Problem 7-1 Debt Classification

BOOMERANG, INC. is a manufacturer and retailer of household furniture. Your audit of the company’s
financial statements for the year ended December 31, 2023, discloses the following debt obligations of
the company at the end of its reporting period. Boomerang’s financial statements are authorized for
issuance on March 6, 2024.

1. A P150,00 short-term obligation due on March 1, 2024. Its maturity could be extended to March
1, 2026, provided Boomerang agrees to provide additional collateral. On February 12, 2024, an
agreement is reached to extend the loan’s maturity to March 1, 2026.
2. A short-term obligation of P3,600,000 in the form of notes payable due February 5, 2024. The
company issues 75,000 ordinary shares for P36 per share on January 25, 2024. The proceeds
from the issuance, plus P900,00 cash, were issued to fully settle the debt on February 5, 2024.
3. A long-term obligation of P2,500,000 due on December1, 2033. On November10, 2023,
Boomerang breaches a covenant on its debt obligation and the loan becomes payable on
demand. An agreement is reached to provide a waiver of the breach on December 11, 2023.
4. A long-term obligation of P4,000,000. The loan is maturing over 4 years in the amount of
P1,000,000 per year. The loan is dated September 1, 2023, and the first maturity date is
September 1, 2024.
5. A debt obligation of P1,000,000 maturing on December 31, 2026. The debt is callable on
demand by the lender at any time.

1. What amount of current liabilities should be reported on the December 31, 2023, statement of
financial position?
a. P8,250,000
b. P5,750,000
c. P4,750,000
d. P3,750,000
2. What amount of noncurrent liabilities should be reported on the December 31, 2023, statement
of financial position?
a. P5,500,000
b. P3,000,000
c. P6,500,000
d. P7,500,000

Solution:

Current Noncurrent
1. P 150,000
2. 3,600,000
3. P2,500,000
4. 1,000,000 3,000,000
5. 1,000,000
Total P5,750,000 P5,500,000
1. Current liabilities
Answer: B
2. Noncurrent liabilities
Answer: A
Problem 7-2 Current Liabilities

The data below are from the records of ALMANOR, INC. on December 31, 2023:

Accounts payable P 680,000

Cash balance, ABC Bank 1,240,000
Cash overdraft with XYZ Bank 80,000
Customers’ accounts with credit balance 25,000
Dividends in arrears on preference shares 400,000
Employees’ income tax payable 100,000
Estimated warranty payable 50,000
Estimated premium claims outstanding 90,000
Income tax payable 400,000
Notes payable (issued in 2023 maturing in 20 semi-
annual installments beginning on April 1, 2024) 4,000,000
Salaries payable 400,000

The amount to be shown as total current liabilities on Almanor’s statement of financial position at
December 31, 2023, is

a. P2,225,000
b. P2,025,000
c. P2,625,000
d. P2,145,000

Solution:

Accounts payable P 680,000

Cash overdraft (XYZ Bank 80,000
Customers’ accounts with credit balance 25,000
Employees’ income tax payable 100,000
Estimated warranty payable 50,000
Estimated premium claims outstanding 90,000
Income tax payable 400,000
Notes payable due in 2024 400,000
Salaries payable 400,000
Total current liabilities P2,225,000
Answer: A
Problem 7-3 Accounts payable and Accrued Expenses

Included in DADANG Company’s unadjusted trial balance on December 31, 2023, are Accounts payable
and Accrued expenses of P523,100 and P63,100 respectively. Upon verification, you discovered the
following information:

1. On December 28, 2023, the company issued checks to creditors totaling P115,000. These checks
were released on January 5, 2024.
2. A check dated December 12, 2023, in payment of accounts payable was recorded as P12,000.
Upon examination of the checks returned by the bank, the actual amount was P21,000.
3. On December 26, 2023, the company purchased on account goods worth P215,000, but no entry
was made in the books. The goods were already included in the year-end physical count.
4. The following items were erroneously included in accounts payable:
 Accrued expenses totaling P37,450
 A cash advance from the President of Dadang Company amounting to P350,000 to be
used as working capital. This will be repaid within 6 months without interest.
 A debit balance of P87,250 representing advance payment for goods ordered to be
shipped by the supplier on January 12, 2025.
5. Your review of subsequent payments from January 2-15, 2024, revealed that no accruals was
made on December 31, 2023, for the following:
Light and water for Nov. and Dec. 2023 P 21,200
Telephone bills for Dec. 2023 18,150
Representation expenses for Dec. 2023 11,990
Minor repair of a delivery car on Dec. 26, 2023 3,180
Transportation expenses for 2024 2,560
Total P 57,080

1. The adjusted balance of accounts payable at December 31, 2023, is

a. P437,900
b. P543,900
c. P395,900
d. P738,900
2. The adjusted balance of Accrued expenses on December 31, 2023, is
a. P157,630
b. P54,520
c. P155,070
d. P57,080

Solution:
1. B Accounts payable per book P 523,100
Unreleased checks 115,000
Understatement of book disbursement
(P21,000-P12,000) (9,000)
Unrecorded purchase 215,000
Accrued expenses (37,450)
Cash advance from the company president (350,000)
Advance payment for goods ordered erroneously
debited to Accounts payable 87,250
Adjusted balance P 63,100
 2. C Accrued expenses per book P 63,100
Accrued expenses erroneously included in Accounts payable 37,450
Various accruals (P21,200+P18,150+P11,990+P3,180) 54,520
Adjusted accrued expenses P 155,070

PROBLEM 7-4 Recording Purchases

SAIMAA CORP. records its purchases at gross amounts but wishes to change to recording
purchases net of purchase discounts. Discounts on purchases recorded from January 1, 2023, to
December 31, 2023, totaled P80,000. Of this amount, P8,000 is still available in the accounts payable
balance. The balances in Saimaa's accounts as of and for the year ended December 31,2023, before
conversion are:
Purchases P 4,000,000
Purchase discounts 32,000
Accounts payable 1,200,000
The amount of purchase discounts lost to be recognized is
A. P8,000 C. P 32,000
B. P O D. P40,000
2. The accounts payable balance should be reduced by
A. P8,000 C. P 32,000
B. P80,000 D. P40,000
3.The purchases account should be reduced by
A. P32,000 C. P40,000
B. P80,000 D. P8,000
4. The entry to record the conversion is
A. Accounts payable 80,000
Purchases 80,000
B. Purchase discounts lost 32,000
Purchases 32,000
C. Purchase discounts lost. 40,000
Purchase discounts 32,000
Accounts payable. 40,000
 Purchases 80,000
D. Purchase discounts lost 32,000
Accounts payable 8,000
Purchases 80,000

SOLUTION 7-4
Discounts on 2023 purchases P 80,000
Less: Discounts taken 32,000
Discounts still available in the
accounts payable balance 8,000 40,000
Purchase discounts lost P40,000
Answer: D
2. The accounts payable should be reported net of discounts still available at the end of the reporting
period which amounts to P8,000.
Answer: A
3. Under the net method, purchases are reported net of discounts, regardless of whether the discounts
are taken or not. Hence, the purchases account should be reduced by P80,000.
Answer: B

4. The entry to record the conversion is:

Purchase Discount Lost 40,000
Purchase discounts 32,000
Accounts payable 8,000
Purchases 80,000
Answer: C

PROBLEM 7-5 PREMIUMS

PUKAKI COMPANY sold 700,000 boxes of "puto mix" under a new sales promotional program.
Each box contains one coupon, which if submitted with P40, entitles the customer to a kitchen knife.
Pukaki pays P60 per knife and P5 for handling and shipping. Pukaki estimates that 70% of the coupons
will be redeemed, even though only 250,000 coupons had been processed during 2023.
How much should Pukaki report as liability for unredeemed coupons at December 31, 2023?
A. P6,000,000 C. P15,600,000
B. P9,600,000 D. P12,250,000

SOLUTION 7-5
Boxes of "puto mix" sold 700,000
Redemption rate 70%
Total coupons redeemable P 490,000

Coupons to be redeemed (490,000 - 250,000) 240,000

Net cost per kitchen knife (P65 - P40) x25
Liability for unredeemed coupons P6.000.000
Answer: A

PROBLEM 7-6
PREMIUMS
In packages of its products, PLACID, INC. includes coupons that may be presented at retail stores
to obtain discounts on other Placid products. Retailers are reimbursed for the face amount of coupons
redeemed plus 10% of that amount for handling costs. Placid honors requests for coupon redemption by
retailers up to 3 months after the consumer expiration date. Placid estimates that 60% of all coupons
issued will ultimately be redeemed. Information relating to coupons issued by Placid during 2023 is as
follows:
Consumer expiration date. Dec. 31, 2020
Total payments to retailers as of Dec. 31, 2023 P165,000
Liability for unredeemed coupons as of Dec. 31, 2023 P99,000

What is the total face amount of coupons issued by Placid, Inc. in 2023?
A. P440,000 C. P600,000
B. P400,000 D. P264,000

SOLUTION 7-6
Liability for unredeemed coupons, Dec. 31, 2023 P 99,000
Add: Total payments to retailers 165,000
Total cost 264,000
Less: Handling charges (P264,000 - [P264,000/110%]) 24,000
To be redeemed 240,000
Divide by redemption rate ÷ 60%
Total face amount of coupons issued P400,000
Answer:B

PROBLEMS 7-7 Liability for

Returnable Containers

OMEGA COMPANY sells its products in expensive, reusable containers. The customer is charged a
deposit for each container delivered and receives a refund for each container returned within two years
after the year of delivery. Omega accounts for the containers not returned within the time limit as being
sold at the deposit amount. Information for 2023 is as follows:

Containers held by customers at

December 31,2022,

From deliveries in: 2021 85,000

2022. 240,000 325,000

Containers delivered in 2023 430,000

Containers returned in 2023.

From deliveries in: 2021. 57,000

2022. 140,000

2010. 157,000 354,500

1. How much revenue from container sales should be recognized for 2023?

A. P127,500 C. P27,500

B. P267,500 D. P85,000

2. What is the total amount of Omega Company9s liability for returnable containers ate December
31,2023?

A. P373,000 C. P267,500

B. P400,500 D. P430,000

Solution 7-7
1. Containers held by customers at Dec.31.2022,

from deliveries in 2021. P85,500

Less: Containers returned in 2023

from deliveries in 2021 57,500

Revenue from container sales P27,500

Answer: C

2. Liability for returnable containers, Dec.31,2022 P325,000

Add: Deliveries in 2023 430,000

Total 755,000

Less: 2023 container returns P354,500

2023 container sales (see no.1) 27,500 382,000

Liability for returnable containers,

Dec. 31,2023 P373,000

Answer: A

Problem 7-8 Various Transactions

Involving Current Liabilities

Described below are curtained transactions of ASHBY COMPANY.

Feb. 2 The company purchased goods from Happy Corp. for P150,00 subject to cash discount terms of
2/10, n/30. The company record purchases and accounts payable at net amounts after cash discounts.
The invoice was paid on February 25.

Apr. 1 The company purchased a truck for P120,000 from Broom Motors Corp., paying P12,000 in cash
and signing a one- year, 12% note for the balance of the purchased price.

May 1 The company borrowed P240,000 from Manila bank by signing a P276,000 noninterest bearing
note due one-year from May 1.

Aug. 1 The company’s board of director’s declared a P900,000 cash dividend that was payable on
September 10 shareholders of record on August31.

1. Prepare all the journal entries necessary to record the transactions described above.
2. Assume that Ashby Company’s financial year ends on December 31 and that no adjusting entries
relative to the transactions above have been recorded. Prepare any adjusting journal entries concerning
interest that are necessary to present fair financial statements at December 31.

SOLUTION 7-8

1. Journal Entries
Feb. 2 Purchases 147,000
Accounts payable 147,000
(P150,000x98%)
Feb. 25 Accounts payable 147,000

Purchase discounts lost (P150,000x2%) 3,000

Cash 150,000
April 1 Trucks 120,000
Cash 12,000

Notes payable 108,000

May 1 Cash 240,000
Discount on notes payable 36,000
Note payable 276,000

Aug. 1 Retained earnings 900,000

Dividends payable 900,000

2. ADJUSTING ENTRIES

December 31
1. Interest expense 9,720

Interest payable 9,270

(P180,000x12%x9/12)
2. Interest expense 24,000
Discount on notes payable 24,000
(P36,000x8/12)

Problem 7-9 Warranties

Situation 1

BARRADO CO, a machinery dealer, sells a machine for P22,200 under a 1-year warranty contract that
requires the company to replace all defective parts and to provide the necessary repair labor at no cost
to the customers. With sales being made evenly throughout the year, Barrado sells for each 600
machines in 2023 (half of the warranty expense is incurred in 2023, half in 2024). On the basis of
experience, the 1-year warranty costs are estimated to be P510 parts and P660 labor. Assume that in
2023, these warranty costs are incurred exactly as estimated.

1.What amount of warranty expense would be charged against 2016 revenue?

A. P702,000 C. P153,000

B. P351,000 D. P396,000

2.What amount of warranty liability would appear on the December 31, 2016, statement of financial
position?

A.P 0 C. P702,000

B.P153,000 D. P351,000

Situation 2

DP INC., a dealer of household appliances, sells washing machines at an average price f P8,100. The
company also offers to each customer a separate 3-year warranty contract for P810 that requires the
company to provide periodic maintenance services and to replace defective parts.

During 2023, DP sold 300 washing machines and 270 warranty contracts for cash. The company
estimates that the warranty costs are P180 for parts and P360 for labor.

Assume sales occurred on December 31, 2023. DP’s policy is to recognize income from the warranties
on a straight-line basis. In 2024, DP incurred actual costs relative to 2023 warranty sales of P18,000 for
parts and P35,000 for labor.

1. What liability relative to these transactions would appear on the December 31, 2023 statement of
financial position and how would it be classified?

Current. Non-Current

A. 145, 800 72, 900

B. 72,900 72,900

C. 72,900 145, 800

D. 0 218, 700

2. What amount of warranty expense would be shown on the income statement for the year ended.
December 31, 2024?

A. 18,000. B. 0. C. 36,000. D. 54,000

3. What liability relative to the 2023 warranties would appear on the December 31, 2024 statement of
financial position and how would it be classified?

Current. Non-Current
A. 145, 000 72,900

B. 72, 900 72,900

C. 72,900 145,800

D. 145, 800 0

Solution 7-9

Situation 1

1. 2023 warranty expense (P1,170 x 600)

* P510 parts + P660 labor. P702.000

Answer: A

2. Warranty liability, Dec. 31, 2023 (P1,170 x 600 x 1/2). P351,000

Answer: D

Situation 2

1. Unearned warranty revenue:

Current (P810 x 270 x 1/3). 72,900

Noncurrent (P810 x 270 x 2/3). 145,800

Answer: C

2. Parts. 18,000

Labor. 36,000

Total warranty expense. 54,000

Answer: D

3. Unearned warranty revenue:

Current (P810 x 270 x 1/3). 72,900

Noncurrent (P810 x 270 x 1/3). 72, 900

Answer: B

PROBLEM 7-10 ACCOUNTING FOR WARRANTIES AND PREMIUMS

OLSON MUSIC EMPORIUM carries a wide variety of musical instruments, sound reproduction
equipment, recorded music, and sheet music. To promote the sale of its products, Olson uses two
promotion techniques-premiums and warranties.

PREMIUMS

The premium is offered on the recorded and sheet music. Customers receive a coupon for each P10
spent on recorded music and sheet music. Customers may exchange 200 coupons and P200 for a power
bank. Olson pays P340 for each power bank and estimates that 60% of the coupons given to customers
will be redeemed. A total of 6,500 power banks used in the premium program were purchased during
the year and there were 1,200,000 coupons redeemed in 2021.

WARRANTIES

Musical instruments and sound reproduction equipment are sold with a one-year warranty for
replacement of parts and labor. The estimated warranty cost, based on past experience, is 2% of sales.
Replacement parts and labor for warranty work totaled P1,640,000 during 2023.

Olson uses the accrual method to account for the warranty and premium costs for financial reporting
purposes. Olson's sales for 2023 totaled P72,000,000-P54,000,000 from musical instruments and sound
reproduction equipment and P18,000,000 from recorded music and sheet music. The balances in the
accounts related to warranties and premiums on January 1, 2023, were as shown below:

Inventory of premium power banks P 399,500

Estimated premium claims outstanding 448,000

Estimated liability from warranties 1,360,000

Based on the preceding information, determine the amounts that will be shown on the 2023 financial
statements for the following:

1. Warranty expense

A P1,640,000 C. P800,000

B. P1,080,000 D. P360,000

2. Estimated liability from warranties

A. P1,920,000 C P240,000

B. P1,080,000 D. P800,000

3. Premium expense

A. P1,836,000 B. 840,000
C. P756,000 D. 2,189,500

4. Inventory of premium power banks.

A. P399,500 C. P2,210,000

B. P569,500 D. P739,500

5. Estimated premium claims outstanding

A. P364,000 C. P756,000

B. P840,000 D. P672,000

SOLUTION 7-10

Sales of musical instruments and

sound reproduction equipment P54,000,000
Estimated warranty cost x 2%

Warranty expense for 2023 P1,080.000

Answer: B

Estimated liability from warranties, Jan. 1, 2023 1,360,000

Add: 2023 warranty expense (see no. 1) 1,080,000

Total 2,440,000

Less: Actual warranty costs during 2023 1,640,000

Estimated liability from warranties, Dec. 31, 2023 800,000

Answer: D

3. Coupons issued (P18,000,000/P10) 1,800,000

Multiply by estimated redemption rate x 60

Estimated number of coupons to be redeemed 1,080,000

Divide by exchange rate (200 coupons for a power bank) 200

Estimated number of power banks to be issued 5,400

Multiply by net cost of a power bank (P340 - P200) X 140

Premium expense for 2023 P756.000

Answer: C
4. Inventory of premium power banks 399,500

Add: Premium power banks purchased

during 2023 (P340 x 6,500) 2,210,000

Total 2,609,500

Less: Premium power banks distributed to

customers during 2023 (1,200,000/200 = 6,000 x P340) 2,040,000

Inventory of premium power banks, Dec. 31, 2023 P569.500

Answer: B

5. Estimated premium claims outstanding, Jan. 1, 2023 448,000

Add: 2023 premium expense (see no. 3) 756,000

Total 1,204,000

Less: 2023 actual redemptions (1,200,000/200 = 6,000 x P140) 840,000

Estimated premium claims outstanding, Dec. 31, 2023 364,000

Answer: A

PROBLEM 7-11 Accounting for Noninterest-bearing Note

On December 31, 2023, BAIKAL COMPANY acquired a piece of equipment from Seller Company by
issuing a P1,200,000 note, payable in full on December 31, 2027. Baikal's credit rating permits it to
borrow funds from its several lines of credit at 10%. The equipment is expected to have a 5-year life and
a P150,000 salvage value. The present value of 1 at 10% for 4 periods is 0.68301.

1. What is the equipment's book value on December 31, 2025?

A. P551,767 C. P491,767

B. P630,000 D. P341,767

2. What is the carrying value of the note at December 31, 2025?

A. P1,090,903 C. P1,200,000

B. P991,730 D. P819,612
SOLUTION 7-1

Cost of equipment (P1,200,000 x 0.68301) P819,612

Less: Accumulated depreciation,

Dec. 31, 2025 (P819,612-P150,000 = P669,612 x 2/5) 267,845

Book value, Dec. 31, 2025 P551.767

Answer: A

Carrying value of note payable at Dec. 31, 2025

(see discount amortization schedule below) P991,730

Answer: B

SCHEDULE OF DISCOUNT AMORTIZATION

Date Discount Amortization Carrying Value of Note

12.31.23 .. 819,612

12.31.24 81,961 901,573

12.31.25 90,157 991,730

12.31.26 99,173 1,090,903

12.31.27 109,097 1,200,000

PROBLEM 7-12 Accounting for Noninterest-bearing Note

(Payable in Installments)
OHRID COMPANY purchased machinery on December 31, 2023, paying P80,000 down and agreeing to
pay the balance in four equal installments of P60,000 payable each December 31. Implicit in the
purchase price is an assumed interest of 12%.

The following data are abstracted from the present value tables:

Present value of 1 at 12% for 4 periods 0.63552

Present value of an ordinary annuity of 1 at 12% for 4 periods 3.03735

1. What is the cost of the machinery purchased on December 31, 2023?

A. P233,083 C. P262,241

B. P320,000 D. P290,842

2. How much interest expense should be reported in Ohrid's income statement for the year ended
December 31, 2024?

A P38,131 C. P17,293

B. P21,869 D. P42,707

3. What is the carrying value of the note at December 31, 2025?

A. P120,000 C. P99,310

B. P144,110 D. P101,403

SOLUTION 7-12

1. Down payment P80,000

Present value of installment payments (P60,000 x 3.03735) 182,241

Cost of machinery P262,241

Answer: C

2. Interest expense for 2024 (see amortization schedule) P21,869

Answer: B
3. Carrying value of note at Dec. 31, 2024 (see amortization schedule) P101,403

Answer: D

SCHEDULE OF NOTE DISCOUNT AMORTIZATION

Date Payment Discount Amortization Carrying Value of Note

12.31.23 P182,241

12.31.24 P60,000 P21,8691 144,1102

12.31.25 P60,000 17,293 101,403

12.31.26 P60,000 12,168 53,571

12.31.27 P60,000 6,429 0

ROPALITO P. DIZON, CPA

BSA - 3A

PROBLEM 7-13 NOTES PAYABLE

Notes Payable On October 1,2023, BALATON CORP. issued a P500,000, 12-month, 12% note to ABC
Company in payment of account. On the same date, the company borrowed P1,000,000 from the Asian
Bank by signing a 12- month, noninterest-bearing, P1,200,000 note.

1. Prepare adjusting journal entries at December 31,2023.

2. What is the total/net liability to be reported on the December 31, 2023, statement of financial
position for?
a) The interest-bearing note?
b) The noninterest-bearing note?

SOLUTION 7-13

1. ADJUSTING JOURNAL ENTRIES

December 31,2023

a. Interest expense 15,000

Interest payable 15,000

(500,000 x 12% x 3/12)

b. Interest expense 30,000

Discount on notes payable 30,000

(P120,000 x 3/12)

2.

a. Notes payable P500,000

Interest payable 15,000

Total P515,000

b. Note payable P1,120,000

Less: Discount on note payable

(P120,000 – P30,000) 90,000

Carrying value P1,030,000

PROBLEM 7-14 NOTES PAYABLE: ADJUSTMENTS FOR INTEREST

Described below are certain transactions of TUNIS COMPANY.

1. On April 1, the corporation bought a truck for P400,000 from General Motors Company, paying
P40,000 in cash and signing a one year, 12% note for the balance of the purchase price.

2. On April 1, the corporation borrowed P800,000 from the Prudent Bank by signing a P920,000
noninterest-bearing note due one-year from May 1.

Prepare any adjusting journal entries to present a fair financial statements at December 31.

SOLUTION 7-14
ADJUSTING JOURNAL ENTRIES

December 31

1. Interest expense 32,400

Interest payable 32,400

(P360,000 x 12 9/12)

2. Interest expense 80,000

Discount on notes payable 80,000

(P120,000 x 8/12)

PROBLEM 7-15 ANALYZING VARIOUS TRANSACTION INVOLVING LIABILITIES

In conjunction with your firm’s examination of the financial statements of BATUR, INC. as of December
31,2023, you obtained the information from the company’s voucher register shown in the work paper
below.

Item Entry Voucher Description Amount Account Charged

No. Date Reference

1 12/18/23 12-200 Supplies, shipped FOB destination,

12/15/23; received 12/17/23 P15,000 Supplies on hand

2 12/18/23 12-203 Auto insurance,12/15/23-12/15/24 22,000 Prepaid insurance

3 12/21/23 12-209 Repairs services; received 12/20/23 19,000 Repairs & maintenance

4 12/26/23 12-212 Merchandise, shipped FOB shipping point, 123,000 Inventory

12/20/23; received 12/24/23

5 12/21/23 12-210 Payroll, 12/7/23-12/21/23 (12 working days) 69,000 Salaries and wages

6 12/21/23 12-234 Subscription to industry magazine for 2024 5,000 Dues & subscriptions
expense

7 12/28/23 12-236 Utilities for December 2023 24,000 Utilities expense

8 12/28/23 12-241 Merchandise, shipped FOB destination, 111,500 Inventory

12/24/23; received 1/2/24

9 12/28/23 12-242 Merchandise, shipped FOB destination, 84,000 Inventory

12/24/23; received 1/2/24

10 1/2/24 1-1 Legal services; received 12/28/23 46,000 Legal and professional fees
expense

11 1/2/24 1-2 Medical services for employees for 25,000 Medical expenses

December 2023

12 1/5/24 1-3 Merchandise, shipped FOB shipping point, 15,000 Inventory

12/29/23; received 1/4/24

13 1/10/24 1-4 Payroll, 12/21/23-1/5/24(12 working days in total, 72,000 Salaries and wages

4 working days in Jan.2024)

14 1/10/24 1-6 Merchandise, shipped FOB shipping point, 11 64,000 Inventory

1/2/11; received 1/6/24

15 1/12/24 1-8 Merchandise, shipped FOB destination, 38,000 Inventory

 1/3/24; received 1/10/24

16 1/13/24 1-9 Maintenance services; received 1/9/24 9,000 Repairs & maintenance

17 1/14/24 1-10 Interest on bank loan,10/10/23-1/10/24 30,000 Interest expenses

18 1/15/24 1-11 Manufacturing equipment; installed 12/29/23 254,000 Machinery & equipment

19 1/15/24 1-12 Dividend declared/ 12/15/23 160,000 Dividends

Accrued liabilities as of December 31,2023, were as follows:

Accrued payroll P48,000

Accrued interest payable 26,666

Dividends payable 100,000

The accrued payroll and accrued interest payable were reversed effective January 1,2024. Review the
given data above and prepare journal entries to adjust the accounts on December 31, 2023. Assume that
the company follows FOB terms for recording inventory purchases.

SOLUTION 7-15

ADJUSTING JOURNAL ENTRIES

December 31,2023

1. Insurance expense 917

Prepaid insurance 917

(P22,000 x 5/12)

2. Prepaid dues and subscriptions 5,000

Dues and subscriptions expense 5,000

3. Accounts payable 111,500

Inventory 111,500

4. Accounts payable 84,000

Inventory 84,000

5. Legal and professional fees expense 46,000

Accounts payable 46,000

6. Medical expenses 25,000

Accounts payable 25,000

7. Inventory 55,000
Accounts payable 55,000

8. Machinery and equipment 254,000

Accounts payable 254,000

PROBLEM 7-16 Provisions

You are engaged to audit the December 31, 2023, financial statements of MILANI COMPANY, a
manufacturer of household appliances. Your audit disclosed the following situations.
1. In June 2023, the company began producing and selling a new line of dishwasher. By the end of the
year, it had sold 120,000 to various dealers for P15,000 each. The product was sold under a 1-year
warranty, and the company estimates warranty costs to be P750 per dishwasher. Milani had paid out P30
million in warranty expenses as of December 31, 2023, which is also the amount shown as warranty
expense in its income statement for the current year.
2. In response to your letter of audit inquiry, Milani's lawyer informed you that the company is involved
in a lawsuit for violating environmental laws regulating hazardous waste. Although the litigation is
pending, Milani's lawyer is certain that Milani will most probably have to pay cleanup costs and fines of
P5,500,000. Milani neither accrued nor disclosed this loss in the financial statements.
3. Milani is the defendant in a patent infringement suit by Megan Yang over Milani's use of a hydraulic
compressor in several of its manufactured appliances. Milani's lawyer informed you that if the suit goes
against your audit client, the loss may be as much as P10 million. However, the lawyer believes that the
loss of this suit is only possible. Milani did not in any way disclose this pending litigation in its financial
statements.
1. What amount of warranty expense should be shown on Milani's income statement for the year ended
December 31, 2023?
A. P30,000,000 C. P60,000,000
B. PO. D. P90,000,000
2. What amount of warranty liability should be shown on Milanľ's statement of financial position as of
December 31, 2023?
A. P60,000,000 C. P30,000,000
B. P90,000,000 D. PO
3. What amount of lawsuit liability should be reported as a provision on Milani's December 31, 2023,
statement of financial position?
A. P10,000,000. C. P15,500,000
B. P5,500,000 D. PO

SOLUTION 7-16
1. Warranty expense (P750 x 120,000) P90,000,.000
Answer.: D
2. Warranty liability (P90,000,000 - P30,000,000) P60,000,.000
Answer.: A
3. Environmental cleanup liability - P5.500.000
Answer: B

PROBLEM 7-17 Loss Contingency

On November 1, 2023, 69 passengers on CANYON AIRLINES Flight No 143 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, 2024, against the airline by 21 injured passengers. The airline carries no
insurance. Legal counsel has studied each suit and advised Canyon that it can reasonably expect to pay
70% of the damages claimed. The financial statements for the year ended December 31, 2023, were
authorized for issue on February 12, 2024. During the past decade, the company has experienced at
least one accident per year and incurred average damages of P4,100,000.
1. Prepare the journal entry that should be made as of December 31, 2023, to recognize the loss.
2. What liability due to the risk of loss from lack of insurance coverage should Canyon Airlines record or
disclose? (Ignore the November 1, 2023, accident.)
SOLUTION 7-17
1. Loss from uninsured accident. 7,000,000
Liability for uninsured accident. 7,000,000
(P10,000,000 x 70%)

The loss Contingency should be accrued because the cause for litigation occurred before the end of the
reporting period and unfavorable outcome is both probable and reasonably estimable.
Under PAS 37: Provisions, Contingent Liabilities, and Contingent Assets, a provision shall be recognized
when:
a. an entity has a present obligation (legal or constructive) as a result of a past event;
b. it is probable that an outflow of resources embodying economic benefits will be required to settle the
obligation; and
c. a reliable estimate can be made of the amount of the obligation.
2. The company is not required to establish a liability for risk of loss from lack of insurance coverage.
However, the fact that the company is self-insured will require note disclosure.

PROBLEM 7-18 Currently Maturing Debt Expected to be Refinanced

NAMEKUS COMPANY has the following three loans payable scheduled to be repaid in February
of next year. The company's accounting year ends on December 31.
a. The company intends to repay Loan 1 for P100,000 when it comes due in February. In the following
October, the company intends to get a new loan for P80,000 from the same bank.
b. The company intends to refinance Loan 2 for P150,000 when it comes due in February. The refinancing
agreement, for P180,000, will be signed in April, after the financial statements for this year have been
authorized for issue.
c. The company intends to refinance Loan 3 for P200,000 before it comes due in February. The actual
refinancing, for P175,000, took place in January, before the financial statements for this year have been
authorized for issue.
1. As of December 31 of this year, the total current liabilities to he reported in the company's statement
of financial position should be?
A. P100.000 C. P450,000
B. P250,000. D. P125,000

2. As of December 31 of this year, the total noncurrent liabilities to be reported in the company's
statement of financial position should be?
À. P25,000. C. P175,000
B. PO D. P350,000
SOLUTION 7-18

1. Loan 1 P100,000
Loan 2 150,000
Loan 3. 200,000
Total current liabilities P450,000
Answer.: C
2. Noncurrent liabilities. PO
Answer: B

Problem 19

The following items are based on the financial statements of CARMEL COMPANY.

Current assets P 750,000

Short- term loan payable 600,000

Total liabilities 3,000,000

Current ratio 1.5

Debt- to- equity ratio 1.5

Carmel Company has arranged with its bank to refinance its short- term loan when it becomes due in 3
months. The new loan will have a term of 5 years.

1. Compute for the following:

A. Total current liabilities
B. Total shareholders’ equity
C. Total non- current liabilities
2. As the auditor of Carmel Company, how would you verify the validity of the short term loan
refinancing?

SOLUTION 7-19
1. A. current ratio= current assets
Current liabilities

1.5= 750,000
Current liabilities
Current liabilities= 750,000/1.5
=500,000
b. Debt-to-equity ratio = total liabilities
total equity
1.5 = 3,000,0000
total equity
 total equity = 3,000,000/1.5
= 2,000,000

c. Total liabilities 3,000,000

less: Current liabilities 500,000
Noncurrent liabilities 2,500,000
2. The refinancing should occur on or before the end of the reporting period. The
refinancing agreement should be examined to verify that the refinancing has actually
taken place.

Problem 20

ALEGARIO CO. owes P 10,000,000 to Boom Bank. Unpaid interest on this loan has been accrued in the
amount of P 100,000. Because ALEGARIO is in financial trouble. Boom Bank agrees to accept from the
company 160,000 ordinary shares (P 10 par) that have a fair value of P 8,000,000, in full settlement of
the P 10,000 loan obligation.

1. How much gain on extinguishment of debt should ALEGARIO CO. recognize in its book?

2. What entry should be made by ALEGARIO CO. for the debt restructure?

SOLUTION 7-20

1. Loan payable P10,000,000

Accrued interest 100,000

Carrying amount of liability 10,100,000

Fair value of ordinary shares issued 8,000,000

Gain on extinguishment of debt P2,100,000

2. Loan payable 10,000,000

accrued Interest payable 100,000

Ordinary shares 1,600,000

Share premium - Ordinary shares 6,400,000

Gain on extinguishment of debt 2,100,000

Problem 21
BONTONG CO. is having financial difficulty and therefore has asked Thrift Bank to restructure its 5% P9
million note outstanding. The present note has 5 years remaining with an accrued interest that is due
immediately amounting to P 450,000. The note was issued at its face value. To assist BONTONG CO.,
Thrift Bank agrees to restructure the loan. It agrees to reduce the principal balance due to P 7,250,000
and interest rate to 4%. The accrued interest of P 450,000. Is forgiven outright. Given BONTONG ‘S
current financial condition, the market rate of interest for its debt would actually be 12%.

1. How much is the gain on extinguishment of debt should BONTONG CO. recognize in its book?

2. What entry should be made by BONTONG CO. for the debt restructure?

SOLUTION 7-21

1. Present value of old liability:

Principal 9,000,000
Accrued interest 450,000 9,450,000
Present value of new liability at 5% rate:
Principal (P7,250,000 x 0.7835) P5,680,375
Interest (P7,250,000 x 4% =
P290,000x 4.33) 1,255,700 6,936,075
Difference 2,513,925

Paragraph 3.3.2 of PFRS 9 states that a substantial modification of the terms of an existing financial
liability shall be accounted for as extinguishment of the original financial lability and the recognition of a
new financial liability.

Under Application Guidance B3.3.6 of PFRS 9, the terms are substantially different if the discounted
present value of the cash flows under the new terms, including any fees paid net of any fees received
and discounted using the original effective interest rate, is at least 10 per cent different from the
discounted present value of the remaining cash flows of the original financial liability.

The present value of the new debt is about 27% of the old debt (P2,513,925/P9,450,000) which exceeds
the 10% threshold. Hence, again will be recognized on the date of restructuring.

1. Present value of old liability:

Principal P9,000,000

Accrued interest 450,000 P9,450,000

 Present value of new liablty (using 12% market interest rate):

Principal (P7,250,000 x 0.5674) P4,113,650

Interest (P7,250,000 x 4% =

P290,000 x 3.605) 1,045,450 5,159,100

Gain on extinguishment of debt 4,290,900

2. Note payable – old 9,000,000

Accrued interest payable 450,000

Discount on note payable - new 2,090,900

Note payable - new 7,250,000

Gain on extinguishment of debt 4,290,900

Face value of new note payable P7,250,000

Present value of new note payable at 12%

market rate of interest 5,159,100

Discount on new note payable P2,090,900

PROBLEM 7-22 Classification of Debt

At December 31, 2023, KISU COMPANY's liabilities include the following:

1. P10 million of 10% notes are due on March 31, 2028. The financing agreement contains a covenant
that requires Kisu to maintain current assets at least equal to 200% of its current liabilities. As of
December 31, 2023, Kisu has breached this loan covenant. On February 10, 2024, before Kisu's financial
statements are authorized for issue, Kisu obtained a period of grace from Mayumi Bank until January 31,
2025, having convinced the bank that the company's normal 3 to 1 ratio of current assets to current
liabilities will be reestablished during 2024.

2. P15 million of noncancelable 12% bonds were issued at face value on September 30, 2002. The bonds
mature on August 31, 2024. Kisu expects to have sufficient cash available to redeem the bonds at
maturity.

3. P20 million of 10% bonds were issued at face value on June 30, 2004. The bonds mature on June 30,
2033, but bondholders have the option to call (demand payment on) the bonds on June 30, 2024.
However, the call option is not expected to be exercised, given prevailing market conditions.

What portion of Kisu Company's debt should be reported as a noncurrent liability?

A. P10 million
C. P20 million

B. P30 million

D. P 0.

SOLUTION 7-22

All of the above liabilities should be reported as current liabilities in Kisu's statement of financial position
as of December 31, 2023, for the following reasons:

1. P10 million notes - The period of grace was given by the bank only after Kisu's reporting date. As of
December 31, 2023, Kisu does not have the right to defer settlement of its liability for at least 12 months
after the reporting period.

2. P15 million bonds - These are payable in the succeeding year. As of the end of the reporting period,
no long-term refinancing has been made by Kisu.

3. P20 million callable bonds - Because these bonds are callable by the creditor in the succeeding year,
Kisu does not have the right to defer its settlement for at least 12 months after the end of the reporting
period, even if the debt is not expected to be called

Answer: D

PROBLEM 7-23 Contingencies, Provisions, and Events After the Reporting Period

Your audit client, CHALA COMPANY, is involved in the situations described below. Chala's accounting year
ends on December 31, 2023, and its financial statements are authorized for issue on March 20, 2024.

1. Chala is involved in a lawsuit resulting from a dispute with a customer. On January 28, 2024, judgment
was rendered against Chala in the amount of P20 million. Chala plans to appeal the judgment and is
unable to predict its outcome though management believes that it will not have a material adverse
effect on the company.

2. On April 25, 2024, the Bureau of Internal Revenue (BIR) is in the process of examining Chala's tax
returns for 2021 and 2022, but has not proposed a deficiency assessment. Management feels an
assessment is reasonably possible, and if an assessment is made, an unfavorable settlement of up to P5
million is reasonably possible.

3. On January 5, 2024, inventory purchased FOB shipping point from a foreign country was detained at
that country's border because of political unrest. The shipment is valued at P1 million. Chala's lawyers
have stated that it is probable that Chala will be able to obtain the shipment.

4. On November 1, 2023, a lawsuit was filed by a disgruntled customer who discovered a safety hazard in
one of Chala's best- selling products. Chala's lawyers feel it is probable that the company will be liable for
P500,000.
5. On December 5, 2023, Chala initiated a lawsuit seeking P1 million in damages from a patent
infringement.

Determine the appropriate means of reporting each situation. Prepare any necessary journal entries on
December 31, 2023.

Solutions 7-23

1. No accrual of the P20 million loss would be made. The judgment will be appealed and the outcome is
uncertain. A note disclosure would be appropriate.

2. Neither accrual nor disclosure would have to be made. The BIR claim is as yet unasserted, and an
assessment is not probable.

3. No adjustment or disclosure is required because the possibility of loss is remote.

4. The loss is both probable and reasonably estimable. Thus, the related obligation is not a contingent
liability but should be recognized as a provision as mandated by PAS 37. The entry to recognize the
provision is as follows:

Loss - litigation 500,000

Liability - litigation 500,000

5. The situation involves a contingent asset because the company is the plaintiff in the lawsuit. Under
PAS 37, a contingent asset shall not be recognized because this may result to recognition of income that
may never be realized. A contingent asset is only disclosed when it is probable. However, when the
realization of income is virtually certain, the related asset is no longer a contingent asset and its
recognition becomes appropriate.

PROBLEM 7-24 Analysis of Amortization

Schedule

LARIO COMPANY issued 10-year bonds on January 1, 2023. The company's year-end is December 31, and
financial statements are prepared annually. The amortization and interest schedule below reflects the
bond issuance and the subsequent interest payments and charges.

AMORTIZATION SCHEDULE
 Date Interest Paid Interest Amount Carrying Value
Expense Unamortized
01/01/23 P27,253 P 471,747
12/31/23 P 55,000 P 56,610 26,643 473,357
12/31/24 55,000 56,803 24,840 475,160
12/31/25 55,000 57,019 22,821 477,179
12/31/26 55,000 57,261 20,560 479,440
12/31/27 55,000 57,533 18,027 481,973
12/31/28 55,000 57,837 15,190 484,810
12/31/29 55,000 58,177 12,013 487,987
12/31/30 55,000 58,558 8,455 491,545
12/31/31 55,000 58,985 4,470 495,530
12/31/32 55,000 59,470* -- 500,000

• Adjustment due to rounding.

1. The bonds were issued at

A. A premium C. Face value

B. A discount D. Par value

2. What amortization method is used in the amortization schedule presented?

A. Straight-line method C. Effective interest method

B. Bonds outstanding method D. Declining balance method

3. What is the nominal (stated) interest rate of the bonds issued on January 1, 2023?

A. 11% C. 10%

B. 12% D. 6%

4. What is the effective interest rate of the bonds issued on January 1, 2023?

A. 11% C. 10%

B. 12% D. 6%

5. On the basis of the schedule presented, what is the journal entry to record the issuance of the bonds
on January 1, 2023?

A. Cash 500,000

Bonds Payable 500,000

B. Cash 471,747

Interest Expense 28,253

Bonds Payable 500,000

C. Cash 500,000

Premium on Bonds Payable 28,253

Bonds Payable 471,747

D. Cash 471,747

Discount on Bonds Payable 28 253

Bonds Payable 500,000

Solutions 7-24

B. 1. The bonds were sold at a discount of P28,253. The issue price (P471,747) is less than the maturity
value (or face value) of P500,00 on December 31, 2032.

C. 2. The amortization schedule presents an increasing interest est charge which characterizes the
effective interest method of amortizing bond premium or discount. Under the straight-line method, the
annual interest would have been P57,825.30 (see computation below).

Interest payment P55,000.00

Amortization of discount (P28,253/10) 2,825,30

Total P57,285,30

A. 3. Stated or nominal interest rate (P55,000/P500,000) 11%

B. 4. Effective interest rate (P56,610/P471,747) 12%

D. 5. Cash 471,747

Discount on Bonds Payable 28,253

Bonds Payable 500,000

PROBLEM 7-25 Classifying Liabilities

ELEANOR CORP. has been producing quality disposable diapers for more than two decades. The
company's fiscal year runs from April 1 to March 31. The following information relates to the obligations
of Eleanor as of March 31, 2023.

BONDS PAYABLE

Eleanor issued P10,000,000 of 10% bonds on July 1, 2021. The prevailing market rate of interest for
these bonds was 12% on the date of issue. The bonds will mature on July 1, 2031. Interest is paid
semiannually on July 1 and January 1. Eleanor uses the effective interest rate method to amortize bond
premium or discount.

The following present value factors are taken from the present value tables:
Present value of 1 at 12% for 10 periods 0.32917
Present value of 1 at 6% for 20 periods 0.31180
Present value of an ordinary annuity of 1 at 12%
for 10 periods 5.65022
Present value of an ordinary annuity of 1 at 6%
for 20 periods 11.46992

NOTES PAYABLE

Eleanor has signed several long-term notes with financial institutions. The maturities of these notes are
given in the schedule below. The total unpaid interest for all of these notes amounts to P600,000 on
March 31, 2023.

Due Date Amount Due

April 1, 2023 P400, 000
July 1, 2023 600,000
October 1, 2023 300,000
January 1, 2024 300,000
April 1, 2024 - March 31, 2025 1,200,000
April 1, 2025 - March 31, 2026 1,000,000
April 1, 2026 - March 31, 2027 1,400,000
April 1, 2027 - March 31, 2028 800,000
April 1, 2028 - March 31, 2029 1,000,000
P7,000,000

ESTIMATED WARRANTIES

Eleanor has a one-year product warranty on some selected items in its product line. The estimated
warranty liability on sales made during the 2021-2022 fiscal year and still outstanding as of March 31,
2022, amounted to P180,000. The warranty costs on sales made from April 1, 2022, through March 31,
2023, are estimated at P520,000. The actual warranty costs incurred during the current 2022-2023 fiscal
year are as follows:

Warranty claims honored on 2021-2022 sales P180,000

 Warranty claims honored on 2022-2023 sales 178,000
Total warranty claims honored P358.000

OTHER INFORMATION

1. TRADE PAYABLES
Accounts payable for supplies, goods and services purchased on open account amount to P740,000 as
of March 31, 2023.
2. PAYROLL RELATED ITEMS
Accrued salaries and wages P300,000
Withholding taxes payable 94,000
Other payroll deductions 10,000
Total P404.000

3. MISCELLANEOUS ACCRUALS
Other accruals not separately classified amount to P150,000 as of March 31, 2023.

4. DIVIDENDS

On March 15, 2023, Eleanor's board of directors declared a cash dividend of P0.20 per ordinary share
and a 10% share dividend. Both dividends were to be distributed on April 12, 2023, to the
shareholders of record at the close of business on March 31, 2023. Data regarding Eleanor ordinary
share capital are as follows:

Par value P5.00 per share

Number of shares issued and outstanding 6,000,000 shares

Market values of ordinary shares:

March 15, 2023 P22.00 per share
March 31, 2023 21.50 per share
April 12, 2023 22.50 per share

1. How much was received by Eleanor from the sale of the bonds on July 1, 2021?
A. P8,852,960 C. P10,500,000
B. P10,000,000 D. P10,647,040
2. What is the current portion of Eleanor's notes payable at March 31, 2023?
A. P2,800,000 C. P1,300,000
B. P1,600,000 D. P3,800,000
3. The balance of the estimated warranties payable at March 31, 2023, is
A. P342,000 C. P520,000
B. P18,000 D. P180,000
4. On March 31, 2023, Eleanor's statement of financial position would report total current liabilities of
A. P5,286,000 C. P5,336,000
B. P4,386,000 D. P5,642,000
5. On March 31, 2023, Eleanor's statement of financial position would report total noncurrent liabilities
of
A. P14,389,350 C. P14,370,783
B. P14,352,217 D. P14,252,960
SOLUTION 7-25

1. Present value of principal (P10,000,000 x 0.31180) P3,118,000

Present value of interest payments
(P10,000,000 x 5% = P500,000 x 11.46992) 5,734,960
Issue price/Proceeds P8,852,960
Answer: A

2. Notes payable - current portion:

April 1, 2023 P 400,000
July 1, 2023 600,000
October 1, 2023 300,000
January 1, 2024 300,000
Total P1.600.000
Answer: B

3. Estimated warranties payable:

Balance, April 1, 2022 P180,000
Add: Warranty expense for current year 520,000
Total 700,000
Less: Actual warranty costs 358,000
Balance, March 31, 2023 P342,000
Answer: A

4. Notes payable - current portion (see no. 2) P1,600,000

Estimated warranties payable (see no. 3) 342,000
Accounts payable 740,000
Payroll-related accruals and deductions withheld 404,000
Miscellaneous accruals 150,000
Cash dividends payable 1,200,000
Accrued interest on:
Bonds payable (P10,000,000 x 10% x 3/12) 250,000
Notes payable 600,000
Total current liabilities P5,286,000
Answer: A

5. AMORTIZATION SCHEDULE (PARTIAL)

Interest Interest Discount Carrying
Date Paid Expense Amortization Value
07/01/21 -- -- -- P8,852,960
12/31/21 P500,000 P531,178 P31,178 8,884,138
07/01/22 500,000 533,048 33,048 8,917,186
12/31/22 500,000 535,031 35,031 8,952,217
07/01/23 500,000 537,133 37,133 8,989,350

Bonds payable
Carrying value, Jan. 1, 2023 P8,952,217
Add: Discount amortization,
Jan. 1 - Mar. 31 (P37,133 x 3/6) 18,566 P 8,970,783

Notes payable - noncurrent portion:

(P7,000,000-P1,600,000 current portion) 5,400,000
Total noncurrent liabilities P14,370,783
Answer: C

PROBLEM 7-26 Bond Redemption Prior to Maturity Date

The following data were obtained from the initial audit of HANSTEEN COMPANY:
15%, 10-year, Bonds Payable, dated January 1, 2022

Debit Credit Balance

Cash proceeds from issue on January 1, 2022, of 1,000,
P1,000 bonds. The market rate of interest on the date of
issue was 12%. P1,172,044 P1,172,044

Bond Interest Expense

Cash paid, 1/2/23 P75,000 75,000
Cash paid, 7/1/23 P75,000 150,000
Accrual, 12/31/23 P75,000 225,000

Accrued Interest on Bonds

Balance, 1/1/23 P75,000 P75,000
Accrual, 12/31/23 75,000 150,000

Treasury Bonds
Redemption price and interest to date on 200 bonds
Permanently retired on Dec. 31, 2023 P265,000 P265,000

Based on the preceding information, determine the following:

1. Carrying value of bonds payable at December 31, 2023
A. P831,110 C. P1,151,583
B. P800,000 D. P921,266
2. Loss on bond redemption
A. P4,683 C. P15,000
B. P19,683 D. P34,683
3. Accrued interest on bonds at December 31, 2023
A. P75,000 C. P60,000
B. P135,000 D. P52,500
4. Bond interest expense for the year ended December 31, 2023
A. P150,000 C. P69,745
B. P139,174 D. P160,826

SOLUTION 7-26

1. AMORTIZATION SCHEDULE (PARTIAL)

 Interest Interest Premium Carrying
Date Paid Expense Amortization Value
01/01/22 -- -- -- P1,172,044
07/01/22 P75,000 P70,323 P4,677 1,167,367
01/01/23 75,000 70,042 4,958 1,162,409
07/01/23 75,000 69,745. 5,255 1,157,154
01/01/24 75,000 69,429 5,571 1,151,583

Carrying value of bonds, Dec. 31, 2023 (P1,151,583 x 800/1,000) P921,266

Answer: D
2. Cash paid P265,000
Less: Interest (P200,000 x 15% x 6/12) 15,000
Redemption price 250,000
Carrying value of bonds redeemed (P1,151,583 x 200/1,000) 230,317
Loss on bond redemption P19,683
Answer: B
3. Accrued interest, Dec. 31, 2023 (P800,000 x 15% x 6/12) P60.000
Answer: C
4. Interest expense for the year ended Dec. 31, 2023
(see amortization schedule):
Jan. 1-July 1 P69,745
July 1-Dec. 31 69,429
Total P139.174
Answer: B

PROBLEM 7-27 Bond Redemption Prior to Maturity Date

The long-term debt section of ELMO COMPANY's statement of financial position as of December 31,
2022, 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 the effective interest method. Interest was paid on January 1 and July 1 of each year.
On July 1, 2023, Elmo retired the bonds at 105 before maturity.

What is the amount of loss to be recognized on the retirement of bonds?

A. P52,400 C. P51,600
B. P20,000 D. P0

SOLUTION 7-27

Effective interest
(P400,000 - P32,000 = P368,000 x 10% x 1⁄2) P18,400
Nominal interest
(P400,000 X 9% x 1⁄2) 18,000
Discount amortization, Jan. 1, 2023-July 1, 2023 P 400

Retirement price (P400,000 x 105%) P420,000

Carrying value of bonds:
 Face value P400,000
Less: Unamortized discount
(P32,000-P400) 31,600 368,400
Loss on retirement of bonds P51,600

Answer: C

PROBLEM 7-28

MALOMBE CORP. had outstanding P6,000,000 of 11% bonds (interest payable July 31 and January 31)
due in 10 years. On July 1, it issued P9,000,000 of 10%, 15-year bonds (interest payable July 1 and
January 1) at 97. A portion of the proceeds was used to call the 11% bonds at 103 on August 1.
Unamortized bond discount and issue cost applicable to the 11% bonds were P240,000 and P60,000,
respectively.

Required:

Prepare journal entries to record the following:

a. Sale of the new issue

b. Retirement of the old issue

SOLUTION 7-28

a. Cash 8,730,000
Discount on bonds payable
(P9,000,000 x 3%) 270,000
Bonds Payable 9,000,000

b. Bonds payable 6,000,000

Loss on redemption of bonds 480,000
Cash (P6,000,000 x 103%) 6,180,000
Discount on bonds payable 240,000
Unamortized bond issue costs 60,000

Redemption price 6,180,000

Carrying value of bonds redeemed:
Face value P6,000,000
Unamortized bond discount (240,000)
Unamortized bond issue costs (60,000)
Loss on redemption 5,700,000
480,000
PROBLEM 7-29

On January 1, 2023, DIAS 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, 2024.

The following present value factors are obtained from the present value tables:

6% 9%
Present value of 1 for 3 periods 0.83962 0.77218
Present value of an ordinary annuity of 1
for 3 periods 2.67301 2.53130
Present value of an annuity due of 1
for 3 periods 2.83339 2.75911

1. The liability component of the convertible debt is

A. P4,000,000 C. P1,600,000
B. P3,696,232 D. P3,730,242

2. The equity component of the convertible debt is

A. P303,768 C. P1,600,000
B. P1,973,621 D. P2,400,000

3. The interest expense to be reported on Dias Company’s income statement for the year ended
December 31, 2024, is
A. P101,000 C. P240,000
B. P110,107 D. P341,000

4. The entry to record the bond conversion on December 31, 2024, should include a credit to share
premium – issuance of
A. P2,289,893 C. P2,593,661
B. P2,400,000 D. 0

SOLUTION 7-29

1. Present value of principal (P4,000,000 x 0.77218) P3,088,720

Present value of interest payments
 (P4,000,000 x 6% = P240,000 x 2.53130) 607,512
Liability component of convertible debt P3,696,232

Answer: B

2. Proceeds P4,000,000
Less: Liability component (see no. 1) P3,696,232

Equity component of convertible debt P303,768

Answer: A

3. AMORTIZATION SCHEDULE

Discount
Interest Interest amortizatio Carrying
Date Paid expense n Value
01/01/202 P3,696,23
3 2
P240,00 P332,66
P92,661
12/31/23 0 1 3,788,893
12/31/24 240,000 341,000 101,000 3,889,893
350,107
110,107
12/31/25 240,000 * 4,000,000
*Adjustment due to
rounding.

Interest expense for 2024 (see amortization schedule) 341,000

Answer: D

4. Carrying value of bonds, Dec. 31, 2024

(see amortization schedule) P3,889,893
add: Share premium – conversion privilege 303,768
Total consideration 4,193,661
Par value of ordinary shares [P2 x (4,000 x 200)] 1,600,000
Share premium – issuance P2,593,661

The entry to record the bond conversion is:

Bonds payable 4,000,000

Share premium – conversion privilege 303,768
 Bond discount (P4,000,000 – P3,889,893) 110,107
Ordinary shares (2 x 800,000 shares ) 1,600,000
Share Premium – issuance 2,593,661

Answer: C

PROBLEM 7-30

On January 1, 2023, ERITREA CO. signs a 10-year noncancelable lease agreement to lease a storage
building from Storage Company. The following information pertains to this lease agreement:

a. The agreement requires equal rental payments of P720,000 beginning on January 1, 2023
b. The fair value of the building on January 1, 2023, is P4,400,00
c. The building has an estimated economic life of 12 years, with an unguaranteed residual value of
P100,000. Eritrea depreciates similar buildings on the straight-line method.
d. The lease is nonrenewable. At the termination of the lease, the building reverts to the lessor.
e. The interest rate implicit in the lease is 12% per year.
f. The yearly rental payment includes P24,705. 10 of executory costs related to taxes on the
property.
The following present value factors are for 10 periods at 12% annual interest rate:

Present value of an annuity due of 1 6.32825

Present value of an ordinary annuity of 1 5.65022
Present value of 1 0.32197

1. What amount of lease liability should be recognized at the inception of the lease?
A. P4,432,197 C. P4,400,000
B. 4,556,340 D. P3,928,570

2. What is the book value of the leased storage building at December 31, 2024?
A. P3,520,000 C. P3,142,856
B. P3,540,000 D. P3,645,972

3. Which of the following should be shown under current liabilities in the statement of financial
position of Eritrea Company at December 31, 2024?

Lease Interest
Liability Payable
A. P280,818 P414,477
B. P695,295 P414,477
C. P280,818 P444,565
D. P695,295 P444,565
 4. What is the noncurrent portion of the lease liability on December 31, 2024?
A. P3,704,705 C. P3,453,975
B. P4,400,000 D. P3,173,157

5. How much interest expense should be recognized for the year ended December 31,2023?
C. P444,565 C. P859,042
D. P414,477 D. 0

SOLUTION 7-30

1. C Minimum annual lease payment

(P720,000- P24,705.10) P695,294.90
Present value of an annuity due of 1 at 12%
for 10 periods x 6.32825
Present value of minimum lease payment -
Lease Liability P4,400,000

2. A Cost of leased storage building P4,400,000

Accumulated depreciation
(P4,400,000 / 10 yrs. X 2) (880,000)
Book Value, Dec. 31 , 2024 P3,520,000

3. A

Annual Lease Balance of Lease

Date Payment Interest Liability
01/01/2023 P4,400,000.00
01/01/2023 P695,294.90 3,704,705.10
01/01/2024 695,294.90 P444,564.61 3,453,974.81
01/01/2025 695,294.90 414,476.98 3,173,156.89

Current
Liabilities:
Lease liability (P695,294.90 -P414,476.98 P280,817.92

4. D Lease liability – non current P3,173,156.89

5. A Interest expense for 2023 P444,565

PROBLEM 7-31 Deferred Tax Liability

EYASI, INC. began operating on January 1, 2023. At the end of the first year of operations, Eyasi reported
P7,500,000 income before income taxes on its income statement but only P6,900,000 taxable income on
its tax return. Analysis of the P600,000 difference revealed that it was a temporary difference related to
a current asset. At the end of 2024, the accumulated temporary tax liability difference related to future
years is P1,100,000. The enacted tax rate is 25% for 2023 and 2024.

1. The journal entry to adjust the deferred tax liability at the end of 2024 should include a

A. Debit to Deferred tax liability of P125,000

B. Credit to Deferred tax liability of P125,000

C. Debit to Deferred tax asset of P125,000

D. Credit to Deferred tax liability of P275,000

2. Assume that at the end of 2024, the accumulated temporary tax liability difference related to future
years is P550,000. What journal entry should be made to adjust the deferred tax liability at the end of
2024?

A. Income tax expense 137,500

Deferred tax liability 137,500

B. Deferred tax asset 12,500

Income tax benefit 12,500

C. Deferred tax liability 12,500

Income tax expense 12,500

D. Deferred tax liability 12,500

Deferred tax asset 12,500

SOLUTION 7-31

1. Deferred tax liability, Dec.31, 2024

(P1,100,000 x 25%) P275,000

Deferred tax liability, Dec.31, 2023

(P600,000 x 25%) 150,000

Increase in deferred tax liability P125,000

Journal Entry: 125,000

Income tax expense

Deferred tax liability 125,000

 Answer: B

2. Deferred tax liability, Dec.31, 2024

(P550,000 x 25%) P137,500

Deferred tax liability, Dec.31, 2023

(P600,000 x 25%) 150,000

Increase in deferred tax liability P(12,500)

Journal Entry: 12,500

Deferred tax liability

Income tax expense 12,500

Answer: C

PROBLEM 7-32 Deferred Income Tax Asset and Liability

At December 31, 2022, GALILEE CORPORATION had a temporary difference (related to depreciation) and
reported a related deferred tax liability of P500,000 on its statement of financial position. At December
31, 2023, Galilee has four temporary differences. An analysis of these reveals the following:

Future Taxable (Deductible) Amounts

Temporary Differences Later

2023 2024 Year

1. Use of straight-line depreciation for accounting

purposes and accelerated depreciation for tax

purposes P1,600,000 P2,200,000 P7,600,000

2. Rent collected in advance; recognized when

earned for accounting purposes and when received

for tax purposes (3,800,000) — —

3. Various expenses accrued when incurred for

accounting purposes; recognized for tax purposes
 when paid (900,000) — —

4. Recognition of gain on installment sale during the

period of sale for accounting purposes and during

the period of collection for tax purposes 2,760,000 2,100,000 —

(P340,000) P4,300,000 P7,600,000

Assume that the company has income taxes of P3,625,000 due per the tax return for 2023. The
installment receivable collectible in 2023 is classified as noncurrent. The enacted tax rate is 25% for all
periods.

1. What amount of deferred tax asset should be shown on Galiliee's statement of financial position at
December 31, 2023?

A. P950,000 C. P1,175,000

B. P1,215,000 D. P225,000

2. What amount of deferred tax liability should be shown on Galiliee's statement of financial position at
December 31, 2023?

A. P2,850,000 C. P1,175,000

B. P1,215,000 D. P4,065,000

3. How much is Galiliee's pretax accounting income for 2023?

A. P15,639,000 C. P14,500,000

B. P24,060,000 D. P26,060,000

4. How much is Galilee's net income for 2023?

A. P19,710,000 C. P24,060,000

B. P18,045,000 D. P14,500,000
SOLUTION 7-32

1. Deferred tax asset, December 31, 2023

(see computation below) P1,175,000

Answer: C

2. Deferred tax liability, December 31, 2023

(see computation below)

Answer: D P4,065,000

COMPUTATION OF DEFERRED TAX ASSET AND LIABILITY

Future Taxable Tax Deferred Tax

Temporary Difference (Deductible) Amounts Rate Asset Liability

Depreciation P11,400,000 25% P2,850,000

Unearned rent (3,800,000) 25% P 950,000

Accrued expenses (900,000) 25% 225,000

Installment sale 4,860,000 25% 1,215,000

Totals P1,175,000 P4,065,000

3. Taxable income (P3,625,000/25%) P14,500,000

Excess depreciation for tax (P1,600,000 + P2,200,000 +

P7,600,000 - P2,000,000*) 9,400,000

Excess rent income for tax (3,800,000)

Excess expenses per books (900,000)

Excess income per books for installment sale

(P2,760,000 + P2,100,000) 4,860,000

Pretax accounting income P24,060,000

* Beginning cumulative temporary difference related to depreciation. (P500,000/25% = P2,000,000)

 Answer: B

4. Deferred tax liability, Dec. 31, 2023 (see computation) P4,065,000

Deferred tax liability, Jan. 1, 2023 (500,000)

Deferred tax expense for 2023 P3,565,000

Deferred tax asset, Dec. 31, 2023 (see computation) P1,175,000

Deferred tax asset, Jan. 1, 2023 0

Deferred tax benefit for 2023 P1,175,000

Income before income taxes P24,060,000

Income tax expense:

Current P3,625,000

Deferred (P3,565,000 - P1,175,000) 2,390,000 (6,015,000)

Net income P18,045,000

Answer: B

Alternative computation

Pretax accounting income P24,060,000

Less: Income tax (P24,060,000/25%) 6,015,000

Net income P18,045,000

PROBLEM 7-33 Deferred Income Tax Asset and Liability

The following data pertain to the CARROLL COMPANY.

1. At December 31, 2023, the company has a P900,000 liability reported for estimated litigation claims.
This P900,000 balance represents amounts that have been charged to income but are not tax deductible
until they are paid. The company expects to pay the claims and thus have tax-deductible amounts in the
future in the following manner:

Year Payments

2026 P150,000

2027 690,000

2028 60,000
 P900,000

2. The company uses different depreciation methods for financial reporting and tax purposes.
Consequently, at December 31, 2023, the company has a cumulative temporary difference due to
depreciable property of P2,400,000. This P2,400,000 cumulative temporary difference is to result in
taxable amounts in future years in the following manner:

Year Amount

2024 P 480,000

2025 480,000

2026 480,000

2027 480,000

2028 480,000

P2,400.000

3. The income tax rate is 25%.

4. Taxable income for 2023 is P7,200,000. The company expects to report taxable income for the next
five years.

5. No temporary differences existed at the end of 2022.

1. The deferred tax liability to be reported in Carroll's statement of financial position at December 31,
2023, is

A. P600,000 C. P384,000

B. P480,000 D. P225,000

2. The deferred tax asset to be reported in Carroll's statement of financial position at December 31,
2023, is

A. P225,000 B. P600,000

C. P375,000 D. P1,800,00

3. The amount of current income tax payable to be reported in Carroll's statement of financial position at
December 31, 2023, is

A. P1,575,000 B. P1,425,000

C. P2,400,000 D. P1,800,000
4. Carroll's pretax accounting income for 2023 is
A. P8,700,000 B. P9,600,000

C.. P6,300,000 D. P5,700,000

5. Carroll's net income for 2023 is

A. P6,525,000 B. P6,900,000

C. P7,425,000 D. P4,125,000

SOLUTION 7-33

1. Deferred tax liability, December 31, 2023 (P480,000 x 5 x 25%) P600,000

Answer: A

2. Deferred tax asset, December 31, 2023 (P900,000 x 25%) P225,000

Answer: A

3. Taxable income for 2023 P7,200,000

Tax rate 25%

Income tax payable for 2023 (current)
P1,800,000

Answer: D

4. Taxable income for 2023 P7,200,000

Future taxable temporary difference - depreciation 2,400,000

Future deductible temporary difference - litigation (900,000)

Pretax accounting income for 2023 P8,700,000

Answer: A

5. Pretax accounting income (see no. 4) P8,700,000

Income tax expense:

Current (see no. 3) P1,800,000

Deferred (P600,000¹ - P225,000) 375,000 (2,175,000)

 Net income P6,525,000

¹Deferred tax liability, December 31, 2023 P600,000

Deferred tax liability, January 1, 2023 0

Deferred tax expense for 2023 P600.000

2 Deferred tax asset, December 31, 2023 P225,000

Deferred tax asset, January 1, 2023 0

Deferred tax benefit for 2023 P225.000

Answer: A

PROBLEM 7-34 Deferred Income Tax Asset and Liability

KAMPESCA, INC., in its first year of operations, has the following differences between the carrying value
and tax base of its assets and liabilities at the end of 2023:
Carrying value Tax base
Equipment (net) P4,000,000 P3,400,000
Estimated warranty liability 2,000,000 0

Kampesca estimates that the warranty liability will be settled in 2024.

The difference in equipment (net) will result in taxable amounts as shown below:
Year Amount
2024 P200,000
2025 300,000
2026 100,000

The company has taxable income of P5,200,000 for 2023. The income tax rate is 25%.

1. What amount of deferred tax liability should be reported in' Kampesca's statement of financial
position at December 31, 2023?
A. P150,000
B. P125,000
C. P100,000
D. P75,000
2 What amount of deferred tax asset should be reported in Kampesca's statement of financial position at
December 31, 2923?
A. P150,000
B. P0
C. P500,000
D. P75,000

3. What is the amount of income tax payable (current) to be reported in Kampesca's statement of
financial position at December 31, 2023?
A. P950,000
B. P396,000
C. P1,300,000
D. P1,650,000

4. What is the total income tax expense for 2023?

A. P950,000
B. P1,650,000
C. P800,000
D. P1,450,000

SOLUTION 7-34

1. A Deferred tax liability, December 31 2023

(200,000+300,000+100,000= P600,000 x 25%) P150,000

2. C Deferred tax asset, December 31 2023

(P2,000,000 x 25%) P500,000

3. C Taxable income for 2023 P5,200,000

Tax rate x 25%
Income tax payable P1,300,000

4. A Taxable income for 202Current Tax Expense for 2023 (see no. 3 ) P1,300,000
Deferred tax expense for 2023 150,000
Deferred tax benefit for 2023 500,000
Income tax expense for 2023 P950,000

PROBLEM 7-35 Liability Under Finance Lease

On December 31, 2022, LEMAN CO. signs a 10-year noncancelable lease agreement to lease a storage
building from Storage Company.
The following information pertains to this lease agreement:
1. The agreement requires equal rental payments of P720,000 beginning on December 31, 2022.
2. The fair value of the building on December 31, 2022, is P4,400,000.
3. The building has an estimated economic life of 12 years, with an unguaranteed residual value of
P100,000. Leman depreciates similar buildings on the straight-line method.
4. The lease is nonrenewable. At the termination of the lease, the building reverts to the lessor.
5. The interest rate implicit in the lease is 12% per year.
6. The yearly rental payment includes P24,705 of executory costs related to taxes on the property.,

The following present value factors are for 10 periods at 12% annual interest rate:
Present value of an annuity due of 1 6.32825
Present value of an ordinary annuity of 1 5.65022
Present value of 1 0.32197

1. What amount should be capitalized as the cost of the right of use asset?
A. P4,556,340
B. P4,400,000
C. P4,432,197
D. P0

2. What amount should be included in the current liabilities section of Leman's statement of financial
position at December 31, 2023?
A. P720,000
B. P414,477
C. P695,295
D. P280,818

3. What amount should be included in the non-current liabilities section of Leman's statement of
financial position at December 31, 2023?
A. P3,453,975
В. Р3,173,157
C. P5,562,360
D. P0

4. What is the total lease-related expenses to be reported in Leman's income statement for the year
ended December 31, 2023?
A. P909,270
B. P879,182
C. P1,160,000
D. P464,705

SOLUTION 7-35
1. B Present value of minimum lease payments:
(P720,000 - P24,705 [executory costs] x 6.32825) P4,400,000

2. D Lease liability, Dec. 31, 2023 (current portion)

(P695,295 - P414,477) P280,818

3. B Lease liability, Dec. 31, 2023 (noncurrent portion) P3,173,157

LEASE AMORTIZATION SCHEDULE (PARTIAL)

ANNUAL INTEREST
PAYMENT LESS ON UNPAID BALANCE OF
DATE EXECUTORY COST LEASE LIABILITY LEASE LIABILITY
12/31/22 -------- ------- P4,400,000
12/31/22 P695,295 ------- 3,704,705
12/31/23 P695,295 P444,565 3,453,975
12/31/24 P695,295 414,477 3,173,157

4. A LEASE-RELATED EXPENSES FOR 2023

Interest expense (see amortization schedule ) P444,565
Executory costs - property tax P24,705
Depreciation expense (P4,400,000/10 years ) P440,000
Total P909,270