Bonds Payable

ASMR Company had the following long-term debt:

Collateral trust bonds P1,500,500

Registered debentures 2,500,500
Sinking fund bonds, unsecured by a realty 1,800,500

1. What is the total amount of debenture bonds?

a. P2,500,500 c. P4,301,000
b. P4,001,000 d. P5,801,500

SOLUTION:

Registered debentures P2,500,500

Sinking fund bonds, unsecured by a realty 1,800,500
Total amount of debenture bonds P4,301,000

Sales and Leaseback

On January 1, 2021, Vortex Company sold their machinery at fair value for P5,000,000 which has
a remaining useful life of 10 years and immediately leased it back for 5 years.

The following information given by the company are as follows:

Carrying amount of the machinery P3,500,000

Annual rental payable at the end of each year 500,000
Implicit interest rate 9%

2. What present value factor should be used in this problem?

a. 3.89 c. 6.42
b. 0.71 d. 0.42

3. What is the initial lease liability?

a. P1,945,000 c. P3,210,000
b. P 355,000 d. P 210,000

4. What is the cost of right of use asset?

a. P2,247,000 c. P248,500
b. P1,361,500 d. P147,000

SOLUTION:

1 – (1.09)-5 = 3.89
.09

P500,000 x 3.89 = P1,945,000

1,945,00/5,000,000 x 3,500,000 = P1,361,500

Warranty Liability

In 2020, Fairy Inc. has given the following information:

Net sales P6,000,000

Warranty liability at the beginning of the year 100,000
Warranty payments made during the year 60,000
Annual warranty expense 10%

5. What is the warranty expense for 2020?

a. P610,000 c. P604,000
b. P616,000 d. P600,000

6. What is the warranty liability at the end of 2020?

a. P760,000 c. P700,000
b. P640,000 d. P560,000

SOLUTION:

P6,000,000 x 10% = P600,000

Warranty liability, January 1, 2020 P100,000

Warranty expense for 2020 600,000
Warranty payments (60,000)
Warranty liability, December 31, 2020 P640,000

Operating Lease – Lessor

Brownie Co. leased a building to Pinky Co. at the beginning of 2020. It is agreed by the two
entities that it will be under an operating lease for 8 years at P650,00 which is payable at the
beginning of each lease year.

Brownie Co. paid P160,000 finder fee to a real estate broker.

A total of P100,000 has been incurred for the year by Brownie Co. in insurance and property tax
expense.

The depreciation of the building is P200,000 per year.

7. What is the amortization of the finder fee?

a. P160,000 c. P100,000
b. P 20,000 d. 0

8. What is the net rent income for 2020?

a. P530,000 c. P330,000
b. P190,000 d. P350,000
 SOLUTION:

160,000/8 years = P20,000

Rent Income P650,000

Amortization of finder fee ( 20,000)
Depreciation (200,000)
Insurance and property tax (100,000)
Net rent income P330,000

Accounting for Income Tax

At the beginning of 2019, Madali Lang Yan Company started its operations. The said company
reported its net income at P10,000,000 before income tax in the profit or loss. However, there is
only P7,500,000 taxable income in the tax return.

It has been reported that the P2,500,000 difference in the income was a P1,500,000 permanent
difference and a P1,000,000 temporary difference.

The tax rate for the current year is 30%.

9. What is the current tax expense?

a. P2,250,000 c. P3,000,000
b. P2,500,000 d. 0

10. What is the total income tax expense to be reported in the profit or loss for the current year?
a. P1,800,000 c. P1,950,000
b. P2,550,000 d. P2,700,000

SOLUTION:

P7,500,000 x 30% = P2,250,000

Accounting income P10,000,000

Permanent difference (1,500,000)
Accounting income subject to tax P 8,500,000
Tax rate 30%
Total income tax expense P 2,550,500
Liabilities

11. The following information regarding liability account balances were presented by ST
Company on December 31, 2021:

Bonds Payable P8,000,000

Accounts Payable 1,000,000
Deferred tax liability 200,000
Dividends Payable 730,000
Income tax payable 990,000

What amount should be reported as current liabilities on December 31, 2021?

a. 2,720,000 c.1, 990,000
b. 3,720,000 d.1,730,000

SOLUTION:
Accounts Payable 1,000,000
Dividends Payable 730,000
Income tax payable 990,000
Total Current Liabilities P2,720,000

Share Based Compensation (Share Appreciation Right)

12. On January 1, 2021, Yes Company granted 150 share appreciation rights to each of the
1,000 employees. On December 31, 2023, the management estimated that 80% of the rewards
will vest. On December 31, 2021, the fair value of each share appreciation right is P10. What is
the fair value of the liability for the share appreciation rights on December 31, 2021?
a. 100,000 c. 400,000
b. 800,000 d. 450,000

SOLUTION:
Compensation expense for 2021 (150,000 X P10 X 80%=1,200,000/3) = P400,000

Premium Liability

Ngik Company sold 700,000 boxes of Ube Halaya under a new sales promotional program. Each
box of Ube Halaya contains one coupon that entitles the customer to a piece of Relyenong Bangus upon
remittance of P50.00. Each Relyenong Bangus costs P50.00 and P10.00 for its shipping. Ngik Company
estimated that 90% of the coupons will be redeemed even though only 400,000 coupons had been
processed.

13. What amount is the liability for unredeemed coupons?

a. 2,300,000 c. 2,100,000
b. 3,000,000 d. 2,120,000

14. How much is the premium expense for the year?

a. 5,000,000 c. 6,300,000
b. 4,950,000 d. 6,000,000
 SOLUTION:
Coupons to be redeemed (700,000 x 90%) 630,000
Less: Coupons redeemed 400,000
Coupons outstanding 230,000

Liability for unredeemed coupons (230,000 x P10) = P2,300,000

Premium expense: (630,000 x P10) = P6,300,000

Effective Interest Method

Ngik Company issued 8% bonds in the face amount of P7,000,000 on January 1, 2021. The
issued bond will mature on January 1, 2031. The bonds were issued for P6,695,000 to yield 10%.
Ngik Company used the interest method and the interest is payable annually on December 31.

15. How much is the carrying amount of the bonds payable on December 31, 2021?

a. 5,000,000 c. 6,300,000
b. 4,950,000 d. 6,804,500

SOLUTION:
Bonds payable 7,000,000
Discount on bonds payable (305,000–109,500) 195,500
Carrying amount on Dec. 31, 2021 P6,804,500

16. How much is the interest expense for 2021?

a. 109,500 c. 190,000
b. 190,500 d. 109,000

SOLUTION:
Interest expense (6,695,000 x 10%) 669,500
Interest paid (7,000,000 x 8%) 560,000
Amortization of discount for 2021 P109,500

Shareholder’s Equity

On the beginning of the year, 12,000 ordinary shares with P221 par value and 30,000 preference
shares with P120 par value were issued by Lip Balmer Company for a total consideration of P10,000,000.
At the date of issue, the ordinary share was selling for P290 and the preference share was selling for
P200.
17. What amount should be allocated to the ordinary shares?

a. 7,324,000 c. 6,239,886
b. 6,329,114 d. 7,670,114

18. What amount should be allocated to the preference shares?

a. 3,600,000 c. 4,670,886
b. 3,670,886 d. 4,600,000

SOLUTION:

Market Value Fraction Allocated Proceeds

Ordinary share (12,000 x P290) 3,480,000 3.48/9.48 3,670,886

Preference share (30,000 x P200) 6,000,000 6/9.48 6,329,114
9,480,000 10,000,000

19. What amount is the share premium from the issuance of preference share?

a. 2,324,000 c. 2,239,886
b. 2,329,114 d. 2,729,114

SOLUTION:
Proceeds from preference shares 6,329,114
Par value of preference shares (30,000 x P120) 3,600,000
Share premium of preference shares P2,729,114

20. What amount is the share premium from the issuance of ordinary share?

a. 1,324,000 c. 1,239,886
b. 1,329,114 d. 1,018,886

SOLUTION:

Proceeds from ordinary shares 3,670,886

Par value of ordinary shares (12,000 x P221) 2,652,000
Share premium of preference shares P1,018,886