LIABILITIES and EQUITY ALASTOY BSA 2

PREMIUMS AND WARRANTY LIABILITY

1. In December 2016, Cucumber Company began including one coupon in each package of goodies that it sells and offering a pen in exchange for P30 and three coupons. The pens cost P60 each. Eventually, 70% of the coupons will be

redeemed. During December, the entity sold 120,000 packaged of goodies and no coupons were redeemed.

On December 31, 2016, what amount should be reported as estimated liability for coupons?

a. 1,200,000 c. 1,680,000

b. 840,000 d. 2,400,000

Answer is b Solution:

Coupons to be redeemed (70% x 120,000) 84,000

Divide by 3

Number of pens 28,000

Multiply by net cost of pen (60-30) 30 Estimated liability – December 31, 2015 840,000

2. At the beginning of the current year, Masigasig Company began marketing a bottled chocolate called ChocoMoTo. To help promote the product, the

management is offering a special ChocoMoTo mug to each customer for every 10 marked bottle cops of ChocoMoTo. The entity estimated that out of the 250,000 bottles of ChocoMoTo sold during the year, only 80% of the marked bottle cops would be redeemed. During the year, the entity purchased 10,000 mugs at a total cost of P400,000 and already distributed 15,000 mugs to customers.

What is the premium liability at year-end?

a. 200,000 c. 400,000

b. 800,000 d. 600,000

Answer is a Solution:

Mugs already distributed 15,000

Mugs outstanding 5,000

Estimated liability at year-end (40 x 15,000) 200,000 3. Shark Company sells gift certificates redeemable only when merchandise is

purchased. These gift certificates have no expiration date. Upon redemption or expiration, the entity recognizes unearned revenue as realized.

Information for the current yeas is as follows:

Unearned revenue, January 1, 2016 550,000

Gift certificates sold 1,250,000

Gift certificates redeemed 750,000

Gift certificates expected not to be redeemed 50,000

Cost of goods sold 50%

On December 31, 2016, what amount should be reported as unearned revenue?

a. 1,000,000 c. 1,050,000

b. 500,000 d. 550,000

Answer is a Solution:

Unearned revenue – January 1, 2016 550,000

Add: Gift certificates sold 1,250,000

Total 1,800,000

Less: Gift certificates redeemed 750,000

Gift certificates expected not to be redeemed 50,000 800,000 Unearned revenue – December 31, 2016 1,000,000 4. On July 1, 2016, Xilam Company began offering a new product for sale under

one-year warranty. Of the 60,000 units in inventory on July 1, 2015, 40,000 had been sold by September 30, 2016. Based on its experience with similar products, the entity estimated that the average warranty cost per unit sold would be P90. Actual warranty costs incurred from Jul 1 through September 31, 2016 amounted to P800,000.

On September 31, 2016, what is the estimated warranty liability?

a. 2,600,000 c. 2,800,000

b. 1,800,000 d. 4,400,000

Solution:

Warranty expense (40,000 x 90) 3,600,000

Actual warranty cost ( 800,000)

Warranty liability – September 31, 2016 2,800,000

5. Mayday Company introduced a new product that carried a 2-year warranty against defects. The estimated warranty cost related to sales is 4% in the year of sale and 5% in the year after sale. Sales are P3,800,000 for 2016 and P

4,500,000 for 2017. Actual warranty expenditures are P150,000 for 2016 and P400,000 for 2017.

What amount should be reported as estimated warranty liability on December 31, 2017?

a. 377,000 c. 192,000

b. 197,000 d. 0

Answer is b Solution:

Warranty expense:

2016 (9% x 3,800,000) 342,000

2017 (9% x 4,500,000) 405,000 747,000

Actual warranty expenditures

2016 150,000

2017 400,000 550,000

Warranty liability – December 31, 2017 197,000

6. During 2016, Yamashita Co. introduced a new line of machines that carry a three-year warranty against manufacturer’s defects. Based on industry

experience, warranty costs are estimated at 2% of sales in the first year of sale, 3% in the year after sale, and 4% in the second year after sale. Sales and actual warranty expenditures for the first three-year period were as follows:

Sales Actual Warranty Expenditures 2016 P 600,000 P 4,000

2018 1,600,000 120,000

P3,400,000 P159,000

What amount should Yamashita report as a liability at December 31, 2018?

a. 0 c. 147,000

b. 24,000 d. 112,000

Answer is c Solution:

Warranty expense:

2016 (9% x 600,000) 54,000

2016 (9% x 1,200,000) 108,000

2017 (9% x 1,600,000) 144,000 306,000

Actual warranty expenditures

2016 4,000

2016 35,000

2017 120,000 159,000

Warranty liability – December 31, 2018 147,000

7. Delfin Co. includes one coupon in each bag of dog food it sells. In return for eight coupons, customers receive a leash. The leashes cost Delfin P3 each. Delfin estimates that 40 percent of the coupons will be redeemed. Data for 2016 and 2017 are as follows:

2016 2017

Bags of dog food sold 500,000 600,000

Leashes purchased 18,000 22,000

Coupons redeemed 120,000 150,000

What is the premium liability at December 31, 2017?

b. 31,875 d. 63,750

Answer is d Solution:

Coupons to be redeemed – 2016 (40% x 500,000) 200,000 Less: Coupons redeemed – 2016 120,000

Balance 80,000

Add: Coupons to be redeemed – 2017 (40% x 600,000) 240,000

Balance 320,000

Less: Coupons redeemed – 2017 150,000

Total 170,000

Premiums to be distributed (170,000/8) 21,250 Premium liability – December 31, 2017 (21,250 x P3) 63,750 8. Similac Company offered a cash rebate of P8 on each P20 package of

batteries sold during the current year. Historically, 10% of customers mail in the rebate form. During the year, 8,500,000 packages of batteries are sold, and 420,000 P8 rebates are mailed to customers.

What amount of rebate expense and liability for rebates should be reported respectively at year-end?

a. 6,800,000 and 3,440,000 b. 6,800,000 and 6,800,000 c. 3,440,000 and 3,360,000 d. 3,440,000 and 3,440,000 Answer is d

Solution:

Rebate expense (8,500,000 x 10% x 8) 6,800,000 Rebates redeemed (420,000 x 8) (3,360,000)

Liability for rebates at year-end 3,440,000

9. Diego Company sells its only line product at average selling price of P500 per unit. To promote its sales, a gift item is offered to customers on the return of 5 empty containers as proof of purchase, plus remittance of P50. The cost of gift item is P150/pc., and it is estimated that 80% of the proof of purchase will be redeemed. For the current year, Diego Company’s total sales for the

product amounted to P6,000,000, of which actual containers redeemed were 7,600.

How much of the estimated liability for premium payable should be reported in its current year’s end balance sheet?

a. 20,000 c. 60,000

b. 40,000 d. 240,000

Answer is b Solution:

Containers to be redeemed (6,000,000 / 500 x 80%) 9,600

Less: Containers redeemed 7,600

Balance 2,000

Gift items to be distributed (2,000 / 5) 400 Estimated Premium Liability – year end (400 x 100) 40,000

10. At December 31, 2016, Dora Company had 1,000 gift certificates outstanding, which had been sold to customers during 2016 for P75. Dora operates on a gross margin of 60%. How much revenue pertaining to the 1,000 outstanding gift certificates should be deferred at December 31, 2016?

a. P0 c. P30,000

b. P45,000 d. P75,000

Answer is d Solution:

Unearned revenue ( 1,000 x 75) 75,000

DEFERRED REVENUE

1. Malan Depot sells gift certificates redeemable only when product is purchased. These gift certificates have no expiration date. Upon redemption or expiration, the entity recognizes the unearned revenue as realized.

Information for the current year is as follows:

Unearned revenue, Jan. 1, 2013 675,000

Gift certificates redeemed 1, 950,000 Gift certificates expected not to be redeemed 100,000 Cost of goods sold 60 percent

On December 31, 2013, what amount should be reported as unearned revenue?

a. 595,000 c. 875,000

b. 485,000 d. 975,000

Answer is c Solution:

Unearned Revenue, January 1, 2013 675,000

Add: Gift certificates sold 2,250,000

Total 2,925,000

Less: Gift Cert. Redeemed 1,950,000

Gift Cert. expected not to be redeemed 100,000 2,050,000 Unearned Revenue – December 31, 2013 875,000 2. Stilt Corporation sells subscriptions to a directory that is published semiannually

and shippd to subscribers on April 15 and October 15. Subscriptions received after the March 31 and September 30 cut off dates are held for the next publication. Cash from subscribers is received evenly during the year and is credited to deferred revenue from subscriptions. Data relating to current year are as follows:

Deferred Revenue from subscriptions, January 1, 2010 1,500,000

Cash receipts from subscribers 7,200,000

On December 31, 2010, what amount should be reported as deferred revenue from subscriptions?

a. 1,800,000 c. 3,600,000

b. 3,300,000 d. 5,400,000

Answer is a Solution:

Monthly Subscriptions (7,200,000/12) 600,000 Subscriptions after September 30

October 600,000

December 600,000 Total Unearned Subscription revenue – 12/31/10 1,800,000 3. In November and December 2009, Freud Company, a magazine publisher,

received P7,200,000 for 1,000 3-year subscriptions at P2400 per year, starting with the January 2010 issue. The entity elected to include the entire P7,200,000 in the 2010 income tax return

What amount should be reported in the income statement for subscriptions revenue for 2009?

a. P7,200,000 c. P 400,000

b. P2,400,000 d. P 0

Answer is d Solution:

The subscriptions revenue should be reported for accounting purposes annually at P2,400,000 for 2010, 2011 and 2012. So the answer is 0.

4. Ikaw lang sapat na Company sells magazine subscriptions for one year, two year or three year period. Cash receipts from subscribers are credited to magazine subscriptions collected in advance, and this account had a balance of P 2,400,000 on December 31, 2012 expire as follows :

During 2013 650,000

During 2014 830,000

During 2015 470,000

On December 31, 2012, what amount should be reported as magazine subscriptions collected in advance?

a. P 500,000 c. P 1,900,000

b. P 1,200,000 d. P 2,400,000

Answer is c Solution:

2013 650,000

2014 830,000

2015 470,000

5. Ibakana Company offers three payment plans on its twelve-month contracts. Information on the three plans and the number of children enrolled in each plan for the September 1, 2015 through August 31, 2016 contract year is as follows:

Initial payment Monthly fee Number of per child per child children #1 60,000 - 15

#2 30,000 4,200 12

#3 5,500 9

The entity received P990,000 of initial payments on September 1, 2015, and P324,000 of monthly fees during the period September 1 through December 31, 2015.

On December 31, 2015, what amount should be reported as deferred revenue?

a. 330,000 c. 660,000

b. 438,000 d. 990,000

Answer is c Solution:

Plan #1 (50,000 x 15) 750,000

Plan #2 (20,000 x 12) 240,000

Total initial payments 990,000

Deferred revenue – December 31, 2015 (990,000 x 8/12) 660,000

Plan #2 (3,000 x 12 x 4) 144,000

Total monthly fees – already earned 324,000

6. Umasa Company sells office equipment service contracts agreeing to service equipment for a two-year period. Cash receipts from contracts are credited to unearned service contract revenue and service contract costs are charged to service contract expense as incurred. Revenue from service contracts is recognized as earned over the lives of the contracts. Additional information for the current year is as follows:

Unearned service contract revenue at January 1 520,000 Cash receipts from service contracts sold 980,000

Service contract revenue recognized 860,000

Service contract expense 520,000

What amount should be reported as unearned service contract revenue on December 31?

a. 380,000 c. 410,000

b. 400,000 d. 640,000

Answer is d Solution:

Unearned revenue – January 1 520,000

Cash receipts from service contracts sold 980,000

Total 1,500,000

Less: Service contract revenue recognized 860,000 Unearned service contract revenue – December 31 720,000 7. Sinoka Video Company sells 1- and 2-year subscriptions for its

video-of-the-month business. Subscriptions are collected in advance and credited to sales. An analysis of the recorded sales activity revealed the following:

2015 2016

Sales 420,000 500,000

Less cancelations 20,000 30,000

Net sales 400,000 470,000

2015 120,000

2016 155,000 130,000

2017 125,000 200,000

2018 140,000 400,000 470,000 On December 31, 2016, what amount should be reported as unearned subscription revenue?

a. 495,000 c. 465,000

b. 470,000 d. 340,000

Answer is c Solution:

Subscriptions received in 2015 that will expire in 2017 125,000 Subscriptions received in 2016 that will expire in 2017 200,000 Subscriptions received in 2016 that will expire in 2018 140,000 Unearned subscription revenue – December 31, 2016 465,000 8. Saunalang Company sells equipment service contracts that cover a two-year

period. The sale price of each contract is P600. The past experience is that, of the total pesos spent for repairs on servicer contracts, 40% is incurred evenly during the first contract year and 60% evenly during the second contract year. The entity sold 1,000 contracts evenly throughout 2015.

What amount should be reported as deferred service revenue on December 31, 2015?

a. 540,000 c. 360,000

b. 480,000 d. 300,000

Answer is b Solution:

Second contract year (60% x 600,000) 360,000

Total contracts sold in 2015 600,000

Since the contracts are sold evenly, one-half of the 40% is earned in 2015 and one-half will be earned in 2016. One-half of the 60% will be earned in 2016 and one-half will be earned in 2017.

Thus, the deferred service contract revenue on December 31, 2015 is computed as follows:

Total contracts sold (1,000 x 600) 600,000

Less: Contracts earned in 2015 (240,000 x ½) 120,000 Deferred service revenue – December 31, 2015 480,000 9. Nasaktan Company requires advance payments with special orders for

machinery constructed to customer specification. These advances are non-refundable. Information for the current year is as follows:

Advances from customers – January 1 1,180,000

Advances received with orders 1,840,000

Advances applied to orders shipped 1,640,000

Advances applicable to orders cancelled 500,000 What amount should be reported as current liability for advances from customers at year-end?

a. 1,480,000 c. 880,000

b. 1,380,000 d. 0 Answer is c

Solution:

Advances from customers – January 1 1,180,000

Total 3,020,000 Less: Advances applied to orders shipped 1,640,000

Advances applicable to orders cancelled 500,000 2,140,000 Advances from customers – December 31 880,000 10.Ditokalang Company records stamp service revenue and provides for the cost of

redemptions in the year stamps are sold to licenses. The past experience indicates that only 80% of the stamps sold to licenses would be redeemed. The liability for stamp redemptions was P6,000,000 on January 1, 2015. Additional information for the current year is s follows:

Stamp service revenue from stamps sold to licenses 5,000,000 Cost of redemption of stamps sold prior to 1/1/2015 2,750,000 If all the stamps sold in 2015 were presented for redemption in 2016, the redemption cost would be P2,250,000.

What amount should be reported as liability for stamps redemptions on December 31, 2015?

a. 7,250,000 c. 5,050,00

b. 5,500,000 d. 3,250,000

Answer is c Solution:

Liability for stamp redemptions – January 1, 2015 6,000,000 Add: Estimated cost of redemptions for stamps sold

In 2015 (80% x 2,250,000) 1,800,000

Total 7,800,000

Less: Cost of redemption in 2015 2,750,000

Liability for stamp redemptions – December 31, 2015 5,050,000

PROVISION AND CONTINGENT LIABILITY

1. In June 2016, the Hiloma Company began producing and selling a new line of dishwasher. By the end of the year, it has sold 120,000 to various dealers for 150,000 each. The product was sold under a 1-year warranty, and the company estimates warranty costs to be P750 per dishwasher. Hiloma had paid out P30

Million in warranty expenses as of December 31, 2016, which is also the amount shown as warranty expense in its income statement for the current year.

What amount of warranty expense should be shown on Hiloma’s income statement for the year ended December 31, 2016?

a. P30,000,000 c. P60,000,000

b. P0 d. P90,000,000

Answer is d Solution:

Warranty Expense (P750 x 120,000) P90,000,000

2. In May 2015, Cherry Company relocated an employee from the Manila head office to a branch in Cebu City. At the end of reporting period on June 30, 2015, the costs are estimated at P350,000 analyzed as follows:

Cost for shipping goods 50,000

Airfare 15,000

Temporary accommodation cost for May and June 60,000 Temporary accommodation cost for July and August 80,000 Reimbursement for lease break cost paid in July

(lease was terminated in May) 20,000 Reimbursement for cost of living increases for the

period May 1, 2015 to May 1, 2016 150,000

Total 350,000

What amount should be recognized as provision for relocation costs on June 30, 2015?

a. 145,000 c. 295,000

b. 225,000 d. 170,000

Answer is d Solution:

Cost for shipping goods 50,000

Temporary accommodation cost for May and June 60,000

Reimbursement for lease break cost 20,000

Reimbursement for cost of living increases for

May and June (120,000x 2/12) 25,000

Total 170,000

3. On November 25, 2014, an explosion occurred at a Tom Company plant causing extensive property damage to area buildings. By March 10, 2015, claims had been asserted against the entity. The management and counsel concluded that it is probable that the entity would be responsible for damages, and that P2,500,000 is a reasonable estimate of the liability. Tom’s P10,000,000 comprehensive public liability policy has a P500,000 deductible clause. What should be reported in the December 31, 2014 financial statements, issued on March 25, 2015, in relation to this item?

a. An accrued liability of P500,000

b. A disclosure indicating the probable loss of P2,500,000

c. A footnote disclosure indicating the probable loss of P500,000 d. An accrued liability of P2,500,000

Answer is a Solution:

The accrued amount is P500,000 only because it is the extent of liability of Tom under the comprehensive insurance policy.

4. Caso Company is the defendant in a lawsuit filed by Smith Company in 2015 disputing the validity of copyright held by Caso. On December 31, 2015, Caso determined that Smith would probably be successful against Caso for estimated amount of P500,000. Appropriately, a P500,000 loss was accrued by a charge to income for the year ended December 31, 2015. On December 31, 2016, Caso and Smith agreed to a settlement providing cash payment of P350,000 by Caso to Smith, and transfer of Caso’s copyright to Smith. The carrying amount of the copyright on Caso’s accounting records was P70,000 on December 31, 2016. What would be the effect of the settlement on Caso’s income before tax in 2016?

a. 80,000 decrease c. 80,000 increase b. 70,000 decrease d. 150,000 increase

Answer is c Solution:

Accrued liability on December 31, 2015 500,000 Cash settlement on December 31, 2016 (350,000) Carrying amount of copyright transferred ( 70,000)

Gain on settlement in 2016 80,000

5. During 2014, Steel Company became involved in a tax dispute with the BIR. On December 31, 2014, the tax advisor believed that an unfavourable outcome was probable and a reasonable estimate of additional taxes was P300,000. After the 2014 financial statements were issued, the entity received and accepted a BIR settlement offer of P400,000.

What amount of accrued liability should have been reported on December 31, 2014?

a. 300,000 c. 500,000

b. 400,000 d. 0

Answer is a Solution:

The reasonable estimate of P300,000 is recorded. The accepted BIR offer is not recorded because it was made after the statements are issued. In 2015, when the BIR settlement offer of P400,000 is accepted, an additional liability of P100,000 will be recognized.

6. Orlando Company decided on November 1, 2015 to restructure the entity’s operations as follows:

Factory A would be closed down and put on the market for sale.

Employees working in Factory A would be retrenched on November 30, 2015, and would be paid their accumulated entitlements plus six months’ wages.

Some employees working in Factory A would be transferred to Factory B, which would continue operating.

On December 31, 2015, the following transactions and events had occurred: The retrenched employees have left and their accumulated entitlements have been paid. However, an amount of P1,200,000, representing a portion of the six months’ wages for the retrenched employees, has still not been paid.

Costs of P300,000 are expected to be incurred in transferring the remaining employees to their new work in Factory B. The transfer is planned for January 15, 2016.

One employee, Juan Cruz, remains in order to complete administrative tasks relating to the closure of Factory A and the transfer of employees to Factory B. Juan Cruz is expected to stay until January 31, 2016. His salary for January will be P50,000 and his retrenchment package will be P180,000, all of which will be paid on the day he leaves.

Juan Cruz, would spend 70% of his time administering the closure of Factory A, 20% on administering the transfer of employees to Factory B, and the remaining 10% on general administration.

What total amount should be recognized as restructuring provision on December 31, 2015?

a. 1,500,000 c. 1,425,000

b. 1,430,000 d. 1,415,000

Answer is d Solution:

Unpaid wages of retrenched employees 1,200,000

Salary for administering closure of

Factory A (70% x P50,000) 35,000

Total restructuring provision 1,415,000

7. Regal Company has several contingent liabilities on December 31, 2014. The auditor obtained the following brief description of each liability.

In May 2014, Regal Company became involved in litigation. In December 2014, the court assessed a judgment for P1,000,000 against Regal.

The entity is appealing the amount of the judgment. The entity’s attorneys believed it is probable that they can reduce the assessment on appeal by 50%. In July 2014, Pasig City brought action against Regal Company for polluting the Pasig River with its waste products.

It is probable that Pasig City will be successful but the amount of damages Regal might have to pay should not exceed P800,000.

What total amount should be accrued as provision on December 31, 2014?

a. 800,000 c. 1,300,000

b. 1,800,000 d. 1,000,000

Answer is c Solution:

Assessment on appeal (50% x 1,000,000) 500,000

Environmental Cost 800,000

Total provision 1,300,000

8. On November 1, 2014, Tower Company was awarded a judgment of P1,200,000 in connection with a lawsuit. The decision is being appealed by the defendant and it is expected that the appeal process will be completed by the end of 2015. The attorney believed that it is highly probable that an award will be upheld on appeal but that the judgment may be reduce by 25%.

What amount should be reported as a receivable on December 31, 2014?

a. 300,000 c. 900,000

b. 1,200,000 d. 0

Answer is d Solution:

The contingent asset is only disclosed when probable and measurable. The asset and related gain are recognized only when realized.

9. During 2015, South Company filed suit against North Company seeking damages for patent infringement. On December 31, 2015, South’s legal counsel believed that it was probable that South would be successful against North for an estimated amount of P2,000,000. In March 2016, South was awarded P1,300,000 and received full payment thereof.

In South’s 2015 financial statements issued February 2016, how should this award be reported?

a. As a receivable and deferred revenue of P1,300,000 b. As a receivable and revenue of P1,300,000

c. As a disclosure of a contingent asset of P2,000,000 d. As a disclosure of a contingent asset of P1,300,000

Answer is c Solution:

The contingent asset is disclosed only. Since the case is settle in March 2016 after the issuance of the 2015 financial statements in February 2016, the estimated amount of P2,000,000 shall be disclosed.

10.During 2015, Iriga Company is the defendant a breach of patent lawsuit. The lawyers believe there is an 70% chance that the court will not dismiss the case and the entity will incur outflow of benefits.

If the court rules in favour of the claimant, the lawyers believe that there is a 60% chance that the entity will be required to pay damages of P1,000,000 and a 40% chance that the entity will be required to pay damages of P500,000. Other amounts of damages are unlikely.

The court is expected to rule in late December 2016. There is no indication that the claimant will settle out of court.

A 8% risk adjustment factor to the cash flows is considered appropriate to reflect the uncertainties in the cash flow estimates.

An appropriate discount rate is 12% per year.

What is the measurement of the provision on December 31, 2015?

a. 865,080 c. 801,000

b. 605,556 d. 560,700

Answer is b Solution:

Weighted probabilities:

60% x 1,000,000 x 70% 420,000

60% x 500,000 x 70% 210,000

Expected cash flows 630,000

Multiply by risk adjustment factor (100% + 8%) 1.08

Adjusted cash flows 680,400

Multiply by PV of 1 at 12% for one period .89

Present value of cash flows 605,556

11.On January 1, 2014, Ranger Company owned a machine with cost of P2,500,000. The accumulated depreciation was P1,500,000 estimated residual value was P150,000 and fair value was P3,500,000. On January 3, 2014, this

machine was irreparably damaged by Dean Company and became worthless. In October 2014, a court awarded damages of P3,500,000 against Dean in favour of Ranger. On December 31, 2014, the final outcome of this case was awaiting appeal and was therefore uncertain. However, in the opinion of Ranger’s attorney, Dean’s appeal would be denied.

On December 31, 2014, what amount of gain should be accrued?

a. 150,000 c. 250,000

b. 350,000 d. 0

Answer is d Solution:

The contingent asset and related contingent gain are only disclosed because the case is still under appeal by the defendant.

BONDS PAYABLE and EFFECTIVE INTEREST METHOD

1. Diosa Company issued 5,000, 10-year 10% P1000 bonds on January 1, 2016 at 103 to yield 9%. Interest is payable every June 30 and December 31. On June 30, 2016, how much is the amortized premium?

a) 150,000 c) 18,250

b) 36,500 d) 65,000

Answer is c Solution:

Interest Paid (5,000,000 x 10% x 6/12) P250,000 Interest Expense (5,150,000 x 9% x 6/12) (231,750)

2. On May 1, 2016, Mabuhay Company issued 1,000, P2000 face value 6% bonds dated January 1, 2016 with interest payments June 30 and December 31. The entity received cash of P2,150,000 plus accrued interest. What is the discount or premium from the issuance of bonds?

a) 110,000 premium b) 150,000 discount c) 110,000 discount d) 150,000 premium

Answer is a Solution:

Cash Received P2,150,000

Accrued Interest (2,000,000 x 6% x 4/12) ( 40,000)

Carrying amount of Bonds P2,110,000

Face Value of Bonds (2,000,000)

Premium on Bonds P 110,000

3. On June 1, 2015, Love Ko To Company issued three thousands, P2000 face value 10% five-year bonds for P5,568,000. The bonds were issued to yield 12% interest. Interest is payable semi-annually on December 1 and June 1. Using the effective interest method, what should be the bond interest expense on June 1, 2016?

a) 334,080 c) 336,125

b) 560,208 d) 280,104

Answer is a Solution:

First Interest Payment

(June 1,2015 to December 1, 2015)

Interest paid (6,000,000 x 10% x 6/12) (300,000)

Discount amortization P 34,080

Carrying amount as June 1, 2015 5,568,000

Carrying amount as of December 1, 2015 P5,602,080

Second Interest Payment

(December 1, 2015 to June 1, 2016)

Interest expense (5,602,080 x12% x6/12) P336,125 Interest expense related to second interest payment

yet already recognized on December 2015

(336,125 x 1/6) ( 56,021)

Interest expense on June 1, 2016 P280,104

4. Umasa Company issued on January 1, 2015 a one thousand, P5000 face value 8% five-year bonds at 105 and paid bond issue costs of 60,000 to yield 7%. Interest is payable annually every December 31. What is the carrying amount of the bonds on December 31, 2015?

a) 5,190,000 c) 5,226,700

b) 5,153,300 d) 5,226,700

Answer is b Solution:

Bonds payable at issue price (5,000,000 x 105%) P5,250,000

Bond issue costs (60,000)

Carrying amount of bonds, January 1, 2015 P 5,190,000

Interest paid (5,000,000 x 8%) P400,000

Interest expense (5,190,000 x 7%) (363,300)

Premium Amortization P 36,700

Carrying amount P5,190,000

Premium amortization (36,700)

5. Face Value of bonds 4,000,000

Nominal rate 12%

Effective rate 14%

Date of issue January 1,2016

The bonds mature on every December 31 of each year at the rate of 1,000,000 for 4 years. The interest is payable annually on December 31.

The present value of 1 at 14% is as follows:

One period .8772

Two periods .7695

Three periods .6750

Four periods .5921

What is the present value of the bonds on January 1, 2016?

a) 3,844,928 c) 2,652,608

b) 3,299,528 d) 4,000,000

Answer is a Solution:

(a) (b) (axb)

Principal Interest Total PV Present

Date Payment Payment Payment Factor Value

12-31-16 1,000,000 480,000 1,480,000 0.8772

1,298,25 6 12-31-17 1,000,000 360,000 1,360,000 0.7695 1,046,520 12-31-18 1,000,000 240,000 1,240,000 0.6749 837,000 12-31-19 1,000,000 120,000 1,120,000 0.5921 663,152 3,844,92

8

6. On July 1, 2015, an entity issued bonds with face amount of 7,000,000 and 10% interest rate for 7,703,000. The bonds are sold to yield 8%. Interest is payable annually. The entity paid bond issue costs of 150,000. On December 31, 2015, the fair value of the bonds is determined to be 7,650,000. The entity elects the fair value option of measuring the bonds payable. What is the carrying amount of

the bonds payable on December 31,2015 and the gain or loss in the change of fair value, respectively.

a) 7,650,000 and 97,000 gain b) 7,650,000 and 97,000 loss c) 7,457,240 and 95,760 gain d) 7,457,240 and 95,760 loss

Answer is b Solution:

Carrying amount of bonds—January 1, 2015 P7,553,000 (7,703,000-150,000)

Carrying amount of bonds—December 31, 2015 ( 7,650,000 ) Increase in fair value of bonds payable—loss (P 97,000)

7. On December 31, 2015 the Niloko Company retired its P5,000,000 face value, 10% bonds. The entity paid a total cash of P5,500,000 including the accrued interest of P400,000. The entity incurred a loss of 150,000 in the retirement of the said bonds. What is the unamortized premium or discount of the retired bonds? a) 350,000 premium c) 100,000 discount

b) 250,000 premium d) 50,000 discount

Answer is d Solution:

Total cash paid P5,500,000

Accrued interest (400,000)

Retirement price P5,100,000

Loss on retirement (150,000)

Carrying amount of bonds P4,950,000

Face value of bonds P5,000,000 Carrying amount of bonds ( 4,950,000)

8. The entity retired its bond with a face value of P5,000,000 and an unamortized premium of 150,000. The bonds is retired at 105 and paid the accrued interest of 200,000. What is the gain or loss in the retirement of bonds?

a) 300,000 loss c) 100,000 loss

b) 300,000 gain d) 100,000 gain

Answer is c Solution:

Retirement price (5,000,000 x 105%) P5,250,000 Carrying amount of bonds (5,000,000+150,000) (5,150,000)

Loss on retirement of bonds P 100,000

.

9. On December 31, 2015 the Nanloko Company retired its P8,000,000 face value, 10% bonds. The entity paid a total cash of P8,500,000 including the accrued interest of P400,000. The entity incurred a gain of 150,000 in the retirement of the said bonds. What is the unamortized premium or discount of the retired bonds?

a) 250,000 discount c) 50,000 discount b) 250,000 premium d) 50,000 premium

Answer is b Solution:

Total cash paid P8,500,000

Accrued interest (400,000)

Retirement price P8,100,000

Gain on retirement 150,000

Carrying amount of bonds P8,250,000

Carrying amount of bonds P 8,250,000

Face value of bonds (P 8,000,000)

10. The Makakamove-on Company retired its bond with a carrying amount of

P4,850,000 at a price that would gain P200,000. The entity also paid the accrued of P200,000. How much is the total cash paid by the entity?

a) 4,850,000 c) 5,050,000

b) 5,250,000 d) 4,650,000

Answer is a Solution:

Carrying amount of bonds P4,850,000

Gain on retirement of bonds (200,000)

Retirement price P4,650,000

Accrued interest 200,000

Total cash paid P4,850,000

COMPOUND FINANCIAL INSTRUMENT

1. ABC Company issued 6,000 of 12%, 12-year, P1,000 face value bonds with detachable share warrants at 120. Each bond has a detachable warrant for ten ordinary shares of ABC Company at a specified option price of P20 per share. The par value of the ordinary share is P15. Immediately after the issuance, the market value of bonds ex warrants was P6,500,000 and the market value of the-warrants was P800,000.

Q1: What is the carrying amount of bonds payable at year end?

a. 6,000,000 c. 6,900,000

b. 6,500,000 d. 7,200,000

Q2: The issuance of the bonds payable with share warrants will show which of the following?

a. A credit to Cash 7,200,000

b. A credit to Bonds Payable 6,500,000

c. A debit to Discount on bonds payable 500,000 d. A credit to Share warrants outstanding 700,000 Answer is b,d

a. Issue price of bonds payable – equal to market value ex-warrants 6,500,000

b. Cash 7,200,000

Bonds Payable 6,000,000

Premiums on bonds payable 500,000

Share warrants outstanding 700,000

2. On December 31, 2015, Divergent Company had outstanding 10%, P2,000,000 face amount convertible bonds payable maturing on December 31, 2020. Interst is payable on June 30 an December 31. Each P1,000 bond is convertible into 50 shares of P15 par value. On December 31, 2015, the unamortized premium on bonds payable was P70,000. On December 31, 2015, 400 bonds were converted when Divergent’s share had a market price of P25. The entity incurred P6,000 in connection with the conversion. No equity component was recognized when the bonds were originally issued.

Q1: What is the share premium from the issuance of shares as a result of the bond conversion on December 21,2015?

a. 108,000 c. 120,000

b. 114,000 d. 130,000

Q2: The carrying amount of converted bonds payable is equal to ______.

a. 300,000 c. 1,035,000

b. 414,000 d. 2,070,000

Answer is a,b Solution:

Bonds Payable 2,000,000

Premium on bonds payable 70,000

Carrying amount 2,070,000

Carrying amount converted (400/2,000 x 2,070,000 414,000 Par value of shares issued (400 x 50 x P15) (300,000)

Share premium 114,000

Conversion Expenses (6,000)

Net share premium 108,000

3. Lychee Corporation issued P7,000,000 face value, 5-year bonds at 110 on December 31, 2015. Each P1,000 bond was issued with 25 detachable share warrants, each of which entitled the bondholder to purchase one ordinary share of P5 par value at P15. Immediately after issuance, the market value of each warrant is P7. The stated interest on the bonds is 9% payable annually every December 31. However, the prevailing market rate of interest for similar bonds without warrant is 11%.

Q1: On December 31, 2015, what amount should be recorded as discount or premium on bonds payable?

a. 359,000 c. 539,000

b. 395,000 d. 593,000

Q2: The amount allocated to equity is ____________.

a. 1,239,000 c. 3,129,000

b. 1,329,000 d. 3,192,000

Answer is c,a Solution:

PV of principal (7,000,000 x 0.59) 4,130,000

PV of interest payments (630,000 x 3.70) 2,331,000 TOTAL PRESENT VALUE OF BONDS PAYABLE 6,461,000

Bonds payable 7,000,000

PV of bonds payable 6,461,000

Discount on bonds payable 539,000

Issue price of bonds with warrants (7,000,000 x 110%) 7,700,000

PV of bonds payable (6,461,000)

Residual amount allocated to warrants 1,239,000 4. Anneth Company issued 8,000 convertible bonds at the beginning of the current

year. The bonds had a five-year term with a nominal rate of interest of 5%, and were issued at par with a face value of P1,000 per bond. Interest is payable annually on December 31. Each bond is convertible into 40 ordinary shares with a par value of P10. The market rate of interest on similar nonconvertible bond is 9%. At the issuance date, the amount of P325,000 was credited to share

premium from conversion privilege. The bonds were not converted and instead, the entity paid off the convertible bondholders as maturity.

Q1: What amount should be recorded as gain or loss on the full payment of the convertible bonds at maturity?

a. 8,000,000 loss c. 325,000 gain

b. 325,000 loss d. 0

Q2: Which of the following is false in recording the issuance of the convertible bonds?

a. A credit to Cash 8,000,000

b. A credit to Bonds Payable 7,675,000

c. A debit to Discount on bonds payable 325,000 d. A credit to Share warrants outstanding 325,000 Answer is d,c

Solution:

There is no gain or loss since the bonds were not converted and instead, the entity paid off the convertible bondholders as maturity.

Cash 8,000,000

Discount on bonds payable 325,000

Bonds payable 8,000,000

Share Premium - conversion privilege 325,000 9-10)

Fajardo Company had outstanding share capital with par value of P100,000,000 and a 9% convertible bond payable in the face amount of P20,000,000. Interest payment dates of the bond issue are June 30 and December 31. The conversion clause in the bond indenture entitled the bondholders to receive 20 shares of P20 par value in exchange for each P1,000 bond. On June 30, 2015, the holders of P5,000,000 face value bonds exercised the conversion privilege. The market price of the bonds on that date was P1,100 per bond and the market price of the share was P30. The total unamortized bond discount at the date of conversion was P900,000. The share premium from conversion privilege has a balance of P3,000,000 on June 30, 2015.

Q1: What amount of share premium should be recognized by reason of the conversion of bonds payable into share capital?

a. 3,525,000 c. 1,750,000

Q2: The total consideration is equal to ____________.

a. 3,525,000 c. 1,750,000

b. 2,775,000 d. 1,525,000

Answer is d,a Solution:

Bonds Payable 20,000,000

Discount on bonds payable (900,000)

Carrying amount 11,100,000

Carrying amount converted (5/20 x 11,100,000) 2,775,000 Applicable share premium from conversion privilege

(5/20 x 3,000,000) 750,000

Total consideration 3,525,000

Par value of shares issued (5,000 x 20 x 20) (2,000,000) Carrying amount converted (5/20 x 11,100,000) 2,775,000 Applicable share premium from conversion privilege

(5/20 x 3,000,000) 750,000

Total consideration 3,525,000

NOTE PAYABLE

1. U-en-I Company had 1,500,000 note payable due on June 30,2016. Under the existing loan facility, the entity had the discretion to refinance or roll over the note payable for at least twelve months after the end of reporting period.

On December 31,2015, what amount of the note payable should be reported as noncurrent liability?

a. 1,500,000 c. 2,250,000

b. 1,800,000 d. 0

Answer is a Solution:

The entire amount is classified as non-current liability.

PAS 1, paragraph 73, provides that if an entity has the discretion to refinance or roll over an obligation for at least twelve months after the end of

reporting period, it shall classify the obligation as noncurrent, even if it would otherwise be due within a shorter period.

2. Fred Company reported the following liabilities on December 31,2015:

Accounts Payable 600,000

Short-term borrowings 300,000

Mortgage payable, current portion P100,000 2,000,000

Note payable, due June 30, 2016 900,000

The P900,000 note payable was refinanced with a 5-year loan on January 15, 2016 with the first principal payment due January 15, 2017. The financial statements were issued February 28, 2016.

What amount should be reported as current liabilities on December 31, 2015?

a) 900,000 c. 1,000,000

b) 1,900,000 d. 700,000

Answer is b Solution:

Accounts Payable 600,000

Short-term borrowings 300,000

Mortgage payable- current portion 100,000

Note payable 900,000

Total current liabilities 1,900,000 3. On January 1, 2015, Anne Company sold land to Guring Company. There was no

establish market price for the land. Guring gave Anne a P3,000,000 noninterest bearing note payable in three equal annual installments of P1,000,000 with the first payment due December 31, 2015.

The note has no ready market. The prevailing rate of interest for a note of this type is 12%. The present value of a P3,000,000 note payable in three equal annual installments of P1,000,000 at 12% rate of interest is P2,401,830. What is the carrying amount of the note payable on December 31, 2015?

a) 2,401,830 c. 1,690,050

b) 1,401,830 d. 3,000,000

Solution:

Note Payable 3,000,000

Present Value (2,401,830)

Discount on note payable - January 1, 2015 598,170 Amortization or interest expense (12% × 2,401,830) 288,220 Discount on note payable - December 31, 2015 309,950

Note payable - January 1, 2015 3,000,000

Annual payment on December 31, 2015 1,000,000

Note payable - December 31, 2015 2,000,000

Discount on note payable - December 31, 2015 309,950 Carrying amount - December 31, 2015 1,690,050 4. On March 1, 2015, Puring Company borrowed P500,000 and signed a 2-year

note bearing interest at 8% per annum compounded annually. Interest is payable in full at maturity on February 28, 2017.

What amount should be reported as accrued interest payable on December 31, 2016?

a) 33,333 c. 76,000

b) 40,000 d. 80,000

Answer is c Solution:

Accrued interest from March 1, 2015

to February 28, 2016 (500,000 × 8%) 40,000

Accrued interest from March 1 to

December 31, 2016 (500,000 + 40,000 × 8% × 10/12) 36,000 Accrued interest payable - December 31, 2016 76,000 5. On July 1, 2015, Arman Company obtained a P1,000,000, 180-day bank loan at

an annual rate of 10%. The loan agreement requires Arman to maintain a

P200,000 compensating balance in its checking account. Arman would otherwise maintain a balance of only P100,000 in this account. The checking account earns interest at an annual rate of 5%.

What is the effective interest rate on the borrowing?

a) 10% c. 11.33%

Answer is d Solution:

Interest expense (1,000,000 × 10% × 180/360) 50,000 Interest income on compensating balance

in excess of the normal checking account

balance (100,000 × 5% × 180/360) (2,500)

Net interest expense 47,500

Net proceeds of loan (1,000,000 - 100,000) 900,000 Effective amount (900,000 × 180/360) 450,000 Effective interest rate (47,500/450,000) 10.56% 6. On January 1, 2015, Jinky Company signed a P200,000 noninterest bearing note

at a discount rate of 11%. The entity elected the fair value option for reporting the note payable.

On December 31, 2015, the credit rating and risk factors indicated that the rate of interest applicable to its borrowings was 10%. The present value factors at 11% and 9% are as follows:

PV factor 11%, 3 periods .731 PV factor 10%, 3 periods .751 PV factor 11%, 2 periods .812 PV factor 10%, 2 periods .826 PV factor 11%, 1 period .901 PV factor 10%, 1 period .909 Q1: What is the initial carrying amount of the note payable on January 1, 2015?

a) 146,200 c. 162,400

b) 150,200 d. 165,200

Q2: What is the carrying amount of the note payable on December 31, 2015?

a) 165,200 c. 181,800

b) 162,400 d. 150,200

Answer is a,a Solution:

a. Fair value of note - January 1, 2015 (200,000 × .731) 146,200 b. Fair value of note - December 31, 2015 (200,000 × .826) 165,200

7. On July 1, 2015, Daniel Company borrowed P2,000,000 on a 11% five-year note payable. On December 31, 2015, the fair value of the note is determined to be

P1,950,000 based on market and interest factors. The entity has elected the fair value option for reporting the financial liability.

Q1: What amount should be reported as interest expense for 2015?

a) 220,000 c. 110,000

b) 214,500 d. 107,250

Q2: What is the carrying amount of the note payable on December 31, 2015?

a) 2,000,000 c. 1,000,000

b) 1,950,000 d. 1,780,000

Q3: What is the gain or loss to be recognized in 2015 as a result of the fair value option?

a) 150,000 gain c. 75,000 gain

b) 150,000 loss d. 0

Answer is c,b,a Solution

a. Interest expense for 2015 (2,000,000 × 11% × 6/12) 110,000

b. Carrying amount equal to fair value 1,950,000

c. Note Payable - July 1, 2015 2,000,000

Fair value - December 31, 2015 1,950,000

Decrease in fair value of note payable - gain 150,000 DEBT RESTRUCTURE

1. Balleta Company has the following three loans payable scheduled to be repaid in February next year. The Balleta’s accounting year ends on December 31. The company intends to repay loan 1 for P100,000 when it comes due in February. In the following October, the company intends to get a new loan for P80,000 from the same bank. The company intends to refinance loan 2 for P150,000 when it is due in February. The refinancing agreement, for P180,000 will be signed in April

after the financial statements for this year have been authorized issue. The company intends to refinance loan 3 for P200,000 before it comes due in February. The actual refinancing, for 175,000 took place in January, before the financial statements for this year have been authorized for issue.

As of December 31 of the year, what are the total current and non-current liabilities to be reported?

a. P100,000;P25,000 c. P450,000;0

b. P250,000;P175,000 d. P125,000;P350,000 Answer is c

Solution:

Loan 1 P100,000

Loan 2 150,000

Loan 3 200,000

Total current liabilities P450,000 No non-current liabilities

Under PAS 1: Presentation of Financial Statements, an entity classifies its financial Liabilities as current when they are due to be settled within 12 months after the end of the reporting period, even if:

a. The original term was for a period longer than 12 months; and

b. An agreement to refinance, or to reschedule payments, on a long-term basis is completed after the end of the reporting period and before the financial statements are authorized for issued.

PAS 1 further provides that if the refinancing on a long-term basis occurs between the end of the reporting period and the date the financial

statements are authorized for issue, such events qualifies or disclosure as non-adjusting event in accordance with PAS 10.

2. Caramel Company has arranged with its bank to refinance its short-term loan when it becomes due in 3 months. The new loan will have a term of 5 years. The following items are based on the financial statements of Caramel:

Current Assets P750,000

Short-Term Loan Payable 600,000

Total Liabilities 3,000,000

Current Ratio 1.5

What are the total current, shareholders’ equity and non-current liabilities? a. P500,000; P2,000,000; P2,500,000

b. P2,500,000; P500,000; P2,000,000 c. P2,000,000; P2,500,000; P500,000 d. P500,000; P2,500,000; P2,000,000

Answer is b Solution:

a. Current Ratio = Current Assets

Current Liabilities

1.5 = P750,000

Current Liabilities Current Liabilities = P750,000

1.5

= P500,000

b. Debt-to-equity ratio = Total Liabilities_{Total Equity}

1.5 = P3,000,000

Total Equity

Total Equity = P3,000,000

1.5

= P2,000,000

c. Total Liabilities P3,000,000

Less: Current Liabilities 500,000

3. Al Rey Co. owes P1,998,000 to Lomi Corp. The debt is a 10-year, 11% note. Because Al Rey Co. is in financial trouble, Lomi Corp. agrees to accept land and cancel the entire debt. The land has a book value of P800,000 and fair market value of P1,200,000.

What entry should be made by Al Rey Co. for the restructure?

a. Gain on restructuring of debt 1,998,000

Land 800,000

Note Payable 1,198,000

b. Notes Payable 1,998,000

Land 800,000

Gain on restructuring of debt 1,198,000

c. Note Payable 800,000

Gain on restructuring of debt 1,198,000

Land 1,998,000

d. Notes Payable 1,198,000

Land 800,000

Gain on restructuring of debt 1,998,000 `

Answer is b Solution:

Notes Payable 1,998,000

Land 800,000

Gain on restructuring of debt 1,198,000 `

Total liability P1,998,000

Book value of land 800,000 Gain in debt restructuring P1,198,000

4. Canela Co. is having financial difficulty and therefore has asked Enriquez Bank to restructure its 3 million note outstanding. The present note has 3 years

remaining and pays a current rate of interest of 12%. The note was issued at its face value. Enriquez Bank agrees to accept land in exchange for extinguishing its claim on this note. The land has a book value of P2,000,000 and a fair value of P2,500,000. Enriquez Bank agrees to reduce the principal balance due to P2,000,000 and interest to 10%.

12% 10%

Present value of 1 for 3 periods 0.71178 0.75132 Present value of an ordinary annuity

Of 1 for 3 periods 2.40183 2.48685

Q1: What is the gain on debt restructuring?

a. P1,096,074 c. P480,366

b. P1,903,926 d. P1,423,560

Q2: Discount on note payable

c. P480,366 c. P96,074

d. P903,926 d. P48,532

Answer is a,c Solution:

Present value principal (P2,000,000 x 0.71178) P1,423,560 Present value of interest payments

(P2,000,000 x 10%= P200,000 x 2.40183) 480,366

Total P1,903,926

a. Note payable – old P3,000,000

Present value of restructured liability 1,903,926

Gain on debt restructuring P1,096,074

b. Face value of note payable – new P2,000,000 Present value of restructured liability 1,903,926

Discount on note payable P 96,074

5. At year-end, Yohannah Company showed the following data with respect to its matured obligation:

Note Payable 6,000,000 Accrued interest payable 750,000

The entity is threatened with a court suit it could not pay maturing debt. Accordingly, the entity entered into an agreement with the creditor for the issuance of share capital in full settlement of the note payable.

The agreement provided for the issue of 40,000 shares with par value of P100. The share is currently quoted at P120. The fair value of the note payable on the date of restructuring is P4,700,000

Q1: Under the “equity swap”, what amount should be recognized as gain from extinguishment of debt?

a. 450,000 c. 950,000

b. 1,000,000 d. 800,000

Q2: What is the share Premium?

a. 450,000 c. 950,000

b. 1,000,000 d. 800,000

Answer is a,d Solution:

Note Payable 6,000,000

Accrued Interest Payable 750,000 Total carrying amount of liability 5,250,000 Fair value of shares (40,000 x 120) 4,800,000 Gain on extinguishment of debt 450,000

Fair value of shares 4,800,000

Par Value of shares (40,000 x 100) 4,000,000

Share Premium 800,000

6. Due to extreme financial difficulties, Restine Co. had negotiated a restructuring of a 10% P5,000,000 note payable due on December 31, 2015. The unpaid interest on the note on such date is P500,000. The creditor had agreed to reduce the face value to P4,000,000 forgive the unpaid interest, reduce the interest rate to 8% and extend the due date three years from December 31, 2015.

The PV of 1 at 10% for 3 periods is 0.75 and the PV of an ordinary annuity of 1 at 10% for 3 periods is 2.49

a. 1,703,000 c. 2,000,000

b. 1,203,000 d. 540,000

Q2: What is the interest expense for 2016?

a. 320,000 c. 400,000

b. 379,680 d. 500,000

Answer is a,b Solution:

PV of principal (4,000,000 x .75) 3,000,000

PV annual interest payments (320,000 x 2.49) 796,800 Total present value of new liability 3,796,800

Note payable – old 5,000,000

Accrued interest payable 500,000

Total old liability 5,500,000

Present value of new liability 3,796,000

Gain on extinguishment 1,703,200

Interest expense for 2016 (10% x 3,796,800) 379,680

Interest paid (8% x 4,000,000) 320,000

Amortization of discount 59,680

7. Kengel Co. had bonds payable with face value of P5,000,000 and a carrying amount of P4,800,000. In addition, unpaid interest on the bonds was accrued in the amount of P250,000. The creditor had agreed to the settlement of the bonds payable in exchange for 50,000 shares of P50 par value. The shares have no reliable measure of fair value. However, the bonds are quoted at P3,500,000. Q1: What is the gain on the extinguishment of the bonds payable?

a. 1,500,000 c. 1,550,000

b. 1,300,000 d. 0

Q2: What is the share premium from the issuance of the shares?

a. 2,300,000 c. 1,000,000

b. 1,300,000 d. 0

Answer is c,c Solution:

Carrying amount of bonds payable 4,800,000

Accrued interest on bonds payable 250,000

Total 5,050,000

Fair value of bonds payable (3,500,000)

Gain on extinguishment of bonds payable 1,550,000

Fair value of bonds payable 3,500,000

Par Value of shares (50,000 x 50)-/ 2,500,000

Share premium 1,000,000

OPERATING LEASE

1. On December 1, 2015, Rain Company leased office space for five years at a monthly rental of P300,000. On the same date, the entity paid the lessor the following amounts:

Bonus to obtain Lease 150,000

First month’s rent 300,000

Last month’s rent 300,000

Security deposit refundable at

lease expiration 700,000

Installation of new walls and offices 2,400,000 What total amount of the expenses relating to utilization of the office space should be reported for 2015?

a.) 342,500 c.) 555,000

b.) 810,500 d.) 425,000

Answer is a Solution:

Amortization of Lease Bonus (150,000 / 5 x 1/12) 2,500

Rent for December 300,000

Depreciation of leasehold improvement

(2,400,000 / 5 x 1/12) 40,000

Total December 2015 Expenses 342,500

2. As an inducement to enter a lease, McDough Company, a lessor, granted SpaFry Company, a lessee, nine months of free rent under a six year operating lease. The lease was effective on July 1, 2015 and provided for monthly rental of P100,000 to begin April 1, 2016.

In the income statement for the year ended June 30, 2016, what amount should be reported as rent expense?

a.) 1,050,000 c.) 900,000

b.) 300,000 d.) 255,000

Answer is a Solution:

Total Rent Expense (100,000 x 63 remaining months) 6,300,000 Average annual rent expense, July 1, 2015 to

June 30, 2016 (6.300,000 / 6) 1,050,000

3. On July 1, 2015, Walton Company leased office premises for a three-year period at an annual rental of P360,000 payable on July 1 each year. The first rent payment was made July 1, 2015. Additionally on July 1, 2015, the entity paid P240,000 as a lease bonus to obtain a three-year lease instead of the lessor’s usual term of six years.

On December 31, 2015, what amount should be reported as prepaid rent?

a.) 240,000 c.) 220,000

Answer is d Solution:

Rent payment on July 1, 2015 (360,000 x 6/12) 180,000

Lease Bonus (240,000 x 30/36) 200,000

Prepaid Rent – December 31, 2015 380,000

4. On July 1, 2015, Gold Company leased a delivery truck from Marr Company under a 3-year operating lease. Total rent for the term of the lease will be P360,000, payable as follows:

12 months at 6,000 = P 72, 000 12 months at 6,500 = 78,000 12 months at 17,500 = 210,000

All payments were made when due. On June 30, 2017, what amount should be reported as accrued rent receivable?

a.) 90,000 c.) 210,000

b.) 120,000 d.) 0

Answer is a Solution:

Average annual rent revenue (360,000 / 3) 120,000 Rent revenue from July 1, 2015 to June 30, 2017

(120,000 x 2) 240,000

Less: Rentals received:

First 12 months 72,000

Second 12 months 78,000

Rent Receivable – June 30, 2017 90,000

5. B.I. Company leased a new machine to H.I. Company on January 1, 2015. The lease expires on January 1, 2020. The Annual rental is P900,000. Additionally, on January 1, 2015, H.I. Company paid P 500,000 to B.I. Company as a lease bonus and P250,000 as a security deposit to be refunded upon expiration of the lease.

What amount of rental revenue should be reported for 2015?

a.) 900,000 c.) 1,250,000

b.) 1,000,000 d.) 1,400,000

Answer is b Solution:

Annual Rental 900,000

Amortization of lease bonus (500,000 / 5) 100,000

Total Rental Revenue 1,000,000

6. Babe Company owns and manages apartment complex. On signing a lease, each tenant must pay the first and last month’s rent and a P50,000 refundable security deposit. The security deposits are rarely refunded in total, because cleaning costs of P15,000 per apartment are almost always deducted. About 30% of the time, the tenants are also charged for damages to the apartment which typically cost P10,000 to repair.

If one-year lease is signed on a P90,000 per month apartment, what amount should be reported as refundable security deposit?

a.) 35,000 c.) 32,000

b.) 50,000 d.) 140,000

Solution:

Refundable Security Deposit 50,000

7. Dutch Company leased equipment to Ender Company on July 1, 2015 for a one-year period expiring June 30, 2016 for P45,000 a month. On July 1, 2016, Dutch leased this piece of equipment to Foil Company for a three-year period expiring June 30, 2019 for P60,000 a month. The original cost of the equipment was P4,200,000. The equipment which has been continually on lease since July 1, 2011 is being depreciated on a straight line basis over an eight-year period with no residual value. Both the lease to Ender and the lease to Foil are appropriately recorded as operating lease.

What is the amount of net rental income that would be reported by Dutch Company for the year ended December 31, 2016?

a.) 350,000 c.) 110,000

b.) 610,000 d.) 105,000

Answer is d

Solution:

Rent income – Ender (45,000 x 6) 270,000

Rent income – Foil (60,000 x 6) 360,000

Total rent income for 2016 630,000

Depreciation (4,200,000 / 8) 525,000

Net rental income for 2016 105,000

8. Cain Company, lessor, leased an equipment under an operating lease. The lease term is 5 years and the lease payments are made in advance on January 1 of each year as shown in the following schedule:

January 1, 2015 1,200,000

January 1, 2016 1,150,000

January 1, 2017 1,500,000

January 1, 2019 1,900,000

On December 31, 2016, what amount should be recognized as rent receivable?

a.) 1,210,000 c.) 410,000

b.) 610,000 d.) 0

Answer is b

Solution:

Average annual rental (7,400,000 / 5) 1,480,000 Rent Income for 2015 and 2016 (1, 480,000 x 2) 2,960,000 Rent Received for 2015 and 2016 (1,200,000 + 1,150,000) 2,350,000 Rent Receivable – December 31, 2016 610,000

9. Jaguar Company leased office premises to Fox Company for a five-year term beginning January 1, 2015. Under the terms of the operating lease, rent for the first years is P900,000 and rent for years 2 through 5 is P1,300,000 per annum. However, as an inducement to enter the lease, Jaguar granted Fox the first six months of the lease rent-free.

What amount should Jaguar report as rental income for 2015?

a.) 1,300,000 c.) 900,000

b.) 1,130,000 d.) 450,000

Answer is b

Solution:

First Year (900,000 x 6/12) 450,000

Second Year 1,300,000

Third Year 1,300,000

Fifth Year 1,300,000

Total rental revenue 5,650,000

Average annual rental revenue (5,650,000 / 5) 1,130,000 10. As an incentive to enter a four-year operating lease for a warehouse, Silent Hill

Company received an upfront cash of P90,000 upon signing an agreement at the beginning of current year. The annual rental is P1,122,500.

What amount should be recognized as lease expense for the current year?

a.) 1,122,500 c.) 1,032,500

b.) 1,100,000 d.) 0 Answer is b

Solution:

Annual Rental 1,122,500

Amorization of upfront cash received (60,000 / 4) ( 22,500)

Lease expense for current year 1,100,000

FINANCE LEASE – LESSEE

1. Gandalf Company leased a machine from Harry Leasing Company. The lease qualifies as a finance lease and requires 10 annual payments of P200,000 beginning immediately. The lease specifies an interest rate of 11% and a purchase option of P200,000 at the end of the tenth year, even though the machine’s estimated value on that date is 300,000.

Present Value of an annuity due (in advance)

of 1 at 11% for 10 periods. 6.537

Present value of 1 at 11% for 10 periods. 0.352

What amount should be recorded as lease liability at the beginning of the lease term?

a.) 1,307,400 c.) 1,321,500

b.) 1,377,800 d.) 1,397,200

Answer is b Solution:

Present value of rentals (200,000 x 6.537) 1,307,400 Present value of bargain purchase option

(200,000 x .352) 70,400

Total lease liability – beginning of lease term 1,377,800

2. At the beginning of current year, Nick Company signed an eight-year

noncancelable lease for a new machine, requiring P150,000 annual payments at the beginning of each year. The machine has a useful life of 12 years with no residual value. Title passes to the lessee at the lease expiration date. Cole uses straight line depreciation for all of the plant assets. Aggregate lease payments have a present value of P1,080,000 based on an appropriate rate of interest. What amount should be recorded as depreciation expense of the leased machine for the current year?

a.) 150,000 c.) 90,000

b.) 135,000 d.) 0 Answer is c

Solution:

Depreciation for current year (1,080,000 / 12) 90,000

3. Ziggurat Company is a lessee under a finance lease. The asset is recorded at P5,300,000 and has an economic life of 8 years. The lease term is 5 years. The asset is expected to have a fair value of P1,300,000 at the end of 5 years and a fair value of P300,000 at the end of 8 years. The lease agreement provides for the transfer of title of the asset to the lesee at the end of the lease term.

lease?

a.) 925,000 c.) 625,000

b.) 800,000 d.) 500,000

Answer is c Solution:

Cost 5,300,000

Residual Value after 8 years ( 300,000)

Depreciable Amount 5,000,000

Annual Depreciation (5,000,000 / 8) 625,000

4. On January 1, 2015, Plow Company entered into a ten-year noncancelable lease requiring year-end payments of P1,000,000. Plow’s incremental borrowing rate is 12%, while the lessor’s implicit interest rate, known to Plow, is 10%. Present value factors for an ordinary annuity for ten periods are 6.145 at 10%, and 5.650 at 12%. On same date, Plow Company paid initial direct cost of P200,000 in negotiating and securing the leasing arrangement. Ownership of the property remains with the lessor at expiration of the lease. There is no bargain purchase option. The leased property has an estimated economic life of 12 years.

What amount should be capitalized initially as cost of the leased property?

a.) 5,850,000 c.) 6,145,000

b.) 5,650,000 d.) 6,345,000

Answer is d Solution:

Present value of rentals (1,000,000 x 6.145) 6,145,000

Initial Direct Cost 200,000

5. Loop Company leased a warehouse with adjoining land for a period of 15 years. The fair values of the leasehold interests in the land and the warehouse are P3,000,000 and P1,500,000 respectively. The land has an indefinite economic life whereas the warehouse has a useful life of 15 years. Title to the land is not expected to pass at the end of the lease.

At what amount should the asset in relation to finance lease be recognized in the financial statements of the lessee?

a.) 4,500,000 c.) 1,500,000

b.) 3,000,000 d.) 0

Answer is c Solution:

The warehouse lease is a finance lease and therefore the leasehold interest of P1,500,000 is recognized as an asset.

6. Asylum Company leased a machine with a fair value of P2,450,000 for a period of 5 years under a finance lease. The initial direct costs included in negotiating the lease amounted to P22,500. The present value of the minimum lease payments discounted at the rate implicit in the lease is P2,384,000.

At what amount should the machine be recognized initially in the financial statement?

a.) 2,450,000 c.)2,562,500

b.) 2,406,500 d.)2,384,000

Answer is b Solution:

Present value of minimum lease payments 2,384,000

Initial Direct Costs 22,500

7. Je-Barbie Company entered into a nine-year finance lease on a warehouse on December 31, 2015. Lease payment of P620,000 which includes real estate taxes and other executory cost of P20,000, are due annually, beginning on December 31, 2016 and every December 31 thereafter. The interest rate implicit in the lease is 9%. The rounded present value of an ordinary annuity of 1 for nine years at 9% is 5.6.

What amount should be reported as lease liability on December 31, 2015?

a.) 3,360,000 c.) 3,472,000

b.) 3,000,000 d.) 3,584,000

Answer is a Solution:

Lease Liability (600,000 x 5.6) 3,360,000

8. At the beginning of current year, Forever Company leased a van with a fair value of P 2,400,000 under a finance lease. The lease term is 6 years and the present value of the minimum lease payments is P 2,340,000. The useful life of the van was estimated at 8 years with no residual value. The entity used straight line depreciation.

What is the depreciation charge on the van for the current year?

a.) 400,000 c.) 300,000

b.) 390,000 d.) 292,500

Answer is b Solution:

Annual Depreciation (2,340,000 / 6 years) 390,000 9. Lava Company has leased an asset on a finance lease. The present value of the

minimum lease payments is P986,000 and the fair value of the asset is

4 years, after which the asset can be acquired for a near zero cost, which is substantially below the expected value of the asset at that date. The asset is depreciated on a straight line basis.

What is the amount of the annual depreciation expense?

a.) 197,200 c.) 246,500

b.) 200,000 d.) 250,000

Answer is a Solution:

Annual depreciation (986,000 / 5 years) 197,200 10.Tambak Company leased a land and building for 20 years, the useful life of the

building, with effect from January 1, 2015. At that date, the fair value of the leasehold interest was P10,000,000 and of which 8,000,000 are attributable to the building. Annual rentals of P900,000 are payable in advance on January 1. What amount should be recognized as an operating lease expense for 2015?

a.) 900,000 c.) 180,000

b.) 200,000 d.) 0

Answer is c Solution:

Leasehold interest 10,000,000

Attributable to building 8,000,000

Attributable to land 2,000,000

Operating lease expense

(2,000,000/10,000,000 x 900,000) 180,000

1. On December 31, 2015, Bentong Company, a lessor, sold a machinery that it had been leasing under a direct financing lease. On January 1, 2015 after receipt of the lease payment for the year, the following account balances were associated with the lease:

Gross lease receivable 5,540,000

Unearned interest income 1,000,000

Present value of lease receivable 4,540,000

The interest rate implicit in the lease is 10%. On December 31, 2015, Bentong Company sold the leased machinery to the lessee for P3,150,000 cash.

What is the loss on sale of machinery that should be recognized on December 31, 2015?

a.) 1,700,000 c.) 2,150,000

b.) 1,754,000 d.) 1,390,000

Answer is b Solution:

Interest income for 2015 (10% x 4,540,000) 454,000

Sale Price 3,150,000

Carrying amount of lease receivable

Lease receivable 5,450,000

Unearned interest income

(1,000,000 – 454,000) ( 546,000) 4,904,000

Loss on sale of machinery 1,754,000

2. DU30 Company entered into a finance lease on January 1, 2015. A third party guaranteed the residual value of the asset under the lease estimated to be P220,000 on January 1, 2020, the end of the lease term.

Annual lease payments are P200,000 dues each December 31, beginning December 31, 2015. The last payment is due December 31, 2019.

lease.

Both the lessor and lessee used 10% as the interest rate. The PV of 1 at 10% for 5 periods is .62, and the PV of an ordinary annuity of 1 at 10% for 5 periods is 3.79.

What is the lease receivable of the lessor and lease liability of the lessee at the commencement of the lease?

Lease Receivable Lease Liability

a.) 894,400 894,400

b.) 758,000 758,000

c.) 894,400 758,000

d.) 758,000 894,000

Answer is c Solution:

Lessor

Present value of rentals (200,000 x 3.79) 758,000 Guaranteed residual value (220,000 x .62) 136,400

Lease receivable 894,400

Lessee

Lease Liability (200,000 x 3;79) 758,000

3. Kaleidoscope Company had an asset costing P3,912,500. The asset is leased on January 1, 2015 to another entity. Five annual lease payments are due each January 1, beginning January 1, 2015. The lessee guaranteed P1,000,000 residual value of the asset as of the end of the lease term on December 31, 2019. The implicit interest rate is 8%. The PV of 1 at 8% for 5 periods is .68, and the PV of an annuity of 1 in advance at 8% for periods is 4.31.

What is the annual lease payment?

a.) 680,000 c.) 675,754

Answer is d Solution:

Cost of asset 3,912,500

PV of guaranteed residual value (1,000,000 x .68) ( 680,000) Net investment to be recovered from rentals 3,232,500 Divide by PV of an annuity of 1 in advance at 8%

for 5 periods 4.31

Annual lease payment 750,000

4. Peregrine Company decided to enter the leasing business. The entity acquired a specialized packaging machine for P4,600,000. On January 1, 2015, the entity leased the machine for a period of six years, after which title to the machine is transferred to the lessee.

The six annual lease payments are due each January 1 and the first payment was made on January 1, 2015. The residual value of the machine is P500,000. The lease terms are arranged so that a return of 12% is earned by Irene

Company. The present value of 1 at 12% for six periods is 0.51, and the present value of an annuity in advance of 1 at 12% for six periods is 4.60.

What is the annual lease rental payable in advance required to yield the desired return?

a.) 1,000,000 c.) 745,000

b.) 891,304 d.) 1,255,000

Answer is a Solution:

Cost of asset 4,600,000

12% for six periods 4.60

Annual Lease Payment 1,000,000

5. On January 1, 2015, Abram Company signed a ten-year noncancelable lease agreement to lease a storage building from Lot Company. The agreement required equal rental payments at the end of each year. The fair value of the building on January 1, 2015 is P3,871,350. However, the carrying amount to Lot Company is P3,568,000.

The building has an estimated economic life of 10 years with no residual value. At the termination of the lease, the title to the building will be transferred to Abram Company.

The incremental borrowing rate of Abram Company is 12% per year. Lot

Company set the annual rental to insure a 10% rate of return. The implicit rate of the lessor is known by the lessee.

The annual total lease payment included P20,000 of executor costs related to taxes on the property. Round off present value factor to three decimal places.

Q1: What is the minimum annual lease payment?

a.) 580,635 c.) 600,000

b.) 630,000 d.) 589,400

Q2: What is the total annual lease payment?

a.) 680,635 c.) 620,000

b.) 650,000 d.) 619,400

Answer is b,b Solution:

a. Fair Value 3,871,350

for ten periods 6.145

Minimum annual lease payment 630,000

b. Minimum annual lease payment 630,000

Executory costs: 20,000

Total annual lease payment 650,000

6. On January 1, 2015, B.I. Company, acting as a lessor, leased an equipment for ten years at an annual rental of P800,000, payable by H.I. Company, the lessee, at the beginning of each year under a direct financing lease. The equipment had a cost of P5,600,000 with an estimated life of 12 years and no residual value. The implicit rate is 9%.

What amount of interest income should be reported in 2015?

a.) 800,000 c.) 432,000

b.) 560,000 d.) 610,000

Answer is c Solution:

Present of rentals equal to the cost of asset 5,600,000 Advance payment on January 1, 2015 800,000

Lease Receivable – January 1, 2015 4,800,000

Interest income for 2015 (4,800,000 x 9%) 432,000

7. Cassandra Company acquired a specialized packaging machine for P5,000,000 cash and leased it for a period of six years, after which the machine is to be returned to Cassandra Company. The unguaranteed residual value of the machine is P450,000. The lease terms are arranged so that a return of 12% is earned by Cassandra. The PV of 1 at 12% for six periods is .51, and the PV of an annuity in advance of 1 at 12% for six periods is 4.60.

What is the annual lease payment payable in advance required to yield the desired return?

a.) 680,000 c.) 852,174

b.) 800,000 d.) 732,000

Answer is b Solution:

Cost of asset 3,909,500

PV of unguaranteed residual value (450,000 x .51) ( 229,500) Net investment to be recovered from rentals 3,680,000 Divide by PV of an annuity in advance of 1 at 12% 4.60

Annual rental payable in advance 800,000

8. Camia Company is in the business of leasing new sophisticated equipment. As lessor, the entity expects a 12% return. At the end of the lease term, the

equipment will revert to Camia Company.

On January 1, 2015 an equipment is leased to another entity under a direct financing lease.

Cost of equipment to Camia 5,500,000

Residual value – unguaranteed 400,000

Annual rental payable in advance 959,500

Useful life and lease term 8 years

Implicit interest rate 12%

First lease payment January 1, 2015

Q1: What is the unearned interest income on January 1, 2015?

a.) 1,616,500 c.) 1,776,000

b.) 2,176,000 d.) 2,576,000

Q2: What is the interest income for 2015?

a.) 322,000 c.) 660,000

Answer is b,b Solution:

a. Gross rentals (959,500 x 8) 7,676,000

Residual Value 400,000

Gross Investment 8,076,000

Net investment – equal to the

cost of the equipment 5,500,000

Unearned interest income – January 1, 2015 2,576,000 b. Present value of rentals equal

to the cost of the equipment 5,500,000 First Payment on January 1, 2015 959,500

Lease Receivable 4,540,500

Interest Income for 2015 (4,540,000 x 12%) 544,860

SALES TYPE LEASE – LESSOR

1. Dolce Amore Company leased equipment to Faye Company on January 1, 2016. The lease is for an eight-year period expiring December 31, 2023. The first of eight equal annual payments of P900,000 was made on January 1, 2016. The entity had purchased the equipment on December 29, 2015 for P4,800,000. The lease is appropriately accounted for as sales type lease. The present value on January 1, 2016 of all rent payments over the lease term discounted at a 10% interest rate was P5,280,000.

Q1: What is the gross profit on sale for 2016?

a.) 1,920,000 c.) 480,000

a. 300,000 c. 225,000

b. 100,000 d. 75,000

Answer is c Solution:

Total ordinary shares issued (200,000 + 100,000) 300,000 Treasury shares ( 75,000) Ordinary Shares Outstanding 225,000

SHARE BASED COMPENSATION

1. On January 1,2015, Lynx Company granted Chrome,the president,

compensatory share options to buy 15,000 ordinary shares of P10 par value. The options call for a price of P30 per share and are exercisable in 3years following on the grant date. Chrome exercised the options on December 31,2015. The market price of the share was P60 on January 1,2015, and P70 on December 31,2015. The fair value of the share option id P60 o the grant date.

What is the net increase in the shareholders equity as a result of the grant and exercise of the options?

a. 150,000 c. 450,000

b. 300,000 d. 600,000

Answer is c Solution:

Cash (15,000 x 30) 450,000

Share options outstanding 750,000

Ordinary share capital (15,000 x 10) 150,000 Share premium 1,050,000

2. On January 1,2015, Rain company granted 50 shar options each to 200 employees, conditional upon the employee's remaining in the entity's employ during thr vesting period. The share options vest at the end of a three-year period. On grant date, each share option has fair value of P30. The par value per share is P100 and the option price isP120.

On December 31,2016, 20 employees have left and it is expected that on the basis of a weighted average probability, a further 15 employees will leave before the end of the three-year period.

What is the compensation expense for 2016?

a. 100,000 c. 65,000

b. 247,500 d. 300,000

Answer is c Solution:

2015

Fair value of share options (200 x 50 x 30) 300,000 Compensation expense for 2015 (300,000/3) 100,000 2016

Number of employees 200

Employees who left in 2016 (20)

Employees expected to leav (15)

Employees entitled to share options 165 Fair value of share options (165 x 50 x30) 247,500 Cumulative compensation expense

for 2015 And 2016 (247,500/3 x 2) 165,000 Compensation expense recognized in 2015 (100,000) Compensation expense in 2016 65,000

3. On June 30, 2015, Dale Company granted compensatory share options for 30,000 P20 per value ordianry shares to certain key employees. The market price of the share on that date was P36 and the option price was P30. The Black-Scholes option pricing model measured the total compensation expense to be P5,400,00. The options are exercisable beginning January 1, 2018, provided the key employees are still in entity's employ at the time the options are exercised. The options expire on June 30,2019. On January 15, 2018, when the market price of the share was P42, all 30,000 options were exercised. What is the compensation expense for 2017?

a. 2,160,000 c. 5,400,000

b 2,700,000 d. 0

Answer is a Solution:

(5,400,000/2.5 years) = 2,160,000

4. Reid company granted 20,000 share options to each of its 8 directors on January 1,2015. The options vest on january 1,2019. The fair value of each

option on January 1,2015 isP60 and it is anticipated that all of the share options will vest on January1,2019.

What amount should be reported as increase in expense and equity for the year ended December 31,2015?

a. 2,400,000 c. 2,500,000

b. 9,600,000 d. 3,200,000

Answer is a Solution:

Fair value of share options (20,000 x 8 x 60) 9,600,000 Compensation expense for 2015 (9,600,000/4) 2,400,000

5. Hitler company issued fully paid shares to 200 employees on December 31, 2015. Normally, shares issued to employees vest over a two-year period but these shares have been given as a bonus to the employees because of their exceptional performance during the year. The shares have a market value of P500,000 on December 31, 2015 and an average fair value of P600,000 for the year. What amount should be expensed for this share-based payment

transaction?

a. 600,000 c. 300,000

b. 500,000 d. 250,000

Answer is b Solution:

FAIR VALUE of share options December 31,2015 500,000

6. Santa company granted 150 share appreciation rights to each of the 800 employees in January 2015. The entity estimated that 85% of the awards will vest on December 31,2017. The fair value of each share appreciation right on december 31,2015 is P15.

What is the accrued liability on december 31,2015?

a. 1,530,000 c. 150,000

b. 510,000 d. 10,200

Solution:

Total compensation (150 x 800 x 15 x 85%) 1,530,000 Accrued compensation (1,530,000/3) 510,000

7. On January 1,2015, drusty company granted Lox,the president, 25,000 share appreciatiob rights for past services. These rights are exercisable immediately and expire on January 1,201. On exercise, Lox is entitled to receive cash in excess of the market price on the exercise date over the market price on the grant date. Lox did not exercise any of the rights during 2015. The market price of drusty's share was P60 on January 1,2015 and P80 on December 31,2015.

As a result of the appreciation rights, what amount should be recognized as compensation expense for 2015?

a. 0 c. 250,000

b. 150,000 d. 500,000

Answer is d Solution

Market price dec - jan (80-60) P20 Compensation for 2015 (25,000 x 20) 500,000

8. Valix company has granted share options to employees with a fair value of 7,500,000. The options vest in four years. The Monte Carlo model was used to value the options.

On January 1,2015, which is the date of the grant, the estimated employees leaving the entity during the vesting period is 15% What is the compensation expense for 2015?

a. 1,593,750 c. 1,395.570

b. 1,953,750 d. 1,593,705

Answer is a Solution

(7,500,000 x 85% / 4) 1,593,750

9. On January 1,2015 Lexy Company granted share options to each of the 350 employees working in the sales department.

The share options vest at the end of a three year period provided that the employees remain in the entity's employ and provided the volume of sales will increase by more than 10% per year. The fair value of each share option on grant date is P50.

If the sales increase by more than 10%, each employee will receive 150 share options.

If the sales increased by more than 15% each employee will receive 300 share options.

On December 31,2015 the sales increased by more than 10% but not more than 15% and no employees left.

On December 31,2015 the sales increased by more than 15% and no employees have left.

What amount should be recognized as compensation expense for 2016?

a. 2,625,000 c. 5,250,000

b. 875,000 d. 3,500,000

Answer is a Solution

2015

Fair Value of share options (350 x 150 x 50) 2,625,000 Compensation expense 2015 (2,625,000/3) 875,000 2016

Fair value of share options (350 x 300 x 50) 5,250,000 Cumulative compensation expense (5,250,000/3 x2) 3,500,000 Compensation expensed recognized in 2015 (875,000) Compensation expense 2016 2,625,000

10.LOL company granted 18,000 share appreciation rights which entitled key employees to receive cash equal to the difference between P30 and the market price of the share on the date each right is exercised. The service period is 2015 to 2017 and the rights are exercisable in 2018. The market price of the share was P38 and P42 on December 31,2015 and 2016, respectively.

What amount should be reported as liability under the share appreciation rights on December 31,2016?

a.0 c. 72,000

b. 144,000 d. 216,000

Answer is b Solution

Fair value of share appreciation right (42-30) 12 Accrued compensation december 31,2016