PROBLEMS ON LIABILITIES

Problem 1
These were noted in the following accounts of Faithful Inc. for the year ended December 31, 2019.
Accounts
Accounts Payable, trade
Notes Payable, trade
Advances from Customers
Container Deposit
Notes Payable - BPI
Dividend in arrears on
Cumulative Preferred stock
Share Dividend Payable on
Ordinary Shares
Liabilities under guarantee
agreement
Convertible Bonds
Notes Payable - Officers
Salaries and Wages
Notes Receivable
Output VAT
Accounts Receivable
Cash in Bank
Common Stock Warrants
Outstanding
Common Stock Option
Outstanding
Estimated Warranty Cost for
goods sold
Installment Notes Payable
Provision for Losses
Deferred Tax Liability
Balance Notes
P 170,000 The amount is net of P 30,000 accounts with debit balance
70,000 The notes are all with 5 months term, bearing interest at 15%, P 50,000 of
the notes is dated September 1, while the rest are dated November 3
100,000 The goods pertaining to these advances will be delivered in 2020
50,000 This is an amount received from customers for returnable containers
200,000 This is a five year note and are being paid off at the rate of P 4,000 per
month inclusive of interest
20,000 The company is yet to declare dividends since its last declaration and
distribution in 2020.
37,200
45,000 This pertains to Faithful guarantees its employee’s bank loan. As per past
experience, employees unlikely default on their loan payments
1,000,000 P 1,000 bond is convertible to 10 ordinary shares. Amount due on
December 31, 2022
40,000 This is due in six months
Payroll for the period December 16, 2019 to January 15, 2020 amounted
to P 68,000
30,000 This note has been discounted in the bank on a without recourse basis,
where the company received P 24,000
246,000 Input VAT on purchases and other operating expenses amounted to P
164,000
215,000 The account is net of P 12,300 customer credit balances
115,000 The company’s bank balances include BPI – P 125,000; PNB – P 55,000 and
in BDO an overdraft with the balance
250,000
150,000
46,000 This pertains to warranty costs on goods sold in 2018 and 2019
75,000 This is for the equipment purchases, only one-third is due in 2020
A manufacturing equipment exploded during the year injuring an
employee where he filed claims on November 3. There has been no
resolution for the case as of the balance sheet date but the company
lawyer believed that it is probable that the company is liable between P
25,000 and P 75,000.
150,000 This refers to the cumulative temporary difference on taxable and financial
income which will reverse evenly over the next year.

1. How much is the total current liabilities?

a. P 767,300 b. P 814,300 c. P 817,300 d. P 892,300
2. How much is the total non-current liabilities?
a. P 1,285,000 b. P 1,360,000 c. P 1,429,000 d. P 1,760,000
3. How much is the total liabilities?
a. P 2,177,300 b. P 2,127,300 c. P 2,246,300 d. P 2,252,300
 ANSWER IN PROBLEM 1
Accounts Balance Current Long Term
Accounts Payable, trade P 170,000 170,000 + 30,000 200,000
Notes Payable, trade 70,000 70,000
Interest on Notes above 50,000 x. 15.x 4/12 2500
20,000 x .15 x 2/12 500
Advances from Customers 100,000 100,000
Container Deposit 50,000 50,000
Notes Payable - BPI 200,000 40,000 160,000
Dividend in arrears on Cumulative 20,000 (dividends are only accrued
Preferred stock when declared)
Share Dividend Payable on Ordinary 37,200 (Part of Shareholders’ Equity)
Shares
Liabilities under guarantee agreement 45,000 This is a contingent liability,
where we accrue only when
there are defaults. We are only
secondarily liable
Convertible Bonds 1,000,000
1,000,000
Notes Payable - Officers 40,000
40,000
Salaries and Wages 68,000 x 15/30 34,000
Notes Receivable (This has to be closed upon
30,000 discounting)- Not a liability nor
an asset anymore.
Output VAT The liability is the net of output 82,000
246,000 and input
( 246,000 – 164,000)
Accounts Receivable Credit Balance is reported as 12,300
215,000 liability, A/R is reported as P
227,300 (215,000 + 12,300)
Cash in Bank The balance of BDO is P 65,000, 65,000
115,000 and there is no other acct. on
BDO, reported as liability
Common Stock Warrants Outstanding (This is an Equity Account)
250,000
Common Stock Option Outstanding (This is an Equity Account)
150,000
Estimated Warranty Cost for goods sold 46,000
46,000
Installment Notes Payable Current – 75,000 x 1/3 25,000 50,000
75,000
Provision for Losses This is a provision, since it is 50,000
probable and can be estimated.
(25,000 + 75,000) / 2 . We will
use mid-range.
Deferred Tax Liability Deferred is always long term. 150,000
150,000
TOTAL 2,177,300 817,300 1,360,000

Problem 2
The following information in 2019 were available with regards to the currently maturing obligations of Batangas Inc.
who follows the calendar year financial statements reporting in.

a. Short term Notes Payable of P 1 Million due February 7, 2020 – On January 15, 2020, the company issued
bonds with a face value of P 900,000 at 96; brokerage and other cost of issuance were P 3,450. On January 22,
2020, the proceeds from the bond issuance plus additional cash held by the company were used to liquidate the
P 1 Million of short-term notes.
b. Notes Payable of P 500,000 due June 1, 2020 – On February 2,2020, Batangas entered an agreement with
National Life Insurance Co. where by National will lend Batangas P 400,000 payable in 5 years at 14% the
proceeds of which is intended to be used to partly refinance the said notes. The money will be available to the
company on May 20, 2020.
c. Notes Payable of P 500,000 due June 15, 2020 – At December 31, 2019 Batangas signed an agreement to
borrow up to P 500,000 to refinance the note on a long-term basis. The financing agreement called for
borrowings not to exceed 80% of the value of the collateral. At the date of issue of the December 31, 2019
financial statements, the value of the collateral was P 600,000 and was not expected to fall below this amount
during 2020.
Assuming that the financial statements of Batangas were authorized to issue on March 31, 2020.

4. How much liabilities above are short term as of the balance sheet date?
a. P 1,500,000 b. P 1,520,000 c. P 1,980,000 d. P 2,000,000
5. How much liabilities above are long term as of the balance sheet date?
a. P 2,000,000 b. P 1,500,000 c. P 980,000 d. P 480,000
ANSWER IN PROBLEM 2
Current Long Term PARTICULARS
a. 1,000,000 Not Refinance on a long term basis as of BS date – Current
b. 500,000 Not Refinance on a long term basis as of BS date - Current
c. 20,000 480,000 Refinance on a long term basis as of BS date ( 600,000 x .80)=480,000
total 1,520,000 480,000 ( 480,000 will be long term and the balance of P 20,000 will be current)

Problem 3
Raid Inc., a manufacturer of heavy machinery, grants a 2-year warranty on its products. The Estimated Liability for
Product Warranty account shows the following entries for the year:
Beginning balance P 225,000
Provision during the year (quarterly accrual) 200,000
Total 425,000

A review of the company’s policy of accounting for warranties revealed that based on the company’s past experience,
warranty claims average 5% on net sales. Moreover, the company provides for a quarterly accrual of the estimated
warranties expenditure based on rough estimates.

The following additional information is available from the company’s records:

Gross Sales P 7,250,000
Sales Return and Allowances 150,000
Cost of Sales 3,678,000
The cost of Sales included P 415,500 cost of servicing the warranty claims for the year.

6. What is the correct balance of the estimated liability for product warranty at the end of the year?
a. P 164,500 b. P 264,500 c. P 355,000 d. P 364,500
Beginning Balance 225,000
+ Warranty Expense (7,250,000 – 150,000) x 5% 355,000
Less: Actual Warranty (415,500)
Warranty Liability Balance 164,500
Problem 4
San Mateo Corporation began operation on January 2, 2019 with 250 employees. The company provides its employees 2
weeks paid sick leave and 2 weeks paid vacation leave for every operating year. Per company policy, employees are
allowed to carry over accumulated leaves for the current period over the next year only. The same shall be forfeited if
not availed of over the said period allowed.
On December 31, 2019, records show that there are 55 employees who are yet to avail of any leaves, while there are 25
employees who have remaining 2 weeks unused vacation and sick leaves combined. Employees had an average daily
wage rate of P 250 for a 5-day weekly operation in 2019.
On December 31, 2020, records show that 925 days of vacation and sick leaves carried over from the last operating
period were exercised and paid in 2020. In addition, there are 30 employees who have 6 weeks accumulated unused sick
leaves and vacation leaves combined; 25 employees who have 3 weeks accumulated unused sick leaves and 2 weeks
vacation leaves; 30 employees who have 3 weeks accumulated unused sick leaves and unused vacation leaves
combined; 10 employees who have 1 week accumulated unused sick leave and 1 week vacation leaves. Employees had
an average daily wage rate of P 275 for a 5-day weekly operation in 2020.

7. How much liability for compensated absences should be included as current liabilities as of December 31, 2019?
a. P 570,625 b. P 453,750 c. P 412,500 d. P 337,500
8. How much liability for compensated absences should be included as current liabilities as of December 31, 2020?
a. P570,625 b. P 453,750 c. P 412,500 d. P 337,500

ANSWER IN PROBLEM 4
Liability for Compensated Absences: Dec. 31, 2019
55 employees x 4 weeks x 5days 1,100
25 employees x 2 weeks x 5 days 250 1,350
Multiplied by Payment per Day 250
Liability, December 31, 2019 337,500

Liability for Compensated Absences: Dec. 31, 2019

30 employees x 6 weeks x 5days (use 4 weeks limit) 600
25 employees x 5 weeks x 5 days (use 4 weeks limit) 500
30 employees x 3 weeks x 5days 450
10 employees x 2 weeks x 5 days 100 1,650
Multiplied by Payment per Day 275
Liability, December 31, 2019 453,750

Note: Four weeks limit: 2 weeks VL and 2 weeks SL, since, only a year can be carried to the following year.

Problem 5
Climbing Company manufactures and sells air conditioning units with a 12-month warranty under which defective air
conditioning units will be replaced free of any charges.
The company started out in 2019 expecting a 10% of the sales to be returned. However, due to the innovations and
improvements made to the products during the year, the estimated percentage of returns increased to 15% on July 1. It
is assumed that no units sold during a given quarter are returned in that quarter. Each unit is stamped with a date at
time of sale so that the warranty may be properly administered. The following table of percentages indicates the pattern
of sales return during the 12-month period of warranty, starting the quarter following the sale of conditioning units.
Quarter following quarter of sale % of the total returns expected Gross Sales in 2019
First Quarter 40% P 16,200,000
Second Quarter 30% 14,850,000
 Third Quarter 20% 12,000,000
Fourth Quarter 10% 8,100,000

The company also pays for the freight costs of the return and the delivery of the defective units returned and the new
replacement units, respectively. The freight costs were approximately 10% of the sales price of the air conditioning units
returned. The manufacturing cost of the air conditioning units are roughly 80% of the sales price. The returned units can
be salvaged at an estimated value of 15% of their sales price. Returned units on hand at December 31, 2019, were thus
valued in the inventory at 15% of their original sales price.

9. What is the total estimated returns for the year ended, December 31, 2019?
a. P 5,115,000 b. P 6,120,000 c. P 6,300,000 d. P 7,672,500
10. What is the warranty expense for the year ended, December 31, 2019?
a. P 4,590,000 b. P 4,896,000 c. P 5,508,000 d. P 6,120,000
11. What is the estimated warranty payable as at December 31, 2019?
a. P 2,176,875 b. P 2,205,900 c. P 2,322,000 d. P 2,612,250

ANSWER IN PROBLEM 5

First Quarter Sales P

16,200,000
Second Quarter Sales 14,850,000
Total 31,050,000
Multiplied by Rate of Return 10% 3,105,000

Third Quarter Sales 12,000,000

Fourth Quarter Sales 8,100,000
Total 20,100,000
Multiplied by Rate of Return 15% 3,015,000
Total Returns 6,120,000
Manufacturing % of Sales Price 80%
Warranty Expense on Inventory Cost 4,896,000
Freight on Returns (6,120,000 x .10) 612,000
Less: Salvage Value of returns (6,120,000 x .15) (918,000)
Warranty Expense 4,590,000
Exp. Return
Expected Return on First QTR Sales (16.2 M x.10) P 4th Quarter 10% 162,000
1,620,000
Expected Return on Second QTR Sales (14.85 M x.10) 1,485,000 3rd and 4th 10%+20% 445,500
Expected Return on Third QTR Sales (12 M x.15) 1,800,000 2nd, 3rd, & 4th 10%+20%+30% 1,080,000
Expected Return on Fourth QTR Sales (8.1 M x.15) 1,215,000 1st to 4th 100% 1,215,000
Expected returned based on Sales as of Dec. 31 2,902,500
Estimated Cost 80%
Est. Inventory Cost of Expected Returned 2,322,000
Freight (2,902,500 x 10%) 290,250
Salvage Value (2,902,500 x 15%) (435,375)
Total Liability as of December 31, 2019 2,176,875
Note: Return is expected within a year, but it was expected it will start on the following quarter of sale. Sales in the
first quarter is only expected on the fourth quarter as of the end of the year, which is 10% (see table)

Problem 6
The Manger Home Shopping carries a wide variety of promotion techniques to attract customers.
 1. Kitchen and Home Appliances are sold in a one-year warranty for replacement of parts and labor. The estimated
warranty costs, based on past experience is 5% of sales.
2. The premium is offered on home furniture. Customer receive a coupon for each peso spent on home furniture.
Customers may exchange 2,000 coupons and P 50 for a rice cooker which the company purchased at P 340 for
each rice cooker and estimates that 60% of the coupons given to customers will be redeemed.

The company’s total sales for 2019 were P 115.2M – P 86.4M from kitchen and home appliances and P 28.8M from
home furniture. Replacement parts and labor for warranty work totaled P 2.624M during 2019. A total of 5,200 rice
cookers used in the premium programs were purchased during the year and there were 9,600,000 coupons redeemed in
2019.
The accrual method is used by the company to account for the warranty and premium costs for financial reporting
purposes. The balance of the accounts related to warranties and premiums on January 1, 2019, were as shown below:
Inventory of Premium Items P 340,000
Estimated liabilities for premiums 716,000
Estimated liabilities for warranties 2,176,000
Based on the information above, determine:

12. Promotional expenses related to premiums for the current year 2019?
a. P 1,392,000 b. P 1,632,000 c. P 2,505,600 d. P 2,937,600
13. Estimated liabilities for premiums as of December 31, 2019?
a. P 716,000 b. P 1,829,600 c. P 2,021,600 d. P 1,589,600
14. Estimated liabilities under warranties as of December 31, 2019?
a. P 2,624,000 b. P 3,872,000 c. P 4,320,000 d. P 5,312,000

ANSWER IN PROBLEM 6
Sales of Home Furniture 28,800,000
% of Redemption 60%
Coupons expected to be redeemed 17,280,000
No. of Coupons required for a premium 2,000
Number of Premium to be given away 8,640
Multiply by Estimated Net Cost ( P 340 -P 50 ) P 290 P 2,505,600 Premium Expense
Add: Premium Liability at the beg. of the year 716,000
Coupon Redeemed during the year (9,600,000/2,000) x P 290 (1,392,000)
Premium Liability of the end of the year 1,829,600 Premium Liability

Sales on Kitchen and Home Appliance 86,400,000

Rate of Expected Warranty on Sales 5%
Warranty Expense in 2019 4,320,000
Warranty liability, beginning of the year 2,176,000
Actual Warranty worked (2,624,000) 3,872,000 Warranty Liability

Problem 7
Orange Appliance Center reports the following liability items in its balance sheet as of December 31, 2019:
Liability for unredeemed coupons P 109,750
Unearned Service Contracts 300,000
Accrued officer bonuses -
The liability for unredeemed coupons is in relation to discount coupons distributed by the company to customers who
may present the same within a stated expiration date to various company distributors to avail of them discount as
indicated in the face of the coupons. Distributors are reimbursed for the face value of coupons redeemed, plus 10% of
the coupon value for handling costs. The company honors requests for coupon reimbursements to distributors three
months after the expiration date. In Orange experience, 75% of the coupons issued ultimately are redeemed by
customers. The total face value of coupon issued during the year and expiring on December 31, 2019 amounted to P
250,000 while total payments to distributors as of the same date is at P 140,250. The total coupon value was set up as a
liability while the total payments were charged against the liability set-up. Aside from the company’s normal selling
operations, it also sells equipment service contracts agreeing to service equipment for a two-year period. Revenue from
service contracts is recognized as earned over the lives of the contracts. Additional information shows that Unearned
Service Contract revenue at January 1, 2019 is at P 300,000; cash Receipts from service contract sold is at P 490,000
recorded as revenue; service contract revenue actually realized is at P 430,000.

The company provides a special bonus for its executive officers based on 10% of its net income before bonus but after
income tax. Net income for the year before tax and before adjustments related to the previous information is at P
1,016,250. Assume income tax rate is 35%. Accrual is yet to be made on the bonuses.

15. What is the adjusted balance of the liability for unredeemed coupons?
a. P 134,750 b. P 109,750 c. P 66,000 d. P 47,250
16. What is the adjusted balance of the unearned service contract?
a. P 240,000 b. P 300,000 c. P 360,000 d. P 490,000
17. What is the adjusted balance of the accrued officer bonuses accounts?
a. P 61,032 b. P 67,358 c. P 90,909 d. P 100,000
ANSWERS IN PROBLEM 7
Total Face Value of Coupon Issued during the year P 250,000
Add: Handling Cost 10% 25,000
Total 275,000
Percentage Expected to be redeemed 75%
Required Estimated Expense 206,250
Actual Cost / Reimbursements to distributors (140,250)
Estimated liability of discount coupon, end 66,000

Contract Service, Beginning P 300,000

Contract Sold this period 490,000
Less: Service Earned (430,000)
Contract Service liability, end 360,000

Unadjusted Income before Tax P 1,016,250

Overstatement of liability of on unredeemed coupon (109,750-66,000) 43,750
Understatement of Unearned Service Contract (360,000 – 300,000) (60,000)
Adjusted Income before tax P 1,000,000

B = .10 (NI); Tax = .35 (IBT-B)

B=.10 (1,000,000 - .35 (1,000,000 – B)
B=.10 (1,000,000 – 350,000+.35B)
B=.10 (650,000 + .35B)
B= 65,000 + .035B
1B-.035B = P 65,000
.965B = P 65,000
B = 67,358

Problem 8
You are auditing the financial statements of Puerto Rico Inc. for the year ended, December 31, 2019. The liability portion
of the company’s balance sheet shows the following information:
Current Liabilities
Accounts Payable P 250,000
Warranty Liability 10,000
 Non-Current Liability
Liability Under Finance Lease 540,000
Bonds Payable 851,706
Upon further investigation on the liability accounts, you discovered the following:
a. Accounts Payable
You rendered purchase cut-off on the company’s purchases transactions from December 15 to January 15. The
results of such cut-off are summarized below:
Receiving Report No. Amount Invoice Date Shipment Date Shipping Terms
2631 P 5,500 12/15.2019 12/15/2019 FOB SUPPLIER
2632 6,000 12/17/2019 12/20/2019 FOB SUPPLIER
2633 7,900 12/21/2019 12/21/2019 FOB BUYER
2635 8,900 12/26/2019 12/30/2019 FOB BUYER
2636 10,000 12/30/2019 12/30/2019 FOB SUPPLIER
2637 8,000 12/30/2019 01/02/2020 FOB SUPPLIER
2638 9,500 12/31/2019 12/31/2019 FOB BUYER
2639 10,500 01/02/2020 01/05/2020 FOB BUYER
2640 11,000 01/05/2020 01/10/2020 FOB SUPPLIER
2641 12,000 01/07/2020 01/11/2020 FOB SUPPLIER
2642 15,000 01/10/2020 01/15/2020 FOB BUYER

The inventory count procedures were done on December 31, 2019 and documents cut-off shows that the last
receiving report used and recorded for the current year by the company is RR number 2635. Receiving Report
number 2634 is for the shipment made on December 27, 2019. The related invoice amounting to P 12,500, was
misplaced and was recovered only on January 5, 2020 and was recorded on this date.

b. Warranty Liability
The company has two-year warranty on its products. The warranty estimated in the past years were at 5% of the
net sales. During the current year, because of increased returns, the company decided to increase warranty
estimates at 6% of its total net sales and one-third of the year following the year of sale. The summary of the
company’s total sales and actual warranty cost incurred for the past three years are presented below, assuming
that sales are evenly incurred throughout the year.
2017 2018 2019
Net Sales P 8,000,000 P 9,050,000 P 10,550,000
Actual Warranty Cost Paid 375,000 467,500 310,000
The company is yet to update its warranty liabilities as of December 31, 2019.

c. Other Accruals
You also conducted a search for unrecorded liabilities by reviewing the voucher register several days before and
after the balance sheet date. Your review is summarized below:

Entry Date Voucher Reference Description Amount Account Charged

December 18, 2019 12-200 Supplies, Shipped FOB P 1,500 Unused Supplies
Destination, received 12/17
December 18, 2019 12-203 Auto Insurance, 12/15/2019 P 20,000 Prepaid Insurance
to 12/15/2020
December 26, 2019 12-212 Repairs Services; received P 1,900 Repairs and
12/20/ 2020 Maintenance
December 28,2019 12-215 Utilities for December P 2,400 Utilities Expense
January 3, 2020 1-1 Legal Services: received P 4,600 Legal and
12/28/2019 Professional Fees
January 4, 2020 1-2 Medical Services for P 5,500 Medical Expense
Employees in 2019
 January 10,2020
January 12, 2020
January 14, 2020
1-3 Payroll 12/21/2019 to
1/5/2020 (12 working days,
4 days in January 2020)
1-4 Royalties in December
1-5 Repair Services: received
1/9/2020
P 14,400 Salaries and Wages
P 3,900 Royalty Expense
P 1,900 Repairs and
Maintenance

d. Liabilities Under Finance Lease

The company leases one of its warehouse from Princess Properties, Inc. The term of the lease provides for a
minimum lease payments of P 150,000 per quarter, payable at the beginning of the quarter. The initial lease
term runs for ten years with no renewal or purchase options. The company is responsible of paying property
taxes and also for the needed repairs to the warehouse. The cost of the warehouse to Princess Properties was P
3,000,000 and the market value at the date of completion was P 4,185,388. The implicit interest rate stated in
the lease agreement is 8%. The lease was signed and the warehouse occupied on January 2, 2019. The company
recorded the lease liability at the total amount expected to be paid for the 10-year period, and charges the same
for the quarterly payments made.
e. Bonds Payable
The company issued P 800,000 of a 12% face value bonds for P 851,706. The bonds were dated and issued on
April 1, 2019, are due March 31, 2023, and pay interest semiannually on September 30 and March 31. The
company sold the bonds to yield 10%.
18. What is the correct balance of Accounts Payable account?
a. P 272,500 b. P 282,000 c. P 290,000 d. P 260,000
19. What is the correct balance of Warranty liabilities?
a. P 308,000 b. P 318,000 c. P 323,000 d. P 333,000
20. How much is the correct additional accruals to be included in the company’s total current liabilities?
a. P 124,067 b. P 47,600 c. P 23,600 d. P 25,500
21. What is the balance of the Liability Under Finance Lease to be presented as long- term liabilities?
a. P 3,912,158 b. P 3,823,326 c. P 3,616,404 d. P 3,520,251
22. How much is the carrying value of the Bonds Payable as of December 31, 2019?
a. P 843,448 b. P 840,606 c. P 843,584 d. P 840,817

ANSWERS IN PROBLEM 8

a. Accounts Payable
You rendered purchase cut-off on the company’s purchases transactions from December 15 to January 15. The
results of such cut-off are summarized below:
Receiving Amount Invoice Date Shipment Shipping Terms
Report No. Date
2631 P 5,500 12/15.2019 12/15/2019 FOB SUPPLIER Okay = A/P
2632 6,000 12/17/2019 12/20/2019 FOB SUPPLIER Okay = A/P
2633 7,900 12/21/2019 12/21/2019 FOB BUYER Okay = A/P
2635 8,900 12/26/2019 12/30/2019 FOB BUYER CUT OFF on records. Okay = A/P
2636 10,000 12/30/2019 12/30/2019 FOB SUPPLIER Not Okay = A/P (Added)
2637 8,000 12/30/2019 01/02/2020 FOB SUPPLIER Not Recorded - Okay = No A/P
2638 9,500 12/31/2019 12/31/2019 FOB BUYER Not Recorded - Okay = No A/P
2639 10,500 01/02/2020 01/05/2020 FOB BUYER Not Recorded - Okay = No A/P
2640 11,000 01/05/2020 01/10/2020 FOB SUPPLIER Not Recorded - Okay = No A/P
2641 12,000 01/07/2020 01/11/2020 FOB SUPPLIER Not Recorded - Okay = No A/P
2642 15,000 01/10/2020 01/15/2020 FOB BUYER Not Recorded - Okay = No A/P
 The inventory count procedures were done on December 31, 2019 and documents cut-off shows that the last
receiving report used and recorded for the current year by the company is RR number 2635. Receiving Report
number 2634 is for the shipment made on December 27, 2019. The related invoice amounting to P 12,500, was
misplaced and was recovered only on January 5, 2020 and was recorded on this date.
Note that our basis of A/P is the Shipping term vs. Shipment Date (For FOB Supplier or FOB Shipping Point) . Per
Record as of December, the cut-off is 2635, beyond that, it was assumed to be recorded January next period.
Unadjusted A/P 250,000
Add: Unrecorded (RR 2636)- In transit 10,000
Unrecorded 2634 12,500
ADJUSTED A/P 272,500

b. Warranty Liability
The company has two-year warranty on its products. The warranty estimated in the past years were at 5% of the
net sales. During the current year, because of increased returns, the company decided to increase warranty
estimates at 6% of its total net sales and one-third of the year following the year of sale. The summary of the
company’s total sales and actual warranty cost incurred for the past three years are presented below, assuming
that sales are evenly incurred throughout the year.
2017 2018 2019
Net Sales P 8,000,000 P 9,050,000 P 10,550,000
Actual Warranty Cost Paid 375,000 467,500 310,000
The company is yet to update its warranty liabilities as of December 31, 2019.

Warranty Liability, unadjusted P 10,000

Warranty Expense 2019 (P10,550,000 x .06) 633,000
Actual Warranty Cost paid in 2019 (310,000)
Warranty liability end of 2019 333,000

c. Other Accruals
You also conducted a search for unrecorded liabilities by reviewing the voucher register several days before and
after the balance sheet date. Your review is summarized below:

Entry Voucher Description Account Adjustments Reason of its Adjustment

Date Referenc Charged
e
December 12-200 Supplies, Shipped P 1,500 Unused This item related in 2019
18, 2019 FOB Destination, Supplies - paid in 2019 (with Voucher
received 12/17 12-XX)
December 12-203 Auto Insurance, P Prepaid This item related in 2019
18, 2019 12/15/2019 to 20,000 Insurance - paid in 2019. Expense just
12/15/2020 adjusted
December 12-212 Repairs Services; P 1,900 Repairs and This is a Prepayments
26, 2019 received 12/20/ Maintenance - (Asset)
2020
December 12-215 Utilities for P 2,400 Utilities This item related in 2019
28,2019 December Expense paid in 2019 (with Voucher
12-XX)
January 3, 1-1 Legal Services: P 4,600 Legal and Add to liability. Incurred in
2020 received Professional 4,600 2019, paid in 2020
12/28/2019 Fees
January 4, 1-2 Medical Services P 5,500 Medical 5,500 Add to liability. Incurred in
2020 for Employees in Expense 2019, paid in 2020
2019
 January 1-3 Payroll P Salaries and Add to Liability . Dec Salary
10,2020 12/21/2019 to 14,400 Wages 9,600 Paid in 2020 (14,400 x 8/12)
1/5/2020 (12 = 9,600
working days, 4
days in January
2020)
January 1-4 Royalties in P 3,900 Royalty 3,900 Add to liability. Incurred in
12, 2020 December Expense 2019, paid in 2020
January 1-5 Repair Services: P 1,900 Repairs and - Ok. Incurred and paid in
14, 2020 received 1/9/2020 Maintenance 2020
TOTAL 23,600

Additional Accruals:
Voucher (see above) P 23,600
Accrued Interest on Finance Lease (see table in d below) 76,467
Accrued Interest on bonds (unpaid nominal) (see e below) 24,000
Additional Accrual 124,067

d. Liabilities Under Finance Lease

The company leases one of its warehouse from Princess Properties, Inc. The term of the lease provides for a
minimum lease payments of P 150,000 per quarter, payable at the beginning of the quarter. The initial lease
term runs for ten years with no renewal or purchase options. The company is responsible of paying property
taxes and also for the needed repairs to the warehouse. The cost of the warehouse to Princess Properties was P
3,000,000 and the market value at the date of completion was P 4,185,388. The implicit interest rate stated in
the lease agreement is 8%. The lease was signed and the warehouse occupied on January 2, 2019. The company
recorded the lease liability at the total amount expected to be paid for the 10-year period, and charges the same
for the quarterly payments made.

We will prepare the Amortization table up to December 31, 2020

Date Payment Interest (8%/4=2%) Principal Balance
Balance 4,185,388
January 1, 2019 150,000 150,000 4,035,388
April 1, 2019 150,000 80,708 69,292 3,966,096
June 1, 2019 150,000 79,322 70,678 3,895,418
October 1, 2019 150,000 77,908 72,092 3,823,326
January 1, 2020 150,000 76,467 73,533 3,749,793
April 1, 2020 150,000 74,996 75,004 3,674,789
June 1, 2020 150,000 73,496 76,504 3,598,285
October 1, 2020 150,000 71,966 78,034 3,520,251

Current as of December 31, 2019 = (73,533+75,004+76,504+78,034) = 303,075

Long Term Balance 3,520,251
Balance as of December 31, 2019 3,823,326

e. Bonds Payable
The company issued P 800,000 of a 12% face value bonds for P 851,706. The bonds were dated and issued on
April 1, 2019, are due March 31, 2023, and pay interest semiannually on September 30 and March 31. The
company sold the bonds to yield 10%.

Date Nominal Interest Effective Interest Amortization Balance

4.01.2019 851,706
9.30.2019 48,000 42,585 (5,415) 846,291
 12.31.2019 24,000 21,157 (2,843) 843,448

Problem 9
The following schedule of liabilities were provided to you by the accountant of Delight Inc. in line with your audit of its
various liabilities as of and for the period ended December 31, 2019:
Accounts Payable (Note 1) P 534,000
Premium Payable (Note 2) 242,000
10%, Bonds Payable (Note 3) 2,000,000
Lease Liability (Note 4) 3,000,000

Note 1. The purchases journal included the following transactions several days before and after December 31, 2019.
December 2019 Purchase Journal
Purchase Invoice Date
December 26, 2019
December 28, 2019
December 30, 2019
December 30, 2019
January 2020 Purchase Journal
Purchase Invoice Date
December 29, 2019
December 30, 2019
January 2,2020
Receiving Report Number/Date Amount Terms
1012 / December 30, 2019 P 50,000 FOB Destination
1014/ January 2, 2020 40,000 FOB Shipping Point
1015/ January 2, 2020 35,000 FOB Destination
1017/ January 4, 2020 25,000 FOB Shipping Point
Receiving Report Number/Date Amount Terms
1013 / December 30, 2019 P 65,000 FOB Destination
1016/ January 3, 2020 40,000 FOB Shipping Point
1018/ January 3, 2020 30,000 FOB Shipping Point

Note 2. The Premium Payable balance was the accrued amount in December 31, 2018 for a promotional program of the
company which started in 2018. For every 5 product labels the customer surrenders plus P 50, the customer received a
specially designed wall clock which the company purchases at a cost of P 160 per unit. Details about the said
promotional program in 2018 and 2019 are as follows:

2018 2019
Sales in Units 50,000 60,000
Premiums Purchased in Units 3,000 6,000
Inventory of Premiums at the end of each year 1,200 2,100
The company estimates that from the labels issued with product sold, 40% shall be presented for the said promotional
plan redemption.

Note 3. The 10% convertible bonds payable maturing on December 31, 2020, were issued on January 1, 2018 at P
2,050,000. The prevailing market rate of interest for similar securities at the time without conversion option was at 12%.
The issuance was recorded as debit to cash for the proceeds and credit to bonds payable at face value with the
difference being charged to interest expense. The bonds were convertible to ordinary shares on the basis of P 1,000
bonds to ten, P 50 par value ordinary shares. Interest are payable on the bonds annually every December 31. On
December 31, 2019 after the payment of the annual interest which was recorded appropriately, half of the bonds were
converted to ordinary shares. The conversion is yet to be recorded by Delight Inc.

Note 4. The lease liability is for a five-year lease agreement for an equipment of Joy Corporation on January 1, 2019. The
equipment which had a useful life of 10 years had a fair value on January 1, 2019 at P 2,400,000. There is no provision
for transfer ownership to Delight nor is there any agreement for a bargain purchase option at the end of the lease term.
The lease agreement requires Delight to pay P600,000 annually starting December 31, 2019. The implicit lease rate
known to both parties was at 8% while the incremental borrowing rate is 10%. The lease was recorded by the company
as a debit to Equipment and credit to Lease Liability at P 3,000,000, which is the total payment to be made for the lease.
The company is yet to record the first lease payment made on December 31, 2019.

23. What is the correct Accounts Payable as of December 31, 2019?

 a. P 539,000 b. P 564,000 c. P 594,000 d. P 604,000
24. What is the correct Premium Payable as of December 31, 2019?
a. P 304,000 b. P 143,000 c. P 209,000 d. P 171,000
25. What is the correct interest expense in 2019 on the bonds payable?
a. P 209,947 b. P 228,471 c. P 206,948 d. P 231,888
26. What is the credit to Shareholders’ Equity as a result of conversion of the half of the bonds on December 31,
2019? a. P 555,179 b. P 628,216 c. P 539,236 d. P 612,272
27. What is the correct carrying value of the lease liability as of December 31, 2019?
a. P 0 b. P 1,987,276 c. P 1,546,258 d. P 1,901,919
28. What is the correct depreciation expense on the leased equipment to be recognized in 2019?
a. P 0 b. P 239,562 c. P 479,125 d. P 454,894

ANSWERS IN PROBLEM 9

Note 1. The purchases journal included the following transactions several days before and after December 31, 2019.
December 2019 Purchase Journal
Purchase Invoice Date
December 26, 2019
December 28, 2019
December 30, 2019
December 30, 2019
January 2020 Purchase Journal
Purchase Invoice Date
December 29, 2019
December 30, 2019
January 2,2020
Receiving Report Amount Terms AUDIT NOTES
Number/Date
1012 / December 30, P 50,000 FOB Destination Okay – December RR
2019
1014/ January 2, 2020 40,000 FOB Shipping Point Okay- Dec Invoice
1015/ January 2, 2020 35,000 FOB Destination To be deducted, recorded
in Dec. but received Jan.
1017/ January 4, 2020 25,000 FOB Shipping Point Okay – Dec Invoice
Receiving Report Amount Terms
Number/Date
1013 / December 30, P FOB Destination Added- Received Dec but
2019 65,000 recorded January
1016/ January 3, 2020 40,000 FOB Shipping Point Added- Invoice Dec,
recorded January
1018/ January 3, 2020 30,000 FOB Shipping Point Okay Invoiced January,
recorded January

Note: In this problem, FOB Destination is based on RR Date, while FOB Shipping Point is based on Invoice Date.
Unadjusted balance P 534,000
RR # 1015 (35,000)
RR # 1013 65,000
RR # 1016 40,000
Adjusted Accounts Payable 604,000

Note 2. The Premium Payable balance was the accrued amount in December 31, 2018 for a promotional program of the
company which started in 2018. For every 5 product labels the customer surrenders plus P 50, the customer received a
specially designed wall clock which the company purchases at a cost of P 160 per unit. Details about the said
promotional program in 2018 and 2019 are as follows:

2018 2019
Sales in Units 50,000 60,000
Premiums Purchased in Units 3,000 6,000
 Inventory of Premiums at the end of each year 1,200 2,100
The company estimates that from the labels issued with product sold, 40% shall be presented for the said promotional
plan redemption.

Premium Expense in 2018 50,000 x .40 /5 (160 -50) P 440,000

Premium Given Out in 2018 (3,000 – 1,200) x (160-50) (198,000) 242,000 Premium liability 2018
Premium Expense in 2019 60,000 x .40 /5 (160 -50) 528,000
Premium Given Out in 2019 (1,200+6,000-2,100) x (160-50) (561,000) (33,000) Decrease Liability 2019
209,000 Premium Liability end 2019

Note 3. The 10% convertible bonds payable maturing on December 31, 2020, were issued on January 1, 2018 at P
2,050,000. The prevailing market rate of interest for similar securities at the time without conversion option was at 12%.
The issuance was recorded as debit to cash for the proceeds and credit to bonds payable at face value with the
difference being charged to interest expense. The bonds were convertible to ordinary shares on the basis of P 1,000
bonds to ten, P 50 par value ordinary shares. Interest are payable on the bonds annually every December 31. On
December 31, 2019 after the payment of the annual interest which was recorded appropriately, half of the bonds were
converted to ordinary shares. The conversion is yet to be recorded by Delight Inc.

To get the Value of the bond at issuance, we will use the Residual Method as follows:
Total Proceeds at Issuance P 2,050,000
PV bonds without conversion (P 2M x .71178) P 1,423,560
(P 2M x .10 x 2.40183) 480,366 1,903,926
Bond Conversion Option 146,073

Date Nominal Interest Effective Interest Amortization Balance

01/01/2018 1,903,926
12.31.2018 200,000 228,471 28,471 1,932,397
12.31.2019 200,000 231,888 31,888 1,964,285

On Conversion of half of the bond in December 31, 2019: (Entry)

Bonds Payable (2M / 2) 1,000,000
Bond Conversion Option (146,073 / 2) 73,036
Discount on Bonds Payable (2K-1,964,285)/2 17,857
Ordinary Share Capital (2K x .5 /P1,000 x 10 = 1,000 shares x P50) 500,000
Share Premium Ordinary 555,179

Note 4. The lease liability is for a five-year lease agreement for an equipment of Joy Corporation on January 1, 2019. The
equipment which had a useful life of 10 years had a fair value on January 1, 2019 at P 2,400,000. There is no provision
for transfer ownership to Delight nor is there any agreement for a bargain purchase option at the end of the lease term.
The lease agreement requires Delight to pay P600,000 annually starting December 31, 2019. The implicit lease rate
known to both parties was at 8% while the incremental borrowing rate is 10%. The lease was recorded by the company
as a debit to Equipment and credit to Lease Liability at P 3,000,000, which is the total payment to be made for the lease.
The company is yet to record the first lease payment made on December 31, 2019.

PV of Minimum Lease Payments (600,000 x PVA 8%(lower)5 years= P 600,000 x 3.993 = 2,395,626
Fair Value 2,400,000
So use the lower value of P 2,395,626, without any other components, this could be the value of Right to Use Asset
and the Initial Value of Lease Liability.
Date Nominal Interest Effective Interest Amortization Balance
01/01/2019 2,395,626
12.31.2019 600,000 191,650 (408,350) 1,987,276
Depreciation Expense of the Leased Asset = 2,395,626 / 5 years = P 479,125

Problem 10
You were assigned to audit the financial statements of People Corporation for the year ended December 31, 2019. The
liability portion of the company’s balance sheet shows the following information:
Non-Current Liabilities
Notes Payable P 7,195,000
Liability Under Capital Lease 2,240,000
Current Liabilities
Accounts Payable 1,840,500
Warranty Liability ( 42,500)
Deferred Tax Payable 250,000
Upon further investigation on the liabilities account, you discovered the following information:
a. The principal amount of the Notes Payable is P 8,000,000 and bears interest of 12% payable every March 31. The
note is dated April 1, 2017 and is due 5 years after its issuance. The prevailing market rate of interest when the
notes was issued was at 15%. The entry made by the client on April 1, 2017 was to debit cash and credit notes
payable for the cash consideration received. No other entry has been made since apart from the annual interest
payments every march 31, being debited to interest expense and credit to cash.
b. The capitalized lease is for eight-year period beginning December 31, 2016. Equal annual payments of P
1,200,000 are due on December 31 of each year beginning December 31, 2016. The implicit rate of the lease
known to People is 10%. The asset was recorded at the inception of the lease at the cash selling price of the
lease asset. The annual payments related to the lease transaction has been recorded by the company as debit to
Liability under Capital Lease account.
c. The result of the purchase cut-off on the company’s purchases transactions from December 15 to January 15
you have rendered is shown below:
Receiving Report No. Invoice Date Receiving Report Date Shipment Terms Amount
65212 12/15/2019 12/15/2019 FOB Shipping Point P 15,000
65213 12/17/2019 12/20/2019 FOB Shipping Point 16,000
65214 12/21/2019 12/21/2019 FOB Destination 17,500
65215 12/26/2019 12/30/2019 FOB Destination 20,000
65216 12/30/2019 01/02/2020 FOB Shipping Point 30,000
65217 12/30/2019 01/02/2020 FOB Shipping Point 28,000
65218 12/31/2019 01/03/2020 FOB Destination 19,000
65219 01/02/2020 01/05/2020 FOB Buyer 30,500
65220 01/05/2020 01/10/2020 FOB Shipping Point 41,000
65221 01/07/2020 01/11/2020 FOB Shipping Point 22,000
65222 01/10/2020 01/15/2020 FOB Destination 25,000
Investigation revealed that the last receiving report recorded in the voucher register was RR65220.

d. The company has a two-year warranty on its products. The warranty estimates in the past years were at 5% of
the net sales. During the current year, because of the increase returns, the company decided to increase
warranty estimates to 8% of its total net sales, 70% of which is expected to be incurred during the year of sales
and the balance on the year following the year of sale. Presented below are information relevant to your audit:
2017 2018 2019
Net Sales P 24,000,000 P 27,150,000 P 31,650,000
Actual Warranty Costs Paid 1,150,000 1,450,000 1,950,000
The company is yet to update its warranty liabilities as of December 31, 2019.

29. What is the correct balance of notes Payable as of December 31, 2019?
a. P 7,314,250 b. P 7,451,388 c. P 7,569,669 d. P 7,609,096
30. What was the initial amount debited to the asset account at the inception of the finance lease?
 a. P 2,240,000 b. P 3,440,000 c. P 5,640,000 d. P 7,040,000
31. How much is the total non-current liabilities to be presented in the 2019 balance sheet?
a. P 8,389,565 b. P 10,550,813 c. P 10,800,813 d. P 11,370,709
32. What is the correct Accounts Payable as of December 31, 2019?
a. P 1,722,000 b. P 1,750,000 c. P 1,778,000 d. P 1,797,000
33. What is the correct Warranty Expense ins 2019?
a. P 582,000 b. P 1,582,500 c. P 1,950,000 d. P 2,532,000
34. How much should be presented as current liabilities in the balance sheet of People as of December 31, 2019?
a. P 2,289,500 b. P 3,871,896 c. P 3,109,396 d. P 5,539,500

ANSWERS IN PROBLEM 10
a. The principal amount of the Notes Payable is P 8,000,000 and bears interest of 12% payable every March 31. The
note is dated April 1, 2017 and is due 5 years after its issuance. The prevailing market rate of interest when the
notes was issued was at 15%. The entry made by the client on April 1, 2017 was to debit cash and credit notes
payable for the cash consideration received. No other entry has been made since apart from the annual interest
payments every march 31, being debited to interest expense and credit to cash.

PV of the Note:
PV of the Principal (P 8,000,000 x .4971 ) P 3,977,414
PV of Interest (P8,000,000 x .12 x 3.352) 3,218,069
PV of the Notes at Issuance 7,195,483

Date Nominal Interest Effective Interest Amortization Balance

April 1, 2017 7,195,483
April 1, 2018 960,000 1,079,322 119,322 7,314,805
April 1, 2019 960,000 1,097,221 137,221 7,452,026
December 31, 2019 720,000 838,353 118,353 7,570,379
I did not round off the PV Factor.

b. The capitalized lease is for eight-year period beginning December 31, 2016. Equal annual payments of P
1,200,000 are due on December 31 of each year beginning December 31, 2016. The implicit rate of the lease
known to People is 10%. The asset was recorded at the inception of the lease at the cash selling price of the
lease asset. The annual payments related to the lease transaction has been recorded by the company as debit to
Liability under Capital Lease account.
The Amount Initially Capitalized here is equal to (Ending balance + Total Payments)
Initial Amount of Capital Lease Liability = 2,240,000 + ( 1,200,000 x 4) = P 7,040,000
AND ALSO AMOUNT CAPITALIZED AS AN ASSET
DATE PAYMENTS EFFECTIVE AMORTIZATIO BALANCE
INTEREST N
BALANCE 7,040,000
12.31.2O16 1,200,000 (1,200,000) 5,840,000
12.31.2O17 1,200,000 584,000 (616,000) 5,224,000
12.31.2O18 1,200,000 522,400 (677,600) 4,546,400
12.31.2O19 1,200,000 454,640 (745,360) 3,801,040
12.31.2O20 1,200,000 380,104 (819,896) 2,981,144
Current Long Term
c. The result of the purchase cut-off on the company’s purchases transactions from December 15 to January 15
you have rendered is shown below:
Receiving Invoice Date Receiving Report Shipment Terms Amount
Report No. Date
65212 12/15/2019 12/15/2019 FOB Shipping Point P 15,000 OK= SP is Invoice date and
 recorded in December
65213 12/17/2019 12/20/2019 FOB Shipping Point 16,000 OK= SP is Invoice date and
recorded in December
65214 12/21/2019 12/21/2019 FOB Destination 17,500 OK= D is RR date and
recorded in December
65215 12/26/2019 12/30/2019 FOB Destination 20,000 OK= D is RR date and
recorded in December
65216 12/30/2019 01/02/2020 FOB Shipping Point 30,000 OK= SP is Invoice and
recorded in December
65217 12/30/2019 01/02/2020 FOB Shipping Point 28,000 OK= SP is Invoice and
recorded in December

65218 12/31/2019 01/03/2020 FOB Destination 19,000 For Deduction, D is RR, RR is

Jan date but recorded Dec.
65219 01/02/2020 01/05/2020 FOB Buyer 30,500 For Deduction, D is RR, RR is
Jan date but recorded Dec
65220 01/05/2020 01/10/2020 FOB Shipping Point 41,000 For Deduction, SP is Invoice,
Invoice is Jan, recorded Dec
65221 01/07/2020 01/11/2020 FOB Shipping Point 22,000 OK, SP is Invoice, Invoice is
Jan date, recorded Jan
65222 01/10/2020 01/15/2020 FOB Destination 25,000 OK, D is RR, RR is dated Jan
and recorded Jan
Investigation revealed that the last receiving report recorded in the voucher register was RR65220.
Remember Shipping Point is to Invoice Date, while Destination/Buyer is Receiving Report Date
For adjusted Accounts Payable:
Unadjusted Balance P 1,840,500
RR 65218 (19,000)
RR 65219 (30,500)
RR 65220 (41,000)
Adjusted Accounts Payable 1,750,000

d. The company has a two-year warranty on its products. The warranty estimates in the past years were at 5% of
the net sales. During the current year, because of the increase returns, the company decided to increase
warranty estimates to 8% of its total net sales, 70% of which is expected to be incurred during the year of sales
and the balance on the year following the year of sale. Presented below are information relevant to your audit:
2017 2018 2019
Net Sales P 24,000,000 P 27,150,000 P 31,650,000
Actual Warranty Costs Paid 1,150,000 1,450,000 1,950,000
The company is yet to update its warranty liabilities as of December 31, 2019.

Warranty Expense in 2019 = 31,650,000 x .08 = P 2,532,000

Warranty Payable as of Dec. 31, 2019:

Beginning Balance This amount will be course through expense since it is negative)
Warranty Expense 2019 2,532,000
Warranty Cost (1,950,000)
Warranty Payable, end 582,000

Non-Current Liabilities Current Liabilities

Notes Payable (a) 7,570,379 Current Portion of Lease Liability (b) 819,896
Lease Liability- Long Term (b) 2,981,144 Accounts Payable (c ) 1,750,000
 Deferred Tax Liability (Always Long Term) 250,000 Warranty Payable (d) 582,000
Total Long Term 10,801,523 Interest Payable on Notes (a) 720,000
Total Current 3,871,896

Problem 11
Angel Inc. had the following unadjusted liability balances as of December 31, 2019:
Accounts Payable P 540,000
Premium Payable 140,000
Deferred Taxes ( 42,000)
10% Bonds Payable 5,500,000
Audit Notes:
a. Accounts Payable is net of P 50,000 debit balance in one of the company’s suppliers accounts due to an
overpayment made. The agreement with the supplier calls for the supplier to deliver additional merchandise to
offset the overpayment. No deliveries made as of the balance sheet date.
b. The company started a promotional program in 2018 where an eco-friendly tote bag shall be given to customers
upon presenting 6 product labels plus P 5 cash. The following information are deemed relevant in relation to the
program.
2018 2019
Sales P 7,700,000 P 8,400,000
Total costs of Tote Bags Purchased ( P 25 each) 375,000 500,000
Tote Bags Actually distributed 9,000 19,000
Estimated tote bags to be distributed the following year 7,000 5,000
The balance of the premium liability account reflects the accrual at the end of the previous year (2018), no entry
had been made during the current year affecting the said account.
c. Deferred tax balance appearing above is the result of deferred tax credited by the premium liability in the
previous year which is tax deductible upon settlement. Adjustments are yet to be made to the said account to
reflect the movement of the account balance during the year. Moreover, another temporary difference arising
during the year created by the company’s excess tax depreciation over financial depreciation for the period
amounted to P 150,000. The income tax rate is at 30%.
d. The balance of the bonds payable account was the total proceeds from its issuance on January 1, 2019. The
bonds which shall mature on December 31, 2023 have a total face value of P 5,000,000 and are convertible into
ordinary shares at a rate of P 1,000 bonds to ten, P 50 par value ordinary shares. On the issuance date, the
effective yield rate on similar securities without the convertibility option was at 8% while each ordinary share was
selling at P 75 per share. The only other entry made by the client in relation to the bonds was the payment of
interest on December 31, as interests are payable annually every December 31.
35. What is the correct premium expense for 2019?
a. P 320,000 b. P 480,000 c. P 380,000 d. P 340,000
36. What is the total deferred tax liability as of December 31, 2019?
a. P 30,000 b. P 15,000 c. P 45,000 d. P 75,000
37. What is the total current liability to be reported in 2019 financial statements?
a. P 735,000 b. P 590,000 c. P 890,000 d. P 690,000
38. What is the correct credit to Shareholders’ account as a result of issuance of Bonds on January 2019?
a. P 100,729 b. P 399,271 c. P 168,787 d. P 500,000
39. Assuming that the bonds were converted on January 2, 2021, what is the total credit to share premium as the
result of the conversion?
a. P 2,761,439 b. P 2,831,213 c. P 2,931,213 d. P 2,858,439
 40. Assuming that the bonds were retired on January 2, 2021 at 105, when the prevailing market rate of interest for
similar securities without conversion option is at 12%, how much should be reported in the profit or loss as a
result of the retirement?

a. P 571,396 b. P 497,893 c. P 639,454 d. P 479,398

ANSWERS TO PROBLEM NO. 11

35. The company started a promotional program in 2018 where an eco-friendly tote bag shall be given to customers
upon presenting 6 product labels plus P 5 cash. The following information are deemed relevant in relation to the
program.
2018 2019
Sales P 7,700,000 P 8,400,000
Total costs of Tote Bags Purchased ( P 25 each) 375,000 500,000
Tote Bags Actually distributed 9,000 19,000
Estimated tote bags to be distributed the following year 7,000 5,000
The balance of the premium liability account reflects the accrual at the end of the previous year (2018), no entry
had been made during the current year affecting the said account.

Total Bags Distributed in 2019 19,000

Less: Bags distributed related to 2018 (7,000)
Bags distributed related to 2019 12,000
Bags to be distributed 5,000
Bags for distribution related to 2019 17,000
Net Cost per bag (P25 -5) X 20
Premium Expense 2019 P 340,000
Our Entry in here is:
Premium Expense P 340,000
Cash (19,000 x 5) 95,000
Premium Liability (7,000-5,000) x 20 40,000
Premium Inventory (19,000 x 25) 475,000

Premium Liability (42,000 – 40,000) 2,000

Retained Earnings (overstatement) 2,000

36. Deferred tax balance appearing above is the result of deferred tax credited by the premium liability in the
previous year which is tax deductible upon settlement. Adjustments are yet to be made to the said account to
reflect the movement of the account balance during the year. Moreover, another temporary difference arising
during the year created by the company’s excess tax depreciation over financial depreciation for the period
amounted to P 150,000. The income tax rate is at 30%.

The Balance of Premium (5,000 units x P 20 x .30) is Deferred Tax Asset 30,000
Additional related to Depreciation - Deferred Tax Liability (150,000 x .30) 45,000
Note that the balance in Deferred Tax Liability is closed per our entry this year in no. 35 above

37. Accounts Payable (540,000 + 50,000) P 590,000

Premium Liability ( 5,000 x P 20 ) 100,000
Total Current Liability 690,000
Note: Bonds and Deferred are all Long Term.

38– 40 The balance of the bonds payable account was the total proceeds from its issuance on January 1, 2019. The
bonds which shall mature on December 31, 2023 have a total face value of P 5,000,000 and are convertible into
ordinary shares at a rate of P 1,000 bonds to ten, P 50 par value ordinary shares. On the issuance date, the effective
 yield rate on similar securities without the convertibility option was at 8% while each ordinary share was selling at P
75 per share. The only other entry made by the client in relation to the bonds was the payment of interest on
December 31, as interests are payable annually every December 31.

Proceeds of the 10 % bonds payable(balance) P 5,500,000

PV of the bonds at issuance:
PV of Principal (5M x .680583) P 3,402,916
PV of Interest ( P 5M x .10 x 3.99271) 1,996,355 5,399,271
Conversion Option Equity 100,729
DATE NOMINAL EFFECTIVE NOMINAL BALANCE
1/1/2019 5,399,271
12/31/2019 500,000 431,942 (68,058) 5,331,213
12/31/2020 500,000 426,497 (73,503) 5,257,710

Conversion Entry:
Bonds Payable 5,000,000
Premium on Bonds Payable 257,710
Conversion Option 100,729
Ordinary Share Capital (5M/1,000=5,000 x 10 x P 50) 2,500,000
Share Premium Ordinary 2,858,439

Retirement Entry:
Get PV at 12% at n = 3 yrs. PV of P = 5M x .711780 = 3,558,901
PV of I (5M x .20 x 2.40183) =1,200,916
PV of bonds at 12% 4,759,817
Book Value (see Table) 5,257,710
Gain on retirement (Profit or loss) 497,893
Entry:
Bonds Payable 5,000,000
Premium on Bonds Payable 257,710
Conversion Option 100,729
Cash 4,759,817
Gain on Retirement 497,893
Share Premium – Conversion Option 100,729

Problem 12
In the course of your audit of Sunlight Corporation’s December 31,2020 liabilities, the following schedule is presented to
you by the accountant.
Accounts Payable P 225,000
Estimated Premium Liability ?
Estimated Warranties Payable 220,750
Accrued Salaries 240,400
Deferred Tax Liability 200,000
Notes Payable, 20% due 4/1/20 500,000
Interest Payable on Notes Payable 75,000
Serial bonds Payable,12% 1,000,000
TOTAL ?
Audit Notes:
a. The accounts payable balance is net of a P 35,000 advances made to a supplier for merchandise to be delivered
in 2021.
 Moreover, the following summarizes the result of your purchases cut-off procedure. You have ascertained that
all related inventories were correctly accounted for.
Receiving Report Amount Suppliers’ Shipment Receiving Report Shipment Terms
(RR) Number Date Date
Last entries on the December 2020 Journal
0633 P 5,500 12/26/2020 12/28/2020 FOB Destination
0634 6,000 12/28/2020 01/02/2021 FOB Destination
0635 7,900 12/28/2020 12/30/2020 FOB Shipping Point
First entries on the January 2021 Journal
0636 8,900 12/28/2020 01/03/2021 FOB Shipping Point
0637 10,000 12/29/2020 12/31/2020 FOB Destination
0638 15,000 01/03/2021 01/01/2021 FOB Shipping Point
b. The company started a promotional program in 2020 whereby for every five product labels, customer
surrenders with P 25 cash, a customer shall receive a specially designed t-shirt. The company sold 40,000 units
of the product covered by the said promotional program and purchased 4,500 t-shirts in an anticipation of the
premium’s redemption which the company appropriately debited to premium inventory account upon purchase.
Each t-shirt costs P 95. The company estimates that 60% of the product labels accompanying sales shall
ultimately be presented for the redemption of the premium. 1,200 t-shirts remained on hand as of December
31, 2020. Actual redemption during the year were appropriately recorded while accrual at year end is yet to be
made.
c. The company has a two-year warranty on its products. The warranty estimate is at 8% of the peso sales. Two-
thirds of which is expected to be incurred in the year of sales and one-third on the year following the year of
sale. The summary of the company’s sales and actual warranty costs for the past three years are presented
below. (Assume sales were made evenly throughout the year)
2018 2019 2020
Net Sales P 4,000,000 P 4,525,000 P 5,275,000
Actual Cost Paid 127,500 233,750 285,250
The company is yet to update its warranty liabilities as of December 31, 2020.

d. The deferred tax liability is net of deferred tax asset of P 50,000, and has resulted from excess tax depreciation
over financial depreciation and is expected to be reversed the following year.
e. The 20% Notes Payable was to a bank and was originally dated April 1, 2018, three- year term and interest is
payable annually every April 1. On December 31, 2020, the company entered an agreement with the bank to
refinance the notes by issuing another 5-year note, the proceeds of which shall be used to refinance the
obligation maturing currently. As part of the agreement, the company if to offer an asset as a collateral of the
loan and that the loan will be set at 75% of the fair market value of the collateral, which has P 600,000 fair
market value at December 31, 2020. Due to the nature of the asset, the fair value of the collateral will not be
expected to change materially at any time up to the execution of the refinancing agreement.
f. The 12% bonds payable matures at the rate of P 200,000 annually every December 31. Interests are also payable
every December 31. The last P 200,000 bonds will be paid on December 31, 2026.

41. What is the correct balance of accounts payable?

a. P 264,000 b. P 282,900 c. P 272,900 d. P 262,900
42. What is the correct estimated premiums liability as of December 31, 2020?
a. P 329,000 b. P 105,000 c. P 231,000 d. P 336,000
43. What is the correct estimated warranties payable as of December 31, 2020?
a. P 423,500 b. P 411,750 c. P 457,500 d. P 421,750
44. How much should be presented as current liabilities in the December 31, 2020 statement of financial position?
a. P 1,150,800 b. P 1,200,800 c. P 1,400,800 d. P 1,650,800
45. How much should be presented as non-current liabilities in the December 31,2020 statement of financial
position? a. P 1,450,000 b. P 1,650,000 c. P 1,700,000 d. P 1,750,000
ANSWERS TO PROBLEM 12

41. A/P balance per book P 225,000

Debit Balance 35,000
RR No.0634 ( 6,000)
RR No.0636 8,900
RR No. 0637 10,000
ADJUSTED ACCOUNTS PAYABLE 272,900

42. Number of Premiums (40,000 x .60)/5 4,800

Multiply by Net Expense (95-25) 70
PREMIUM EXPENSE P 336,000
Number of Units Given ( 4,500 – 1,200) 3,300
Multiply by Net Expense (95-25) 70
NET COST OF PREMIUM GIVEN AWAY 231,000
PREMIUM LIABILITY 105,000
43.
2018 Warrant Expense (P4M x .08) 320,000
2018 Actual Cost paid (127,500)
Warranty Payable, end 2018 192,500
Add: 2019 Premium Expense (P4.525Mx8%) 362,000
2019 Actual Cost paid (233,750)
Warranty Payable, end 2019 320,750
Add: 2020 Warrant Expense (P5.275M x .08) 422,000
2020 Actual Cost paid (285,250)
Warranty Payable, end 2020 457,500

44. Total Current Liabilities

Accounts Payable (#41) 272,900
Estimated Premium Payable (#42) 105,000
Estimated Warranty Payable (#43) 457,500
Accrued Salaries (Trial Balance) 240,400
Notes Payable, Current (500,000 – 450,000) 50,000
Accrued Interest on Notes (500,000 x.20x 9/12) 75,000
Total Current Liability, end 2020 1,200,800

45.Total Non-Current Liability

Deferred Tax Liability (P200,000 +50,000) 250,000
Notes Payable, Long Term (600,000 x .75) 450,000
Bonds Payable 1,000,000
Total Non-Current Liability 1,700,000

Problem 13
An excerpt of the Joint Company’s trial balance for the period ended December 31, 2021 revealed the following liability
balances:
Accounts Payable P 420,000
Provision for Warranties 273,000
Accrued Salaries Expense 770,000
Bonds Payable, 10% maturing December 31, 2024 2,000,000
Audit Notes:
 a. Accounts Payable balance refers to the accounts of suppliers of the merchandise. A purchase cut-off procedure
was conducted to entries several days before and after the balance sheet date in the purchase journal. The
corresponding inventories were appropriately included/excluded in the count. The result of the cut-off
procedures are as follows:
December 2021 entries on the purchase journal
Receiving Receiving Amount Remarks
Report No. Report Date
2132 December 18 P 26,000 FOB Shipping Point
2133 December 22 40,000 FOB Destination
2134 December 28 19,000 FOB Destination (From a Consignor)
2135 January 2 24,000 FOB Destination (In Transit)
January 2022 entries on the purchase journal
Receiving Receiving Amount Remarks
Report No. Report Date
2817 December 31 P 25,000 FOB Destination
2818 January 2 23,000 FOB Destination (In Transit)
2819 January 3 41,000 FOB Shipping Point
b. The company’s inventories are covered by a two-year warranty program. Sales in 2020 and in 2021 covered by
the said warranty are 2,600 units and 3,200 units, respectively. The company estimates that 20% of the units
sold will be returned for repairs in the year of sale and 30% of the units sold will be returned for repairs on the
year following the year of sale. The company also estimates that the cost per unit returned for repairs will be P
300 for parts and labor. The balance in the provision for warranties account is the amount accrued in the prior
period. No entry has been made by the company during the year in relation to the warranty except for the
actual repair costs incurred during the year in the amount of P 388,000, which was charged to current years
warranty expense.
c. The accrued salaries expense included employee unused compensation absences amounting to P 560,000,
which was the accrued amount at the end of the prior year and employee incentive bonus amounting to P
210,000, which was 10% of the net income after 30% income tax and after bonus (before any adjustments)
As of December 31, 2020, the employees had an accumulated 1,750 days of unused vacation and sick leaves. In
2021, employee exercises 1,200 days from the leaves carried forward in the prior year. Additional 1,400 vacation
and sick leaves were earned by the employee in 2021. The average daily salary rate of employees increased by
10% during the year. The company estimates that from the cumulative unused employee leaves, only 80% shall
probably be exercised by the employees.
d. The bonds were issued on January 1, 2020 when the prevailing market rate was at 12%. The bonds pay interest
every December 31. The company recorded the bonds issuance by debiting cash for the cash consideration
received, crediting bonds payable account at face value. The difference was charged to interest expense. The
only other entry made by the client were the payment of annual interest on December 31, 2020 and 2021.

46. What is the adjusted Accounts Payable balance as of December 31, 2021?
a. P 402,000 b. P 400,000 c. P 425,000 d. P 401,000
47. What is the adjusted provision for warranties balance at December 31, 2021?
a. P 365,000 b. P 426,000 c. P 209,000 d. P 192,000
48. What is the correct accrued salaries expense related to the accrued compensated absences as of December 31,
2021? a. P 686,400 b. P 492,800 c. P 858,000 d. P 624,000
49. What is the correct carrying value of the bonds payable as of December 31, 2021?
a. P 1,903,927 b. P 1,878,506 c. P 1,932,398 d. P 1,964,286
50. What is the correct accrued salary expense related to the accrued bonus as of December 31, 2021?
a. P 195,227 b. P 196,890 c. P 197,234 d. P 198,765

ANSWERS TO PROBLEM 13

46.
Accounts Payable, unadjusted P 420,000 AJE # 1
RR 2134 Consigned Goods (19,000) Accounts Payable 18,000
RR 2135 In Transit – FOB Destination (24,000) Purchases 18,000
RR 2136 In Transit – FOB SP 25,000
Adjusted A/P 402,000 47.
AJE # 2 Provision for Warranties, beg P 273,000
Warranty Expense (365,000- 273,000) 92,000 Warranty Expense (3,200 u x .50 x P 300) 480,000
Warranty Liability Actual Warranty Costs (388,000)
92,000 Warranty Liability , end 365,000

48.
2020 Unused leaves earned 1,750
2020 Availed leaves (1,200)
2021Earned leaves 1,400
Accumulated leaves 1,950
Exercisable Rate .80
Leaves expected to be exercised in days 1,560
2021 Rate per day (P 400 x 1.10) P 440
Accrued Compensation absences P 686,400
2020 rate per day ( P 560,000 / (1750 x .8) = P 400

AJE # 3
Salary Expense (686,400 – 560,000) 126,400
Accrued Salary Payable 126,400
49.
PV of the bonds at issuance:
PV of P = 2,000,000 x .567426 = P 1,134,854
PV of I = 2,000,000 x .10 x 3.604776 = 720,955
PV of Bonds 1,855,809

DATE NOMINAL EFFECTIVE AMORTIZATION BALANCE

1.1.2020 1,855.809
12.31.2020 200,000 222,697 22,697 1,878,506
12.31.2021 200,000 225,421 25,421 1,903,927
Adj # 4
Discount on Bonds Payable (2,000,000 – 1,903,927) 96,073
Interest Expense (225,421 – 200,000) 25,421
Retained Earnings 121,494

50.
a. The accrued salaries expense included employee unused compensation absences amounting to P 560,000,
which was the accrued amount at the end of the prior year and employee incentive bonus amounting to P
210,000, which was 10% of the net income after 30% income tax and after bonus (before any adjustments)

Let x – be the unadjusted Income before tax

Bonus = .10 ( x – B – Tax)
Tax = .30 (X-B) =.30X - .30B
B = .10 (X-B-(.30X-.30B)
B= .10(X-B-.30X+.30B)
B = .10 (.70X – .70B)
B= .07X - .07 B
1.07B = .07 X
B = .07X/1.07
If B = 210,000
So, 210,000 x 1.07 = .07 X
P 224,700 = .07 X
224,700 / .07 =X
P 3,210,000 =X

Unadjusted Income before Tax P 3,210,000

Adj # 1 credit to Purchases 18,000
Adj # 2 Warranty Expense (92,000)
Adj # 3 Salary Expense (126,400)
Adj # 4 Interest Expense ( 25,421)
Adjusted Income Before Tax 2,984,179
B = .07 (2,984,179) - .07B
1.07B = 208,893
B = P 195,227

Problem 14
You are auditing the financial statements of Labada, Inc., a company which carries a wide variety of laundry appliances
and supplies, for the year ended December 31, 2019. Information of the company’s varied liability accounts are as
follows:
a. Premium items are being offered to its Class A (residential use) washing machines and dryers. Customers shall
receive a coupon for each P 50 spent on Class A laundry appliance. Customers may exchange 400 coupons and a
P 1,000 for a dryer. Labada pays P 5,100 for each dryer and estimates that 60% of the coupons given to the
customers will be redeemed. A total of 4,500 dryers to be used on the premium program were purchased during
the year, and there were 1,680,000 coupons redeemed during the year.
b. Class B laundry appliances are sold with a two-year warranty for replacement of parts and labor. The estimated
warranty costs based on past experience is 1% of sales to be incurred in the year of sales and 2% of sales to be
incurred on the year following the year of sale. Replace parts and labor for warranty work totaled P 1,640,000
during 2019.
c. The company provides key employees 5% bonus based on the net income of the company after tax. The same is
yet to be accrued at year end.
d. Labada uses the accrual method to account for the warranty and premium cost for financial reporting purposes.
Labada sales in 2019 totaled P 280,000,000, 60% of which is attributed to Class A laundry appliance sales.
e. The company reported the following balances at year end.
Inventory of Premium Items P 1,530,000
Premium Expense 17,220,000
Warranty Expense 1,640,000
Net Income, before 35% income tax and before any adjustments 80,164,000

51. What is the current premium liability as of December 31, 2019?

a. P 4,284,000 b. P 3,444,000 c. P 1,530,000 d. P 1,230,000
52. What is the correct warranty expense?
a. P 1,640,000 b. P 1,720,000 c. P 2,240,000 d. P 3,360,000
53. What is the total bonus to key employees?
a. P 2,395,577 b. P 2,468,354 c. 2,480,916 d. P 3,865,504
54. What is the correct income tax?
a. P 25,381,679 b. P 25,386,076 c. P 25,411,548 d. P 25,897,074
55. What is the correct net income?
a. P 47,137,405 b. P 47,145,570 c. P 47,192,875 d. P 46,237,422

SOLUTIONS TO THE ANSWERS 51-55

51. Class A Sales = P 280,000,000 x .60 Class A = P 168,000,000
Divided by Sales for every coupon 50
Number of Coupons based on Sales 3,360,000
Promo Participation Rate .60
Number of Coupons Expected to participate 2,016,000
Number of Coupons Redeemed (1,680,000)
Coupons to be Redeemed 336,000
Required Number of Coupon for a Premium 400
Estimated Premium Items to be Distributed 840
Multiply Net Cost of Premium (5,100 -1,000) P 4,100
Estimated Premium Liability P3,444,000

52.
Class B Sales = P 280,000,000 x .40= P 112,000,000
Warranty Rate (1%+2%) .03
Warranty Expense P 3,360,000
Actual Warranty Paid ( 1,640,000)
Warranty Liability 1,720,000

53.
Unadjusted Net Income P 80,164,000
Adjustment for Additional Premium Expense ( 3,444,000)
Adjustment for Additional Warranty Expense (3,360,000- 1,640,000) ( 1,720,000)
Adjusted Net Income before Tax 75,000,000

B= .05 (75M - .35 (75M-B)

B= .05(75M – 26.25 M + .35B)
B=.05 (48.75 M + .35B)
B= 2,437,500 + .0175B
.9825B = 2,437,500
B = 2,480,916

54. Correct Income Tax = .35 (P 75 M- 2,480,916) = P 25,381,679

55. Correct Net Income = .65 (P 75 M- 2,480,916) = P 47,137,405

Problem 15
Mimi Inc. reported the following information in its long- term liability portion of the Statement of Financial Position for
the period ended, December 31, 2020:
12% Bonds Payable P 5,500,000
10% Notes Payable – Bank 2,500,000
Deferred Tax Liability, net 340,000
Audit Notes:
a. The bonds payable with a face value of P 5M was issued with a conversion option into 20,000, P 100 par value
ordinary shares at any time until its maturity on June 30, 2025. These were issued on June 30, 2020 when the
prevailing yield rate on similar debt security without conversion option was 10%. The company recorded the
transaction as debit to Cash and credit to Bonds Payable for the total consideration received. Interest are being
paid semi-annually every December 31 and June 30 and were recorded appropriately. No other entries were
made by the client affecting the carrying value of the bonds. Half of the bonds were retired on December
31,2021 at pa value. The prevailing yield rate on similar debt instruments without conversion option on this date
was 14%. The transaction is yet to be recorded at year end.
 b. The 10% note payable to the bank is dated September 1, 2020 and is payable at the rate of P 500,000 annually
every September 1 of each year starting 2021. Interest is also payable every September 1.
c. The deferred tax liability at the beginning of the year resulted to the following cumulative temporary difference
as of December 31, 2020:
Cumulative temporary difference creating future taxable amount P 1,050,000
Cumulative temporary difference creating future deductible amount 200,000
At the end of the year the balances of cumulative temporary difference were:
Cumulative temporary difference creating future taxable amount P 1,550,000
Cumulative temporary difference creating future deductible amount 300,000
Income tax rate is at 40%.

56. What is the equity portion of the convertible bonds?

a. P 0 b. P 113,914 c. P 120,921 d. P 500,000
57. How much should be recognized in the profit or loss as a result of the retirement of half of the bonds at the end
of 2021? a. P 144,659 b. P 201,618 c. P 279,392 d. P 77,776
58. What is the total interest expense in 2021?
a. P 233,333 b. P 533,928 c. P 767,261 d. P 770,407
59. Assuming that the total financial income after permanent difference is at P 1,000,000, what is the total current
tax expense for 2021?
a. P 100,000 b. P 240,000 c. P 400,000 d. P 560,000
60. How much deferred tax should be presented separately in the non-current liability portion of the Statement of
Financial Position at December 31, 2021?
a. P 340,000 b. P 420,000 c. P 500,000 d. P 620,000
61. How much is the long-term liability to be presents in the 2021 Statement of Financial Position?
a. P 5,144,659 b. P 5,264,659 c. P 4,644,659 d. P 4,764,659

SOLUTIONS TO THE ANSWERS OF NO. 56 TO 61

56.
PV of Principal – 5,000,000 x .61391 =P 3,069,566
PV of Interest - 5,000,000 x .06 x 7.72173 = 2,316,520
PV of Bonds at Issuance 5,386,086
Proceeds at Issuance 5,500,000
Conversion Option to Equity 113,914

57.

DATE NOMINAL EFFECTIVE AMORTIZATIO BALANCE

N
June 30, 2020 5,386,086
December 31, 2020 300,000 269,304 30,696 5,355,390
June 30, 2021 300,000 267,770 32,230 5,323,160
December 31, 2021 300,000 266,158 33,842 5,289,318
Retirement (2,644,659) 2,644,659

PV of P – 2,500,000 x .6227497 = 1,556,874

PV of I - 2,500,000 x .06 x 5.389289 = 808,393
PV of bonds on retirement 2,365,267
Book Value of Retired bonds
( 5,289,318 x .5) 2,644,659
Gain on Retirement 279,392
58. Interest of bonds for 2021 (see table in 57) (267,770 + 266,158) = 533,928
Interest of Notes for 2021:
250,000 X 8/12 = 166,667
200,000 X 4/12 = 66,667 = 233,334
Total Interest 2021 767,262

Notes Payable Amortization Table.

DATE Payment of Principal Payment of Interest Balance
9.01.2020 2,500,000
9.01.2021 500,000 250,000 500,000 2,000,000
9.01.2022 500,000 200,000 500,000 1,500,000

59.
Income before Tax 1,000,000
Cumulative temporary difference creating future deductible amount (300,000-200,000) 100,000
Cumulative temporary difference creating future taxable amount (1,550,000 – 1,050,000) (500,000)
Taxable Income 600,000
Tax Rate 40%
Current Tax Expense/ Income Tax Payable 240,000

60.
Cumulative temporary difference creating future taxable amount at year end (1,550,000 x 40%) = 620,000

61.
Bonds Payable (see table) 2,644,659
Notes Payable (long term) 1,500,000
Deferred Tax Liability 620,000
Total Long-Term Liability 4,764,659

Problem 16
On January 1, 2019, Kelly Corporation issued a 3-year, 4,000 convertible bonds at face value of P 1,000 per bond.
Interest is to be paid annually in arrears at a stated coupon rate of 6%. Each bond is convertible, at the holders’ option,
into 40, P10 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 option was 9%. On the same date, the market price of one common share
was P 12.
62. What is the equity component of the compound instruments?
a. P 110,091 b. P 211,093 c. P 303,755 d. P 388,766
63. What is the interest expense to be reported by Kelly’s income statement for the year ended December 31,
2021? a. P 303,113 b. P 332,662 c. P 341,002 d. P 350,092
64. What is the credit to share premium account assuming that 3,000 of the bonds were converted on January 1,
2021? a. P 1,510,432 b. P 1,945,248 c. P 2,017,432 d. 2,289,908
65. Assuming that on the issuance date, the company paid transactions costs totaling to P 151,469, and as a result,
the yield rate increased by 1.5%, what is the equity component of the compound instrument?
a. P 292,253 b. P 303,755 c. P 443,722 d. P 315,257
66. Using the assumption in the previous item, and assuming that 4,000 bonds were retired on January 1, 2021
when the prevailing yield rate on the bonds without conversion option was at 9% at P 4,000,000, what is the loss
to be reported in the income statement?
a. P 0 b. P 52,804 c. P 162,895 d. P 330,275

SOLUTIONS TO ANSWERS FOR NOS. 62 TO 66

62.
Present Value of Principal – 4,000 x P 1,000 x .77218 = 3,088,734
Present Value of Interest - 4,000 x P 1,000 x .06 x 2.53129 = 607,511
PV of Bonds at Issuance 3,696,245
Issued Price (Face Value) – 4,000 x P 1,000 4,000,000
Conversion Option P 303,755
63.
DATE NOMINAL EFFECTIVE AMORTIZATION BALANCE
1.1.2019 3,696,245
1.1.2020 240,000 332,662 92,662 3,788,907
1.1.2021 240,000 341,002 101,002 3,889,909
1.1.2022 240,000 350,092 110,091 4,000,000

64.
Book Value of the Bonds P 3,889,909
Conversion Option 303,755
Total 4,193,664
Multiply Conversion Rate = 3/4 (3,000/4,000)
Book Value Converted 3,145,248
Par Value of Shares (3,000 x 40 x P 10) (1,200,000)
Share Premium P 1,945,248

65.
Proceeds (4,000 x P 1,000) - 151,469 = P 3,848,531
Present Value of Principal – 4,000 x P 1,000 x .741162 = 2,964,648
Present Value of Interest - 4,000 x P 1,000 x .06 x 2.465123 = 591,630 3,556,278
Conversion Option P 292,253

66.
Amortization Table Using 10.5% market value (9% + 1.5%)
DATE NOMINAL EFFECTIVE AMORTIZATION BALANCE
1.1.2019 3,556,278
1.1.2020 240,000 373,409 133,409 3,689,687
1.1.2021 240,000 387,417 147,417 3,837,104
1.1.2022 240,000 402,896 162,896 4,000,000
PV of bonds at 9% (Payment) P 3,889,909
PV of bonds at 10.5% ( Book Value 3,837,104
Loss in Profit or loss (52,805)