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How Much Is The Adjusted Book Disbursements For September?: Part Ii: Practical Problems Problem No.1
How Much Is The Adjusted Book Disbursements For September?: Part Ii: Practical Problems Problem No.1
How Much Is The Adjusted Book Disbursements For September?: Part Ii: Practical Problems Problem No.1
PROBLEM NO.1
You work as an accountant in The Magic Shop Hotel and you were assigned on the cash in bank account of the
company. You were able to gather the following information for the month of September.
August 31 September 30
Cash account balance P 15,822 P 39,745
Bank statement balance 107,082 137,817
Deposit in transit 8,201 12,880
Outstanding checks 27,718 30,112
Bank service charge 72 60
Customer’s check deposited September 10, returned by bank on September 8,250
16 marked NSF, and redeposited immediately; no entry made on books for
return or redeposit.
Collection by bank of the company’s notes receivable 71,815 80,900
SOLUTION:
Disbursement per bank statement P218,373
Add: Outstanding Checks, Sept. 30,112
Less: Outstanding Checks, Aug. (27,718)
NSF check redeposited (8,250)
Adjusted Disbursement P212,517
PROBLEM NO.2
On September 5, 2020, a fire damaged the warehouse of Clay Company. All inventory items and many accounting
records stored in the warehouse were destroyed. However, a portion of the inventory could be sold for scrap. The
company’s backup files provide the following information:
SOLUTION:
Beginning Inventory P750,000
Purchases 2,770,000
Cash Sales (@ cost) – (445,000 x .68) (302,600)
Credit Sales (@ cost) – (530,000 + 4,230,000 – 350,000) x .68 (2,998,800)
Ending Inventory P218,600
Salvaged Inventory (15,000)
Estimated loss in fire P203,600
PROBLEM NO.3
On January 1, 2020, Autumn Leaves Company purchased debt securities for cash of P765,540 to be held as financial
assets at amortized cost. The securities have a face value of P600,000 and they mature in 15 years, the securities
carry fixed interest of 10% that is receivable semiannually, on June 30 and December 31. The prevailing market
interest rate on these debt securities is 7% compounded semiannually. How much is the carrying value of the debt
securities on December 31, 2020?
SOLUTIONS:
Carrying Value, Jan.1,2020 P765,540
Amortization of premium, Jan.1-June 30 (3,206)
(600,000x10%x1/2)-(765,540x7%x1/2)
Carrying Value, June 30,2020 762,334
Amortization of premium, June 30 – Dec.31 (3,318)
P30,000 – (762,334x7%x1/2)
Carrying Value at amortized cost, December 31, 2020 P759,016
PROBLEM NO.4
Hashirama Incorporated purchased 40% of the outstanding ordinary shares of Madara Industries on January 2, 2020,
for P270,000,000. The book value of Madara’s net assets at the purchase date is P450,000,000. Book values and fair
values were the same except for inventory and buildings, for which fair value exceeded book values by P12,500,000
and P112,500,000 respectively. All inventory on hand at the purchase date was sold during 2020. The buildings have
average remaining useful life of 15 years.
Madara reported net income P110,000,000 for the year ended December 31, 2020 and paid cash dividends of
P40,000,000. The fair value of Hashirama’s investment in associate was P300,000,000 at December 31, 2020. What
is the balance of the investment as of December 31, 2020?
SOLUTION:
Purchase price P270,000,000
Share of net income (P110Mx40%) 44,000,000
Cash dividends received (P40Mx40%) (16,000,000)
Increase in cost of goods sold (P12.5Mx40%) (5,000,000)
Additional depreciation (3,000,000)
(P112.5Mx40% = P45/15years)
Investment Balance, Dec. 31, 2020 P290,000,000
PROBLEM NO.5
Namikaze Minato Incorporated includes coupons in the packages of its products. These coupons may be presented
at retail stores to obtain discounts on the company’s other products. Retailers are reimbursed for the face amount
of coupons redeemed plus 10% of that amount for handling costs. The company honors requests for coupon
redemption by retailers up to 3 months after the consumer expiration date. It estimates that 60% of all coupons
issued will ultimately be redeemed. Information relating to coupons issued by the company during 2020 is as follows:
What is the total face amount of coupons issued by the company in 2020?
SOLUTION:
Liability for unredeemed coupons, Dec.31, 2020 P99,000
Add: Total payments to retailers 165,000
Total cost 264,000
Less: Handling charges (P264,000-[264,000/110%]) (24,000)
To be redeemed 240,000
Divide by redemption rate 60%
Total face amount of coupon issued P400,000
PROBLEM NO.6
Kurama Company buys a machine for P228,600 on January 1, 2017. The maintenance costs for the years 2017 to 2014
are as follows:
Year Cost
2017 P 13,500
2018 10,800
2019 65,700
2020 18,900
The maintenance costs in 2019 includes P54,900 cost of a new motor installed in December 2019.
Kurama recorded the cost of the machine frame in one account at a cost of P176,400 and the motor was recorded
in a second account at a cost of P52,200. Straight-line method of depreciation is used with a useful life of 10 years
for the frame and 4 years for the motor. Residual values are immaterial and thus ignored in the computation of
depreciation. How much is the total machine-related expenses in 2020?
SOLUTION:
Depreciation – frame (P176,400/10) P17,640
Depreciation – motor (P54,900/4) 13,725
Maintenance expense 18,900
Total expense in 2020 P50,265
PROBLEM NO.7
On November 1, 2019 69 passengers on Kaguya Airlines Flight No.1709 were injured upon landing when the plane
skidded off the runway. Personal injury suits for damages totaling P10,000,000 were filed on January 12, 2020,
against the airline by 21 injured passengers. The airline carries no insurance. Legal counsel has studied each suit
and advised the company that it can reasonably expect to pay 70% of the damages claimed. The financial statements
for the year ended December 31, 2019, were authorized for issue on February 12, 2015. During the past decade, the
company has experienced at least one accident per year and incurred average damages of P4,100,000. How much is
the liability that the company must recognize as in 2019 in relation to the accident?
SOLUTION:
Liability for uninsured accident (P10M x 70%) P7,000,000
PROBLEM NO.8
The long-term section of Himawari Company’s statement of financial position as of December 31, 2019, included 9%
bonds payable of P400,000, less unamortized discount of P32,000. Further examination revealed that these bonds
were issued to yield 10%. The amortization of the bond discount was recorded using effective interest method.
Interests were paid on January 1 and July 1 of each year. on July 1, 2020, the company retired the bonds at 105
before maturity. What is the amount of loss to be recognized on the retirement of bonds?
SOLUTION:
Retirement Price P420,000
Carrying Value of the bonds:
Face Value P400,000
Less: Unamortized discount
P32,000–[(368,000x10%x1/2)-(400,000x9%x1/2)] (31,600) (368,400)
Loss on retirement of bonds P51,600
PROBLEM NO.9
Sarada Corporation is experiencing financial difficulty and has asked her bank to restructure its P3,000,000 note
outstanding. The present note has 3 years remaining and pays a current rate of interest of 12%. The note was issued
at face value. The bank agrees to accept land in exchange for relinquishing its claim on this note. The land has a
book value of P2,000,000 and a fair value of P2,500,000. How much gain or loss should be reported in the income
statement as a result of this agreement?
SOLUTION:
Gain on debt restructuring (asset swap) (P3,000,000 – P2,000,000) P1,000,000
PROBLEM NO.10
On January 1, 2019, Inojin Company issued 3-year, 4,000 convertible bonds at face value of P1,000 per bond. Interest
is to be paid annually in arrears at the stated coupon rate of 6%. Each bond is convertible, at the holder’s option,
into 200 P2 par value ordinary shares at any time up to maturity. On the date of issuance, the prevailing market
interest rate for similar debt without the conversion privilege was 9%. On the same date, the market price of one
ordinary share was P3. The bonds were converted on December 31, 2020. How much is the share premium on issuance
of shares that should be recorded in connection with the conversion of the bonds?
SOLUTION:
PV of principal (P4M x 0.77218) P3,088,720
PV of interest payments (P4Mx6%) x 2.53130 607,512
Liability component P3,696,232
PROBLEM NO.1
The Levithan Incorporated sold P6,000,000 of 9% bonds on January 1, 2013. The bonds were dated July 1, 2012;
interest payable semiannually on January 1 and July 1; redeemable after June 30, 2017 to June 30, 2020, at 101,
and thereafter until maturity at 100; and convertible into P10 par value common stock as follows:
• Until June 30, 2017, at the rate of 6 shares for each P1,000 bond.
• From July 1, 2017, to June 30, 2020, at the rate of 5 shares for each P1,000 bond.
• After June 30, 2020, at the rate of 4 shares for each P1,000 bond.
The bonds mature 10 years form their issue date and the prevailing market interest rate on the date of its issuance
was 11% The company adjust its books monthly and closes its books as of December 31 each year.
2019 Dec 31 P1,000,000 face value of bonds were reacquired at 98 plus accrued interest. These were
immediately retired.
2020 July 1 The remaining bonds were called for redemption and accrued interest was paid. For purposes of
obtaining funds for redemption and business expansion, an P8,000,000 issue of 7% bonds was sold
at 97. These bonds are dated July 1, 2020, and are due in 20 years.
Required:
1. Carrying value of bonds payable at December 31, 2013.
2. Total interest expense for 2013.
3. In recording the bond conversion on July 1, 2018, how much should be credited to the additional paid-in capital
account.
4. Gain or loss on bond conversion on July 1, 2018.
5. Carrying value of the bonds reacquired on December 31, 2019.
6. Gain (loss) on bond reacquisition on December 31, 2019.
7. Carrying value of the bonds retired on July 1, 2020.
8. Gain (loss) on bond retirement on July 1, 2020.
SOLUTION:
n = 10yrs x 2 = 20
NR = 9%/2 = 0.045
ER = 11%/2 = 0.055
Interest Interest
Date Amortization Carrying Value
Payment Expense
Jan.1,2013 ₱5,282,808
Jul.1,2013 ₱270,000 ₱290,554 ₱20,554 ₱5,303,362
Dec.31,2013 ₱270,000 ₱291,685 ₱21,685 ₱5,325,047
Jul.1,2014 ₱270,000 ₱292,878 ₱22,878 ₱5,347,925
Dec.31,2014 ₱270,000 ₱294,136 ₱24,136 ₱5,372,061
Jul.1,2015 ₱270,000 ₱295,463 ₱25,463 ₱5,397,524
Dec.31,2015 ₱270,000 ₱296,864 ₱26,864 ₱5,424,388
Jul.1,2016 ₱270,000 ₱298,341 ₱28,341 ₱5,452,729
Dec.31,2016 ₱270,000 ₱299,900 ₱29,900 ₱5,482,629
Jul.1,2017 ₱270,000 ₱301,545 ₱31,545 ₱5,514,174
Dec.31,2017 ₱270,000 ₱303,280 ₱33,280 ₱5,547,454
Jul.1,2018 ₱270,000 ₱305,110 ₱35,110 ₱5,582,564
Interest Interest
Date Payment Expense Amortization Carrying Value
Jul.1,2018 P3,721,709
PROBLEM NO.2
In connection with the audit of the company’s financial statements for the year ended
December 31, 2015 the Camille Corporation presented to their records. This is the first time
the company has been audited. The company issued serial bonds on April 1, 2012. Your audit
showed the following details of the issue and the accounts as of December 31, 2015.
Since the corporation had excess cash, bonds of P400,000 scheduled to be retired on March
1, 2017 were retired on April 1, 2015 at 98%.
Interest Expense
3/1/15 VR P 240,000
Required:
1. Adjusted balance of the bonds payable accounts as of December 31, 2015.
2. Unamortized bond premium as of December 31, 2015.
3. Accrued interest payable as of December 31, 2015.
4. The bond interest expense that should be reported by the corporation for the year
2015.
5. The gain on early retirement of bonds.
SOLUTION:
2.
Total proceeds 2,742,400
Less accrued interest payable (P2,000,000 x 12% x 1/12) 20,000
Issue price 2,722,400
Less face value 2,000,000
Total bond premium 722,400
Less:
Amortization:
Prior years, 2012 and 2014 (108,000 + 144,000+144,000) 396,000
Current year (2015)
Bonds retired on maturity (P400,000 x 0.006 x 2 mos.) 4,800
Bonds retired prior to maturity (P400,000 x 0.006 x 3 mos.) 7,200
Remaining bonds (P1,200,000 x 0.006 x 12 mos.) 86,400 98,400 (494,400)
Unamortized premium cancelled on bonds retired prior to maturity 55,200
(P400,000 x 0.006 x 23 mos.) .
Unamortized bond premium, 12/31/15 172,800
Alternative computation:
Remaining Amortization Unamortized
Maturity date Amount months rate premium
March 1, 2016 400,000 2 0.006 4,800
March 1, 2017 - - 0.006
March 1, 2018 400,000 26 0.006 62,400
March 1, 2019 200,000 38 0.006 45,600
March 1, 2020 200,000 50 0.006 60,000
1,200,000 172,800
4. Interest expense
Remaining bonds (P1,200,000 x 12%) 144,000
Bonds retired on maturity (P400,000 x 12% x 2/12) 8,000
Bonds retired prior to maturity (P400,000 x 12% x 2/12) 12,000
Bond premium amortization for 2015 (98,400)
65,600
5.
Retirement price (P400,000 x 98%) 392,000
Less carrying value of bonds retired:
Face value 400,000
Add unamortized bond premium, 4/1/15 to 2/28/17
(P400,000 x .006 x 23mos.) 655,200 455,200
Gain on early retirement of bonds 63,200