lOMoARcPSD|13860191 Chapter 4 – Investments in Equity Securities 4-8. (Anti Corporation) (a) Cash 50,000 Investment Income (10,000 x 5) 50,000 (b) Equity Investments at FVPL (2,000 x 75) 150,000 100,000 Cash (2,000 x 50) Investment Income 50,000 Equity Investments at FVPL 90,000 90,000 Unrealized Gain on Equity Investments at FVPL 936,000 Market value (12,000 shares x 78) 810,000 Carrying value before this 126,000 adjustment (660,000 + 150,000) Unrealized gain 4-9. (Tolits Corporation) (a) Equity Investments at FV through OCI–Diana Year 2 Ordinary a. Cash 54,000 54,000 b. Memorandum entry. Received 500 additional 121,200 shares of Diana ordinary shares as a result of 2- for-1 split. 121,200 c. Equity Investments at FV through OCI – Smith Preference Cash (1,000 x 120) + 1,200 d. Equity Investments at FV through OCI - Diana 6,000 Ordinary Unrealized Gains and Losses on Equity 6,000 Investments at FV - OCI 15,000/250 = 60; 54,000/1,000 = 54 (60 – 54) x 1,000 shares = 6,000 Cash 15,000 Equity Investments at FV through OCI – Diana Ordinary 15,000 e. Memorandum entry. Received 750 stock rights 13,725 from Diana for the purchase of one share for every two rights submitted at P55 per share. 12,375 1,350 f. Equity Investments at FV through OCI – Diana Ordinary Cash Investment Income 60% x 750 = 450; 450/2 = 225 shares 225 x 61 = 13,725; 225 x 55 = 12,375 225 x (61 – 55) = 1,350 Cash 900 Investment Income 900 50 Downloaded by Genesis Mae Bitancor ([email protected])
lOMoARcPSD|13860191 Chapter 4 – Investments in Equity Securities g. Equity Investments at FV through OCI – Diana Ordinary 675 Unrealized Gains and Losses on Equity Investments at FV - OCI 675 225 x (64 – 61) = 675 6,400 8,000 Cash (100 x 64) 6,400 Equity Investments at FV through OCI – 6,200 Diana Ordinary h. Cash (1,000 x 100 x 8%) 8,000 Dividend Revenue i. Unrealized Gains and Losses on Equity Investments - OCI 4,950 Equity Investments at FV through OCI – Diana ordinary 1,250 Equity Investments at FV through OCI - Smith Diana 1 (875 sh) Market CV Unreal Smith (1,000 x 115) 54,250 53,000* 1,250 Total 115,000 121,200 (6,200) 169,250 174,200 (4,950 *Original Diana shares 500 shares at P108 P54,000 -____ 2-for-1 split 500 shares P54,000 1,000 shares at P54 6,000 Adjust prior to sale P60,000 15,000) Balance 1,000 shares at P60 P45,000 Sale (250 shares 13,725 675 Balance 750 shares at P60 6,400) Exercise of rights 225 shares at P61 P53,000 Adjust prior to sale Sale (100 shares at P64 Balance 875 shares (b) Investment income from stock rights(1,350 + 900) P 2,250 Dividends revenue 8,000 Total income P10,250 4-10. (Carlo Company) Year 2 Cash (5,000 x 25) 125,000 139,000 Apr. 1 Loss on Sale of Equity Investments 14,000 30,550 30,550 May 15 Equity Investments at FVPL – Avi Ordinary 24,000 24,000 Equity Investments at FV through OCI – Ghio Preference Cash (600 x 50) + 550 July 10 Memorandum entry. Received 4,000 additional shares of Darrel ordinary representing a 20% bonus issue. Shares now held are 24,000. Nov. 30 Cash (1 x 24,000) Dividend Revenue 51 Downloaded by Genesis Mae Bitancor ([email protected])
lOMoARcPSD|13860191 Chapter 4 – Investments in Equity Securities Dec. 31 Unrealized Loss on Equity Investments – Profit or 9,000 31 Loss 9,000 Equity Investments at FVPL – Avi Ordinary 5,000 x 26 = 130,000; 130,000 – 139,000 Equity Investments at FV through OCI - Darrel 110,000 Equity Investments at FV through OCI - Ghio 650 Unrealized Gains and Losses on Equity 110,650 Investments – OCI Darrel FV CV Change in FV Ghio 480,000 370,000 110,000 Total 650 31,200 30,550 110,650 511,200 400,550 4-11. (Hostel Company) (a) 1. Investment in Associates 2,000,000 Cash 300,000 2,000,000 2. Investment in Associates (20% x 1.5M) 300,000 Share in Profit of Associates 3. Memo. Received 2,000 additional shares of Atlanta ordinary as 10% bonus issue. Shares now held are 22,000. 4. Investment in Associates (20% x 3M) 600,000 Share in Profit of Associates 600,000 5. Cash (20% x 1M) 200,000 Investment in Associates 200,000 (b) Investment cost P2,000,000 Share in profit – 2019 300,000 Share in profit – 2020 600,000 Share in dividends (200,000) Carrying amount, December 31, 2020 P2,700,000 4-12. (Byron, Inc.) 2019 Investment in Associates – Pirates Ordinary 5,160,000 5,160,000 Jan. 1 Cash 1,080,000 1,080,000 Dec. 31 Investment in Associates – Pirates Ordinary Share in Profit of Associates 30% x 3,600,000 31 Cash (30% x 400,000) 120,000 Investment in Associates – Pirates Ordinary 120,000 4-13. (Barbie, Inc.) (a) Investment in Associates – Kitchie 1,365,000 2019 Cash Mar. 1 1,365,000 52 Downloaded by Genesis Mae Bitancor ([email protected])
lOMoARcPSD|13860191 Chapter 4 – Investments in Equity Securities Dec. 31 Cash (30% x 800,000) 240,000 240,000 31 Investment in Associates – Kitchie 300,000 300,000 31 Investment in Associates – Kitchie 52,500 52,500 Share in Profit of Associates (1.2M x 10/12) x 30% Share in Profit of Associates – Kitchie Investment in Associates – Kitchie Amortization of undervaluation of assets (30% x 750,000)/5 yrs. = 45,000 45,000 x 10/12 = 37,500 50,000 x 30% = 15,000 37,500 + 15,000 = 52,500 (b) Acquisition cost, March 1, 2019 P1,365,000 Cash dividends received ( 240,000) Share in reported profit of associate 300,000 Adjustment in reported profit ( 52,500) Investment carrying value, December 31, 2019 P1,372,500 Income reported by Barbie from its investment in associates: P 247,500 (300,000 – 52,500) 4-14. (Richmonde Corporation) (a) Equity Investments at FV through OCI – Pen 900,000 Year 1 Cash 200,000 Jan. 1 480,000 Dec. 31 Cash 1,380,000 900,000 31 Dividend Revenue 480,000 200,000 10% x 2,000,000 2,600,000 480,000 Equity Investments at FV through OCI – Pen 1,950,000 Unrealized Gains and Losses on Equity 1,380,000 Investments – OCI 900,000 480,000 1,380,000 – 900,000 2,600,000 Year 2 Investment in Associates – Pen, Inc. (at FV) 1,950,000 Jan. 1 Equity Investments at FV through OCI – Pen 900,000 Unrealized Gains and Losses on Equity Investments at FV - OCI Retained Earnings 1 Investment in Associates – Pen, Inc. Cash Dec. 31 Investment in Associates – Pen, Inc. Share in Profit of Associates (30% x 6,500,000) 31 Cash Investment in Associates (30% x 3,000,000) 53 Downloaded by Genesis Mae Bitancor ([email protected])
lOMoARcPSD|13860191 Chapter 4 – Investments in Equity Securities (b) Cost transferred from Equity Investments at FV 1,380,000 Additional investment 2,600,000 Share in profit 1,950,000 Cash dividends received (900,000) Carrying amount, December 31, Year 2 5,030,000 4-15. (E Corporation) (a) Investment in Associates – F Company 8,250,000 Year 1 Cash (50,000 x 165) 8,250,000 Jan. 1 Aug. 1 Cash 210,000 Dec. 31 Investment in Associates – F Company 210,000 Investment in Associates – F Company Share in Profit of Associates 170,000 25% x 680,000 170,000 Year 2 Cash 240,000 240,000 Dec. 31 Investment in Associates – F Company 250,000 250,000 31 Investment in Associates – F Company Share in Profit of Associates – F Company 25% x 1,000,000 Year 3 Cash (20,000 x 175) 3,500,000 Jan. 2 Investment in Associates – F Company Gain on Sale of Investment in Associates 3,288,000 212,000 Acquisition cost 8,250,000 Share in profit (Year1) 170,000 Cash dividends received (Year1) (210,000) Cash dividends received (Year2) (240,000) Share in profit (Year 2) 250,000 Investment carrying amount Portion sold 8,220,000 CV of investment sold 20/50 3,288,000 2 Equity Investments at FV through OCI 5,250,000 Investment in Associates – F Company Investment Income 4,932,000 318,000 30,000 x 175 = 5,250,000 8,220,000 – 3,288,000 = 4,932,000 5,250,000 – 4,932,000 = 318,000 Dec. 31 Cash 120,000 Dividend Revenue 450,000 120,000 31 Equity Investments at FV through OCI 450,000 Unrealized Gains and Losses on Equity Investments – OCI 30,000 x (190 - 175) 54 Downloaded by Genesis Mae Bitancor ([email protected])
lOMoARcPSD|13860191 Chapter 4 – Investments in Equity Securities (b) Year 1 Year 2 Year 3 Cost/Carrying Value, beg of year P8,250,000 P8,210,000 Income from associates 170,000 250,000 Cash dividends received (210,000 (240,000) Carrying value, end of year P8,210,000 P8,220,000 Market value 30,000 x 190 P5,700,000 4-16. 1. A and B 6. C 11. A 2. A 3. B and C 7. A 12. B 4. A 5. C 8. A, B, and C 13. A and B 6. C 9. C 14. A, B and C 10. B 15. B MULTIPLE CHOICE QUESTIONS Theory MC1 B MC6 A MC11 D MC2 B MC7 B MC12 C MC3 A MC8 A MC13 C MC4 A MC9 A MC14 C MC5 D MC10 B Problems MC15 B Total market, December 31, 2020 P535,000 Total market, December 31, 2019 525,000 Gain reported in 2020 profit or loss P 10,000 MC16 C Market value, December 31, 2020 Market value, December 31, 2019 P2,100,000 Unrealized loss taken to 2020 profit or loss 1,750,000 P 350,000 MC17 C Market value, December 31, 2020 Investment cost on January 1, 2019 (2.0M + 50,000) P2,100,000 Unrealized gain (cumulative) reported in statement of financial 2,050,000 position, December 31, 2020 P 50,000 MC18 D Asia Textile (600 x 440) RJ Company (2,000 x 138) P264,000 Total fair value, December 31, Year 2 276,000 Total fair value, December 31, Year 1 (270,000 + 280,600) Decrease in fair value (debit) P540,000 550,600 MC19 A Purchase price (1,000 x 150) Brokerage fee P 10,600 Total cost Cash dividends declared prior to acquisition of invest (10 x 1,000 sh) P150,000 Investment in equity securities 2,250 MC20 D Number of shares held prior to exercise of rights P152,250 Lot A 800 x 1.2 = 960; 960 – 500 = 460 (10,000) Lot B = 600 P142,250 Number of rights required to buy one new share 1,060 ÷ 10 New ordinary shares acquired through exercise of rights 106 55 Downloaded by Genesis Mae Bitancor ([email protected])
lOMoARcPSD|13860191 Chapter 4 – Investments in Equity Securities MC21 Income from sale of 500 rights (500 x 20 = 10,000; 10,000 – 500 P9,500 Income from exercise of rights 18,020* Fair value of new shares acquired (106 x 620) 65,720 209,180 P236,700 Exercise/subscription price (106 x 450) 47,700 P80 Unrealized gain due to increase in fair value at year end P453,000 Fair value of shares at year end (1,666 sh x 650) 1,082,900 468,000 Carrying value/cost of shares P 15,000 P20,000 (448,000+360,000+65,720) 873,720 15,000 P35,000 Total income from investments P50,000 *Income from exercise should have been the excess of fair value on P100,000 date of exercise over the subscription price. Since there is no fair value given at date of exercise, the fair value nearer to this date was 15,000 used. P115,000 SA DATI NATING ANSWER, DI NATIN ISINAMA YUNG P1,500,000 UNREALIZED GAIN WHEREAS THE REQUIREMENT IS TOTAL INCOME AND THESE ARE FVPL. PLEASE CHECK AND REVISE, 600,000 WHEN NEEDED. THANKS (500,000) P1,600,000 MC22 B Revised cost per share after receipt of 10% bonus issue (88 ÷ 1.10) P150,000 MC23 B Fair values, December 31, Year 2 800,000 MC24 A (1,000 x 140) + (900 x 170) + (800 x 200) P950,000 P200,000 Fair values/cost, December 31, Year 1 P1,200,000 (1,000 x 130) + (900 x 180) + (800 x 220) (120,000) Increase in unrealized loss during the year 2 160,000 P1,240,000 Unrealized loss balance, December 31, Year 1 (150 – 130) x 1,000 Increase in unrealized loss during Year 2 Unrealized loss account (accumulated) reported in equity MC25 B Dividend revenue (5,000 x 10) MC26 A No gain is recognized on sale of equity investments at fair value through other comprehensive income MC27 C June 10 lot Fair value, 12/31/19 (2,400 shares x 125) P300,000 Original cost 200,000 December 5 lot Fair value, 12/31/19 (600 shares x 125) P 75,000 Original cost 360,000 x 600/3,600 60,000 Cumulative other comprehensive income, December 31, 2019 MC28 C Acquisition cost (10,000 x 150) Share in profit (20% x 3M) Cash dividends received (10,000 x 50) Investment carrying value, December 31, 2019 MC29 D Dividend revenue (1.50 x 100,000) Unrealized gain taken to profit or loss (100,000 x 68) - 6,000,000 Total amount recognized in profit or loss MC30 B Share in profit of associate (20% x 1.0M) = MC31 B Acquisition cost Dividends received (3.00 x 40,000) Share in reported profit (25% x 640,000) Investment carrying value, December 31, 2020 56 Downloaded by Genesis Mae Bitancor ([email protected])
lOMoARcPSD|13860191 Chapter 4 – Investments in Equity Securities MC32 B Share in reported income (40% x 450,000) P180,000 Adjustment for excess of fair value over book value of depreciable MC33 A assets (150,000 ÷ 12) (12,500) Adjusted income from investment P167,500 MC34 A MC35 B Cost of investment (25,000 x 180) P4,500,000 Share in income (2,400,000 – 480,000) x 25% 480,000 MC36 A Dividends received (60,000 + 60,000) MC37 C Carrying value, December 31, 2019 (120,000) P4,860,000 MC38 B CV at date of reclassification is equal to FV (15,000 x 200) P3,000,000 MC39 C Selling price (10,000 x 200) Carrying amount of investment sold (4,860,000 x 10,000/25,000) P2,000,000 MC40 B Gain on sale 1,944,000 MC41 B P 56,000 No income is recognized upon receipt of bonus issue. P0 Fair market value of original shares (10%) Additional acquisition on December 31, 2020 P 650,000 Investment amount, December 31, 2020 1,300,000 Share in reported profit (40% x 1.2M) P1,950,000 Adjustment for excess in fair value of plant (40% x 900,000) ÷ 18 Adjustment for excess in fair value of inventory (40% x 100,000) P480,000 Adjusted share in profit (20,000) (40,000) Acquisition cost ,000,000 + 420,000 – (40% x 200,000) = 4,340,000 Adjusted share in profit P420,000 Cash dividends received (40% x 200,000) Investment carrying value, December 31, 2020 P4,000,000 420,000 Share in reported profit (20% x 5.5M) (80,000) Adjustment for excess in fair value of inventory (20% x 1,000,000) Adjusted share in profit P4,340,000 Investment acquisition cost P1,100,000 Adjusted share in profit (200,000) Cash dividends received (20% x 1,500,000) Investment carrying value, December 31, 2020 P 900,000 P3,700,000 900,000 (300,000) P4,300,000 57 Downloaded by Genesis Mae Bitancor ([email protected])
lOMoARcPSD|13860191 Chapter 5 - Financial Liabilities 5-1. (Jefferson Corporation) (a)(1) Gross method Dec. 16 Purchases 66,000 Freight in 1,400 67,400 Accounts Payable – Intel 19 Purchases 72,000 Accounts Payable – Celeron 72,000 26 Accounts Payable – Intel 67,400 Purchase Discounts 1,320 Cash 66,080 31 Accounts Payable – Celeron 72,000 Purchase Discounts 1,440 Cash 70,560 (a)(2) Net method Dec. 16 Purchases 64,680 Freight in 1,400 66,080 Accounts Payable – Intel 19 Purchases 69,840 Accounts Payable – Celeron 69,840 26 Accounts Payable – Intel 66,080 Cash 66,080 31 Accounts Payable – Celeron 69,840 Purchase Discounts Lost 720 70,560 Cash (b) Adjusting entry at December 31 under the net method Dec. 31 Purchase Discounts Lost 720 Accounts Payable – Celeron 720 5-2 (Washington Company) Reported amount of accounts payable at December 31, 2018 P1,000,000 Adjustments: (350,000) Unrecorded check written and issued on December 27 147,000 Unrecorded purchases received on December 28, net Goods purchased FOB shipping point still in transit and not 120,000 80,000 yet recorded at year end Debit balance in a supplier’s account netted in the balance P 997,000 Correct amount of accounts payable at December 31, 2018 Downloaded by Genesis Mae Bitancor ([email protected])
lOMoARcPSD|13860191 Chapter 5 – Financial Liabilities 5-3. (Adams Company) Reported amount of accounts payable at December 31, 2018 P1,500,000 Adjustments: Goods purchased FOB shipping point lost in transit 240,000 Credit memo for goods returned to supplier not recorded at yearend (80,000) Correct amount of accounts payable at December 31, 2018 P1,660,000 5-4. (Madison Company) (a) Automobile 3,600,000 2019 May 1 Discount on Notes Payable 324,000 Notes Payable 3,924,000 3,924,000/1.09 = 3,600,000 216,000 Dec. 31 Interest Expense 216,000 108,000 3,924,000 Discount on Notes Payable P3,924,000 324,000 x 8/12 = 216,000 108,000 2020 P3,816,000 Apr. 1 Interest Expense 108,000 Notes Payable 3,924,000 Discount on Notes Payable Cash 324,000 – 216,000 = 108,000 (b) Notes Payable Less Discount on Notes Payable Net amount, December 31, 2019 5-5. (Monroe Corporation) (a) 2019 June 1 Cash 2,700,000 Discount on Notes Payable 300,000 Notes Payable 3,000,000 3M x 10% = 300,000 3M – 300,000 = 2,700,000 Dec. 31 Interest Expense 175,000 Discount on Notes Payable 300,000 x 7/12 175,000 2020 May 31 Interest Expense 125,000 Notes Payable 3,000,000 Discount on Notes Payable 125,000 3,000,000 Cash 300,000 – 175,000 = 125,000 (b) Notes Payable P3,000,000 Less Discount on Notes Payable 125,000 Net amount, December 31, 2019 P2,875,000 59 Downloaded by Genesis Mae Bitancor ([email protected])
lOMoARcPSD|13860191 Chapter 5 – Financial Liabilities 5-6. (Unison Company) (a) Market rate of interest is 5% P8,000,000 Principal 720,000 Stated interest (8M x 9%) Maturity value P8,720,000 PV factor at 5% for 1 period 0.9524 Present value of note at May 1, 2019 Face value of note P8,304,928 Premium on notes payable 8,000,000 P 304,928 2019 Equipment 8,304,928 May 1 Premium on Notes Payable Notes Payable 304,928 8,000,000 Dec. 31 Interest Expense 276,715 Premium on Notes Payable 203,285 Interest Payable 304,928 x 8/12 = 203,285 480,000 8M x 9% x 8/12 = 480,000 2020 Apr. 30 Interest Expense 138,357* Premium on Notes Payable 101,643 Interest Payable 480,000 Notes Payable 8,000,000 Cash 8,720,000 304,928 – 203,285 = 101,643 *difference is due to rounding off. Notes Payable P8,000,000 Premium on Notes Payable 101,643 Interest Payable 480,000 Carrying amount at December 31, 2019 P8,581,643 (b) Market rate of interest is 12% P8,000,000 Principal 720,000 Stated interest (8M x 9%) Maturity value P8,720,000 PV factor at 12% for 1 period 0.8929 Present value of note at May 1, 2019 Face value of note P7,786,088 Discount on notes payable 8,000,000 P 213,912 2019 Equipment 7,786,088 May 1 Discount on Notes Payable 213,912 Notes Payable 8,000,000 Dec. 31 Interest Expense 622,608 Discount on Notes Payable Interest Payable 142,608 213,912 x 8/12 = 142,608 480,000 8M x 9% x 8/12 = 480,000 60 Downloaded by Genesis Mae Bitancor ([email protected])
lOMoARcPSD|13860191 Chapter 5 – Financial Liabilities 2020 Apr. 30 Interest Expense 311,304 Interest Payable 480,000 Notes Payable 8,000,000 Discount on Notes Payable 71,304 8,720,000 Cash 213,912 – 142,608 = 71,304 *difference is due to rounding off. Notes payable P8,000,000 Discount on notes payable (71,304) Interest payable 480,000 Carrying amount at December 31, 2019 P8,408,696 5-7. (KFC Delivery Service) (a) Effective interest method 6,949,800/9,000,000 = 0.7722 Using Table II – PV of P1, under 3 periods, 0.7722 is under 9% interest rate (b) Table of Amortization Date Amortization of Discount Carrying Value 4/1/18 6,949,800 3/31/19 625,482 7,575,282 3/31/20 681,775 8,257,057 3/31/21 742,943* 9,000,000 *Rounded; difference is due to rounding off. (c) Interest expense for year ended December 31, 2019: January 1 – April 1 625,482 x 3/12 P156,371 April 1 – December 31 681,775 x 9/12 511,331 Total interest expense P667,702 Carrying amount, April 1, 2018 P6,949,800 Add amortization of discount 469,112 625,482 x 9/12 P7,418,912 Carrying amount, December 31, 2018 (d) 2018 6,949,800 April 1 Land 2,050,200 Discount on Notes Payable 9,000,000 Notes Payable Dec 31 Interest Expense 469,112 Discount on Notes Payable 469,112 2019 469,112 Jan 1. Discount on Notes Payable 469,112 Interest Expense April 1 Interest Expense 625,482 Discount on Notes Payable 625,482 Dec. 31 Interest Expense 511,331 Discount on Notes Payable 511,331 61 Downloaded by Genesis Mae Bitancor ([email protected])
lOMoARcPSD|13860191 Chapter 5 – Financial Liabilities 2020 511,331 511,331 Jan 1. Discount on Notes Payable 681,775 681,775 511,331 511,331 Interest Expense 511,331 511,331 Mar.31 Interest Expense 742,943 625,482 Discount on Notes Payable 9,000,000 9,000,000 Dec. 31 Interest Expense Discount on Notes Payable 2021 Jan 1. Discount on Notes Payable Interest Expense Mar.31 Interest Expense Discount on Notes Payable 31 Cash Notes Payable 5-8. (JFC Company) (a) Interest Expense 2018 = 6,949,800 x 9% x 8/12 P416,988 P663,011 2019 = 6,949,800 x 9% x 4/12 = 208,494 P722,681 6,949,800 x 1.09 = 7,575,282 7,575,282 x 9% x 8/12 = 454,517 2020 = 7,575,282 x 9% x 4/12 = 227,258 7,575,282 x 1.09 = 8,257,057 8,257,057 x 9% x 8/12 495,423 (b) Notes Payable P6,949,800 Interest Payable (416,988 + 663,011) 1,079,999 Total Notes Payable, including accrued interest P8,029,799 (c) On December 31, 2019, the notes payable including accrued interest shall be reported among the non-current liabilities, since this amount will be due after more than 12 months. On December 31, 2020, the notes payable including accrued interest shall be reported among the current liabilities, since this amount will be due on April 1, 2021, a period of less than 12 months. (d) 6,949,800 2018 May 1 Land Notes Payable 6,949,800 Dec.31 Interest Expense 416,988 Interest Payable 416,988 2019 663,011 Dec. 31 Interest Expense 663,011 Interest Payable 2020 722,681 Dec. 31 Interest Expense 722,681 Interest Payable 62 Downloaded by Genesis Mae Bitancor ([email protected])
lOMoARcPSD|13860191 Chapter 5 – Financial Liabilities 2021 Apr 30 Interest Expense 247,520 Interest Payable 247,520 9,000,000 6,949,800 + 416,988 + 663,011 + 722,681 = 8,752,480 9,000,000 – 8,752,480 = 247,520 30 Notes Payable 6,949,800 Interest Payable 2,050,200 Cash 5-9. (Wendy’s Catering Service) (a) Present value of the note P2,591,760 800,000 x 3.2397 (b) Table of Amortization Periodic Amortization Date Payment of Discount Carrying Value 4/1/18 2,591,760 3/31/19 800,000 233,258 2,025,018 3/31/20 800,000 182,252 1,407,270 3/31/21 800,000 126,654 733,924 3/31/22 800,000 66,076* -0- *Rounded off. (c) Equipment 2,591,760 2018 Discount on Notes Payable 608,240 Apr.1 Notes Payable 3,200,000 Dec.31 Interest Expense 174,944 Discount on Notes Payable 233,258 x 9/12 174,944 2019 174,944 Jan. 1 Discount on Notes Payable 174,944 Interest Expense Mar31 Notes Payable 800,000 Interest Expense 233,258 Cash Discount on Notes Payable 800,000 233,258 Dec.31 Interest Expense 136,689 Discount on Notes Payable 182,252 x 9/12 136,689 2020 136,689 Jan. 1 Discount on Notes Payable 136,689 Interest Expense Mar31 Notes Payable 800,000 Interest Expense 182,252 Cash Discount on Notes Payable 800,000 182,252 Dec.31 Interest Expense 94,990 63 Downloaded by Genesis Mae Bitancor ([email protected])
lOMoARcPSD|13860191 Chapter 5 – Financial Liabilities Discount on Notes Payable 94,990 126,654 x 9/12 94,990 94,990 2021 800,000 Jan. 1 Discount on Notes Payable 126,654 800,000 126,654 Interest Expense 94,990 94,990 Mar31 Notes Payable Interest Expense 94,990 94,990 Cash Discount on Notes Payable 800,000 800,000 66,076 66,076 Dec.31 Interest Expense Discount on Notes Payable 126,654 x 9/12 2022 Jan. 1 Discount on Notes Payable Interest Expense Mar31 Notes Payable Interest Expense Cash Discount on Notes Payable 5-10 (Burgee’s Food Corporation) (a) Table of Amortization Periodic Interest Reduction Date Payment Expense of Principal Carrying Value 10/1/18 2,591,760 9/30/19 800,000 233,258 566,742 2,025,018 9/30/20 800,000 182,252 617,748 1,407,270 9/30/21 800,000 126,654 673.345 733,924 9/30/22 800,000 66,076* 733,924 -0- *Rounded off. (b) (Note that the author opted not to prepare reversing entries. Reversing entries may also be made and resulting account balances will be the same. 2018 2,591,760 Oct. 1 Equipment 2,591,760 Notes Payable Dec. 31 Interest Expense 58,315 Interest Payable 233,258 x 3/12 58,315 2019 Notes Payable 566,742 Oct. 1 Interest Payable 58,315 Interest Expense 174,943 Cash 800,000 233,258 x 9/12 =174,943 Dec.31 Interest Expense 45,563 Interest Payable 182,252 x 3/12 45,563 2020 64 Downloaded by Genesis Mae Bitancor ([email protected])
lOMoARcPSD|13860191 Chapter 5 – Financial Liabilities Oct. 1 Notes Payable 617,748 Interest Payable 45,563 Interest Expense 136,689 Cash 800,000 182,252 x 9/12 = 136,689 Dec.31 Interest Expense 31,664 Interest Payable 31,664 800,000 126,654 x 3/12 2021 Oct. 1 Notes Payable 673,345 Interest Payable 31,664 Interest Expense 94,991 Cash 126,654 x 9/12 = 94,991 Dec.31 Interest Expense 16,519 Interest Payable 16,519 66,076 x 3/12 2022 Oct. 1 Notes Payable 733,924 Interest Payable 16,591 Interest Expense 49,485* Cash 800,000 66,076 x 9/12 =49,557* *Rounded (c) Current Non-current Total Notes Payable P617,748 P1,407,270 P2,025,018 Interest Payable 45,563 -0- 45,563 Totals, December 31, 2019 P663,311 P1,407,270 P2,070,581 5-11. (Ruby Corporation) Bond issue price At 8% At 12% Nominal interest for 2018 5,405,725 4,632,025 Interest expense (Effective interest) for 2018 Premium/discount amortization in 2018 250,000 250,000 Bond carrying value at December 31, 2019 216,229 277,922 Nominal interest for 2019 Interest expense for 2019 33,771 27,922 Premium/discount amortization in 2019 5,371,954 4,659,947 Bond carrying value at December 31, 2019 500,000 500,000 428,351 560,970 71,649 60,970 5,300,305 4,720,917 Computations: At 8%: Issue price = (5,000,000 x 0.6756) + (250,000 x 8.1109) = 3,378,000 + 2,027,725 = 5,405,725 Date Interest Interest Premium Bond 06/30/18 Paid Expense Amortization Carrying Value 12/31/18 06/30/19 250,000 216,229 33,771 5,405,725 12/31/19 250,000 214,878 35,122 5,371,954 250,000 213,473 36,527 5,336,832 5,300,305 65 Downloaded by Genesis Mae Bitancor ([email protected])
lOMoARcPSD|13860191 Chapter 5 – Financial Liabilities At 12%: Issue price = (5,000,000 x 0.5584) + (250,000 x 7.3601) = 2,792,000 + 1,840,025 = 4,632,025 Date 06/30/18 Interest Interest Discount Bond 12/31/18 Paid Expense Amortization Carrying Value 06/30/19 12/31/19 250,000 277,922 27,922 4,632,025 250,000 279,597 29,597 4,659,947 250,000 281,373 31,373 4,689,544 4,720,917 5-12. (Fire Company) (a) Issue price Present value of face value (4,000,000 x 0.6756) P2,702,400 1,622,180 Present value of interest payments (200,000 x 8.1109) P4,324,580 Issue price (b) Amortization Table Interest Interest Premium Bond Carrying Date Paid Expense Amortization Value 3/01/18 - - - 4,324,580 8/31/18 200,000 172,983 27,017 4,297,563 2/28/19 200,000 171,903 28,097 4,269,466 8/31/19 200,000 170,779 29,221 4,240,245 (c) Cash 4,324,580 2018 Bonds Payable Mar. 1 Premium on Bonds Payable 4,000,000 324,580 Aug. 31 Interest Expense 172,983 Premium on Bonds Payable 27,017 Cash 200,000 Dec. 31 Interest Expense (171,903 x 4/6) 114,602 Premium on Bonds Payable 18,731 Interest Payable (200,000 x 4/6) 133,333 2019 Interest Expense (171,903 x 2/6) 57,301 Feb. 28 Premium on Bonds Payable (28,097 x 2/6) 9,366 Interest payable 133,333 Cash 200,000 5-13. (Mercury Corporation) (a) 2018 Cash 4,458,429 Aug. 1 Discount on Bonds Payable 708,238 Interest Payable 166,667 5,000,000 Bonds Payable 5M x 8% x 5/12 = 166,667 4,458,429 – 166,667 = 4,291,762 5,000,000 – 4,291,762 = 708,238 66 Downloaded by Genesis Mae Bitancor ([email protected])
lOMoARcPSD|13860191 Chapter 5 – Financial Liabilities Dec. 31 Interest Expense 178,823 2019 Interest Payable 166,666 Mar. 1 12,157 Discount on Bonds Payable 4,862 5M x 8% x 5/12 = 166,666 400,000 4,291,762 x 10% x 5/12 = 178,823 178,823 – 166,666 = 12,157 Interest Expense 71,529 Interest Payable 333,333 Discount on Bonds Payable Cash 4,291,762 x 10% x 2/12 = 71,529 5M x 8% x 2/12 = 66,667 71,529 – 66,667 = 4,862 5M x 8% = 400,000 Dec. 31 Interest Expense 359,065 Discount on Bonds Payable 25,732 Interest Payable 333,333 4,291,762 + 12,157 + 4,862 = 4,308,781 4,308,781 x 10% x 10/12 = 359,065 5M x 8% x 10/12 = 333,333 359,065 – 333,333 = 25,732 (Amounts can be conveniently computed by using a partial amortization table as follows) August 1, 2018 Effective Nominal Amortization Carrying value February 28, 2019 4,291,762 February 28, 2020 250,353 233,333 17,020 4,308,782 430,878 400,000 30,878 4,339,659 Interest expense for 2018: 250,353 x 5/7 = 178,824 Interest expense for 2019: (250,353 x 2/7) + (430,878 x 10/12) = 430,594 Carrying amount, December 31, 2018: 4,291,762 + (17,020 x 5/7) = 4,303,919 Carrying amount, December 31, 2019: 4,308,782 + (30,878 x 10/12) = 4,334,514 (b) August 1 – December 31, 2018 2018 2019 4,291,761 x 10% x 5/12 178,823 January 1 – March 1, 2019 4,291,761 x 10% x 2/12 71,529 March 1 – December 31, 2019 4,308,780 x 10% x 10/12 359,065 Interest Expense for the year 178,823 430,594 (c) December 31, 2018 December 31, 2019 Bonds Payable P5,000,000 P5,000,000 Less Discount on Bonds Payable 696,081 665,487 Carrying amount P4,303,919 P4,334,513 5-14. (Metal Corporation) P5,400,000 5,100,000 Issue price of bonds and warrants (5,000,000 x 1.08) MV of bonds without warrants (5,000,000 x 1.02) P 300,000 Value assigned to warrants 67 Downloaded by Genesis Mae Bitancor ([email protected])
lOMoARcPSD|13860191 Chapter 5 – Financial Liabilities (a) Cash 5,400,000 100,000 Premium on Bonds Payable 5,000,000 Bonds Payable 1,400,000 Share Warrants Outstanding 300,000 300,000 (b) Cash (5,000 x 2 x 140) 1,000,000 Share Warrants Outstanding 700,000 Ordinary Share Capital (5,000 x 2 x 100) Share Premium - Ordinary 5-15. (Onyx) Issue price of bonds with warrants (1,000,000 x 1.04) 452,300 P1,040,000 (a) Bond price without warrants 456,380 908,680 (b) 1,000,000 x 0.4523 P131,320 (c) 100,000 x 4.5638 Value of share warrants P90,868 (d) P908,680 Interest Expense for 2018 (908,680 x 12% x 10/12) 7,535 Bond carrying value, March 1, 2018 90,868 901,145 Amortization through December 31, 2018 83,333 750,000 908,680 x 12% x 10/12 581,320 1,000,000 x 10% x 10/12 Bond carrying value, December 31, 2018 Cash (1,000 x 30 x 40) 1,200,000 Share Warrants Outstanding 131,320 Ordinary Share Capital (30,000 x 25) Share Premium - Ordinary 5-16. (Celeron Company) 1,134,800 P2,020,000 720,960 (a) Issue price of convertible bonds (2M x 1.01) 1,855,760 Issue price of bonds without conversion privilege 164,240 2,000,000 x 0.5674 200,000 x 3.6048 Allocation to equity (b) Amortization Table Interest Interest Premium Bond Carrying Date Paid Expense Amortization Value 07/01/18 - - - 1,855,760 06/30/19 200,000 222,691 22,691 1,878,451 06/30/20 200,000 225,414 25,414 1,903,865 06/30/20 (1,142,319) 06/30/20 761,546 06/30/21 80,000 91,386 11,386 772,932 06/30/22 80,000 92,752 12,752 785,684 06/30/23 80,000 94,316 14,316* 800,000 *Adjusted; difference is due to rounding off. (c) Cash 2,020,000 Discount on Bonds Payable 144,240 2018 July 1 Bonds Payable PIC Arising from Bond Conversion Privilege 2,000,000 164,240 68 Downloaded by Genesis Mae Bitancor ([email protected])
lOMoARcPSD|13860191 Chapter 5 – Financial Liabilities 2019 Interest Expense 222,691 June 30 Discount on Bonds Payable 2020 Cash 22,691 June 30 200,000 Interest Expense 225,414 30 Discount on Bonds Payable 25,414 Cash 200,000 2021 June 30 Bonds Payable 1,200,000 57,681 PIC Arising from Bond Conversion Privilege 86,544 960,000 268,863 Discount on Bonds Payable Ordinary Share Capital 1,142,319 Share Premium - Ordinary 1,200,000 Carrying value of bonds converted (1,903,865 x120/200) 57,681 Face value of bonds converted 86,544 Discount on bonds payable cancelled 960,000 Value of equity converted (144,240 x 120/200) Par value of ordinary shares issued (120 x 80 x 100) 11,386 80,000 Interest Expense 91,386 Discount on Bonds Payable Cash 5-17. (Lim Corporation) (a) Cash 5,200,000 Discount on Bonds Payable 379,180 Bonds Payable 5,000,000 PIC Arising from Bond Conversion Privilege 579,180 Issue price (5M x 1.04) 5,200,000 Present value of the bonds 5M x .6209 3,104,500 400,000 x 3.7908 1,516,320 4,620,820 Amount allocated to the conversion privilege 579,180 Discount on bonds payable 379,180 5,000,000 – 4,620,820 Refer to the following table for the amounts included in the journal entries. Interest Interest Discount Bond Date Paid Expense Amortization Carrying Value 01/02/18 4,620,820 12/31/18 400,000 462,082 62,082 4,682,902 12/31/19 400,000 468,290 68,290 4,751,192 12/31/20 400,000 475,119 75,119 4,826,311 12/31/20 (965,262) 12/31/20 3,861,049 12/31/21 320,000 386,105 66,105 3,927,154 12/31/22 (1,963,577) 12/31/22 1,963,578 12/31/22 160,000 196,422* 36,422* 2,000,000 *Adjusted due to rounding off 69 Downloaded by Genesis Mae Bitancor ([email protected])
lOMoARcPSD|13860191 Chapter 5 – Financial Liabilities (b) Interest Expense 468,290 Cash Discount on Bonds Payable 400,000 68,290 (c) Interest Expense 475,119 Cash Discount on Bonds Payable 400,000 75,119 Bonds Payable 1,000,000 PIC Arising from Bond Conversion Privilege 115,836 Discount on Bonds Payable 34,738 Ordinary Share Capital (200 x 40 x 100) 800,000 Share Premium – Ordinary 281,098 Carrying amount of bonds converted 4,826,311 x 1/5 965,262 Carrying amount of conversion privilege cancelled (579,180x 1/5) 115,836 Total 1,081,098 Par value of shares issued 200 x 40 x 100 800,000 Share Premium 281,098 (d) Interest Expense 386,105 Cash Discount on Bonds Payable 320,000 66,105 Bonds Payable 2,000,000 PIC Arising from Bond Conversion Privilege 231,672 Discount on Bonds Payable 36,423 2,020,000 Cash (2,000,000 x 1.01) 17,633 Gain on Retirement of Bonds 157,616 PIC from Unexercised Bond Conversion Privilege Retirement price 2,020,000 Retirement price on account of liability 1,945,944 (2,000,000 + 160,000) x .9009 74,056 Retirement price on account of equity Carrying value of bonds retired 1,963,577 3,927,154 x 1/2 1,945,944 Retirement price of bonds 17,633 Gain on retirement of bonds 231,672 Carrying value of equity cancelled 74,056 Retirement price on account of equity Gain on cancellation taken to equity 157,616 (e) Interest Expense 196,422 Cash Discount on Bonds Payable 160,000 36,422 Bonds Payable 2,000,000 Cash 2,000,000 70 Downloaded by Genesis Mae Bitancor ([email protected])
lOMoARcPSD|13860191 Chapter 5 – Financial Liabilities 5-18. (Emerald Corporation) (a) Carrying value, December 1, 2019 (see, table) 5,323,145 Amortization for one month (33,843 x 1/6) 5,640 Carrying value, December 31, 2019 5,317,505 The following tables may facilitate the computations required in this problem. Interest Interest Premium Bond Date Paid Expense Amortization Carrying Value 12/01/18 -- - 5,386,072 06/01/19 300,000 269,304 30,696 5,355,376 12/01/19 300,000 267,769 32,231 5,323,145 06/01/20 300,000 266,157 33,843 5,289,302 12/01/20 300,000 264,465 35,535 5,253,767 06/01/21 300,000 262,688 37,312 5,216,455 12/01/21 300,000 260,823 39,177 5,177,278 Carrying amount of remaining bonds on June 1, 2021 5,216,455 x 2/5 = 2,086,582 06/01/21 2,086,582 2,070,911 12/01/21 120,000 104,329 15,671 2,054,456 16,454 2,037,179 06/01/22 120,000 103,546 17,277 2,019,038 18,141 2,000,000 12/01/22 120,000 102,723 19,038 06/01/23 120,000 101,859 12/01/23 120,000 100,962* *Adjusted; difference is due to rounding off. (b) Interest Expense for year 2019 224,420 January 1-June 1, 2019 (269,304 x 5/6) 267,769 June 1-December 1, 2019 December 1-31, 2016 (266,157 x 1/6) 44,360 536,549 Total (c) Carrying value of bonds retired on June 1, 2021 3,129,873 5,216,455 x 3/5 7,835 Amortization June 1-August 1, 2018 (39,177 x 2/6 x 3/5) 3,122,038 Carrying value of bonds retired on August 1, 2021 (d) Carrying value of bonds retired 3,122,038 Redemption price (3,000,000 x 1.05) 3,150,000 Loss on redemption of bonds 27,962 (e) Carrying value of remaining bonds, June 1, 2021 2,086,582 Amortization, June 1 – December 1 15,671 (18,413) 2,068,169 Dec. 1-31, 2021 (16,454 x 1/6) 2,742 Carrying value of remaining bonds, December 31, 2021 (f) On bonds redeemed: 2021 2022 January 1-June 1, 2021 (262,688 x 3/5 x 5/6) 131,344 June 1-August 1, 2021 (260,823 x 3/5 x 2/6) 52,164 On remaining bonds January 1-June 1, 2021 (262,688 x 2/5 x 5/6) 87,563 June 1-December 1, 2021 104,329 December 1-31, 2021 (103,546 x 1/6) 17,258 January 1-June 1, 2022 (103,546 x 5/6) 86,288 June 1-December 1, 2022 102,723 December 1-31, 2022 (101,859 x 1/6) 16,977 Interest Expense 392,658 205,988 71 Downloaded by Genesis Mae Bitancor ([email protected])
lOMoARcPSD|13860191 Chapter 5 – Financial Liabilities 5-19. (Ohio Company) 185,270 (a) Amortization of premium for 2018 (see table) 11,849,272 (b) Carrying value of bonds on December 31, 2018 (see table) Date Interest Interest Premium Bond Carrying 01/02/18 Paid Expense Amortization Value 12/31/18 - 12/31/19 - - 12,684,120 12/31/20 1,200,000 1,014,730 185,270 12,498,850 12/31/21 1,200,000 200,092 12,298,758 12/31/21 1,200,000 999,908 216,099 12,082,659 12/31/22 1,200,000 983,901 233,387 11,849,272 966,613 7,109,563 720,000 151,235 6,958,328 568,765 (c) Carrying value of bonds called (11,849,272 x 4/10) 4,739,709 Call price/retirement price (4,000,000 x 110%) 4,400,000 Gain on retirement of bonds 339,709 (d) Interest expense for year 2022 (see table) 568,765 (e) Carrying value of the bonds, December 31, 2022 6,958,328 5-20. (Jim Company) Date Nominal Effective Discount Bond 03/01/18 Interest Interest Amortization Carrying value 09/01/18 03/01/19 170,000 176,670 6,670 3,926,000 09/01/19 170,000 176,970 6,970 3,932,670 03/01/20 170,000 177,284 7,284 3,939,640 09/01/20 170,000 177,612 7,612 3,946,924 03/01/21 170,000 177,954 7,954 3,954,536 09/01/21 170,000 178,312 8,312 3,962,490 03/01/22 170,000 178,686 8,686 3,970,802 170,000 179,077 9,077 3,979,488 3,988,565 (a) Interest expense recorded on September 1, 2018 P176,670 Discount amortization recorded on September 1, 2018 P 6,670 (b) Carrying amount of the bonds, September 1, 2019 P3,946,924 Amortization through December 31, 2019 (7,612 x 4/6) 5,075 Carrying amount of the bonds, December 31, 2019 P3,951,999 (c) Retirement price (4M x 1.01) P4,040,000 Accrued interest (4,000,000 x 8.5% x 1/12) 28,333 Amount of cash paid on September 30, 2021 P4,068,333 (d) Carrying value, September 1, 2021 (see table) P3,979,488 Amortization through September 30, 2021 (9,077 x 1/6) 1,513 Carrying value, September 30, 2021 Retirement price (at 101) P3,981,001 Loss on retirement of bonds 4,040,000 P 58,999 72 Downloaded by Genesis Mae Bitancor ([email protected])
lOMoARcPSD|13860191 Chapter 5 – Financial Liabilities 5-21. (Kim Company) (a) Issue price of the bonds Principal Interest Amount Due Due Due Date Due PV Factor Present Value 800,000 2,800,000 0.8929 2,500,120 12/31/18 2,000,000 640,000 2,640,000 0.7972 2,104,608 480,000 2,480,000 0.7118 1,765,264 12/31/19 2,000,000 320,000 2,320,000 0.6355 1,474,360 160,000 2,160,000 0.5674 1,225,584 12/31/20 2,000,000 P9,069,936 12/31/21 2,000,000 12/31/22 2,000,000 Selling price of bonds (b) Amortization Table Principal Interest Effective Discount Carrying Amortization Value, end Due Date Due Due Interest P9,069,936 288,392 7,358,328 12/31/15 242,999 5,601,327 192,159 3,793,486 12/31/16 2,000,000 800,000 1,088,392 135,218 1,928,704 12/31/17 2,000,000 640,000 882,999 71,296* -0- 12/31/18 2,000,000 480,000 672,159 12/31/19 2,000,000 320,000 455,218 12/31/20 2,000,000 160,000 231,296 *Adjusted; difference is due to rounding off. (c) Interest Expense 1,088,392 2019 Discount on Bonds Payable Dec. 31 Cash 288,392 800,000 31 Bonds Payable 2,000,000 2,000,000 Cash 882,999 2020 242,999 Dec. 31 Interest Expense 640,000 Discount on Bonds Payable Cash 31 Bonds Payable 2,000,000 Cash 2,000,000 5-22. (Blue Sapphire Corporation) (a) Issue price of the bonds Principal Interest Amount Due Due Due Date Due PV Factor Present Value 960,000 2,960,000 0.9259 2,740,664 12/31/18 2,000,000 720,000 2,720,000 0.8573 2,331,856 480,000 2,480,000 0.7938 1,979,784 12/31/19 2,000,000 240,000 2,240,000 0.7350 1,646,400 8,698,704 12/31/20 2,000,000 12/31/21 2,000,000 Selling price of bonds 73 Downloaded by Genesis Mae Bitancor ([email protected])
lOMoARcPSD|13860191 Chapter 5 – Financial Liabilities (b) Amortization Table Principal Interest Effective Premium Carrying Amortization Value, end Due Date Due Due Interest 8,698,704 264,104 6,434,600 01/01/18 205,232 4,229,368 141,651 2,087,717 12/31/18 2,000,000 960,000 695,896 87,717* -0- 12/31/19 2,000,000 720,000 514,768 12/31/20 2,000,000 480,000 338,349 12/31/21 2,000,000 240,000 152,283 *Adjusted; difference is due to rounding off. (c) Cash 8,698,704 2018 Bonds Payable Jan. 1 Premium on Bonds Payable 8,000,000 698,704 Dec. 31 Interest Expense 695,896 Premium on Bonds Payable 264,104 Cash 960,000 Bonds Payable 2,000,000 Cash 2,000,000 2019 Interest Expense 514,768 Dec. 31 Premium on Bonds Payable 205,232 Cash 720,000 Bonds Payable 2,000,000 Cash 2,000,000 2020 Interest Expense 338,349 Dec. 31 Premium on Bonds Payable 141,651 Cash 480,000 Bonds Payable 2,000,000 Cash 2,000,000 2021 Interest Expense 152,283 Dec. 31 Premium on Bonds Payable 87,717 Cash 240,000 Bonds Payable 2,000,000 Cash 2,000,000 5-23. (a) (South Company) Notes Payable 900,000 Interest Payable 90,000 Accumulated Depreciation 400,000 Equipment Gain on Disposal of Equipment 1,000,000 Gain on Debt Restructuring 200,000 190,000 74 Downloaded by Genesis Mae Bitancor ([email protected])
lOMoARcPSD|13860191 Chapter 5 – Financial Liabilities (b) (Joy Company) Bonds Payable 10,000,000 Interest Payable 900,000 Ordinary Share Capital 7,500,000 Share Premium – Ordinary 900,000 Gain on Debt Restructuring 2,500,000 (c) (Capshell) Notes Payable 10,000,000 Interest Payable 1,000,000 Restructured Notes Payable 7,459,264 Gain on Debt Restructuring 3,540,736 Present value of future payments: 6,377,600 8,000,000 x 0.7972 1,081,664 8,000,000 x 8% x 1.6901 7,459,264 Total 11,000,000 3,540,736 Carrying value of liability Difference 3,740,736/11,000,000 = 32%, thus the restructuring qualifies as a derecognition of the old liability and creation of a new liability. The old liability shall be cancelled; the new liability shall be measured based on the discounted cash flow of the future payments discounted at the entity’s incremental borrowing rate considering its credit rating: (d) (Solid Company) Notes Payable 3,000,000 Interest Payable 330,000 Restructured Notes Payable 3,111,024 Premium on Restructured Notes Payable 218,976 Present value of future payments 3,000,000 x 0.5935 = 1,780,500 3,000,000 x 12% x 3.6959 = 1,330,524 Total 3,111,024 Carrying value of liability 3,330,000 Difference 218,976 218,976/3,330,000 = 6.6% which is < 10% of 3,330,000. Thus, the debt restructuring does not qualify for derecognition of the old obligation. No gain shall be recognized and a new effective interest rate shall be computed. 75 Downloaded by Genesis Mae Bitancor ([email protected])
lOMoARcPSD|13860191 Chapter 5 – Financial Liabilities MULTIPLE CHOICE QUESTIONS Theory MC1 D MC6 A MC11 D MC16 B MC21 B MC2 B MC7 A MC12 D MC17 B MC22 A MC3 B MC8 C MC13 C MC18 B MC4 C MC9 C MC14 C MC19 D MC5 D MC10 D MC15 C MC20 A Problems Reported amount of accounts payable P540,000 MC23 D Goods in transit purchased FOB shipping point 40,000 Goods lost in transit but shipped FOB shipping point 15,000 MC24 A Correct amount of accounts payable, December 31, 2019 MC25 A P585,000 Net proceeds (100%-10%) Effective interest rate (10%/90%) 90% 11.11% Interest expense (59,737 – 10,000) x 10% P4,974 Carrying amount of note, January 1, 2019 P49,737 Reduction in principal at December 31, 2019 15,026 P34,711 Annual payment P20,000 P288,000 Interest expense 4,974 P1,688,000 Carrying amount of note, December 31, 2019 P797,440 MC26 B Interest expense for 2019 (2,400,000 x 12%) MC27 D P600,000 Carrying value, December 31, 2019 (2,400,000 -1,000,000 + 288,000) 288,000 Amount due on December 31, 2020 (current) P312,000 Annual payment P1,000,000 P1,000,000 P2,000,000 Amortization of discount (1,688,000 x 12% 202,560 P385,540 MC28 B Discount on notes payable, January 1, 2019 (3,000,000 – 2,400,000) 491,566 MC29 B Amortization of discount on December 31, 2019 (see above) MC30 D P877,106 MC31 B Discount on notes payable, December 31, 2019 MC32 A P310.00 MC33 B Debenture bonds 458.80 Serial bonds P768.80 Present value of maturity value (1,000,000 x .38554) Present value of interest payments (1M x 8% x 6.14457) P1,940,000 Total issue price 50,000 Present value of maturity value (1,000 x 0.31) P1,990,000 Present value of interest payment (1,000 x 4% x 11.47) Issue price per P1,000 bond P2,080,000 2,000,000 Issue price (2,000,000 x 0.97) Accrued interest (2,000,000 x 10% x 3/12) P 80,000 Cash received from bond issuance Bond price without warrants (2,000 x 1,040) Face value of bonds Premium on bonds payable 76 Downloaded by Genesis Mae Bitancor ([email protected])
lOMoARcPSD|13860191 Chapter 5 – Financial Liabilities MC34 B Retirement price (4,000,000 x 0.97) P3,880,000 Accrued interest (4,000,000 x 12% x 3/12) 120,000 Total cash paid for retirement of bonds P4,000,000 MC35 C Carrying amount of bonds retired (1,000,000 + 70,000) Retirement price (1,000,000 x .96) P1,070,000 Gain on retirement of bonds 960,000 MC36 A Accrued interest (1,000,000 x 12% x 1/12) P 110,000 MC37 B Issue price (1,000,000 x 1.02) P10,000 Transaction costs Initial carrying amount, February 1, 2019 P1,020,000 (50,000) MC38 D Carrying value of bonds converted (1,000,000 -30,000 + 50,000) Par value of shares issued upon conversion (40,000 sh x 20) P 970,000 Expenses incurred in connection with the conversion Share premium upon conversion P1,020,000 (800,000) MC39 D No gain or loss is recognized upon conversion of bonds. (10,000) MC40 C Interest expense (1,032,880 x 10% x 6/12) P 210,000 MC41 A Carrying amount, July 1, 2019 51,644 P51,644 Amortization of premium 60,000 Effective interest (1,032,880 x 5%) P1,032,880 Nominal interest (1,000,000 x 6%) Carrying amount, December 31, 2019 8,356 P1,024,524 MC42 A Carrying amount, January 1, 2019 187,800 Effective interest (1,878,000 x 10%) 180,000 P1,878,000 Nominal interest (2,000,000 x 9%) 7,800 Carrying amount, December 31, 2019 P1,885,800 MC43 B Carrying amount, January 1, 2019 (10M – 1,145,000) = P8,855,000 P531,300 Effective interest (8,855,0000 x 6%) 500,000 Nominal interest (10M x 5%) Increase in carrying amount (amort of discount), Jan. 1- Jun 30 P 31,300 MC44 C Effective interest (5M x 1.136 = 5,680,000; 5,680,000 x 4%) P 227,200 MC45 A Unamortized bond premium, June 30, 2018 (2,100,000 – 2,000,000) P100,000 Effective interest (2,100,000 x 6%) P126,000 14,000 P 86,000 Nominal interest (2,000,000 x 7%) 140,000 P51,644 Unamortized bond premium, June 30, 2019 51,226 MC46 D Interest expense, January 1-June 30 (1,032,880 x 5%) P102,870 Interest expense, July 1-December 31 (6% x 1,000,000) – 51,644 = 8,356; (1,032,880 – 8,356) x 5% P1,902,800 Total interest expense for 2019 (400,000) MC47 D Carrying value, December 31, 2019 190,280 30,280 Principal paid 160,000 P1,533,080 Amortization of discount Effective interest (1,902,800 x 10%) P5,500,000 Nominal interest (2,000,000 x 8%) 3,000,000 Carrying value, December 31, 2020 P2,500,000 MC48 D Carrying value of the debt (5,000,000 + 500,000) Carrying value of land transferred Amount taken to profit or loss 77 Downloaded by Genesis Mae Bitancor ([email protected])
lOMoARcPSD|13860191 Chapter 5 – Financial Liabilities MC49 D Carrying value of the debt (6,000,000 + 600,000) P6,600,000 Present value of restructured debt 6,455,520 P 144,480 6,000,000 x 0.621 3,726,000 P0 6M x 12% x 3.791 2,729,520 P6,600,000 Gain on restructuring 5,378,980 P1,221,020 144,480/6,600,000 = 2%; this is less than 10%; P8,640,000 Hence, no gain is recognized 6,213,780 P2,426,220 MC50 C Carrying value of the debt (6,000,000 + 600,000) P11,000,000 Present value of restructured debt 9,750,000 P 1,250,000 5,000,000 x 0.6209 3,104,500 5M x 12% x 3.7908 2,274,480 Gain on debt restructuring MC51 B Carrying value of the debt (8,000,000 + 640,000) Present value of restructured debt 6,000,000 x 0.8573 5,143,800 6M x 10% x 1.7833 1,069,980 Gain on debt restructuring MC52 B Carrying value of the debt (10,000,000 + 1,000,000) Market value of shares issued (150,000 x 65) Amount reported in profit or loss 78 Downloaded by Genesis Mae Bitancor ([email protected])
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