3/12) + (5 x 5,000 x 9/12)] SUMMARY OF ANSWERS: 1. A 2. D 3. C
4.
C
5.
D
PROBLEM 30-11 Basic and Diluted EPS with Warrants and Options Question No. 1 Basic EPS = P4,000,000 / 100,000 = P40 per share Question No. 2 Diluted EPS Diluted EPS
P4,000,000 101,200 shares * = P39.53 per share =
Weighted average of actual ordinary shares Add: Weighted average of incremental shares from assumed exercise of options (1,200 x 12/12) Total weighted average of ordinary shares
100,000 1,200 101,200
Note: Months outstanding for assumed exercise of options is 12 months, which is from date of issuance up to the reporting date. Option shares Multiply by: Total exercise price (120+10) Proceeds from assumed exercise of options Divided by: Average market price during the year Assumed treasury shares
92
9,000 130 1,170,000 150 7,800
Chapter 30 – Book Value and Earnings Per Share
Option shares Less: Assumed treasury shares Incremental shares
9,000 7,800 1,200
Question No. 3 Diluted EPS Diluted EPS
P4,000,000 100,900 shares * = P39.64 per share =
Weighted average of actual ordinary shares Add: Weighted average of incremental shares from assumed exercise of options (1,200 x 9/12) Total weighted average of ordinary shares
100,000 900 100,900
Question No. 4 Diluted EPS Diluted EPS
P4,000,000 104,667 shares * = P38.22 per share =
Weighted average of actual beginning ordinary shares Add: Weighted average number of shares from issuance of share options (9,000 x 4/12) Total weighted average of actual ordinary shares issued Add: Weighted average of incremental shares from assumed exercise of options (2,500 x 8/12) Total weighted average outstanding ordinary shares Option shares Multiply by: Total exercise price (120+10) Proceeds from assumed exercise of options Divided by: Market price at exercise date Assumed treasury shares Option shares Less: Assumed treasury shares Incremental shares SUMMARY OF ANSWERS: 1. A 2. C 3. B
4.
Basic EPS Basic EPS
3,000 103,000 1,667 104,667 9,000 130 1,170,000 180 6,500 9,000 6,500 2,500
D
PROBLEM 30-12 Multiple Potential Dilutive Securities Question No. 1
100,000
(A)
P2,360,000 – (60,000 x P100 x 6%) = 200,000 = P10 per share
93
Chapter 30 – Book Value and Earnings Per Share
Question No. 2 1) Check for initial test of dilution a. Options Dilutive. The exercise price (P50) is less than the average market price (P100). b.
Convertible preference shares Probably dilutive. The incremental EPS (P1.2) is less than the basic EPS (P10). (P6,000,000 x 6%) Incremental EPS = (60,000 x 5) Incremental EPS = P1.2 per share
c.
Convertible bonds Probably dilutive. The incremental EPS (P.84) is less than the basic EPS (P10). (P2,000,000 x 12%) x (1-30%) Incremental EPS = (P2,000,000/P1,000) x 100 Incremental EPS = P.84 per share
`
2) Rank the dilutive potential diluters from the most dilutive to the least dilutive. 1st Options 2nd Convertible bonds (incremental EPS of P.84 per share) 3rd Convertible preference share (incremental EPS of P1.2 per share) 3) Include potentially dilutive convertible securities one by one. Every time an item is included, calculate new earnings per share or new loss per share amount as follows: Ordinary Profit shares EPS Basic EPS from continuing *2,000,000 200,000 10 operations Options 0 10,000 Total 2,000,000 210,000 9.52 Convertible Bonds payable 168,000 200,000 Total 2,168,000 410,000 5.29 Convertible Preference share 360,000 300,000 Total 2,528,000 710,000 3.56 *Net Income less preference dividends [(P2,360,000 –(60,000 x P100 x 12%)] Answer: The final diluted EPS would be P3.56 per share. Question No. 3
Basic EPS Basic EPS
(B)
P500,000 = 200,000 = P2.5 per share
94
(E)
Chapter 30 – Book Value and Earnings Per Share
Question No. 4 Diluted EPS Diluted EPS
(E) P500,000 = 710,000 = P.70 per share
SUMMARY OF ANSWERS: 1. A 2. E 3. B
4.
E
PROBLEM 30-13 Rights Issue Fair value per share – right on Less: Theoretical value of one right* Theoretical ex-rights fair value per share *Value of one right
=
150 –40 4* + 1
=
P P 22
Adjustment factor (150/128)
1.17
Question No. 1 2013: Weighted average outstanding shares (40,000 x 1.17 x 12/12) Basic EPS (P562,500 /46,800)
(D)
Question No. 2 2014: Weighted average outstanding shares (40,000 x 1.17 x 3/12) [(40,000 + 10,000) x 9/12]
46,800 P12.02 / share
11,700 37,500
Basic EPS (P800,000/49,200)
(B)
49,200 P16.26 / share
Question No. 3 2015: Weighted average outstanding shares[(40,000 + 10,000) x 12/12] Basic EPS (P1,000,000 /50,000)
(A)
PROBLEM 30-14 Written Put Options
(C)
Incremental shares
=
150 22 128
(P350 – P280) x 10,000 P280
95
=
50,000
P20 per share
2,500 shares
Chapter 30 – Book Value and Earnings Per Share
PROBLEM 30-15 Comprehensive Problem Note to professor: Question No. 1 – Change 2014 to 2015. Item Unadjusted 1) 2) 3) 4) 5) 6) 7) 8) 9) Adjusted
Net Income 2014 2015 **1,300,000 *500,000 (50,000) 50,000 (30,000) 45,000 (45,000) ***28,000 (28,000) 5,000 (5,000) (20,000) 1,328,000 422,000
Retained Earnings 12/31/15 1,800,000 (30,000) (20,000) 1,750,000
* (P5 EPS x P1,000,000 / P10 par) ** (1,800,000 – 500,000 2015 net income) *** (P48,000 / 12 x 7 months) Question No. 1 (D) Refer to table above. Adjusted Net Income in 2015 is P422,000. Question No. 2 Refer to table above.
(C)
Question No. 3 (C) EPS 2015 (P422,000 / 100,000 shares) = P4.22 Question No. 4 (B) Ordinary share capital, P10 par Share premium Retained earnings, 12/31/2015 (as adjusted) Total shareholders' equity
1,000,000 500,000 1,750,000 3,250,000
Question No. 5 (B) BVPS (P3,250,000 / 100,000) = P32.50 SUMMARY OF ANSWERS: 1. D 2. C 3. C
4.
B
5.
96
B
Chapter 32 – Statement of Financial Position and Comprehensive Income
CHAPTER 32: STATEMENT OF FINANCIAL POSITION AND COMPREHENSIVE INCOME Note to professor: Page 1211
Existing data: On March 1, 2015, Joshua…
Change to: On March 1, 2016, Joshua…
PROBLEM 32-1 Current and Noncurrent Assets Question No. 1 Cash Trade receivables Inventory, including inventory expected in the ordinary course of operations to be sold beyond 12 months amounting to P800,000 Prepaid insurance Financial assets at fair value through profit or loss Noncurrent Assets held for sale building Total Current Assets (D) Question No. 2 Financial assets at fair value through other comprehensive income Financial assets at amortized cost Deferred tax asset Machinery Accumulated depreciation Land used as a plant site Total Noncurrent Assets (C)
400,000 1,500,000 1,200,000 240,000 300,000 650,000 4,290,000
600,000 1,000,000 150,000 800,000 (200,000) 920,000 3,270,000
PROBLEM 32-2 Current and Noncurrent Assets Question No. 1 Cash (1M+300,000+100,000-50,000-280,000) Accounts receivable (3M-200,000+50,000) Investments securities held for trading (1.8M-500,000) Inventories (800,000-200,000+(450,000/125%) Prepaid Expenses (only the prepaid insurance) Total Current Assets (A)
1,070,000 2,850,000 1,300,000 960,000 48,000 6,228,000
Question No. 2 Cash in sinking fund Long-term investments Deposit to supplier for inventories to be delivered in 16 months Cash surrender value Property, plant and equipment Total noncurrent Assets (A)
280,000 500,000 23,000 20,000 5,000,000 5,823,000
97
Chapter 32 – Statement of Financial Position and Comprehensive Income
PROBLEM 32-3 Current and Noncurrent Liabilities Question No. 1 Bank overdraft Accounts payable (1M+25,000+100,000) Property dividends payable Income tax payable Note payable, due January 31, 2016 Cash dividends payable Financial liabilities at fair value through profit or loss Estimated expenses of meeting warranties Estimated damages as a result of unsatisfactory performance on a contract Loans payable-current Total current liabilities (A) Question No. 2 Bonds payable Premium on bonds payable Deferred tax liability Mortgage payable Loans payable-noncurrent Total noncurrent liabilities
(C)
300,000 1,125,000 400,000 300,000 500,000 80,000 130,000 335,000 268,000 100,000 3,538,000 3,400,000 200,000 400,000 1,000,000 400,000 5,400,000
PROBLEM 32-4 (Shareholders’ Equity) Ordinary share capital Share premium Subscribed ordinary share Subscriptions receivable Retained earnings unappropriated (6M-2M cost of treasury) Reserves: Retained earnings appropriated for treasury shares Reserve for contingencies Unrealized gain on FVTOCI Revaluation surplus Cumulative translation adjustment – debit Total Less: Treasury shares Total Shareholders' Equity (C)
98
10,000,000 1,000,000 100,000 (120,000) 4,000,000 2,000,000 3,000,000 1,000,000 4,000,000 (1,500,000) 23,480,000 2,000,000 21,480,000
Chapter 32 – Statement of Financial Position and Comprehensive Income
PROBLEM 32-5 Adjusting and Nonadjusting events Note to the professor: The fifth bullet should be March 1, 2016 and not March 1, 2015. Loss on expropriation Impairment loss on Accounts Receivable Litigation loss Total adjusting events (A)
100,000 600,000 1,000,000 1,700,000
All other data are nonadjusting events. PROBLEM 32-6: Related Party Relationship Requirement No. 1 The following companies are considered to be related parties of Frozen Throne Company in accordance with PAS 24 Related Party Disclosures: Name Description 1) Sand King Co. Post-employment benefit plan established by Frozen Throne 2) Shadow Fiend Co. Associate 4) Harbringer Co. Subsidiary 5) Night Crawler Co. Subsidiary of Harbringer 6) Disruptor Co. Associate of Harbringer 7) Geomancer Co. Parent 8) Jakiro Co. Parent of Geomancer 9) Rylai Co. Sister company of Frozen Throne Company 10) Medusa Co. Key Management personnel of Frozen Throne Company. 11) Barathrum Co. Bank 16) Pudge Co. Joint venturer of Frozen Throne Company 17) Invoker Co. Joint venture of Frozen Throne Company Requirement No. 2 Regardless of whether there have been transactions between a parent and a subsidiary, an entity must disclose the name of its parent and, if different, the ultimate controlling party. Therefore, Frozen Throne Company should disclose Jakiro Co., its ultimate parent or controlling party.
99
Chapter 32 – Statement of Financial Position and Comprehensive Income
PROBLEM 32-7 (Distribution costs and general and administrative expenses) Question No. 1 Advertising Delivery expense Rent for office space (500,000 X 1/2) Sales commissions Depreciation on delivery truck Total distribution costs
(E)
500,000 300,000 250,000 1,075,000 14,000 2,139,000
Question No. 2 Auditing and Accounting fees Officers’ salaries Rent for office space (500,000 X 1/2) Insurance Depreciation on office equipment Total general and administrative expenses(E)
300,000 625,000 250,000 200,000 15,000 1,390,000
PROBLEM 32-8 Comprehensive Income Net Sales Cost of goods sold Gross income Other income Share of profit of associate Total income Expenses: Distribution costs Administrative expenses Finance cost Other expense Income before income tax Income tax expense Income from continuing operations Income from discontinued operations Net Income Other comprehensive income: Revaluation surplus Translation gain Comprehensive income
4,000,000 2,500,000 1,500,000 30,000 125,000 1,655,000 60,000 120,000 35,000 80,000
300,000 50,000 (C)
Other income: Interest income Other expense: Loss on sale of equipment
30,000 80,000
100
295,000 1,360,000 408,000 952,000 200,000 1,152,000 350,000 1,502,000
Chapter 32 – Statement of Financial Position and Comprehensive Income
COMPREHENSIVE PROBLEMS PROBLEM 32-9 Note to the professor: Additional information number 1, the date should be April 1, 2019 and not April 1, 2016. Additional information number 5, the date should be July 31, 2016 and not July 31, 2015. Unadjusted balances No. 1 NR-Noncurrent Land No. 2 No. 3 Inventory No. 4 Treasury shares No. 5 Prepaid insurancecurrent No. 6 Bonds payable No. 7 Accrued wages Mortgage-current No. 8 No. 9 Premium on BP No. 10 Allow. For DA Accum. Depr. bldg. Accum. Depr.-equipment Adjusted balances
CA 540,000
NCA 1,440,000
(70,000) (250,000) 0
70,000 250,000 0
70,000
(70,000)
CL 730,000
NCL 380,000
(23,000) 24,000
SHE 870,000
(23,000)
(24,000) (400,000)
400,000
180,000 40,000
(180,000) (40,000) 0 40,000
(40,000)
600,000 (B)
(12,000) (65,000) (30,000) 700,000 (A)
(12,000) 302,000 (C)
(65,000) (30,000) 1,548,000 (B)
550,000 (A)
PROBLEM 32-10
Unadjusted balances 1 2 3 4 5 6 7
Cash in bank 100
Inventory 1,800
Accts. Receivable 2,500
PPE 1,000
Accum. Depr 400
(14) 20 (5) -
4 (15) -
5 -
500
112.5
101
Depreciation 112.5
Chapter 32 – Statement of Financial Position and Comprehensive Income
8 9 10 11 Adjusted balances
101 1. (B)
60 1,849
2,505
(20) 1,480
(4) 508.5
(4) 108.5
Continuation…
Unadjusted balances 1 2 3 4 5 6 7 8 9 10 11 Adjusted balances
Advances from customers -
Accounts payable 320
Interest payable
Bonds payable 1,924,144
Discount -
Amortization -
4 14 20 (5) 60 413 2. (E)
180 180
75,856 1,936,558
63.442 63.442
12.414 12,414
5 5
*000 Current Assets: Cash in bank Inventory Accounts Receivable
101,000 1,849,000 2,505,000
Noncurrent assets: PPE Less: Accumulated Depreciation Total assets
1,480,000 508,500
Current liabilities: Advances from customers Accounts payable Interest payable
5,000 413,000 180,000
Noncurrent liabilities: Bonds payable Discount on bonds payable Total liabilities SUMMARY OF ANSWERS: 1. B 2. E 3. A
2,000,000 63,442
4.
B
5.
102
E
6.
4,455,000
3. (A)
971,500 5,426,500
4. (B)
598,000
5. (E)
1,936,558 2,534,558
6. (C)
C
Chapter 32 – Statement of Financial Position and Comprehensive Income
PROBLEM 32-11 Question No. 1 Unadjusted beginning balance (Credit) Add: Share premium credited to retained earnings Unadjusted retained earnings (Debit) Unadjusted Net loss (C)
70,000 40,000 143,200 253,200
Question No. 2 Unadjusted net loss Sales over, Net income over (20,000 x 140%) Ending inventory under, Net income over Gain under, Net income under Repairs expense over, Net income under Depreciation Expense building under, NI over (5% x 500,000) Depreciation Expense equipment under, Net income over Bad debts expense under, Net income over Adjusted net loss (C)
(253,200) (28,000) 20,000 1,000 20,000 (25,000) (20,100) (2,600) (287,900)
Computation of gain Net Selling Price Less: Carrying amount (10,000-(10,000 x 10% x 2) Gain on sale Computation of depreciation expense equipment: Beg. Balance of the eqpmt. net of asset disposed (201,000-10,000) 191,000 Asset disposed 10,000 Asset acquired 20,000 Depreciation expense
9,000 8,000 1,000
x 10% x 10% x 6/12 x 10% x 3/12
Equipment Unadjusted balance end Add: Amount credited for asset disposed Unadjusted balance beginning Add: Asset acquired Total Less: Cost of asset disposed Adjusted balance end
192,000 9,000 201,000 20,000 221,000 10,000 211,000
Computation of bad debts Required allowance (240,000-28,000) x 5% Less: Allowance for bad debts unadjusted Additional bad debts expense
10,600 8,000 2,600
103
19,100 500 500 20,100
Chapter 32 – Statement of Financial Position and Comprehensive Income
Question No. 3 Cash Accounts Receivable (240,000-28,000) Less: Allowance for Bad Debts Advances to employees Interest Receivable Prepaid expenses Merchandise inventory (180,000 +20,000) Land Building Less: Accumulated Depreciation (150,000+25,000) Equipment Less: Accumulated Depreciation (59,200+20,100-2,000) Utility deposits Other Assets Total assets (D) Question No. 4 and 5 LIABILITIES AND CAPITAL Accounts payable Advances from customer Interest payable Accrued expense Mortgage Payable, current portion Total current Mortgage payable, noncurrent portion Total liabilities Ordinary shares Share Premium Retained earnings (deficit) Beg. Balance Less: Adjusted net loss Total liabilities and SHE SUMMARY OF ANSWERS: 1. C 2. C 3. D
4.
A
212,000 10,600
500,000 175,000 211,000 77,300
35,000 201,400 4,800 3,000 16,200 200,000 200,000 325,000 133,700 15,000 6,000 1,140,100
260,000 10,000 18,000 30,000 100,000 418,000 500,000 918,000
(A) 400,000 40,000 70,000 (287,900)
5.
(217,900)
222,100 1,140,100
A
PROBLEM 32-12
1. EI over, COS under 2014 2015
Sales 385,000
104
2014 COS EI 157,600 98,500 6,200 (6,200)
OPEX 69,300
Chapter 32 – Statement of Financial Position and Comprehensive Income
2. Salaries expense under 2014 2015 3. Sales overstated 2014 2015 4. Expense overstated 2014 2015 5. Purch. Over, COS over 2014 2015 6. Sales under 2014 2015 7. Bad debt under 2014 (32.4+2.5) x 2% 2015 (66.1+4) x 2%-698 8. Dep. Expense under 2014 2015 Adjusted bal.
1. EI over, COS under 2014 2015 2. Salaries expense under 2014 2015 3. Sales overstated 2014 2015 4. Expense overstated 2014 2015 5. Purch. Over, COS over 2014 2015 6. Sales under 2014 2015 7. Bad debt under
14,600
(1,700)
(180)
(3,200)
2,500
698
14,500 385,800
Sales 420,000
160,600
92,300
2015 COS EI 203,800 164,900 (6,200) 8,500 (8,500)
98,918
OPEX 76,700
(14,600) 17,300 1,700 (800) 180 (200) 3,200 (4,600) (2,500) 4,000
105
Chapter 32 – Statement of Financial Position and Comprehensive Income
2014 (32.4+2.5) x 2% 2015 (66.1+4) x 2%-698 8. Dep. Expense under 2014 2015 Adjusted bal.
704
422,400
204,700
156,400
Question No. 6 (A) Sales Less Cost of sales Gross Profit Less Operating expenses Add Other income Net profit Add: Retained earnings, beginning Retained earnings, December 31, 2014)
385,800 160,600 225,200 98,918 2,100 128,382 23,400 151,782
Question No. 7 (C) Cost Less Accumulated depreciation (14,500 x 2) Book value of machinery, December 31, 2015
145,000 29,000 116,000
Question No. 9 (B) Accounts receivable, 2014 (32,400+2,500) Less: Allowance for bad debts (32,400+2,500) * 2% Net realizable value Question No. 10 (B) Sales 2015 Less: Cost of sales Gross Profit Less: Operating expenses Add: Other income Net income SUMMARY OF ANSWERS: 1. C 2. C 3. D 6. A 7. C 8. B
34,900 698 34,202
422,400 204,700 217,700 94,584 1100 124,216 4. 9.
A B
5. 10.
106
C B
14,500 94,584
Chapter 32 – Statement of Financial Position and Comprehensive Income
PROBLEM 32-13
Question Nos. 1-3 Net Income 2014 2015 290,000 375,000 100,000 (100,000) (30,000) 30,000 16,000 5,000 (5,000) 6,000
Unadjusted balances 1. Sales under, NI under. AR under 2. EI 2014 over, NI over EI 2015 under, NI under 3. Income under 2014 Income under 2015 4. Depreciation exp. 2014 over, NI under 5. Insurance exp. over, NI under (48,000 x 6/12) 6. Rent expense over, NI under (12,000 x 3/12) Adjusted
25,000
Question No. 4 Current liabilities Long-term liabilities Total liabilities Question No. 5 Capital stock Retained earnings Total shareholders’ equity
Total Assets 2014 750,000 100,000 (30,000) 5,000 25,000
(24,000)
(24,000)
(24,000)
3,000 369,000 (A)
(3,000) 295,000 (B)
3,000 829,000 (C)
(D)
50,000 150,000 200,000
(A)
100,000 649,000 799,000
The balance of the retained earnings on December 31, 2015 is computed as follows: Retained earnings, January 1, 2014 35,000 Add Net income 2014 369,000 2015 295,000 Retained earnings, December 31, 2015 699,000 SUMMARY OF ANSWERS: 1. A 2. B 3. C
4.
D
5.
107
A
Chapter 32 – Statement of Financial Position and Comprehensive Income
PROBLEM 32-14 Question Nos. 1 and 2 Unadjusted net income 1) BD expense under, NI over (392,000 x 10% )27,000 2) Unreal. Gain (Loss) (81,000-78,000) and (62,000-81,000) 3) EI overstated, NI over EI overstated, NI over 4) *Expense over, NI under Depreciation expense under, NI over **Gain on sale under, NI under 5) Exp. Over Adjusted net income
2014 195,000
2015 220,000 (2,200)
3,000 (4,000)
(19,000) 4,000 (6,100)
10,900 1,800 206,700 (B)
(1,100) 2,500 (900) 197,200 (B)
*(Expenses recorded P12,000 should be (12,000-1,000)/10=12,000-1,000) **Net Selling Price 2,500 Less carrying amount Cost 17,500 Less Accumulated depreciation 17,500 0 Gain on sale 2,500 Question No. 3 Cash Accounts receivable (296,000-18,000) Trading securities at Fair value Merchandise inventory (202,000-4,000) Prepaid insurance (2,700-1,800) Total current assets (C) Question No. 4 Cash Accounts receivable (392,000 x 90%) Trading securities at Fair value Merchandise inventory (207,000-6,100) Prepaid insurance Total current assets Property, plant and equipment (169,500+12,000-17,500) Less: Accumulated. Depreciation (121,600+1,100+1,100-17,500) Net Book value Total Assets (B)
108
82,000 278,000 81,000 198,000 900 639,900
163,000 352,800 62,000 200,900 900 779,600 164,000 106,300 57,700 837,300
Chapter 32 – Statement of Financial Position and Comprehensive Income
Question No. 5 Share capital (20,000 x P10) Share premium Retained earnings (206,700+197,200+*52,000) Adjusted Shareholders' equity (A) *(247,000-195,000) SUMMARY OF ANSWERS: 1. B 2. B 3. C
4.
B
5.
200,000 60,000 455,900 715,900
A
PROBLEM 32-15 Questions No. 1 to 3
1 2 3 4 5 6
7
Unadjusted balances 2014 Purchases over NI under 2014 Ins. Expense Over, NI Under – Prepaid insurance 2014 Sales under, NI under 2014 Bad debts exp. under, NI over (60,000 x 4%) Sales over, NI over Loss on sale under, NI over Admin exp over, NI under Depr. Under, NI over Equipment Building Patent EI under, NI under
Current
Total
Assets
NCA
SC and Share Prem
600,000 (40,000)
915,000
3,100,000
1,420,000
10,000 60,000
(5,000) (60,000)
5,000
(2,400)
(3,600) (20,000) (12,000) 10,000
(6,000)
R/E Jan. 1
Net Income
1,448,000 40,000
1,555,600 1. (B)
(118,250) (100,000) (55,000) 45,000 241,150 2. (D)
Net Proceeds Cost Less: Accumulated Depreciation Loss on sale
(32,000) 10,000
45,000 959,000 3. (A)
(118,250) (100,000) (55,000) 2,804,750
20,000 40,000 8,000
Depreciation: Equipment - old (1.2M-40,000+10,000) x 10% Equipment disposed (40,000 x 10% x 3/12) New equipment (10,000 x 10% x 3/12) Jan. 1 Total Depreciation Question No. 4 Total current assets Add: Non-current assets Total Assets
(C)
109
32,000 (12,000) 117,000 1,000 250 118,250
959,000 2,804,750 3,763,750
1,420,000
Chapter 32 – Statement of Financial Position and Comprehensive Income
Question No. 5 Preference share Ordinary share Share Premium Retained earnings Jan. 1 Net income Total Shareholders’ Equity SUMMARY OF ANSWERS: 1. B 2. D 3. A
100,000 1,100,000 220,000 1,555,600 241,150 3,216,750
(B) 4.
C
5.
B
PROBLEM 32-16 Note to professor:
7) Dividends of P.05 per share were declared on March 25, 2015. – Change 2015 to 2016.
Questions No. 1 to 2 STATEMENT OF COMPREHENSIVE INCOME Revenue 12,000,000 Less Cost of sales (7,100,00+80,000) 7,180,000 Operating expenses (3,480,000+120,000) (3,600,000) Finance costs 240,000 Profit before tax 980,000 Income tax expense 284,200 Profit for the period (B) 695,800 Other comprehensive income Revaluation surplus 800,000 Total comprehensive income (C) 1,495,800
Beg. Balance, 12/31/2015 Total compre. Income Issue of share capital Share issue expenses Balance
STATEMENT OF CHANGES IN EQUITY Ord. Share Retained Other share Prem. earnings compre. income 2,500,000
0
1,424,200 695,800
500,000
1,500,000
3,000,000
(150,000) 1,350,000
110
Total
3,924,200 800,000
1,495,800 2,000,000
2,120,000
800,000
(150,000) 7,270,000
Chapter 32 – Statement of Financial Position and Comprehensive Income
Question No. 3 Inventories Trade and other receivables (980,000+15,000) Cash and Cash equivalents Total Current Assets (E)
1,720,000 995,000 2,059,200 4,774,200
Question No. 4 Borrowings Trade and other payables (400,000+20,000) Current tax payable (*284,200-**200,000) Total current liabilities (D)
2,000,000 420,000 84,200 2,504,200
*Income tax payable of (980,000 x 29%)=P284,200 **Tax refundable Question No. 5 Ordinary shares Share premium Retained earnings Other comprehensive income Total shareholders’ equity SUMMARY OF ANSWERS: 1. B 2. C 3. E
3,000,000 1,350,000 2,120,000 800,000 7,270,000
(B)
4.
D
5.
111
B
Chapter 33 – Statement of Cash Flows
CHAPTER 33: STATEMENT OF CASH FLOWS PROBLEM 33-1 Indirect Method - Operating Activities Net income Decrease in accounts receivable Increase in accounts payable Depreciation expense Net cash provided by operating activities
(A)
668,000 96,000 44,000 20,000 828,000
PROBLEM 33-2 Indirect Method - Operating Activities Net income Increase in accounts receivable Decrease in prepaid expenses Increase in accumulated depreciation-depreciation expense Decrease in accounts payable Net cash provided by operating activities (A)
292,000 (40,000) 12,000 64,000 (16,000) 312,000
PROBLEM 33-3 Investing Activities Note to professor: The question should be net cash provided by investing activities and not financing activities. Cash acquisition of fair value through other comprehensive securities Proceeds from sale of the company’s used equipment Purchase of equipment Net cash provided by investing activities (E)
(100,000) 1,000,000 (560,000) 340,000
PROBLEM 33-4 Financing Activities Issuance of shares of the company’s own ordinary shares Dividends paid to the company’s own shareholders Repayment of principal on the company’s own bonds Net cash provided by financing activities (A)
112
680,000 (28,000) (160,000) 492,000
Chapter 33 – Statement of Cash Flows
COMPREHENSIVE PROBLEMS PROBLEM 33-5 Question No. 1
(B) Accounts receivable
Beg. balance – AR Sales on account
125,0000 1,000,000
135,000 -
-
990,000 -
Recoveries
Total Question No. 2
1,125,000
Balance end - AR Sales returns and allowance* Sales discounts Collections (squeeze) Write-off
1,125,000
(C) Accounts Payable Trade
Payments (squeezed) Purchase returns and allow. Purchase discounts Balance end – AP Total
525,000 0
190,000 485,000
Beg. balance – AP Purchases
0 150,000 675,000 Merchandise Inventory
Beg. Balance Net Purchases (squeeze)
175,000 485,000
Total
660,000
Question No. 3 Payments (squeezed) Balance end Total
160,000 500,000
Balance end Cost of Sales
(D) Deferred income taxes 190,000 85,000
175,000 100,000
Beg. balance Income tax expense
275,000
Question No. 4 (D) Collection of accounts receivable Payment of accounts payable Payment of income taxes* Payment of operating expenses Net cash provided by (or used in) Operating activities *Computation of Payment of income taxes
113
990,000 (525,000) (190,000) (180,000) 95,000
Chapter 33 – Statement of Cash Flows
Prepaid insurance Beg. Balance Payment (squeezed)
25,000 180,000
Total
40,000 165,000
Balance end Operating expenses excluding depreciation (260,000-95,000)
205,000
Depreciation expense=245,000-150,000 =95,000 Question No. 5 Receipt of cash from note payable-bank (200,000-160,000) Issuance for cash of ordinary shares(225,000-200,000) Dividends paid Net cash provided used in Financing activities (A)
40,000 25,000 (75,000) (10,000)
Question No. 6 *Proceeds from Sale of investment Cash acquisition of PPE (540,000-460,000) Net cash provided used in investing activities
20,000 (80,000) (60,000)
(B)
Cost of investment sold (190,000-180,000) Add: Gain on sale Proceeds from sale of investment SUMMARY OF ANSWERS: 1. B 2. C 3. D
4.
D
5.
10,000 10,000 20,000 A
6.
B
PROBLEM 33-6 Question No. 1 Beg. Balance Sales on account
Question No. 2 Bal. end Payment
(A) Accounts receivable 600,000 1,250,000 5,000,000 4,330,000 20,000 5,600,000 5,600,000 (B) Accounts payable 4,800,000 4,500,000 1,900,000 2,200,000 6,700,000 6,700,000
114
Bal. end Collections Write-off
Beg. Balance Net purchases
Chapter 33 – Statement of Cash Flows
Beg. Balance Net purchases
Merchandise inventory 2,000,000 2,200,000 2,200,000 2,000,000 4,200,000 4,200,000
Bal. end Cost of goods sold
Question No. 3 (A) Net income Amortization of premium of Investment in Bonds Depreciation Gain on sale of equipment Amortization of franchise Decrease (or increase) in Trading securities Decrease (or increase) in Net AR Decrease (or increase) in Inventories Increase (or decrease) in AP Increase (or decrease) in DTL Net cash provided by (or used in) Operating activities Computation of accumulated depreciation: Beg. Balance Add: Depreciation expense Less: Accumulated depreciation of asset sold Balance end
3,200,000 900,000 200,000 3,900,000
Gain or (loss) on sale Net Selling Price Less: Carrying amount Cost Less: Accumulated Depreciation Gain on sale Amortization table: Interest Date Collection 1/1/2014 12/31/2014 480,000 12/31/2015 480,000
700,000 60,109 900,000 (220,000) 100,000 (450,000) (530,000) (200,000) 300,000 200,000 860,109
500,000 480,000 200,000
Interest Income
Premium Amortization
425,355 419,891
54,645 60,109
Question No. 4 (B) Acquisition of PPE Sale of PPE Net cash provided by (or used in) investing activities Question No. 5 (D) Dividends paid Cash receipts-issuance of OS (10,000 x 120)
115
280,000 220,000
Present value 4,253,552 4,198,907 4,138,798 (1,000,000) 500,000 (500,000)
(300,000) 1,200,000
Chapter 33 – Statement of Cash Flows
Cash paid for Treasury shares Net cash provided by (or used in) Financing activities SUMMARY OF ANSWERS: 1. A 2. B 3. A
4.
B
5.
(500,000) 400,000
D
PROBLEM 33-7 Note to the professor: Kindly change the name of Josiah Inc. to Jonalyn Inc. in additional information number 1. Question No. 1 Bal. end Payment
Beg. Balance Net purchases
(D) Accounts payable 3,400,000 3,500,000 1,900,000 1,800,000 5,300,000 5,300,000 Merchandise inventory 2,000,000 1,800,000 1,800,000 2,000,000 3,800,000 3,800,000
Beg. Balance Net purchases
Bal. end Cost of goods sold
Question No. 2 (B) Income tax payable/Deferred tax liability Bal. end-ITP 150,000 200,000 Beg. Balance-ITP Bal. end-DTL 700,000 500,000 Beg. Balance-DTL Payment 150,000 300,000 Income tax expense 1,000,000 1,000,000 Question No. 3 (A) Net income Share in the net income of associate Cash dividends from associate Depreciation Loss on sale of equipment Amortization of franchise Decrease (or increase) in Trading securities Decrease (or increase) in Net AR Decrease (or increase) in Inventories Increase (or decrease) in AP Increase (or decrease) in ITP Increase (or decrease) in DTL Net cash provided by (or used in) Operating activities
116
700,000 (1,024,000) 280,000 200,000 100,000 100,000 (90,000) 200,000 (100,000) (50,000) 200,000 516,000
Chapter 33 – Statement of Cash Flows
Year of Acquisition Percentage of ownership Cost of Investment Less: Book value of net asset acquired Excess of cost over book value Over or (under)valued asset Inventory Machinery Land Goodwill Amortization of Over (Under) valued asset Inventory Machinery Divide by: Remaining life Amortization of Under (over) valued asset No of months divide by 12 (1st year) Amortization of Under (over) valued asset Net income of the associate Dividends declared and paid Net income of the associate Multiply by: Percentage of ownership Share in the net income Dividends declared and paid Multiply by: Percentage of ownership Dividends received
20% 4,000,000 2,400,000 1,600,000 (40,000) 240,000 1,800,000 2014 40,000
2015
(240,000) 10 (24,000) 1 (24,000)
(24,000) 1 (24,000)
2014 4,000,000 1,000,000 2014 4,000,000 20% 800,000 1,000,000 20% 200,000
2015 5,000,000 1,400,000 2015 5,000,000 20% 1,000,000 1,400,000 20% 280,000
2015 Investment Income Share in the Net Income Add: Amortization of overvalued machinery Net investment income - 2015
1,000,000 24,000 1,024,000
Investment in Associate Beg. Balance Add: Net investment income Less: Dividends received Balance end
4,584,000 1,024,000 280,000 5,328,000
Question No. 4 (B) Cash receipt from loan receivable Acquisition of PPE Sale of PPE Net cash provided by (or used in) investing activities
117
120,000 (2,000,000) 500,000 (1,380,000)
Chapter 33 – Statement of Cash Flows
Question No. 5 (D) Dividends paid Cash receipts-issuance of Ordinary shares Cash receipts-reissuance of Treasury shares Net cash provided by (or used in) Financing activities SUMMARY OF ANSWERS: 1. D 2. B 3. A
4.
B
5.
(350,000) 1,120,000 105,000 875,000
D
PROBLEM 33-8 Note to the professor: Please change the name of Josiah Inc. to Samuel Inc. in additional information number 1. Question No. 1 Bal. end Payment
Beg. Balance Net purchases
(D) Accounts payable 4,000,000 3,500,000 1,700,000 2,200,000 5,700,000 5,700,000 Merchandise inventory 1,500,000 1,700,000 2,200,000 2,000,000 3,700,000 3,700,000
Beg. Balance Net purchases
Bal. end Cost of goods sold
Question No. 2 (B) Income tax payable/Deferred tax liability Bal. end-ITP 150,000 200,000 Beg. Balance-ITP Bal. end-DTL 700,000 500,000 Beg. Balance-DTL Payment 270,000 420,000 Income tax expense 1,120,000 1,120,000 Question No. 3 (A) Net income Share in the net income of associate Cash dividends from associate Depreciation Loss on sale of equipment Amortization of franchise Amortization of disc on investment in bonds Decrease (or increase) in Net Accounts Receivable Decrease (or increase) in Inventories Increase (or decrease) in Accounts Payable Increase (or decrease) in Income Tax Payable Increase (or decrease) in Deferred Tax Liability Net cash provided by (or used in) Operating activities
118
980,000 (630,000) 225,000 200,000 150,000 100,000 (12,708) (90,000) (200,000) 500,000 (50,000) 200,000 1,372,292
Chapter 33 – Statement of Cash Flows
Amortization table: Interest Date Collection 01/01/2015 12/31/2015 100,000 12/31/2016 100,000
Interest Income
Premium Amortization
112,708 114,233
12,708 14,233
Year of Acquisition Percentage of ownership Cost of Investment Less: Book value of net asset acquired Excess of cost over book value Over or (under)valued asset Inventory Machinery Land Goodwill Amortization of Over (Under) valued asset Inventory Machinery Divide by: Remaining life Amortization of Under (over) valued asset No of months divide by 12 (1st year) Amortization of Under (over) valued asset Net income of the associate Dividends declared and paid Net income of the associate Multiply by: Percentage of ownership Share in the net income Dividends declared and paid Multiply by: Percentage of ownership Dividends received 2014 Investment Income Share in the Net Income Add: Amortization of overvalued machinery Less: Undervaluation of inventory Net investment income - 2014 Investment in Associate Cost of investment Add: Net investment income Less: Dividends received Balance end, 12/31/2014
Present value 939,230 951,938 966,170
25% 3,500,000 2,500,000 1,000,000 (50,000) 300,000 1,250,000 2014 50,000
2015
(300,000) 10 (30,000) 1 (30,000)
(30,000) 1 (30,000)
2014 2,000,000 800,000 2014 2,000,000 25% 500,000 800,000 25% 200,000
2015 2,400,000 900,000 2015 2,400,000 25% 600,000 900,000 25% 225,000 500,000 30,000 50,000 480,000 3,500,000 480,000 200,000 3,780,000
119
Chapter 33 – Statement of Cash Flows
2014 Investment Income Share in the Net Income Add: Amortization of overvalued machinery Net investment income - 2014
600,000 30,000 630,000
Investment in Associate Beginning balance, 01/01/2015 Add: Net investment income Less: Dividends received Balance end, 12/31/2015
Beg. Balance Acquisition cost Present value of MLP
3,780,000 630,000 225,000 4,185,000
Property, Plant and Equipment 9,000,000 900,000 Cost of equipment sold 600,000 9,069,180 bal. end 369,180 9,969,180 9,969,180
Accumulated depreciation Bal. end 3,000,000 3,200,000 Beg. Balance Accumulated depreciation of asset sold 400,000 200,000 Depreciation expense 3,400,000 3,400,000 Net Selling Price Less: Carrying amount Cost Less: Accumulated Depreciation Loss on sale
350,000 900,000 400,000
Question No. 4 (B) Cash acquisition of Investment in Bonds Acquisition of PPE Sale of PPE Net cash provided by (or used in) investing activities Present Value of Periodic Payment (100,000 x 3.4869) Add: Present Value of Bargain Purchase option(30,000 x 0.683) Present Value of Minimum lease payments Amortization table: Interest Date Payment 12/31/2015 12/31/2015 100,000 12/31/2016 100,000
Interest Expense
Amortization
26,918
100,000 73,082
120
500,000 (150,000)
(939,230) (600,000) 350,000 (1,189,230) 348,690 20,490 369,180
Present value 369,180 269,180 196,098
Chapter 33 – Statement of Cash Flows
Question No. 5 (D) Payment of principal finance lease liability Dividends paid Cash receipts-issuance of Ordinary Shares Net cash provided by (or used in) Financing activities
(100,000) (350,000) 720,000 270,000
Share Capital Beginning balance Issuance for cash Issuance thru SDP Balance end
10,000,000 600,000 1,910,000 12,510,000
Share Premium Beginning balance Issuance for cash Balance end
1,000,000 120,000 1,120,000
Retained Earnings Beginning balance Add: Net income Less: Dividends declared-cash Less: Share dividend Balance end
3,740,000 980,000 350,000 1,910,000 2,460,000
SUMMARY OF ANSWERS: 1. D 2. B 3. A
4.
B
5.
D
PROBLEM 33-9 Question No. 1 Cash Accounts receivable Allowance for doubtful accounts Inventories Total current assets (A)
5,639,900 1,000,000 (180,000) 2,200,000 8,659,900
Question No. 2 Investment in bonds - FA at amortized cost Property plant and equipment Accumulated depreciation Franchise - net Total noncurrent assets (A)
3,861,105 9,520,000 (3,900,000) 500,000 9,981,105
Total assets
18,641,005
121
Chapter 33 – Statement of Cash Flows
Question No. 3 Liabilities and equity Accounts payable Dividends payable Total current liabilities
(A)
4,800,000 400,000 5,200,000
Question No. 4 Deferred tax liability Total noncurrent liabilities
(C)
700,000 700,000
Total liabilities
5,900,000
Question No. 5 Ordinary shares, P100 par value Share Premium Treasury shares at cost Retained earnings Total shareholders' equity (C)
11,000,000 1,200,000 (500,000) 1,041,005 12,741,005
Total liabilities and equity
18,641,005
Beg. Balance Sales on account
Bal. end Write-off
Accounts receivable 600,000 1,000,000 5,000,000 4,600,000 5,600,000 5,600,000
Bal. end Collections Write-off
Allowance for doubtful accounts 180,000 40,000 Beg. Balance Doubtful Account 140,000 expense 0 Recovery 180,000 180,000
Beg. Balance Net purchases
Merchandise inventory 2,000,000 2,200,000 2,200,000 2,000,000 4,200,000 4,200,000
Bal. end Payment
Accounts payable 4,800,000 4,500,000 1,900,000 2,200,000 6,700,000 6,700,000
122
Bal. end Cost of goods sold
Beg. Balance Net purchases
Chapter 33 – Statement of Cash Flows
Amortization table: Interest Date Collection 01/01/2014 12/31/2014 320,000 12/31/2015 320,000 12/31/2016 320,000 12/31/2017 320,000 Beg. Balance Acquisition cost Present value of MLP
Interest Income
Discount Amortization
374,637 380,100 386,111 392,816
54,637 60,100 66,079 72,816
Present value 3,746,368 3,801,005 3,861,105 3,927,184 4,000,000
Property, Plant and Equipment 9,000,000 480,000 Cost of equipment sold 1,000,000 9,520,000 bal. end 10,000,000 10,000,000
Accumulated depreciation Bal. end 3,900,000 3,200,000 Beg. Balance Accumulated depreciation of asset sold 200,000 900,000 Depreciation expense 4,100,000 4,100,000 Net Selling Price Less: Carrying amount Cost Less: Accumulated Depreciation Gain on sale
500,000 480,000 200,000
280,000 220,000
Ordinary shares Beginning balance Issuance for cash Balance end
10,000,000 1,000,000 11,000,000
Share Premium Beginning balance Issuance for cash Balance end
1,000,000 200,000 1,20,000
Retained Earnings Beginning balance Add: Net income Less: Dividends declared-cash Balance end
461,005 980,000 400,000 1,041,005
SUMMARY OF ANSWERS: 1. A 2. A 3. A
4.
C
5.
123
C
