PRACTICAL FINANCIAL ACCOUNTING VOLUME TWO CONRADO T, VALIX, BSC, LLB a Preside ified Public Accountant and Lawyer Review Director and CPA Reviewer CFA Review School ofthe Philippines CPAR Lifetime Member Integrated Bar of the Philippines CHRISTIAN ARIS M. VALIX, BSME, BSA Certified Public Accountant ‘Ateneo Management Engineering Graduate ‘San Beds Bachelor of Science in Accountancy ‘Assistant Review Director and CPA Reviewer ‘CPA Review School ofthe Philippines CPAR 2021 Revised EditionCopyright 2021 by Conrado T. Valix Christian Aris M. Valix Any copy of this book not bearing the signature of one of the authors ‘on this page is unauthorized and shall bbe considered as proceeding from an illegal source. ISBN: 978-621-416-103-4 PUBLISHED AND PRINTED BY: GIC ENTERPRISES & CO., INC. *National Book Development Board Registered 2017 C.M. Recto Avenue ‘Manila, Philippines PREFACE ‘This book is primarily intended asa Reviewerin Financial Accounting and Reporting in the Philippine CPA Licensure Examinations. tis prepared in conformity with the new CPA syllabus approved by the Board of Accountancy and based on current PAS, PFRS, IAS, IFRS and IFRIC. ‘A chapter on small and medium. jccordance with PFRS for SME; ‘The problemsare lifted from the following sources: ed entities is included in PHILCPA Philippine CPA Licensure Examinations given by the Board of Accountancy AICPA Uciform CPAExaminations given by the American Institute of Certified Public Accountants TAA fire Problems from various intermediate accounting IFRS Problems and illustations from Application Guidance of Intemational Financial Reporting Standards ACP Author constructed problems to exemplify Philippine GAAP,IAS, IPRS and IFRIC More often, the particular Philippine Accounting Standard, Philippine Financial Reporting Standard, IAS, rtemationai Financial Reporting Standard and IFRIC are cited to authoritatively support the solution to aproblem. Tais CPA Examination textbook reviewer will definitely help the reviewees in large measure in preparing forthe Philippine CPA Licensure Examinations in Financial Accounting and Reporting, CONRADOT. VALIX CHRISTIAN ARIS M. VALIX June 2021CONTENTS CHAPTER 1 PREMIUM LIABILITY WARRANTY LIABILITY DEFERRED REVENUE ACCRUED LIABILITIES Bonus computation 5 PROVISIONAND CONTINGENT LIABILITY 6 NOTE PAYABLE Refinancing and fair value option 7 DEBT RESTRUCTURE 8 BONDS PAYABLE Fir value option 9. EFFECTIVE INTEREST METHOD Market price of bonds 10 COMPOUND FINANCIAL INSTRUMENT. 1 LESSEE ACCOUNTING 12. LEASELIABILITY 13, REMEASUREMENT OF LEASE LIABILITY, 14 OPERATING LEASE-LESSOR 15. SALES TYPELEASE~LESSOR 16 DIRECT FINANCING LEASE -LESSOR 17 18 19 SALE AND LEASEBACK 235 OSTE: : STEMPLOYMENT Benrerrs 256 ROIE : ae vate PEAT OBLIGATION 281 PPAIDIACCRUED BANE cost OTHER EMPLOYEE BENEETTS _ 290 ACCOUNTING For Ni Basio robles FOR INCOME TAX 299 Bil 335 SHAREHOLDERS’ EoUrTy 3 49 SHAREHOLDERS’ FQuTt Treasury sha, outstanding hares shespit 368 RETAINED EARNINGS 388 APPROPRIATION AND QUASI-REORGANIZATION 410 SHARE-BASEDCOMPENSA Sane eas PENSATION 422 SHARE-BASED COMPENSTAION 447 Share appreciation rights BOOK AND PREFERENCE DIVIDENDS 474 BASIC EARNINGS PER SHARE 495 Simp PER SHARE 507 DILUTED EARNINGS PER SHARE 519 Convertible preference shares Convenibie bonds pasate34 35 36 37 39 41 43 45 46 47 48 49 50 DILUTED EARNINGS PER SHARE Share options DILUTED EARNINGS PER SHARE, ‘Multiple potential ordinary shares SINGLE ENTRY Basic problems SINGLE ENTRY Comprehensive problems CASH BASIS ACCRUAL BASIS Basie problems ACCRUAL BASIS: Comprehensive problems ERROR CORRECTION Basie problems ERROR CORRECTION Comprehensive problems CASH FLOW-OPERATING CASH FLOW - INVESTING [AND FINANCING (CASH FLOW -COMPREHENSIVE (CASH FLOW -COMPLEX PROBLEMS HYPERINFLATION CURRENT COST ACCOUNTING SMEs - FINANCIAL STATEMENTS SMEs-RECOGNITION AND MEASUREMENT 536 546 559 567 S77 588 ul 625 634 644 659 674 684 72 728 741 763 CHAPTER | PREMIUM LIABILITY Problem 1-1 (AICPA Adaptea) In an effort to ix promotional campai® 1s, Mill Company inaugurated a sales Fedeemable fora Premium ge 2 he entity placed a coupon Back premlics conse Package of cereal sold, customer to receives prema repens nut be presented by 8 of the coupons issued would be redeenie stated that gnly 60% redeem isavailable: Packages of cereal sold Premium purchased Coupons redeemed 1, What amount should current year? a. 640,000 b. 384:000 ce. 240,000 4. 160,000 be reported as fre [obey a , & 160,000 5b, 224°000 . 2) ¢. 288,000 Qy ety d. 384,000 Solution 1-1 Question I Answer b Question 2 Answer b Coupons to be redeemed (160,000 x 60% Coupons redeemed . son) 6.000) Coupons outstanding 56,000 Premium expense (96,000 / 5 = 19,200 x 20) Estimated liability (56,000 /5=11,200x20) 384,000 224,000 1 Ax $$$Problem 1-2 (AICPA Adapted) During the current year, Day Company sold $00,000 boxes of cake six under a new sales promotional program. Each box contained one coupon, which entitled the customer toa baking pen upon remittance of P40. 1 The entity paid P50 per pan and PS for handling and shipping and estimated that 80% of the coupons would be redeemed, even though only 300,000 coupons had been processed during the year. 1. What amount should be reported as premium expense for the current year? a, 6,000,000 dU oS b. 7,500,000 re c. 4,500,000 + 4. 2,000,000 2. What amount should be reported ‘coupons at year-end? 1,000,000 1,500,000 3,000,000 5,000,000 peoe Solution 1-2 Question I Answer a ‘Net premium expense (50 +5 ~ 40) Coupons to be redeemed (80% x 500,000) Coupons redeemed Coupons outstanding Premium expense .(400,000 x 15) Question 2 Answer b Liability for unredeemed coupons (100,000 x 15) 2 Gi 1,500,000 Problem 1-3(AICPA agg In packages of the dug that may be presenfeg tS, Curran Company i Curran prodicts, "#2 sores o oars a coupons Ped) Retailers were rein . burs oy plus 10% of that amount forte amount ofcoupons redeemed ‘The entity honored reqy IB costs, to three months afterthese cou ‘The entity estimated beredeemed. These ‘pon redemption ilers up Ssntmer extn fae ee 0% reef ey The total face amount of 0 Teunt of coupons paymens to etal cing cure yeaar oo nae 0. 1, Whatamount shouldbe rested ae year? “ pons j ti 2, 600,000 b. 180,000 ©. 462,000 d. 198,000 a. 308,000 b. 200,000 $ ec. 242,000 a 0 Solution 1-3 Question 1 Answer e Question 2 Answer e Total coupons to be redeemed (600,000 x 70% x 110%) Total payments to retailers Liability for unredeemed coupons — Desember 31 3 462,000 (220,000) 242,000Problem 1-4 (AICPA Adapted) Blake Company mailed coupons to consumers which may be present atastated expiration date at retail food stores to obtain discounteon certain Blake products. Retailers were reimbursed for the face value of coupons redeemed plus 10% of coupon face value as compensation for handling costs, ‘The entity honored requests for coupon redemption by retailers received upto three months after the expiration date. Based on past experience, (60% of the coupons issued ultimately are redeemed. ‘The entity provided the following information with respect to the two separate series of coupons issued during the current year: op Series a Series B Consumer expiration date June30 > December 31 Total face value of coupons issued 1,990,000 2,000,000 ‘Total payments to retailers on December 31 + 605,000 405,000 What amount should be reported as liability. ‘for unredeemed coupons on December 31? : chr 970,000 915,000 795,000 0 pose Solution 1-4 Answer b ‘Total face value of coupons ~ Series B 2,000,000 Multiply by 60% Coupons to be redeemed 1,200,000 Compensation for handling costs (10% x 1,200,000) 120,000 “Total liability for coupons 1,320,000 Payments to retailers ~ Series B (405,000) 913,000 Estimated liability - December 31 ‘The Series A coupons already expired on June 30 and therefore there isno more estimated liability, ees Problem 1-5; (AICPA Adapteay Case Cereal Com, n products. On October ‘isteibutea Coupons to promote new AS off each box of crea nett mailed 100,000 coupons for The entity expected 19,999 12.000 ofthe ; the December 31 expire Suto berediemed before Ittakes 30 days from the. redempy the coupons from the reales ste forthe entity to receive anadditional PS for each coupon ae Teimbursed the retailers Tedeemed., tose couponsane sci wes 0500 q ad 5,000 coup 250,000 related to processed for payment, ns on hand that had not been December 31? feo © Teported as liability for ‘coupons on a. 350,000 7 Gone . 290,000 ok 250,000 >CoIe |. 225,000 Solution 1-5 Answer a Coupons expected to be redeemed Multiply by payment for each coupon (45 +5) oe {otal liability for coupons Payments on December 31 ean Liability for coupons ~ December 31 350,000 ‘he coupon liability on December 31 is not reduced by the 5,000 coupons on hand because the coupons had not been processed for- payment.Problem 1-6 (AICPA Adapted) Baker Company sold consumer products that are packaged i ‘The entity offered an unbreakable glass in exchange Gente ores. and P90 asa promotion during thecurent year. The costof the las was P200. t . SD ‘The entity estimated atthe end the year that it would be probabl 50% of the box tops will be redeemed. ae ‘The entity sold 100,000 boxes of the product during the current year and 40,000 box tops were redeemed during the year, 1. Whatamount should be reported.as premium expense forthe curent year? lov kk x StU Se-RID S 97d 00d A a. 3,750,000 jl hey 'b. 3,000,000 [LKISd > Foe . 5,000,000 a d 4,000,000 © 2. Whatamount should be reported as estimated premium liability at year-end? ——— Solution 1-6 Question 1 Answer a 200 Cost of glass Remittance from customer GH ‘Net premium cost 4150 Box tops to be redeemed (50% x 100,000) 50,000 Box. tops redeemed 40,000 Outstanding Premium expense (50,000/2= 25,000 x 150) Question 2 Answer ¢ Estimated liability at year-end (10,000/2=5,000x 150) 750,000 6 Problem 1-7 (AICPA Adaniey ‘Topsy Company start : oa) fox tops retumed, acne emo proprm. Foreved10) ‘The entity estimated th . _ would be redeemed, ony 60% ofthe box ops reaching the market sales of product Units Amount Basketballs purchased 100,000 30,000,000 Basketbells distributed 3500 4,125,000 = 4,000 1, Whatamount should be reported : a. 4,500,000 Nk y ga peer menpense forthe year? )_b. 1,500,000 - 4,125,000 a = 4.5m d.” 7,500,000 ae 2, What amount should be onased las) ecco vhs promlionar seed Ste ability associated a, 4,125,000 ; 7 , b. 1,500,000 AERTS < | De. 3,000,000 d. 4,500,000 Solution 1-7 Question 1 Answer a ~ Basketballs to be distributed (100,000 x 60% / 10) Basketballs distributed pou Balance 2,000 Cost of basketball (4,125,000/5,500) 150 Premium expense (6,000 x 750) Question 2 Answer b Estimated liability (2,000 x 750) 1,500,000Problem 1-8 (IAA) Charlene Company includes one coupon ineach box of lamer soapix sells. A towel is offered as a premium to customers whe coupons and aremittance of PLO. Opp Distribution cost of premium s PS, Expetience indicates that only 30% of the coupons will be redeemed. send, 10, 2021 2022 Boxes of soap sold 2,000,000 2,500,000 ‘Number of towels purchased at PSO each 50,000 80,000 Coupons redeemed 400,000 700,000, Do 1, What amount should be reported as premium expense for 2021? . 2,500,000 iy x20 / fo x15 = 23m b. 2,400,000 c. 1,800,000 d. 2,700,000 2. What amount should be reported as estimated premium liability on December 31, 2021? aa = a. 1,000,000 1,100,000 be Sle = Foye c. 800,000 Disk y, eh fo 4. 900,000 3. What amount should be reported asfpremium expense for 2022?) a. 3,000,000 2.0% fir AE 9,398,008 Cb. 3,750,000 C c. 3,375,000 a. 4,000,000 4, Whatamount should be reported as estimated premium liability on December 31,2022?» a dk a. 1,000,000 Teve (25m 470 b. 1,250,000 | Y ©. 15125,000 ) da 1,375,000 Solution 1-8 Question 1 Answer q Cost of towel Remittance from custome, Distribution cost Net premium cost Coupons to be redeemed Coupons redeemed in pp, 2°22 (2,000,000 x 30%) 600,000 Coupons outstanding ~ December 3, 2501 ae Premium expense for2021 (690.099 19x48) 700,000 Question 2 Answer d, Estimated Viability 127812921 (200,00 /19x45) 900,000 Question 3 Answer ¢ ‘Coupons to be redeemed in 2022 2,500,000 x 30%) Premium expense for 2022 (750,000/ 10 x 45) Question 4 Answer ¢ ~ Coupons outstanding ~ December 31, 2021 200,000 Coupons to be redeemed in 2022 (2'500,000x30%) 750,000 Total coupons to be redeemed 950,000 Coupons redeemed in 2022 (700,000) Coupons outstanding - December 31, 2022 0 Estimated liability — 12/31/2022 (250,000/ 10x45) 1,125,000 |te >, @ 2,400,000 Problem 1-9 (IAA) Love Company included one coupon in each package sold. A pren is offered to customers who send in 10 coupons, Premium 2021 2022 Number of packages sold 00,000 800,000 Number of premiums purchased at P40 each 30,000 60-000 Number of premiums distributed 20,000 50,000 ‘Number of premiums to be distributed next period 5,000. 3,000- 1. What amount should be reported as premium expense fo? 2021? a. 1,000,000 ook xD b. 1,200,000 c. 600,000 d. 500,000 2. Whatamount shouldbe reported as stimated premium abiltyon December 31, 2021? a, 400,000 b. 200,000 ©. 600,000 4. 300,000 209) fo 3. What amount should be reported as premium expense in2022_ cay conn = ave x42 b. 2,000,000 ©. 2,120,000 = [70,909 d. 1,920,000 4, What amount should be reported as estimated premum liability on December 31, 2022? = nti a. 320,000 3h b: 400,000 © 120,000 4. 520,000 10 Solution 1-9 Question I Answer q ‘Number of premiums Number of premiums te touted in 2021 obe distri ‘Total premiums in 2024 Sense Premium exens for 2021 (5.099 49y Question 2 Answer Es mated liability 127842001 (5 999 x x40) Question 3 Answer d Premiums distributed in 202 Premiums to be distributed in 2923 Total Premiums arising from 2021 sales distrbated in 2002 Premiums applicable to 2022 Premium expense for 2022 (48,000 x 40) Question 4 Answer ¢ 4 Viability — 12/31/2022. 3,000 x 40) 20,000 5,000 1,000,000 50,000 3,000 53,000 5,000) 1,920,000Problem 1-10 (IAA) Energy Company offered a cash rebate of P20 on each P150 package of batteries sold during the current year Historically, 10% of customeny ‘mail in the rebate form. = During the year, 600,000 packages of batteries are sold, and 25,000 P20 rebates are mailed to customers. 1. What amountof rebate expense should be reported forthe current year? — » a. 1,200,000 Fb. 1,500,000 ec. 500,000 d. 600,000 = fan 2. What amount should be reported agrebate liability at year-end? Gok Zu) 700,000 500,000 350,000 400,000 Bese Solution 1-10 Question I Answer a Rebate expense (10% x 600,000 x 20) Question 2 Answer a Rebate expense Rebate paid (25,000 x 20) Rebate liability 12 Problem 1-11 14a) During the currentyear underanew: sales romans COPE sd 80,000 reversible belts ro which entitled thecusimer 1 noe n Esch beltcured one coupon ape ° . The entity estimated that 10% grt ae though only 35,000 cousone tots couPenS willbe redeemed even year Processed during the current 1, What amount of rebate Y year? SSS CXPense Should be reported for the current a. 4,000,000 BK xd ~ OD b. 2,800,000 c. 1,750,000 + Lise d. 2,250,000 2. What amount should —— coupe fearea ‘spond astebate ibility for unredeemed 1,750,000 1,050,000 1,225,000 0 eeoe Solution 1-11 Question } Answer b Coupons to be redeemed (70% x 80,000) Multiply by cash rebate per coupon ne Rebate expense 2,800,000 Question 2 Answer b Rebate expense 2,800,000 Rebate paid (35,000 x 50) (4,750,000) Rebate liability 1,050,000 13Problem 1-12 (IFRS) Arianne Company, a grocery retailer, operates 2 customer loyalty program. The entity grants program members loyalty points when they spend specified amount on groceries. Program members can redeem the points for further groceries. The points have no expirty date. During 2021, the sales amounted to P7,000,000 based on stand-alone sellingprice. During the year, the entity granted {0,000 points. But management expected that only 80% of 8,000 points will be redeemed. ‘The stand alone selling price of each loyalty point is P100. ‘On December 31, 2021, 4,800 points have been redeemed . 1n2022, management revised its expectations and now expected that 90% oF 9,000 points will be redeemed altogether. During 2022, the entity redeemed! 2,400 points - 1. Whatamount should be reported 4s sales revenue! including the Laborde on KT = Kas PY a. 7000000 £ F< 4F OT) Gasceo b: 8,000,000 f= ‘fy HS isis / c. 6,125,000 ~ d. 6,650,000 490) k % GBR = 2. What amount should be reported as revenue eared from loyalty. pointsfor20222_ sc arr ee A a. 700,000 _ (Cb. 210,000 79 ©. 175,000 d. 200,000 Jey) Solution 1-12 Question ! Answer g Product sales Points granted during the yea, ruil (10,000 x 100) Product sales (7,000,009, Points (000,005 999 20° 7.000000) 000 ‘Total transaction price *7,000,000) Product sales Revenue froin points red (4,800/ 8,000 875,099) 1" 2821 Total revenue in 2021 Cash Sales a Uneamed revenue — points Cred 875,000 Unearned revenue — points Sales - ee $25,000 Question 2 Answer ¢ To sGieng) Points redeemed in 2021 Points redeemed in 2022 bed 400 Total points redeemed to December31, 2022 a Cumulative revenue on December 31 , 2022 (7,200/9,000 x 875,000) 700,000 Revenue from points recognized in 2021 (525,000) Revenue from points earned in 2022 Unearned revenue — points 175,000 Sales 175,000 15Problem 1-13 (IFRS) Jamaica Company, a retailer of electrical goods, participates in a customer loyalty program operated by anairline. : “The entity grants program members one ar travel point for every P1,000.) spenton electrical goods. eee memiberscan redeem the points for travel with the airline subject toavailability. The entity pays the airline P60 for each point. During the current year, the entity sold electrical goods for consideration totaling P4,500,000 based on stand-alone selling price and granted 5,000 points with stand-alone selling price of P100 per point. 1. What amount should be recognized as product sales revenue? Gsm. 1 a. 4,500,000 © mek Oy b. 4,050,000 ae c. 5,000,000 [Sh 4. 2,500,000 2, What amount should be reported as net revenu dor. a. 450,000 q SO a eas a8 4, b. 150,000 Jip CErEKed) ° e. 200,000 1c 4. 300,000 $ Solution I-13 Question I Answer b- Question 2 Answer b Selling price Fraction _Alleated, Product sales eS * —%,500,000 45/50 4050,000 Points (5,000 x 100) 500,000 5/50 450,000 4,500,000 Revenue from points 450,000 Payment to airline (5,000 x 60) (00,000) [Net revenue from points 150,000 Jmaica Company has fulfilled its obligation by granting the points. “Therefore, venue from points is recognized when the electrical goods are sold. 16 Problem 1-14 (1pRs) Alyanna Company o, Stes ne ape Tey fointshaveno erase the points for further purchases. The During 2021, the cus Picea a i ae emegse ripareaee 2021 amounted ig 6,800,000 based on stand-alone Seaange Pru 20, 00 Points have been redeemed in {rien oa eto etson ee 12022, the entity redeeined 9,000 pj ts ,000 point . What - 1 point ofthe tansaction ice shc ild be allocated to the 4 & 1800000 GEN CEN Sate (& E2000 Flee cfs ses i 020,000 my C$ 2. What amountshould points for 202, berepotedasyevenu ‘camed from loyalty a. 576,000 Agi OO Db. 489,600 WEE COR Ye [e20.be ©. $10,000 NG be a 0 - g 3. What amount should be ; Prints for2n23? 7 ae ae Seuecamst fom los - Third contract year - July'1, 2022 sales July 1, 2024 to June 30, 2025 2022 sales still under warranty after December 31, 2022 2021 sales still under warranty after December 31, 2022 a. 8,000,000 : 2022 sales still under warranty after December 31, 2022 | b, 5,600,000 ~ Pred ; pane e, 300,000 C cted sales still under warranty after December 31, 2022 9,675,000 & 190'000 Solution 2-10 Answer ¢ Major defect (3% x P5,000,000) 150,000 Minor defect (5% x P3,000,000) 150,000 Total warranty provision. 300,000 32 33 'Problem 2-11 (IFRS) Electro Company gives warantesat the time of sale to purchasers of its product. The entity underiakes to make good, by ebm’ Ge replacement, manufacturing defects that become apparent within one ‘year from the date of sale. Sales of P5,000,000 were made evenly throughout 2022. The expenditures for warranty: irs and replacements for the pros sold in 2022 are expected to be made 50% in 2022 and 50% in 2023. The 2023 ourflows of economic beuefits elated tothe warranty will take place on December 31, 2023. The entity estimated that 75% of products sold require no warranty repairs, 15% of products sold require minor repai -scosting P100,000} and 10%¢f products sold require major repairs costing P400,000,, eee sitesi An appropriate risk adjustment factor to reflect the uncertainties in ceash flow estimates is an increment of 6% tothe probability weighted expected cash flows. ‘The appropriate discount factor for cash flows expected to occur on December 31, 2023 is 0.94. 1. Whatamountshould be reported as Warranty expense for 2022? prok 7 a. $00,000 ie . fb. 498,200 kx Lb ope \ e. $14,100 Spoke *50% Sesh ~ a. 330,000 aw! Cen) 2. Whatamount should be reported as warranty liability on December ~ 31, 20227 S a. 265,000 pick b. 249,100 o 25k) peel . 250,000 4. 235,000 Solution 2-11 Question I Answer ¢ Cost of minor repair Cost of major repair Total warranty cost ‘Muhtiply by Total cash flow after risk adjustment Expenditure in 2022 (530,000x 5 Expenditure in 2023 at presen value (262,000 O99) ‘Warranty expense for 2022 Question 2 Answer b ‘Total cash flow for warranty Paid in 2022 (50% x 530,000) Warranty cost to be paid in 2023 Multiply by PV factor Wattanty liability December 31.2022 35Problem 2-12 (IFRS) Humanizer Company gives warranties at the time of sale to purchasers of its product. Under the terms of the sae, the entity undertakes to ake good, by repairor replacement, manufacturing defects that become ‘apparent within one year from the date of sale. On December 31,2021, the entity appropriately recognized 50,000 ‘warranty liability. During 2022, the entity incurred and charged P 140,000 against the warranty liability. Outof the P140,000, an amount of P80,000 related to warranties for sales made in 2022. uring 2022 in the discounted amount recognized as a lity on December 31, 2021 arising from the passage of time is P5,000. The increase On December 31, 2022, the entity estimated that it would incur the following expenditures in 2023 to meet its warranty obligations on December 31, 2022: 5% probabilityof 400,000 ~ | 20% probabilityof P200,000 | [oS 50% probability of P 80,000 | 25% probability of P 20,000 ‘Assume for simplicity that the 2023 cash flows for warranty repairs and replacements take place on December 31,2023. Anappropriate discount rate is 10% per year. The PV of 1 at 10% for ‘one year is 0.91. —— ‘An appropriate risk adjustment factor to reflect the uncertainties in the cash flow estimates is an increment of 20% to the probability-weighted expected cash flows. ° 36 1, Whats the amount of undiscounted cash flows for warranty on December 31,2022 dist a. 105,000 b. 350,000 c. 100,000 i d. 200,000 2, Whatistheamount of undiscounted cash lows for warranty after considering the risk adjustment factor? a. 126,000 b. 266,000 nee of ‘ se fe ach Pe Gado (SIC 4. 211,000 3. Whatamount shouldbe reported asarantyliabilion December 31,2022 —— ar a 4) a, 126,000 (2th x." b. 114,660 aE “Dc. 242,060 He bed 4. 187,460 4, What amount should be recognized as warranty experise for 2022? ys a. 194,660 ¥Sk mb. 199,660 Ifuce 2c, 206,000 d, 211,000 37Solution 2-12 Question 1 Answer a Question 3 Answer Question 2 Answer a Question 4 Ansswer b 2021 Warranty expense 50,000 Warranty liability 2022 Warranty liability 50,000 Finance cost 5,000 Warranty expense 85,000 Cash Warranty expense related to 2022 sales 50,000 140,000 80,000 Warranty expense related to 2021 sales (60,000 55,000) _ 5,000 85,000 Total warranty cost paid in 2022 Warranty expense 114,660 Warranty liability Weighted probabilities: 5% x 400,000 20% x 200,000 50% x 80,000 25% x 20,000 Expected cash flows (Question 1) ‘Multiply by risk adjustment factor (100% + 20%) Adjusted cash flows (Question 2) Multiply by PV of I at 10% for one year Present value of cash flows (Question 3) Warranty cost paid in 2022 Warranty liability related to 2022 sales Total warranty expense in 2022 (Question 4) 38 114,660 20,000 40,000 40,000 5,000 105,000 0 126,000 at 114,660 85,000 114,660 199,660 Sa CHAPTER 3 DEFERRED REVENUE Problem 3-1 (AICPA Adapted) Cobb Department Store sells gift certificates redeemable only when merchandise is purchased. These gift certificates have no expiration date. Upon redemption or expiration, the entity recognizes the unearned revenue as realized. ‘The entity provided the following information for the current year: Unearned revenue, January 1 650,000 Gift certificates sold 2,230,000 Gift certificates redeemed C1950,000 Gift certificates expected not to be redeemed © 100,000 Cost of goods sold 60% On December 31, what amount should be reported as (fovenve? a, 510,000 (> b. 570,000 c. 850,000 4. 950,000 Solution 3-1 Answer e Unearned revenue = January 1 650,000 ‘Add: Gift certificates sold 2,250,000 Total 2,900,000 Less: Gift certificates redeemed 1,950,000 Gift certificates expected not to be redeemed 100,000 2,050,000 850,000 Unearned revenue - December 31 39Problem 3-2 (AICPA Adapted) Regal Department Store sells pitt cetifiates, redeemable for store merchandise and withno expiration date. The entity provided the following information pertaining o the gift Certificate sales and redemptions during the current year: Unearned revenue on January 1 ,., 750,000 Sales of gift certificates 3 2,500,000 Redemptions of prior year sales c Ba , Redemptions of current year sales What amount should be reported as uneamed revenue at year-end? a. 1,250,000 : b. 1,125,000 ys c. 1,000,000 4. 500,000 Solution 3-2 Answer a redeemed - January 1 750,000 Sales of gift certificates during current year 2,500,000 Total 3,250,000 Redemptions of prior year sales (250,000) Redemptions of current year sales (1,750,000) Unearned revenue ~ December 31 1,250,000 40 Problem 3-3 (IAA) Diversified Company sells perishable electronic products that are shipped in reusable containers, ‘Customers pay a deposit for each container. The deposit is equal to the container cost. Customers receive a refund when the container is returned. ~ ‘During the current year, deposits collected on containers shipped amounted t@ P 700,000; Deposits are forfeited if containers are not returned in 18 months. — ee Containers held by customers at the beginning of the year totaled 330,000. During the current year, an amount of P410,000 was refunded and deposits of P25,000 were forfeited. ‘What amount should be reported as liability for refundable deposit at _ vyear-ond? Fore a. 595,000 b. 620,000 h c. 645,000 . 290,000 Solution 3-3 Answer a Containers held by customers — beginning 330,000 Deposits collected from customers during the year 700,000 Total 1,030,000 Deposits refunded (410,000) Deposits forfeited (25,000) Liability for refundable deposit ending 595,000 41Problem 3-4 (AICPA Adapted) Marr Company sells its products in reusable containers, The ustomer is charged a deposit for each container delivered 4 Teceives a refund for each container retumed within two. years after the year of delivery. The entity accounts for the containers not retumed within limit as being retired by sale at the deposit amount The entity provided the following information for 2022: Container deposits on January 1,2022 from deliveries in the time 202 150,000 30 430,000) _ $80,000 780,000 Deposits for containers delivered in 2022 Deposits for containers retumed in 2022 from deliveries in: 2020 be 2021 250, 2022 286,000) 626,000 (On December 31,2022, wt amount shouldbe reported as liability for deposits? Bowe “9 a. 494,000 Fite b. 584,000 Ish) . 674,000 cc Jy? 734,000 Solution 3-4 Answer ¢ Deposits on January 1, 2022 from deliveries: in 2021 430,000 Deposits for containers delivered in 2022 _-780,000 Total 1,210,000 Less: Deposits returned in 2022 from deliveries in: 2021 250,000 2022 286,000 _ $36,000 Liability for container deposits ~ December 31, 2022 _ 674,000 Deposits on January 1, 2022 from deliveries in 2020 150,000 Deposits returned in 2022 from deliveries in 2020 (90,000) Expired and no longer refundable 60,000 a2 Qo: Problem 3-5 (AICPA Adapted) Fell Company operates a retail grocery store that is required by law to collect refundable deposits of PS on soda cans. ‘The entity provided the following information for the current year: 150,000 100,000 10,0007 © Liability for refundable deposit - January | Cans of soda sold Soda cans returned During the current year, the entity leased space and received a 25,000 deposit to be applied against rent at the expiration of the lease in 5 years. The lessor appropriately classified the lease as an operating lease. What amount should be reported as current liability for deposit on December 31? i * a. 125,000 b. 140,000 c. 100,000 4. 25,000 Solution 3-5 Answer c Liability for refundable deposit - January 1 150,000 Deposit made (100,000 x 5) : 500,000 Total 650,000 Deposit refunded (110,000 x 5) (850,000) Balance - December 31 (current liabilit) 100,000 ‘The lease deposit is anoncurrent liability. 43Problem 3-6 (AICPA Adapted) Greene Company sells office equipment service contracts agreeing to service equipment for a two-year period. to unearned service Cash receipts from contracts are credited contract revenue. 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: Unearned service contract revenue at January ! 600,000 Cash receipts from service contracts sold 980,000 Service contract revenue recognized 7 Cn 7 Service contract expense \What amount should be reported as uneamed service contract revenue ‘on December 31? J / a b. 480,000 ©. 490,000 4. 720,000 460,000 p Solution 3-6 Answer d Unearned revenue - January 1 600,000 Cash receipts from service contracts sold 980,000 Total 1,580,000 Service contract revenue recognized (860,000) Unearned service contract revenue - December 31 44 Problem 3-7 (AICPA Adapted) Ryan Company sells major household appliance service contracts for cash. The service contracts are for a one-year, two-year, OF three-year period Cash receipts from contracts are credited to.unearned contract revenue. This account had a balance of P720,000 on December 31,2022 before year-end adjustment. Service contract costs are charged as incurred tothe service contract Eo taMaat: which had a balance of P180,000 on December 31, 2022. Outstanding service contracts on December 31,2022 expire: During 2023 During 2024 During 2025 150,000 What amount should be reported as unearned contract revenue on December31,20222 540,000 475,000 2 295,000 245,000 aege Solution 3-7 Answer b Outstanding contracts on December 31, 2022 that will expire during 2023 150,000 2024 225,000 2025 100,000 Unearnied contract revenue December 31, 2022 475,000 45Problem 3-8 (AICPA Adapted) Dunne Company sells equipment service contracts st covera two-year period. The sale price of each contract is P600. > ‘The past experience is that, of the total pesos spent for ee on service contracts, 40% is incurred evenly during the first co year and 60% evenly during the second contract year. ‘The entity sold 1,000 contracts evenly throughout 2021. 1. What amount shoul be reported as Gontract revenue for 20217 a. 120,000 Mga b. 240,000 Me AON he ©. 300,000 p 7 4. 150,000 2. What amount should be reported as deferred contract revenue _> on December 31, 2021? a 540,000 5, . 480,000 c. 360,000 = d. 300,000 3, What amount should be reported as contract revenue for 2022? ” a, 180,000 leek /. b, 360,000 7 fy Gakxbe x) ©. 300,000 4, 120,000 40° 4, What amount should be reported as contract revenue for 2023? a. 240,000 I b. 360000 / /: cc. 180,000 a 0 46 Solution 3-8 First contract year (40% x 600,000) ‘Second contract year (60% x 600,000) Total contracts sold in 2021 ‘Since the contracts are sold evenly {fof the 40% iseamed in2021 andone-halfwill eeamedias020, One-half ofthe 60% wil be eamed in 2022 and one half willbe earned in 2023. Question I Answer a Contract revenue for 2024 (240,000 x 1/2) 120,000 Question 2 Answer b Total contracts sold (1,000 x 600) 600,000 Contract revenue in 2021 (240,000 x 1/2) (120,000) Deferred contract revenue - December 31, 2021 _480,000 Question 3 Answer Remaining one-half of first contract year (240,000 x 1/2) 120,000 First one-haif of the second contract year (360,000 x 1/2) 180,000 Total contract revenue in 2022 300,000 Question 4 Answer c Remaining one-half of second contract year (360,000 x 1/2) Summary Contract revenue in 2021 120,000 | Contract revenue in 2022 300,000 Contract revenue in 2023 180,000 Total contract revenueProblem 3-9 (AICPA Adapted) Cobb Company sells appliance service contracts agreeing to repair ‘appliances fora two-year period. ‘The past experience is that, of the total amount spent for repairs on service contracts, 40% is incurred evenly during the first contract year and 60% evenly during the second contract year. Receipts from service contract sales are P500,000 for 2021 and 600,000 for 2022. Receipts from contracts are credited to unearned contract revenue. All sales are made evenly during the year. 1. What amount should be reported as contract revenue for 2021? 190,000 200,000 250,000 i 500,000 f 2. What amount should be reported as uneamed contract reveriue on, December 31,2021? any) ‘ a, 300,000 400,000 b. c. 200,000 d. 150,000 aose 3, What amount should be report.d as contract reventie for 207 EX L a. 240,000 onY x. b. 360,000 ae c. 370,000 d. 250,000 4, What amount should be reported as unegmed contract. reverlue on December 31, 2022? 360,000 Ky.6 470,000 3Ey 480,000 7 1. 630,000 3 pose Solution 3-9 Question 1 Answer a Question 2 Answer b 2021 sales 40% x 500,000 equals P200,000. This amount is eared one-half in 2021 or P100,000 and one-half in 2022 or P100,000. 660% x 500,000 equals P300,000. This amount is eamed one-half in 2022 or P150,000 and one-half in 2023 or P150,000. ‘otal contracts sold in2021 500,000 Contract revenue in 2021 (100,000) Unearned contract revenue - December 31, 2021 400,000 Question 3 Answer.c Question 4 Answer d+ 2022 sales 40% x 600,000 equals P240,000. This amount is eamed one-half in 2022 or P120,000 and one-half in 2022 or P120,000. 60% x 600,000 equals P360,000. This amount is earned one-half in 2023 and one-half in 2024. Remaining one-half of first contract year— 2021 sales (200,000 x 1/2) 100,000 First one-half of second contract year— 2021 sales (300,000 1/2) 150,000 First one-half of first contract year ~ 2022 sales (240,000x 1/2) Total contract revenue for 2022 Total contracts sold in 2021 and 2022 1,100,000 Contract revenue in 2021 100,000) Contract revenue in 2022 (370,000) Unearned contract revenue ~ December 31, 2022 630,000 The unearned contract revenue on December 31,2022 is P150,000 for the 2021 sales and P480,000 for 2022 sales or a total of P630,000. 49Problem 3-10 (AICPA Adapted) Kent Company sells magazine subscriptions for one-year, two-Year or three-year period, Cash receipts from subscribers are credited to subscription collected in advance, and this account had a balance of P2,400,000 on December 31,2022 before year-end adjustment. Outstanding subscriptions on December 31,2022 expire: During 2023 600,000 During 2024 900,000 During 2025 400,000 am 1. On December 31,2022, what amount should be reported as (Subscription collected in advance? a. _ 500,000 é b. 1,200,000 <. 1,900,000 d. 2,400,000 2. Whatamount should be reported as subscription revenue for 2022? 600,000 500,000 900,000 400,000 pege Solution 3-10 Question 1 Answer c Allof the outstanding contracts of P1,900,000 are deferred. Question 2 Answer b Subscription collected in advance per book 2,400,000 ‘Adjusted amount ~ December 31, 2022 2,900,000) ‘Subscription revenue in 2022 00,000 30 Problem 3-11 (AICPA Adapted) Hart Company sells subscriptions to a specialized directot that is ublished semiannually and shipped to cubseribe a isand published semiannually and shipped to subscribers on Apri ‘Subscriptions received after the March ember 30 cut-off datesareheld forthe nent pibheton Cash from subscribers is received i year andis| cediliodeereloenstomubeenies Deferred revenue from subscriptions — January 1 1,500,000 Cash receipts from subscribers during the current year 7,200,000 1. What amount should be reported as deferred revenue from subscription on December 31? eDee a. 1,800,000 7 4I/n *hov id 3 b. 3,300,000 c. 3,600,000 » d. 5,400;000 ' Bs 2. What amount should be reported as subscription revenue for the current year? = a. 7,200,000 ets b. 6,900,000 # uv ©. 8,700,000 ) 4. 5,100,000 ee Solution 3-11 Question | Answer a Question 2 Answer b Monthily subscriptions (7,200,000/12) The subscriptions after the September 30 cut-off are: October 600,000 November 600,000, December 600,000 Deferred revenue - December 31 ‘The above subscriptions will be servedin the next publicationnext year. Deferred revenue — January | 1,500,000 Cash receipts from subnscribers 7,200,000 ‘Total 8,700,000 Deferred revenue ~ December 31 (1,800,000) Subscription revenue for current year 6,900,000 51Problem 3-12 (AICPA Adapted) ‘Weaver Compan sells magazine subseriptions fora I-yean 2-year or 3-year period. Cash receipts from subscribers are credited to magazine subscriptions collected in advance and this account hada balance of P1,700,000 on January 1 “The entity provided the following information forthe current year: 2,100,000 Cash receipts from subscribers 1,500,000 Subscription revenue credited on December 31 {What amount should be reported as the balance for subscriptions) collected in advance on December 31? a. 1,900,000 12 b. 2,300,000 ad c. 1,400,000 * . 2,100,000 J Solution 3-12 Answer b Subscriptions collected in advance — January 1 1,700,000 Cash receipts from subscribers in current year 2,100,000, Total 3,800,000 Subscription revenue credited in current year (1,500,000) ‘Subscriptions collected in advance ~ December 31 2,300,000 Ss? Problem3-13 (AICPA Adapted) Meo cone and 2+ iptions for the Video-of-the-month tues sells and 2-year subscription: ‘Subscriptions are collected in advance and credited to sales. An analysis of the recorded sales activity revealed the following: 2021 2022 Sales 420,000 $00,000 Less cancelations 20,000 _ 30,000 Net sales “400,000 470,000 Subscription expirations: 2021 2022 130,000 2023 200,000 ~ 2024 “140,000 00 (On December31, 2022, whatamount should be reported as unearned subscription revenue? SFE. 495,000 470,000 465,000 — . 340,000 aese Solution 3-13 Answer c Subscriptions received in 2021 that will expire in 2023. _ 125,000 Subseriptions received in 2022 that will expire in 2023 "200,000 Subscriptions received in 2022 that will expire in 2024 140,000 Unearned subscription revenue - December 31, 2022 465,000 53Problem 3-14 (AICPA Adapted) Dunn Company records stamp service revenue and provides fr the cost of redemptions in the year stamps are sold to Hicensees- ‘The past experience indicates that only 80% of the stamps sold to licensees would be redeemed. The liability for stamp redemptions was P6,000,000 on January 1 Additional information forthe current year: Stamp service revenue from stamps sold to licensees Cost of redemption of stamps sold prior (0 If all the stamps sold in the current year -redeniption next year, the redemption cost wo" 1. What amount should be reported as at redemptions on December 31? a. 7,250,000 b. 5,500,000 ©. 5,050,000 4. 3,250,000 2. Whatamount should be reported as, sold in current year? a. 2,250,000 b. 4,000,000 © 3,200,000 d 2,750,000 Solution 3-14 Question 1 Answer e Liability for stamp redemptions - January 1 Estimated cost of redemptions for stamps sold 5,000,000 2,750,000 were presented for wuld be P2,250,000. liability for stamp gross income from the stamps 6,000,000 (80% x 2,250,000) 1,800,000 Total 7,800,000 Cost of redemptions in current year (2,750,000) Liability for stamp redemptions - December 31 5,050,000 Question 2 Answer c Stamp service revenue 5,000,000 Estimated cost of redemptions 1,800,000) 3,200,000 Gross income 54 Problem 3-15 (AICPA Adapted) Black Company required advance payments with special orders formachinery constructed o customer specifications. These advances are nonrefundable. ) ‘The entity provided the following information for the current year: Advances from customers ~ beginning 1,180,000 Advances received with orders + 1,840,000 ‘Advances applied to ofders shipped 1,640,000 300,000 Advances applicable to orders canceled What amount should be reported as ¢trrent liability for advances from customers at year-end? Shs, a. 1,480,000 ( b. 1,380,000 ~ c. 880,000 a 0 Solution 3-15 Answer ¢ Advances from customers ~ beginning, 1,180,000 ‘Add: Advances received with orders 1,840,000 Total 3,020,000 Less: Advances applied to orders shipped 1,640,000 ‘Advances applicable to orders canceled 500,000 2,140,000 $80,000 Advances from customers ~ ending 55Problem 3-16 (AICPAAdapted) Lovie Company offered three payment plans on twelve-month contracts. aia Z and the ‘The entity provided the following information on the three plans numberof childrenenolled in each pan from September 1,2022 through August 31,2023 contract year: of Initial payment Monthly fee Number o erchild perchild children a 30,000 = 15 #2 20,000 3,000 Az #8 - 5,000 9 inti September 1, 2022, ‘The entity received P9000 inital payments on September and P324,000 of monthly fees during the period Septe December 31,2022. On December 31,2022, what amount should bereported as deferred révenue? reained a. 330,000 sank xt F 438,000 In . 660,000 d. 990,000 Solution 3-16 Answer ¢ 750,000 Plan #1 (50,000x 15) , Plan #2 (20,000x 12) 240,000 Total initial payments 999,000 Deferred revenue - December 31, 2022 (990,000 x 8/12) 660, ‘The initial payments are earned for 4 months from September | to ‘December 31, 2022 and unearned for 8 months. Plan #2 (3,000x 12.x4 months) 144,000 lan #3 (5,000x 9x4 months) 180,000 Total monthly fees ~ already earned 324,000 56 CHAPTER 4 ACCRUED LIABILITIFS Bonus computation Problem 4-1 (AICPA Adapted) Kemp Company must determi aia0ee Ferthe flloginy crust determine the December 31,2022 accruals * A PS500,000 advertising bill was received January 7, 2023, comprising cost of P350,000 for advertisement in December 2022 issues, and P150,000 for advertisement in January 2023 issues of the newspaper. — * Aoone-year lease, effective December 16,2022, calls for fixed rent of P120,000 per month, payable one month from the effective date and monthly thereafter. ~~ Lo * Theentity has real property subject to real property tax. The city’s fiscal yearns July 1 fone 3and he tak assessed at 3% of real Property onhands payable onJune30, 2023. (24, yt] co 2 The entity estimated that the real property tax will amount to 'P600,000 for the city's fiscal year ending June 30, 2023. On December 31,2022, what amount should be reported as accrued expenses? nae a. 950,000 b. 770,000 aN c. 650,000 d. 710,000 Solution 4-1 Answer d Advertisement for December 2022 350,000 ‘Accrued rent from December 16 to December 31, 2022 (120,000 x 6/12) £0,000 Accrued rea! property tax (600,000 x 6/12) 300,000, 740,000 Total accrued expenses 57 |Problem 4-2 (LAA) Sonia Company reported gross payroll of P600,000 for the month of January, The entity paid the payroll net ofthe following deductions: 70,000 ss as 15,000 Phitheatth : 8.000 Pagibig —8 100,000 In addition, the entity recognized its additional eontributions for the. following in relation to January paytoll: Philhealth 6,000 35,000 What amount should be reported as total payroll tax liability? °) a. 133,000 b. 100,000 ce. 90,000 d. 65,000 Solution 4-2 Answer a Salaries and wages 600,000 Withholding tax payable 70,000 SSS payable - employee 15,000 Philhealth payable—employee 8,000 Pagibig payable employee 7,000 Cash 500,000 Payroll tax expense 35,000 SSS payable employer 20,000 Phithealth payable ~ employer 9,000 Pagibig payable — employer 6,000 ‘Total payroll liability (100,000-+35,000) 58 Problem 4-3 (AICPA Adapted) oer Company reported the following payroll for the month of Total wages Income tax withheld ene All wages paid were subject to SSS, The SSS tax rates were 7% each for employee and employer. Chester remits payroll taxes on the 15th of the followingnionth, Inthe financial statements forthe month ended January'31, what amount should be reported respectively as total payroll tax liability and payroll tax expense? = Se a, 60,000 and 70,000 ore x7 b. 95,000 and 70,000 Rh ¢. 95,000 and 35,000 Fe a d. 130,000 and 35,000 be Solution 4-3 Answer d Income tax withheld SSS - employee SSS— employer Total payroll tax liability (7% 500,000) (7%x 500,000) The pertinent entries for the month of January in relation tothe payroll taxliabilty: Salaries and wages 500,000 Withholding tax payable 60,000 SSS payable — employee 35,000 Cash 405,000 Payroll tax expense . 35,000 SSS payable - employer 35,000 59ee : ets = ae Pr roblem 4-4 (AICPA Adapted) Miyuki Taek Company operates areal store Altes are sold suiee 8 < ue added tax, which the entity collects and records 2 sales The entity files files quarterly sales t ue by the twentieth day followingiivanioticaleque. ee However, in accordance with: i ity remits value state requirements, the entity ei added tax collected by the twentieth day ofthe month following any month such collections exceed P50,000. The entity takes these payments as credits on the au return. The value added taxes paid by the entity are sales revenue. Following is a monthly summary appearing inthe first quarts revenue account: arterly sales tax wharged against sales Debit Credit January — $60,000 60.000 392,000 Mach 2 Iakon ‘What amount should be reported as value added taxes payable on March 31? a. 150,000 b. 168,000 c. 108,000 4. 90,000 Solution 4-4 Answer d January February March Sales including VAT Sales excluding VAT Output VAT (1,400,000 / 1.12) Payment of VAT in February 60,000) VAT payable - March 31 90,000 60 / problem 4-5 (AICPA Adapted) a biweekly basis.) loy Company pays all salaried employees 0” Blo) oe pay however paid inthe next biweekly period: T° Pan accrues salaries expenses only at the ‘December 31 year-end ‘Data relating to salaries enmed in December are: ‘ast payroll was paid on December 26 forthe 2-week period ended December 26 Overtime pay eared forthe 2-week period ended December 26 was 420,000 : Remaining work days were December 29, 30 and 31.0n which days there was no overtime. ee “The recurring biweekly salaries totaled P7,500,000 “Assuming a/S-day work week, what amount should be recorded as ecrued salaries payable on December 31? a. 2,670,000 b. 4,500,000 76. 2,250,000 d. 4,920,000 Solution 4-5 Answer a ‘Accrued salaries for December 29, 30 and 31 (GIO x 7,500,000) 2,250,000 Accrued overtime pay 420,000 ‘Accrued salaries payable ~ December 31 2,670,000 Since there is a 5-day work week, the recurring biweekly salaries of 7,500,000 relate to 10 days. The three remaining work days of December are unpaid. The overtime pay for the 2-week period. ‘ended December 26 is accrued on December 3] because overtime pay is paid in the next biweekly period. 61Problem 4-6 (AICPA Adapted) Ronald Company’ has an incentive compensation plan under which _ ich manager received 10% ofthe branch income afier deduction fthe bonus but before deduction of income tax. Branch income for the current year before the bonus and income tax was P1,650,000. The tax rate is 30%. What amount should be reported as bonils forthe current year? a. 126,000 b. 150,000 c. 165,000 d. 180,000 Solution 4-6 Answer b Income after bonus before tax. (1,650,000/ 110%) (Adve x 1,500,000) 1,500,000 Bonus Problem 4-7 (AICPA Adapted) ‘After three profitable years, Cairo Comp: to the branch manager of 25% of income over. any decided to offera bonus 1,000,000 eared by the branch. ‘ The income for the branch was 1,600,000 before tax and before bonus for the current year. be Crt /1ne “The bonus is computed on income in excess of P1,000,000 after deducting the bonus but before deducting tax. ‘What amount should be reported as bonus of the branch manager for the current year? a. 120,000 b. 150,000 ec. 250,000 d. 320,000 Solution 4-7 Answer a Income after bonus but before tax (600,000/125%) - 480,000 Bonus (25% x 480,000) 62 Problem 4-8 (ACP) ‘The bonus agreement of Christian Company provides that the general manager shal ceive an annual bons Love tenet income er bonus and tax. The income tax rate is 30%, The general manager received P280,000 for the current year as bonus. ‘What amount was reported as income before bonus and tax? a. 4,280,000 ‘angus b. 4,000,000 c. 2,800,000 d. 3,720,000 Solution 4-8 Answer a Income after bonus and tax (280,000/10% — ) 2,800,000 Income before tax (2,800,000/70% — ) 4,000,000 Income before bonus and tax (4,000,000 + 280,000) 4,280,000 Problem 4-9 (ACP) ‘Tobruk Company has an agreement to pay its sales manager a bonus: of 59% ofthe income after bonus and after tax. ‘The income for the current year before bonus and tax isP5,250,000: ‘The income tax rate is 30% of income after bonus. What amount should be reported as Bonus bf the sales manager for the current year? < a. 262,500 b, 250,000 ce. 177,536 d. 186,548 Solution 4-9 Answer e (5 (5,250,000 - B -T) 30 (5,250,000-B) “05 (5,250,000 — B ~ 30 (5,250,000— B)} 205 (5,250,000 ~B - 1,575,000 + 30B) 262,500 ~.05B - 78,750 + .015B 262/500-78,750 1.035B = 183,750 B= 183,750/ 1.035 B= 177,536 woes B+.05B—.015B 63Problem 4-10 (AICPA Adapted) Kent Realty Company maintains an escrow account and pays real estate taxes for the mortgage customers. Escrow funds are kept in interest-bearing accounts. Interest, less a 10% service fee, is credited to the mortgagee’s account and used to reduce future escrow payments. Escrow account liability - January 1 B ae Escrow payments received during the year Heer y Real estate taxes paid during the year C000 Interest on escrow funds ‘What amount should be reported as éscrow account liability on December31? FouK a. 510,000 Iseob b. 515,000 Spore ©. 605,000 Cite See ches) DE 10% Solution.4-10 Answerc > -ow accounts liability - January | 700,000 «add: Escrow payments received 1,580,000 Interest on escrow funds 50,000 1,630,000 Total 2,330,000 Less: Real estate taxes paid 1,720,000 Service fee (10% x 50,000) 5,000 Escrow accounts liability - December 31 64 Problem 4-11 (AICPA Adapted) On the first day of each month, Bell Company received from Carr Company an escrow deposit of P250,000 for real estate taxes. Bell ‘Company recorded the P250,000 in an escrow account. ‘The real estate tax forthe current year is P2,800,000 payable in equal installments on the first day of each calendar quarter. On January 1, the balance in the escrow account was P300,000. ‘What amount should be reported as éScrow liability on September 30?. a. 1,150,000 2 b. 2,250,000 1) Cy eeas) 850,000” hed) d. 450,000 (2m a) Solution 4-11 Answer d Escrow liability —January 1 i Escrow deposit received from January 1 t0 September 30 (250,000 x 9 months) Total Less: Payment for real estate tax from January 1 to September 30 or three quarters (2,800,000 x 3/4) 2,100,000 Escrow liability ~ September 30 450,000 65Problem 4-12 (AICPA Adapted) . On July 1, 2021, the Quezon City governs isd ely tx assessment for the fiscal yearend, ju 3 uevon City. The tiaeee ite oad by a credit for accrued realty taxes, i ire year’ x obliga entity’ probability-weighted expected cash lect the uncertainties in the cash he claimant, the lawyers believe A T% risk adjustment factor the flows is considered appropriate tore! flowestimates. /* ‘Anappropriate discount rate is 5% per year. The present value of | at 5% for one period is 0.95. ‘What amount should be reported as provision for lawsuit? 100,000 b. 84,000 c. 89,880 d. 85,386 Solution 3-2 Answer d Weighted probabilities: 20% x 200,000 x 70% 28,000 80% x 100,000 x 709% 56,000 Weighted cash flows 84,000 Multiply by risk adjustment factor (100% + 7%) 1.07 Adjusted cash flows 89,880 Multiply by PV of I at 5% for one period 95 Present value of cash flows 85,386 68 Problem 5-3 (IFRS) ing t 1 year, Libya Company is the defendant ina breach of Ding The iwyers believe the (80% chance that the patent lawsuit. The lawyers believe there is an 80" Peat will not dismiss the ease andthe entity will incur outflow of benefits Ifthe courtrulesin favorof the claimant, the lawyers believe that there ic 60% chance that the entity will be required to pay damages of 2,000,000 and'a 40% chance that the entity will be required to pay damages of P1,000,000. Other amounts of damages are unlikely. ‘The court is expected to rule in late December next year. There is no indication that the claimant will settle out of court. [A Peerisk adjustment factorto the cash flows is considered appropriate toreflect the uncertainties in the cash flow estimates. “An appropriate discountyrate is 10% per year. The present value of 1 at 10% for one period is 6.91.) What amount should be reported as provision at current year-end? a. 1,280,000 b. 1,369,600 c. 1,500,000 a 1,246,336 Solution 5-3 Answer d Weighted probabilities: 60% x 2,000,000 x 80% 960,000 40% x 1,000,000 x 80% 320,000 Expected cash flows 1,280,000 Multiply by risk adjustment factor (100% + 7%) 1.07 Adjusted cash flows 1,369,600 Multiply by PV of I at 10% for one period Present value of cash flows 69Problem 3-4 (AICPA Adapted) During the current year, Manfred Company guaranteed a: supplier’s 500,000 toan froin a hank. On October J, the emity was notified that the supplier had defaulted on the loan and filed for bank pees protection, Counsel believed that the entity would probably have to pay P250,000 under the guarantee. ‘Asa result ofthe supplier's bankruptcy the entity entered into ¢ Raeree th December fo retool its machines 9 thatthe entity could sotent pars from ether suppliers. Retooling costsare estimated 10 be P300,000, What amount should be reported as liability at cu . 250,000 450,000 . $50,000 750,000 rrent year-end? Solution 5-4 Answer a The guarantee should be accra probable and the amount can be’ Problem 5-5 (AICPA Adapted) yee filed a P2,000,000 lawsuit On February 5, 2022, an employ i Seainst Steel Company for damages suffered when one of Steel's plant exploded on December 29, 2021. ‘The legal counsel believed the entity would probably lose the lawsuit ‘and estimated the loss to be P500,000. “The employce offered to settle the Iawsuit out of court for P900,000 but the entity did not agree to the settlement, p On December 31,2021, what amount should be reported a3, from lawsuit? a. 2,000,000 1ed asa provision because the lossis reasonably estimated. bility b. 1,000,000 cc. 900,000 d. 500,000 Solution 5-5 Answer d ‘The loss is accrued as a provision because it is probable and the amount can be reasonably estimated. 70 |e ory TE Problem 5-6 (AICPA Adapted) ; involved ina tax urcent year, Beal Company became INVES A ag Rrapute withthe BIR. On December 31» the tax advisor belieyse pure witfavorable outcome was probable an esti | taxes was P500,000. During the c! estimate of additional ; i c ssued, the entity ‘After the current year financial statements were issued, Altered and accepted a BIR settlement offer of P550,000. What amount of acerued liabilityshould have been reported on December 31? ~~ a. 650,000 b. 550,000 c. 500,000 d. 0 Solution 5-6 Answer ¢ “The reasonable estimate of P500,000 is recorded. The accepted BIR the statements are ied because it was made after he BIR settlement offer of P550,000 is ‘of P50,000 shall be recognized. offer is not record issued. In the next year, when th ~fecepted, an additional liability Problem 5-7 (IAA) Nia Company is involved in litigationregardinga faulty product sold in aprior year. The entity has consulted with an attorney and determined that its possible that the entity may lose the case. “The attomey estimated that there is 40% chance oflosing. Itthisis the case, theatfomey estimated thatthe arpount of any payment would be 5,000,000. L . Cortrgen What is the required journal entry as aresuit ofthis litigation? a. Debitlitigation expense and credit litigation liability P5,000,000. b. No joumalentry isrequited. c. Debit litigationexpense -and credit litigation liability P2,000,000. d. Debit litigation expense and credit litigation liability ‘P3,000,000. Solution 5-7 Answer b The possible loss is only disclosed as a contingent liability since the probability of loss is 40%, ‘The probability of loss should ke more’ ‘than, (50% jn order to be accrued asa provision ere nProblem 5-8 (AICPA Adapted) ‘On March 1, 2022, a suit was filed against Dean Company for patent ‘nftingement. Dean's legal counsel believed an unfavorable outccrm probable and estimated that Dean will have to pay between P850.000 and P900,000 in damages. However, Dean's legal counsel is ofthe opinion that P600,000 is @ better estimate than any than other amount in the range, The situation was unchanged when the December 31, 2022 finan statements were released on February 15,2023. ‘What amount should be acerued s liability on December 31, 2022 in connection with this suit? a. 900,000 b. 600,000 c. 500,000 a 0 Solution 5-8 Answer b ‘Accrued liability — best estimate {600,000 Problem 5-9 (AICPA Adapted) November 5, 2022, a Dunn Company t susan auto driven by Bell. Dunn receive’ 2023 of a lawsuit for P700,000 damages for personal suffered by Bell. co/2 ‘Theentity’scounsel believed itis probable that Bel will beawarded an estimated amount in the range between P200,000 and. 450,000, and So amount is a better estimate of potential liability than any other ‘amount because each point in the range isas likely as any other. “The 2022 financial statements were issued on March 1, 2023. What amount of loss should be agerued on December 31, 2022? ruck was in an accident c. 1,000,000 + da. 0 Solution 5-14 Answer d A contingent asset and the related contingent gain are diselosed only where the inflow of economic benefits is probable. 754 >> Problem 5-15 (AICPA Adapted) During 2022, Smith Company filed suit against West Compan 18 2022,S y against West Co Se damages for patentinitingemnt, On December 31.202 ‘Smith's seer counsel believed that it was probable that Smith would bbe successful against West foran estimated amount of P1,500.000 On March 1, 2023, Smith Company was warded PI, received full ymentthereof. The 2022 financial statements February 1, 2023. How should the award be re a. Asareceivable and revenue of P1,000,000. a b. Asareceivable and deferred revenue 000. c._ Asadisclosure of a contingent asset of! ac ore ofa condi of P1,500.000. 4d. Asadisclosure of a contingent asset sported oi December 31 20229, Solution 5-15 Answer d “The contingent asset is disclosed only Since the case sre ctoot the 2022 financial statements on February 1, 2023 after the iss. 1, 2023. the estimated amount of PI. Problem 5-16 (AICPA Adapted) ofthe year, Haze Company won ‘500,000 shall be disclosed. litigation award During the latter pat a wa pur 500.000 which was tripled to P4, 500,000 include punt, ‘er yges The defendant, who i financially stable, hes appealed only the P3,000,000punitive damages—— /. 147 “The entity was awarded P5,000,000 nan unrelated suit filed, which ‘rieiisappeated by the defendant, Counsel is unable to estimate the ‘outcome of these appeals. ‘What amount should be reported as pretax gain for the year? a. 1,500,000 - b. 4,500,000 ¢. 5,000,000 d._ 9,500,000 Solution 5-16 Answer a A gain of P1,500,000 should be reported, However, the remainder of P3,000,000 is only dis the defendant has appealed the said amount. ielosed x 16 Problem 5-17 (AICPA Adapted) ‘Tone Company isthe defendant ina lawsuit filed by disputing the validity of copyright held by Tone. Witt in 2021 On December 31, 2021, Tone determined that Witt would probably ,000,000. | ageinst Tone for an estimated amount of P2, be successful ‘Appropriately, a P2,000,000 loss was accrued by a charge t0 income for the year ended December 31; 2021. .greed to a settlement On December 31, 2022, Tone and Witt a 100 by Tone to Witt, providing for cash payment of P1,2 and transfer of Tone's copyright to Witt. ‘The carrying amount of the copyright on Tone’s accounting records was P250,000 on December 31, 2022. ‘What would be the effect of the settlement on one's income before tax in 2022? fs 750,000 increase a b. 750,000 decrease ( c c. 500,000" increase ri oy d. 500,000 decrease : Solution 5-17 Answer c Accrued liability on December 31, 2021 ). Cash settlement on December 31, 2022 a'2so\000) Carrying amount of copyright transferred (250,000) . 500,000 Gain-on settlement in 2022 Journal entry Estimated ability fr lawsuit 2,000,000 Cash 1,250,000 copyright "250,000 Gain on settlement of lawsuit 500,000 7Aa) Problem $-18 (IAA) eect seat fling ts epding penne HE “Toy Company provide , Co itand believes thereisa sending against first lawsuit an + Thecnityis dane The ety estimates that damages 51S chance it will los sei be PI 000,000. nae tee nase vss he entyisdafemlinn ao loscin cour. fitloses the Iawsult, tually onages wil fall somewhere in therange estima ag with each amount in that range believes sere s ar P3,000,000 10 P5,000, oer cts ind lawsuit but the relevant loss isd nat a third lawsuit : , Tce ogee Terese syilony occu far into There of the range are P1,300,000 an F “The management believes the effects of time these amounts are jue of money on i itand believes there is * isdefending against a fourth lawsuit {hiya2caneitwilloseincour Italy ses management + believes damages will fall somewhere intherange ¢ 3,000 7 {4000000 with each amount in the range equally likely to occur. ‘What total amount shouldbe reported as accrued litigation liability at year-end? 5 ~ 5,500,000 Yr’ 7,000,000 23M 8,500,000 a] 8,500,000 Soluton 5-18 Answer b* Firstlawsuit 1,000,000 Second lawsuit (midpoint of range) { * 4000,000 hird lawsuit (midpoint of range) 2,000,000 ‘ourth lawsuit (25% chance ~ possible) ‘Total accrued litigation i 7,000,000 8 (pose Problem 5-19 (IAA)’ ‘Bourne Company provided the following selected transactions related to contingencies. The fiscal year ends on December 31, 2021 and financial statements are issued on March 31,2022. Boume is involved in a lawsuit resulting from a dispute with a customer over a 2021 transaction. On December 31,2021, the {egal counsel advised that it was probable that Bourne would lose 3,000,000 inan unfavorable outcome, OnFebruary 15,2022, judgment was rendered against Boume inthe amount of P4.000,000 plus interest P500,000, Bourne doesnot plan toappedl the judgment, ~ ~ Boume isthe defendant in a lawsuit filed in January 2022 in which Accord Company seeks P5,000,000 as an adjustment to the Purchase price related to the sale of Bourne's hardwood division in 2021. The lawsuit alleged that Bourne misrepresented the division's assetsand liabilitics. i Legal counsel advised that itis reasonably possible that Bourne could lose P2,000,000 but that itis extremely unlikely it could lose the PS,000,000 asked for. (On Mareh 1,2022, the provincial government isin the process of investigating the possibility ofenvironmental violation at one of Bourne's sites but has not proposed a penalty assessment. ‘Management believed an assessment i is easoriably possible up 10 4,000,000. = What total amount should be reported as dcerued liability on December 34, 20217 i ST ones 1S Ra a. 4,000,000 b. 1,500,000 =~ ce. 4.500.000 a 0 Solution 5-19 Answer e ; Lawsuit from dispute with customer 4,500,000, No lossis recognized ftom the lawsuit filed by Accord Company and. fiom the environmental violation because both ae only reasonably 79Problem 5-20 (IAA) lected transactions related i following sel s sem Companperla OG eso Deemer 31.202 Financial Neontingencies, The Beal ear G9! jgsved on April Ty oe a 3021, Westem became aware ofan engineering flaw ; InDeceriber aces psentl isk oF injun: ee pecuue Pe inevitable. This thay Sythe entity P1,500,000. move would il 1it against Western, sont the ity of Manila filed suit against + an Novem 2021. rE ve relef for violations of clean water see eee with ec goverment 10 pe 0.000 in| penalties ‘on February 15,2022. vest lil suit filed against a gin a P4,000,000 lawsuit filed a a oft rom coneat rejected in 2021, * Wester a tie pin custome for ost Xin E jsed that itis virtually sasuitisin final appeal and attorney advis y Pelt ‘Western will be awarded 'P3,000,000. 1. Wher amount shoul be reported as aecrued lability on December 31,2021? a 1,500,000 b. 4200,000 ©, 5,700,000 a 0 2, Whatamount should be reported as gain from lawsuit in 2021? a. 4,000,000 b. 3,000,000 4c 3500,000 4 0 Solution 5-20 Question! Answer c Question 2 Answer d Product recall, 1,500,000 Penalty and injuctve rele? 4,200,000 ‘Accrued libitty 700,000 ‘The lawsuit against the customer isa gain contingency. Contingent gain is disclosed only when probable and measurable. 80 _~ Problem 5-21 (LAA) Eastem Company has several contingent liabilities at current year-end. ‘The auditor obtained the following brief description of each liability. During the current year, Eastern Company became involved in litigation. In December, the court assessed a judgment for 5,600,000 against Eastern Company. The entity is appealing the amount of the judgment. The entity’s attorneys believed itis probable that the assessment can be reduced conappeal by 50% In July, Pasig City brought action against Eastern Company for polluting the Pasig River with its waste products Itis probable that Pasig City will be successful but the amount of damages Eastern Company might have to pay should not exceed 1,500,000. ) What total amount should be aéerued as provision at current year-end? a. 1,600,000 b. 1,500,000} c. 3,100,000 é. 2,300,000 Solution 5-21 Answer d Assessment on appeal (50% x 1,600,000) 800,000 Environmental cost 1,500,000 ‘Total provision 81CHAPTER 6 OTE PAYABLE a pated and fair value option Problem 6-1 (AICPA Adapted) soe Company issued a note payable to Ons a aa OfPI 800,000, bearing interest at Nationa Bare in three equal annual principal payments of 12%, and payee the bank’s prime rate was 11%, The first P600,000. On s September 1.2022. ‘was made on. Jmrrest and prinipal payment was made on September on December 31,2022, what amount should be reported as { acerued intrest payae? 44,000, TAK) 48,000 : yi‘ 66,000 2 72,000 Solution 6-1 Answer b Note payable - September 1, 2021 1,800,000 Payment on September 1, 2022 (600,000) Note payable, September 1, 2022 Accrued interest payable from September 1 to December 31, 2022 (1,200,000 x 1296 x 4/12) January | - August 31, 2022 (1,800,000 x 12% x 8/12) September 1 - December 31, 2022 Total interest expense for 2022 82 Az Problem6-2(AICPAAdapted) 7! y ‘Mann Company reported on June’30, 2022 a\] 0% note payable in the amount of P3,600,000, ‘The note is dated October 1, 2020 and is payable in three equal annual payments of P},200,000 plus interest. The first interest and principal payment was made on October 1, 2021./>, On June 30, 2022, what amount should be reported ag accrued interest payable? a. 270,000 oh ex wee Dita b. 180,000 h i cc. 90,000 | a. 60,000 i Solution 6-2 Answer bY "| | i SUE SSEEEEEEEE | Note payable ~ October 1. 2020 3,600,000 Payment on October 1, 2021 1,200,000 Note payable ~ October 1, 2021 Acerued interest payable from October 1, 2021 to June 30, 2022 (2,400,000 x 10% x 9/12) Problem 6-3 (AICPA Adapted) Atyear-end, Roth Company issued a P1,000,000 face amount note payable to Wake Company in exchange for services rendered to Roth. ‘The note, made at usual trade terms, is due in nine months and bears interest, payable at maturity, atthe annual rate of 3%, ‘The market interest rate is 8%. The compound interest factor of 1 due in nine monthsat 8% is.944, At what amount should the note payable be reported at year-end? a. 1,030,000 qe needify ’. 1,000,000 ef odd cc. 965,200 Ue d. 944,000 Solution 6-3 Answer b Note payable at face amount 83Problem 6-4 (AICPA Adapted) ing los ompany had the following Look Come eit repaid each oat 226i ayable at ans at.12% interest payal vin scheduled maturity date, turity E Amount Maturity date Term a 00.000 vor312022 fOr | year "yyoee san 7/31/2022 Gimonths ey 9 months sstexpense when the loans are repaid. As a “Te entity recorded interstexpense when te loans FS ee ines expense of? 150,000 was feeorded in 2 1. What amount shouldbe reported as interest exPense for 20227 a. 150,000 b, 380,000 > c. 390,000 : 4, 500,000 FOr >. fnocomectionismade, by what amount would interest expense for 2022 be understated? 230,000 TOR 350,000 230y 240,000 0 Solution 6-4 Question | Answer b Question 2 Answer a January | = October 31,2022 ( $00,000 x 12% x 10/12) February 1-July31,2022 (1,500,000 x 12% x 6/12) May 1-December 31,2022 (3,000,000 x 12% x 8/12) Total interest expense for 2022 Recorded interest expense in 2022 Understatement of interest expense 84 Problem 6-5 (AICPA Adapted) On December 31,2021, Boston Company purchased amachine from Helix Company in exchange for a noninterest bearing note requis eight payments of P200,000. ears scat ‘The first payment was made on December 31, 202; and the others are due annually on December 31. Atdate of issuance, the prevailing rate of interest for this type of note was 11%) The PV of'an ordinary annuity of I at 11% for § periods is §.146-and the RY of an annuity of 1 in advance a 1% for periods 185,712, ee 1. OnDeceber St, 2021, hats the caying amount ofthe note a. 1,142,400 - ovr be 11029200 tr ©. 1,046,200 d. 942,400 2. What amount should be reported asi fa. 125,664 Jb. 103,664 ©. 176,000 d. 154,000 Solution 6-5 Question 1 Answer d PV of note payable (200,000 x 5.712) First payment on December 31, 2021 PV of note payable ~ December 31, 2021 The PV of an annuity of 1 in advance is used because the date of purchase is December 31,2021 and the first payment is made on same date, December 31, 2021. Question 2 Answer b Interest expense for 2022 (11% x 942,400) 851 AICPAAGapted) ae camer evidenced bY 8 NSM rye sinventory fmamarrcoerereeh Spy gest intluve sco Fan period at lower than man : sedefar the loan period ney 'y ane interest ate fortis type of loan the prose Ate 1270 imputed 9¥550,000 atthe beginning y value of the note 5 atthe beginnin torent expense should currei hi ofinterest expense should be reported for current What amount of inte ; year? \ 4 50,000 : 306,000 7 0 Jution 6-6 Answer € : 5: 12%) 306,000 snerest expense for current year (2,550,000 x Discouneon ape (3,600,000 - 2,550,000) 1,050,000 Problem 6-7 (AICPA Adapted) in d P1,000,000 and March 1, 2021, Fine Company borrowes 1,00 aoa ‘ear nate bearing iret a 12% per anni compounded ually tnterestis payable in fll at maturity on February28, 2023. ‘What amount should be reported as accrued interest payable on December 31, 2022? 100,000 120,000 232,000 240,000 Solution 6-7 Answer c Pha Accrued interest from March 1, 2021 to February 28, 2022 (1,000,000 x 12%) Accrued interest from March 1 to December 31, 2022 (1,000,000 + 120,000 x 12% x 10/12) 120,000 Accrued interest payable - December 31, 2022 Ifthe interest is com u ipounded annually, it means that the accrued interes for one year will also earn interest 86 Problem 6-8 (AICPA Adapted) On September 30, 2022, World Company borrowed P1,000,000 (on 4 9% note payable. The entity paid the first of four quarterly payments of P264,200 when due on December 31, 2022. 1. What amount should be reported as interest expense for2022? 90,000 lu y9 22,500 67,500 30,000 x hr pesos rs On December 31, 2022, what is the carrying amount of the note payable? 758,300 750,000 825,800 735,800 apse Solution 6-8 Question 1 Answer b Interest expense from October | to December 31, 2022 (9% x 1,000,000 x 3 / 12) Question 2 Answer a Note payable - September 30, 2022 1,000,000 Principal payment: Quarterly payment - December 31, 2022 264,200 Interest expense for 3 months (22,500) ( 241,700) Carrying amount ~ December 31, 2022 87Problem 6-9 (IAA) On January 1,2022, Solemn Company sold land to Glory Company. There was no established market price forthe and. ing note payable in Glory gave Solemn @P2,400,000 noninterest beat + first payment due three equal annuat installments of P800,000 with the December 31, 2022, : cp “The note has no ready market. Te prevailing rat of interest forsee ofthis ype is 10%. The present value ofa P2400,000 no" Fave Ot three equa anni installments of P800,000 ata 1O¥6rate oF meres S 1,989,600. What is the eamying emount ofthe note payable on December 31, 2022? Fe aft) £7 eer cso) a. 1,989,600 = “yy, b. 2,126,400 98) 7 Dery DO c. 1,388,560 ! d. 2,400,000 Solution 6-9 Answer ¢ Note payable 2,400,000 Present value 1,989,600, Discount on note payable ~ January 1, 2022 410,400 Amortization of discount for 2022 (10% x 1,989,600) 198,960) Discount on note payable ~ December 31, 2022 211,440 Note payable January 1,202 2,400,000 ‘Annual payment on December 31, 2022 (800,000) ‘Note payable December 31, 2022 1,600, i 5 600,000 Discount on note payable ~ December 31, 2022 (21440) Carrying amount ~ December 31, 2022 388,560 88 »_ st ie problem 6-10 (AICPA Adapted) Jason Company offered a contest in whic 1,000,000 payable over twenty Years ‘On December 31,2022, Jason Company. ontestand signed a note payable to the wi {4P50,000 installments every January 31. 2022, Jason Company purcha: ie a. 750,000 b. 500,000. ce, 250,000 d. 0 Solution 6-13 Answer a ‘Tho entire amount of P750,000 is reported as current liability because the note payable is due to be settled within one year regardless of the issuance of bonds payable. 5 o1