LIABILITIES

PROBLEM 1.
BIOTECH COMPANY is selling medical and industrial products. The company’s fiscal year ends on
August 31. The following information relates to the obligations of the company as of August 31,
2020:
Trade payables
Accounts payable for supplies, goods, and services purchases on an account amount to P450,000 as
of March 31, 2005.
Notes payable
BIOTECH has signed several long-term notes with financial institutions. The maturities of these
notes are given below. The total unpaid interest for all of these notes amounts to P420,000 on
August 31, 2020
Due date Amount
September 30, 2020 P 800,000
October 31, 2020 1,200,000
August 1, 2021 750,000
September 1, 2021 – July 31, 2025 1,500,000
P 7,350,000
Estimated warranties
BIOTECH has a one-year product warranty on selected items. The estimated warranty liability on
sales made during the 2018 – 2019 fiscal year and still outstanding as of August 31, 2019,
amounted to P150,000. The warranty costs on sales made from September 1, 2019 to August 31,
2020, are estimated at P390,000. The actual warranty costs incurred during 2019 – 2020 fiscal year
are as follows:
Warranty claims honored on 2018 – 2019 sales P 150,000
Warranty claims honored on 2004 – 2005 sales 95,000
Total P 245,000
Bonds payable
BIOTECH issued P5,000,000, 12% bonds, on March 1, 2014 at 96. The bonds will mature on March
1, 2024. Interest is paid semi-annually on March 1 and September 1. Cavaliers uses the straight line
method to amortize bond discount.
Dividends
On August 10, 2020, BIOTECH declared a cash dividend of P0.20 per common share and a 10%
common stock dividend. Both dividends were to be distributed on September 1, 2020 to common
stockholders on record at the close of business on August 31,2005. As of August 31, 2020, Cavaliers
has 5 million, P3 par value, common shares issued and outstanding.

QUESTIONS:
Based on the foregoing information, determine the adjusted balances of the following as of August
31, 2020:
1. Total current liabilities
a. P4,405,000 b. P4,830,000 c. P5,215,000 d. P5,305,000
2. Total noncurrent liabilities
a. P6,500,000 b. P6,410,000 c. P6,520,000 d. P6,800,000
3. Total liabilities
a. P11,715,000 b. P11,630,000 c. P11,240,000 d.
P11,625,,000

SOLUTIONS:
Question 1 - C
N1. Warranty payable, 8/31/2019 150,000
Add warranty expense accrued during 2019-2020 390,000
Total 540,000
Less payments during 2019-2020 245,000
Warranty payable, 3/31/2020 295,000

N2. Bond discount, 3/1/14 (P5,000,000 x .04)

200,000
Discount amortization, 3/1/14 to 3/31/2020 (P200,000/10 x 5.5) (110,000)
Bond discount, 3/31/2020 90,000

N3. Bond interest payable, 3/1/19 to 8/31/2020 (P5,000,000 x 12% x 6/12) 300,000

N4. Notes payable - current (maturing up to 8/31/2021) 2,750,000

Accounts payable 450,000
Estimated warranty payable (see N1) 295,000
Cash dividends payable (5 million shares x P0.20) 1,000,000
Accrued interest:
Notes payable 420,000
Bonds payable (see N3) 300,000 720,000
Q1. Total current liabilities 5,215,000 C
Question 2 - B
N5. Bonds payable:
Face value 5,000,000
Unamortized bond discount (see N2) (90,000) 4,910,000
Notes payable – non-current 1,500,000
Q2. Total non-current liabilities 6,410,000 B
Question 3 - D
Current Liabilities 5,215,000
Non-current Liabilities 6,410,000
Q3. Total Liabilities 11,625,000 D
PROBLEM 2.
On January 1, 2020, the OREO CO., issued P4,000,000 of 8% convertible bonds at par. The bonds
will mature on January 1, 2024 and interest is payable annually every January 1. The bond contract
entitles the bondholders to receive 12 shares of P50 par value common stock in exchange for each
P1,000 bond. On the date of issue, the prevailing market interest rate for similar debt without the
conversion option is 10%.
On December 31, 2021, the holders of the bonds with total face value of P1,000,000 exercised their
conversion privilege. In addition, the company reacquired at 110, bond with a face value of
P500,000.
The balances in the capital accounts as of December 31, 2020 were:
Common stock, P50 par, authorized 100,000 shares, issued
and outstanding, 60,000 shares P3,000,000
Premium on common stock 500,000
Market value of the common stock and bonds were as follows:
Date Bonds Common stock
December 31, 2020 118 40
December 31, 2021 110 42

QUESTIONS:
Based on the above and the result of your audit, answer the following:
1. How much of the proceeds from the issuance of convertible bonds should be allocated to equity?
a. P268,456 b. P253,589 c. P221,664 d. P0
2. How much is the carrying value of the bonds payable as of December 31, 2020?
a. P4,000,000 b. P3,389,400 c. P3,796,170 d. P3,801,052
3. How much is the interest expense for the year 2021?
a. P320,000 b. P338,940 c. P379,617 d. P380,105

SOLUTIONS:
Question 1- B
Total proceeds 4,000,000
Less liability component:
Present value of the principal (P4,000,000 x 0.683013455) 2,732,054
Present value of the interest (P4,000,000 x 8% x 3.16986544) 1,014,357 3,746,411
Q1. Equity component 253,589 B

Int. exp. Int. paid Amort. CV

Jan. 1, 2020 3,746,411
Dec. 31. 2020 374,641 320,000 54,641 3,801,052
Dec. 31. 2021 380,105 320,000 60,105 3,861,157
Dec. 31. 2022 386,116 320,000 66,116 3,927,273
Dec. 31. 2023 392,727 320,000 72,727 4,000,000
253,589
 Int. exp. Int. paid Amort. CV
Jan. 1, 2020 3,746.411
Dec. 31. 2020 374,641 320,000 54,641 3,801,052
Dec. 31. 2021 380,105 320,000 60,105 3,861,157
1,930,578
965,289
Dec. 31. 2022 96,529 80,000 16,529 981,818
Dec. 31. 2023 98,182 80,000 18,182 1,000,000
149,457

Question 2- D
Carrying value, 1/1/2020 (see no. 1) 3,746,411
Add discount amortization for 2020:
Effective interest (P3,746,411 x 10%) 374,641
Nominal interest (P4,000,000 x 8%) 320,000 54,641
Q2. Carrying value, 12/31/2020 3,801,052 D

Question 3- D
Q3. Effective interest (P3,801,052x 10%) 380,105 D

PROBLEM 3.
MINERO CO. had a pretax accounting income of P1,200,000 before considering the following
differences between financial and taxable income for the current year.
   (a)Excess of tax depreciation over book depreciation       P 120,000
   (b)Interest revenue on municipal bonds       18,000
   (c)Excess of estimated warranty expense over actual expenditures      108,000
   (d)Unearned rent received      60,000
   (e)Fines paid       15,000
   (f)Interest on indebtedness incurred to purchase tax-exempt
         securities       6,000
(g)Unrealized losses on marketable securities recognized for
         financial reporting       9,000
The tax rate is 30%.
QUESTIONS:
Compute for the following:
1. Accounting income subject to tax
a. 1,203,000 b. 1,257,000 c. 1,260,000 d. 1,200,000
2. Taxable income for the current year
a. 1,203,000 b. 1,257,000 c. 1,260,000 d. 1,200,000
3. Current tax expense
a. 377,100 b. 360,900 c. 378,000 d. 360,000

SOLUTIONS:
Pretax Income       P 1,200,000
Add (deduct) permanent differences:
      (b)   Tax-exempt interest       (18,000)
      (e)   Fines paid        15,000
      (f)   Interest expense 6,000 3,000
Q1. Accounting Income subject to tax       P 1,203,000 A
Add (deduct) temporary differences:
      (a)Excess of tax over book depreciation    (120,000)
      (c)Excess of warranty expense 108,000
      (d)Unearned rent received       60,000
      (g)Unrealized loss 9,000 57,000
 Q2. Taxable income       P 1,257,000 B
Tax rate x 30%  
Q3. Current Tax Expense 377,100 A

PROBLEM 4.