Chapter 1

Current Liabilities

PROBLEM 1: TRUE OR FALSE

1. FALSE
2. TRUE
3. TRUE
4. FALSE
5. TRUE
6. TRUE
7. FALSE
8. FALSE
9. TRUE
10. FALSE

PROBLEM 2: FOR CLASSROOM DISCUSSION

1. A
2. C

3. Solution:
Accounts payable 15,000
Preference shares issued with mandatory
100,000
redemption
Utilities payable 16,000
Rent payable 9,000
140,00
Total financial liabilities
0

4. Solution:
Accounts payable 500,000
Held for trading financial liabilities 1,000,000
Current portion of Note payable 1,000,000
Unearned revenue 300,000
Dividends payable 800,000
Current liabilities 3,600,000

5. Solution:
Unadjusted accounts payable 2,200,000
Shipment lost - FOB S.P. 40,000
Purchase returns (70,000)
Adjusted accounts payable 2,170,000
6. Solution:
Currently maturing long-term debt (a) 10,000,000
5-year loan that is payable on demand (b) 6,000,000
Loan with breach of provision (b) 14,000,000
Current liabilities 30,000,000

7. Solution:

Unearned revenue
ignored beg.
Redemptions - prior yr. ignored 2,000,000 2006 sales
Redemptions - current yr. 1,400,000
Estimate - not redeemed 200,000
end 400,000

8. Solution:
Total tax for the year (72,000 x 2) 144,000
Divide by: No. of months in a year 12
Monthly tax 12,000

April 1, 20x1
Land xxx
Cash xxx
Real property tax payable (12K x 3 mos.) 36,000

April 30, 20x1

Real property tax expense 12,000
Real property tax payable 12,000

May 1, 20x1
Real property tax payable 48,000
Prepaid real property tax 24,000
Cash 72,000
PROBLEM 3: EXERCISES
1. Solution:

a. Trade accounts payable gross of debit balance, unreleased check, and postdated check
(600,000 + 10,000 + 8,000 + 4,000).
P622,000
b. Advances from customers (Credit balance in customers’ accounts) 4,000
c. Financial liability designated at FVPL 100,000
d. Current portion of bonds payable 200,000
e. Interest payable on note payable 6,000
(P200,000 x 12% x 3/12)
g. Unearned rent 8,000
Total current liabilities P940,000

2. Solution:
Unadjusted balance 1,300,000
(a) -
(b) (40,000)
(c) 60,000
Adjusted accounts payable 1,320,000

3. Solution:
Accounts payable and accrued interest 1,000,000
12% note payable issued Nov. 1, 2004 maturing July 1,
2006 2,000,000
10% debentures payable (current portion) 500,000
Total current liabilities 3,500,000

4. Solution: (2M + 5M) = 7,000,000

5. Solution: 2,000,000
6. Solution:
Plan Initial payment per child No. of children Total
#1 500 15 7,500
#2 200 12 2,400
#3 - 9 -
9,900
Multiply by: Unexpired portion 8/12
Unearned revenue 6,600

7. Solutions:
      20x1 20x2 20x3 Total
Percentage earned
- 1st yr.     40% 60%    
Percentage earned
- 2nd yr.   40% 60%
First half (2M ÷ 2) 1M 400,000 600,000
Second half (2M÷2) 1M 400,000 600,000
Earned portions     400,000 1,000,000 600,000 2,000,000
Requirement (a): Current and noncurrent portions – December 31, 20x1

Current portion of deferred revenue

(earned portion in 20x2) P1,000,000
Noncurrent portion of deferred revenue
(earned portion in 20x3) 600,000
Total deferred revenue
(P1M less earned portion in 20x1 of P200,000) P1,600,000

Requirement (b): Service revenue – 20x2

Service revenue in 20x2 (600,000 + 400,000) P1,000,000

8. Solution:
Advertising expense - December 35,000
Rent expense (120,000 x 1/2) 60,000
Contingent rent [(9M - 6M) x 5%] 150,000
Accrued liabilities 245,000

PROBLEM 4: MULTIPLE CHOICE – THEORY

1. D
2. A
3. D
4. B
5. A
6. D
7. C
8. A
9. A
10. B
PROBLEM 5: MULTIPLE CHOICE – COMPUTATIONAL
1. A – The currently maturing notes are classified as current liabilities.

2. B (1M x 80%) = 800,000 noncurrent; (1M – 800K) = 200,000 current

3. D
Solution:
Accounts payable-trade 750,000
Short-term borrowings 400,000
Bank loan (breach of loan covenant) 3,500,000
Other bank loan, matures June 30, 20x2 1,000,000
Total current liabilities 5,650,000

4. D
Solution:
Unearned revenue
ignored beg.
Redemptions - prior yr. ignored 250,000 Sales - 20x3
Redemptions - 20x3 175,000
Estimate of sales not to be
redeemed 25,000
end. 50,000

The gift certificates sold in 20x2 and their related redemptions are ignored because they have
expired during the current year. Hence, they do not affect the year-end liability.

5. C (125,000 + 200,000 expiring in 20x4) + 140,000 expiring in 20x5 = 465,000 balance of unearned
subscription revenue on Dec. 31, 20x3

6. B
Solution:
Two equal installments of real estate tax 12,000
Multiply by: No. of installments in a year 2
Annual real estate tax 24,000
Divide by: 12
Real estate tax expense per month 2,000

Accrued tax on warehouse - July and Aug. (2,000 x 2) 4,000

Accrued tax - Sept. and Oct. (2,000 x 2) 4,000
Real estate tax payable 8,000
7. B
Solution:
Advances from customers
  118,000 1/1/x0
Advances applied 164,000 184,000 Advances - 20x0
Advances cancelled 50,000  
12/31/x0 88,000  

8. C
Solution:
Liability for escrow account
700,000 1/1/x9
Taxes paid 1,720,000 1,580,000 Escrow received
45,000 Interest, net (50K x 90%)
12/31/x0 605,000

9. A
Solution:
Accounts payable, unadjusted 360,000
Add back: Debit balance 50,000
Add back: Undelivered check 100,000
Accounts payable, adjusted 510,000

10. C
Solution:

Liability for deposits

  ignored 2004 deposits
2004 returns ignored 430,000 2005 deposits
2005 returns 250,000 780,000 2006 deposits
2006 returns 286,000  
end 674,000  
Chapter 2

Notes Payable

PROBLEM 1: TRUE OR FALSE

1. FALSE 6. FALSE
2. TRUE 7. TRUE
3. FALSE 8. TRUE
4. FALSE 9. FALSE
5. TRUE 10. TRUE

PROBLEM 2: FOR CLASSROOM DISCUSSION

1. C

2. C

3. C [50,000 + (250,000 x 10% x 6/12)] = 62,500

4. Solution:

Cash flows 1,600,000

PV of 1 @17%, n=3 0.62437
Present value -
1/1/x1 998,992

Date Interest expense Discount Present value

1/1/x1 601,008 998,992
12/31/x1 169,829 431,179 1,168,821
12/31/x2 198,700 232,480 1,367,520
12/31/x3 232,478 1 1,599,999

1/1/x1
Land 998,992
Discount on note payable 601,008
Note payable 1,600,000

12/31/x1
Interest expense 169,829
Discount on note payable 169,829

12/31/x2
Interest expense 198,700
Discount on note payable 198,700

12/31/x3
Interest expense 232,478
Discount on note payable 232,478

Note payable 1,600,000

Cash 1,600,000
5. Solution:

Requirement (a):
Cash flows 400,000
PV ord. annuity @17%,
n=3 2.20958
Present value - 1/1/x1
883,832

Date Payments Interest expense Amortization Present value

1/1/x1 883,832
12/31/x1 400,000 150,251 249,749 634,083
12/31/x2 400,000 107,794 292,206 341,878
12/31/x3 400,000 58,119 341,881 (3)

Current portion, 12/31/x1: 292,206

Noncurrent portion, 12/31/x1: 341,878

Requirement (b):

1/1/x1
Land 883,832
Discount on note payable 316,168
Note payable 1,200,000

12/31/x1
Note payable 400,000
Interest expense 150,251
Discount on note payable 150,251
Cash 400,000

12/31/x2
Note payable 400,000
Interest expense 107,794
Discount on note payable 107,794
Cash 400,000

12/31/x3
Note payable 400,000
Interest expense 58,119
Discount on note payable 58,119
Cash 400,000

6. Solutions:

Requirement (a):
Loan payable 4,000,000
Transaction costs (4M x 11.19%) (447,600)
Carrying amount - 1/1/x1 3,552,400

Requirement (b):
Trial and error:

Working formula:
 (Principal: 4,000,000 x PV of 1 @ x%, n=4) + (Interest: 480,000 x PV ordinary annuity @ x%, n=4) = 3,552,400

First trial: @16%

 (Principal: 4,000,000 x PV of 1 @ 16%, n=4) + (Interest: 480,000 x PV ordinary annuity @ 16%, n=4) = 3,552,400
 (4,000,000 x 0.55229) + (480,000 x 2.79818) = 3,552,400
 (2,209,160 + 1,343,126) = 3,552,400
 3,552,286 = 3,552,400

If the difference of ₱114 is deemed immaterial then 16% is regarded as the effective interest rate.

Requirement (c):

Date Payments Interest expense Amortization Present value

1/1/x1 3,552,400
12/31/x1 480,000 568,384 88,384 3,640,784
12/31/x2 480,000 582,525 102,525 3,743,309
12/31/x3 480,000 598,930 118,930 3,862,239
12/31/x4 480,000 617,958 137,958 4,000,197
PROBLEM 3: EXERCISES
1. Solution:

Cash flows 2,000,000

PV of 1 @16%, n=3 0.64066
Present value -
1/1/x1 1,281,320

Date Interest expense Discount Present value

1/1/x1 718,680 1,281,320
12/31/x1 205,011 513,669 1,486,331
12/31/x2 237,813 275,856 1,724,144
12/31/x3 275,863 (7) 2,000,007

1/1/x1
Equipment 1,281,320
Discount on note payable 718,680
Note payable 2,000,000

12/31/x1
Interest expense 205,011
Discount on note payable 205,011

12/31/x2
Interest expense 237,813
Discount on note payable 237,813

12/31/x3
Interest expense 275,863
Discount on note payable 275,863

Note payable 2,000,000

Cash 2,000,000

2. Solution:
Cash flows 3,000,000
PV of 1 @17%, n=3 0.53365
Present value -
1/1/x1 1,600,950

Date Interest expense Discount Present value

1/1/x1 1,399,050 1,600,950
12/31/x1 272,162 1,126,889 1,873,112
12/31/x2 318,429 808,460 2,191,540
12/31/x3 372,562 435,898 2,564,102
12/31/x4 435,897 0 3,000,000

1/1/x1
Equipment 1,600,950
Discount on note payable 1,399,050
Note payable 3,000,000

12/31/x1
Interest expense 272,162
 Discount on note payable 272,162

12/31/x2
Interest expense 318,429
Discount on note payable 318,429

12/31/x3
Interest expense 372,562
Discount on note payable 372,562

12/31/x4
Interest expense 435,897
Discount on note payable 435,897

Note payable 3,000,000

Cash 3,000,000

3. Solutions:

Requirement (a):

Cash flows 1,000,000

PV ord. annuity @18%,
n=3 2.17427
Present value - 1/1/x1 2,174,270

Date Payments Interest expense Amortization Present value

1/1/x1 2,174,270
12/31/x1 1,000,000 391,369 608,631 1,565,639
12/31/x2 1,000,000 281,815 718,185 847,454
12/31/x3 1,000,000 152,542 847,458 (5)

Current portion, 12/31/x1: 923,362

Noncurrent portion, 12/31/x1: 1,052,627
Requirement (b):

1/1/x1
Equipment 2,174,270
Discount on note payable 825,730
Note payable 3,000,000

12/31/x1
Note payable 1,000,000
Interest expense 391,369
Discount on note payable 391,369
Cash 1,000,000

12/31/x2
Note payable 1,000,000
Interest expense 281,815
Discount on note payable 281,815
Cash 1,000,000

12/31/x3
Note payable 1,000,000
Interest expense 152,542
Discount on note payable 152,542
Cash 1,000,000

4. Solution:

Requirement (a):

Cash flows 1,200,000

PV ord. annuity @14%,
n=4 2.91371
Present value - 1/1/x1 3,496,452

Date Payments Interest expense Amortization Present value

1/1/x1 3,496,452
12/31/x1 1,200,000 489,503 710,497 2,785,955
12/31/x2 1,200,000 390,034 809,966 1,975,989
12/31/x3 1,200,000 276,638 923,362 1,052,627
12/31/x4 1,200,000 147,368 1,052,632 (5)

Current portion, 12/31/x2: 923,362

Noncurrent portion, 12/31/x2: 1,052,627
Requirement (b):

1/1/x1
Equipment 3,496,452
Discount on note payable 1,303,548
Note payable 4,800,000

12/31/x1
Note payable 1,200,000
Interest expense 489,503
Discount on note payable 489,503
Cash 1,200,000

12/31/x2
Note payable 1,200,000
Interest expense 390,034
Discount on note payable 390,034
Cash 1,200,000

12/31/x3
Note payable 1,200,000
Interest expense 276,638
Discount on note payable 276,638
Cash 1,200,000

12/31/x4
Note payable 1,200,000
Interest expense 147,368
Discount on note payable 147,368
Cash 1,200,000

5. Solutions:
Note payable (a):
Date Interest expense Discount Present value
1/1/x1 2,141,234 2,858,766
12/31/x1 428,815 1,712,419 3,287,581
12/31/x2 493,137 1,219,282 3,780,718
12/31/x3 567,108 652,174 4,347,826
12/31/x4 652,174 (0) 5,000,000

Note payable (b):

Payment Interest Amortizatio Present
Date s expense n value
1/1/x1 2,854,978
12/31/x
428,247 571,753 2,283,225
1 1,000,000
12/31/x
342,484 657,516 1,625,709
2 1,000,000
12/31/x
243,856 756,144 869,565
3 1,000,000
12/31/x
130,435 869,565 (0)
4 1,000,000

Note payable (c):

Date Payments Interest expense Amortization Present value
1/1/x1 6,167,965
1/1/x1 1,600,000 - 1,600,000 4,567,965
1/1/x2 1,600,000 685,195 914,805 3,653,160
 1/1/x3 1,600,000 547,974 1,052,026 2,601,134
1/1/x4 1,600,000 390,170 1,209,830 1,391,304
1/1/x5 1,600,000 208,696 1,391,304 (0)
6. Solutions:

Requirement (a):
Loan payable 5,000,000
Transaction costs (5M x
8.75%) (437,000)
Carrying amount - 1/1/x1 4,563,000

Requirement (b):
Trial and error:

Working formula:
 (Principal: 5,000,000 x PV of 1 @ x%, n=4) + (Interest: 550,000 x PV ordinary annuity @ x%, n=4) = 4,563,000

First trial: @14%

 (Principal: 5,000,000 x PV of 1 @ 16%, n=4) + (Interest: 550,000 x PV ordinary annuity @ 16%, n=4) = 4,563,000
 (5,000,000 x 0.59208) + (550,000 x 2.91371) = 4,563,000
 (2,960,400 + 1,602,541) = 4,563,000
 4,562,941 = 4,563,000

If the difference of ₱60 is deemed immaterial then 14% is regarded as the effective interest rate.

Requirement (c):
Date Payments Interest expense Amortization Present value
1/1/x1 4,563,000
12/31/x1 550,000 638,820 88,820 4,651,820
12/31/x2 550,000 651,255 101,255 4,753,075
12/31/x3 550,000 665,430 115,430 4,868,505
12/31/x4 550,000 681,591 131,591 5,000,096

7. Solutions:
Requirement (a):
The total cash price of the machinery is ₱85,933.75. The company paid ₱10,000 down, leaving a balance of
₱75,933.75 to finance. This amount represents the present value of four payments of unknown amounts discounted
at 12%. The problem can be solved by dividing the amount to be financed, ₱75,933.75, by the factor for the present
value of an ordinary annuity for 4 years at 12%:
₱75,933.75 ÷ 3.03735 = ₱25,000

Requirement (b):
The journal entry to record the acquisition of the machinery at December 31, 2001, would be:

Machinery ................................. 85,933.75

Discount on Notes Payable ................. 24,066.25
  Cash .................................... 10,000
  Notes Payable ........................... 100,000

Requirement (c):
The journal entry at December 31, 2002, would be:

Notes Payable ............................. 25,000.00

Interest Expense .......................... 9,112.05
  Cash .................................... 25,000.00
  Discount on Notes Payable ............... 9,112.05
Chapter 3

Bonds Payable & Other Concepts

PROBLEM 1: TRUE OR FALSE

1. TRUE 6. FALSE
2. TRUE 7. FALSE
3. FALSE 8. TRUE
4. FALSE 9. FALSE
5. FALSE 10. TRUE

PROBLEM 2: FOR CLASSROOM DISCUSSION

1. B

2. A

3. C

4. A

5. A

6. D

7. A

8. D

9. D

10. Solution:

Requirement (a):
Issue price 4,800,000
Transaction costs (473,767)
Carrying amount - 1/1/x1 4,326,233

Requirement (b):
Face amount 5,000,000
Initial carrying amount (4,326,233)
Net discount on bonds payable 673,767

Requirement (c):

Date Interest paid Interest expense Amortization Present value

1/1/x1 4,326,233
12/31/x1 500,000 692,197 192,197 4,518,430
 12/31/x2 500,000 722,949 222,949 4,741,379
12/31/x3 500,000 758,621 258,621 5,000,000

Answer: Periodic interest payments are less than periodic interest expenses.

Requirement (d):
1/1/x1
Cash 4,800,000
Discount on bonds payable 200,000
Bonds payable 5,000,000

1/1/x1
Discount on bonds payable (Bond issue costs) 473,767
Cash 473,767

12/31/x1
Interest expense 692,197
Cash 500,000
Discount on bonds payable 192,197

12/31/x2
Interest expense 722,949
Cash 500,000
Discount on bonds payable 222,949

12/31/x3
Interest expense 758,621
Cash 500,000
Discount on bonds payable 222,949

Bonds payable 5,000,000

Cash 5,000,000

11. Solution:

Requirement (a):
Issue price 5,415,183
Accrued interest (5M x 14% x 3/12) (175,000)
Carrying amount - 4/1/x1 5,240,183

Requirement (b):
4/1/x1
Cash 5,415,183
Interest expense 175,000
Bonds payable 5,000,000
Premium on bonds payable 240,183

Requirement (c):
(5,240,183 x 12% x 9/12) = 471,616

12. Solution:
Cash flows PV factors Issue price
Principal 5,000,000 0.79383 3,969,161
Interest 700,000 2.57710 1,803,968
 5,773,129

13. Solution:

12/31/x2
Bonds payable 5,000,000
Premium on bonds payable 277,778
Loss on derecognition 122,222
Cash (5M + 400,000) 5,400,000

Date Interest paid Interest expense Amortization Present value

1/1/x1 5,773,129
12/31/x1 700,000 461,850.33 238,150 5,534,979
12/31/x2 700,000 442,798.35 257,202 5,277,778
12/31/x3 700,000 422,222.22 277,778 5,000,000

14. Solution:

Requirement (a):
1/1/x1
Cash 5,200,000
Bonds payable 5,000,000
Premium on bonds payable [(5M x 101%) – 5M] 50,000
Share premium – conversion feature (squeeze) 150,000

Requirement (b):
Date Interest paid Interest expense Amortization Present value
1/1/x1 5,050,000
12/31/x1 600,000 585,295 14,705 5,035,295
12/31/x2 600,000 583,591 16,409 5,018,886
12/31/x3 600,000 581,689 18,311 5,000,575

1/1/x3
Bonds payable 5,000,000
Premium on bonds payable 18,886
Ordinary share capital (10,000 sh. x ₱200) 2,000,000 Share premium
3,018,886

Share premium – conversion feature 150,000

Share premium 150,000

15. Solution:

Total retirement price (5M + 200K) 5,200,000

Fair value of bonds (5M x 102) (5,100,000)
Retirement price allocated to equity component 100,000
 Date Interest paid Interest expense Amortization Present value
1/1/x1 5,050,000
12/31/x1 600,000 585,295 14,705 5,035,295
12/31/x2 600,000 583,591 16,409 5,018,886
12/31/x3 600,000 581,689 18,311 5,000,575

1/1/x3
Bonds payable 5,000,000
Premium on bonds payable 18,886
Loss on derecognition (squeeze) 81,114
Cash (allocation to debt component) 5,100,000
Share premium – conversion feature 150,000
Cash (allocation to equity component) 100,000
Share premium 50,000

16. Solution:

Carrying amount of equipment 900,000

Carrying amount of note payable 1,000,000
Gain on derecognition 100,000

17. Solution:

Requirement (a):
Fair value of shares 750,000
Carrying amount of note payable 1,000,000
Gain on derecognition 250,000

Requirement (b):
Note payable 1,000,000
Ordinary share capital (10,000 x ₱10) 100,000
Share premium [10,000 x (₱75 - ₱10)] 650,000
Gain on derecognition 250,000

18. Solution:

  Original terms Modified terms

Principal 2,800,000 2,500,000
Accrued interest 400,000 -
Nominal rate 14% 9%
Maturity already due 4 yrs.

Present value of new liability

(Principal: 2.5M x PV of 1 @14%, n=4) + 2,135,786
(Interest: 2.5M x 9% x PV ordinary annuity @14%, n=4)
Carrying amount of old liability (2.8M + 400K) 3,200,000
 Difference 1,064,214

Difference 1,064,214
Divide by: Carrying amount of old liability 3,200,000
Change in liability - Substantial 33%

Dec. 31, 20x1

Loan payable (old) 2,800,000
Interest payable 400,000
Discount on loan payable (new) 364,214
(2.5M – 2,135,786)
Loan payable (new) 2,500,000
Gain on modification 1,064,214
PROBLEM 3: EXERCISES

1. Solution:
Date Interest paid Interest expense Amortization Present value
1/1/x1 5,773,129
12/31/x1 700,000 461,850.33 238,150 5,534,979
12/31/x2 700,000 442,798.35 257,202 5,277,778
12/31/x3 700,000 422,222.22 277,778 5,000,000

2. Solution:

Requirement (a):

Issue price 8,600,000

Transaction costs (81,645)
Carrying amount - 1/1/x1 8,518,355

Requirement (b):

Face amount 8,000,000

Initial carrying amount 8,518,355
Net premium on bonds payable 518,355

Requirement (c):

Date Payments Interest expense Amortization Present value

1/1/x1 8,518,355
12/31/x1 880,000 766,652 113,348 8,405,007
12/31/x2 880,000 756,451 123,549 8,281,458
12/31/x3 880,000 745,331 134,669 8,146,789
12/31/x4 880,000 733,211 146,789 8,000,000

Answer: Periodic interest payments are greater than periodic interest expenses.

Requirement (d):
1/1/x1
Cash 8,600,000
Premium on bonds payable 600,000
Bonds payable 8,000,000

1/1/x1
Premium on bonds payable (Bond issue costs) 81,645
Cash 81,645

12/31/x1
Interest expense 766,652
Premium on bonds payable 113,348
Cash 880,000

12/31/x2
Interest expense 756,451
Premium on bonds payable 123,549
Cash 880,000

12/31/x3
Interest expense 745,331
Premium on bonds payable 134,669
Cash 880,000

12/31/x4
Interest expense 733,211
Premium on bonds payable 146,789
Cash 880,000

Bonds payable 8,000,000

Cash 8,000,000

3. Solution:

Requirement (a):
Issue price 9,105,022
Accrued interest (8M x 11% x 8/12) ( 586,667 )
Carrying amount - 4/1/x1 8,518,355

Requirement (b):
4/1/x1
Cash 9,105,022
Interest expense 586,667
Bonds payable 8,000,000
Premium on bonds payable 518,355

Requirement (c):
(8,518,355 x 9% x 4/12) = 255,551

4. Solution:

Cash flows PV factors PV

Principal 3,000,000 0.67497* 2,024,910
Interest 270,000 2.32163** 626,840
Issue price 2,651,750

* PV of 1 @ 14%, n=3
** PV ordinary annuity of 1 @ 14%, n=3

Issue price 2,651,750

Face amount 3,000,000
Discount on bonds payable - 1/1/x1 348,250
5. Solution:

Requirement (a):
Calculation of bond sale price: i = 4% n = 20
Present value of the face amount (₱700,000 x .4564) ₱319,480
Present value of the interest (₱35,000 x 13.5903) 475,661
₱795,141

Requirement (b):

Date Payments Interest expense Amortization Present value

3/1/x2 795,141
8/31/x2 35,000 31,806 3,194 791,947
2/28/x3 35,000 31,678 3,322 788,625

Requirement (c):
Journal entries:

(a) 3/1/2002 Cash 795,141

  Premium on Bonds Payable 95,741
  Bonds Payable 700,000

(b) 8/31/2002 Interest Expense 31,806

Premium on Bonds Payable 3,194
  Cash 35,000

(c) Interest Expense

12/31/2002 21,119
(₱31,678 x 4/6)
Premium on Bonds Payable
2,215
(₱3,322 x 4/6)
  Interest Payable
23,334
   (₱35,000 x 4/6)

(d) Assuming no reversing entries:

2/28/2003 Interest Payable 23,334
Premium on Bonds Payable 1,107
Interest Expense 10,559
  Cash 35,000

6. Solutions:

Requirement (a):

Calculation of bond sale price: i = 6% n = 30

Present value of face amount (₱12,000,000  .1741) ..... ₱ 2,089,200
Present value of interest (₱600,000  13.7648) ......... 8,258,880
₱10,348,080

Requirement (b):

Amortization table:
Interest Interest Amortization Carrying
 Date Payment Expense of Discount Value
6/1/2002 ₱10,348,080
11/30/2002 ₱600,000 ₱620,885 ₱20,885 10,368,965
5/31/2003 600,000 622,138 22,138 10,391,103

Requirement (c):
Journal entries:
(a)
6/1/2002 Cash ........................... 10,348,080
Discount on Bonds Payable ...... 1,651,920
  Bonds Payable .................. 12,000,000

(b)
11/30/2002 Interest Expense ............... 620,885
  Cash ......................... 600,000
  Discount on Bonds Payable .... 20,885

(c)
12/31/2002 Interest Expense
(₱622,138 x 1/6 = ₱103,690) ... 103,690
  Discount on Bonds Payable
   (₱22,138 x 1/6 = 3,690) ..... 3,690
  Interest Payable
   (₱600,000 x 1/6) ............ 100,000

(d)
Assuming no reversing entries:
5/31/2003 Interest Expense ............... 518,448
Interest Payable ............... 100,000
  Discount on Bonds Payable .... 18,448
  Cash ......................... 600,000

7. Solution:
Date Payments Interest expense Amortization Present value
1/1/x1 3,784,798
12/31/x1 640,000 681,264 41,264 3,826,062
12/31/x2 640,000 688,691 48,691 3,874,753

12/31/x2
Bonds payable 4,000,000
Loss on derecognition 325,247
Cash (4M + 200,000) 4,200,000
Discount on bonds payable 125,247
(4M – 3,874,753)

8. Solution:

Requirement (a):
1/1/x1
Cash 4,100,000
Discount on bonds payable(a) 215,202
Bonds payable 4,000,000
Share premium – conversion feature (squeeze) 315,202

(a)

Cash flows PV factors PV

Principal 4,000,000 0.51579* 2,063,160
Interest 640,000 2.69006** 1,721,638
Issue price 3,784,798

* PV of 1 @ 18%, n=4
** PV ordinary annuity of 1 @ 18%, n=4

Issue price 3,784,798

Face amount 4,000,000
Discount on bonds payable - 1/1/x1 215,202

Requirement (b):
Date Payments Interest expense Amortization Present value
1/1/x1 3,784,798
12/31/x1 640,000 681,264 41,264 3,826,062
12/31/x2 640,000 688,691 48,691 3,874,753

1/1/x3
Bonds payable 4,000,000
Discount on bonds payable (4M – 3,874,753) 125,247
Ordinary share capital (10,000 sh. x ₱300) 3,000,000 Share premium
874,753

Share premium – conversion feature 315,202

Share premium 315,202

9. Solution:

Total retirement price (4M + 300K) 4,300,000

Fair value of bonds (4M x 105%) (4,200,000)
Retirement price allocated to equity component 100,000

Date Payments Interest expense Amortization Present value

1/1/x1 3,784,798
12/31/x1 640,000 681,264 41,264 3,826,062
12/31/x2 640,000 688,691 48,691 3,874,753

1/1/x3
Bonds payable 4,000,000
Loss on derecognition (squeeze) 325,247
Discount on bonds payable (4M – 3,874,753) 125,247
Cash (allocation to debt component) 4,200,000

Share premium – conversion feature 315,202

Cash (allocation to equity component) 100,000
Share premium 215,202
10. Solution:
1/1/x1
Note payable 1,200,000
Accumulated depreciation 900,000
Equipment 2,000,000
Gain on derecognition 100,000

11. Solution:

Requirement (a):
Fair value of shares (12,000 x110) 1,320,000
Carrying amount of note payable 1,200,000
Loss on derecognition 120,000

Requirement (b):
Note payable 1,200,000
Loss on derecognition 120,000
Ordinary share capital (12,000 x ₱20) 240,000
Share premium [12,000 x (₱110 - ₱20)] 1,080,000

12. Solution:
Note payable 3,000,000
Loss on derecognition of debt 900,000
Discount on note payable 800,000
Cash 1,000,000
Land 2,100,000

13. Solution:
Note payable 380,000
Ordinary share capital (1,000 x 200) 200,000
Share premium [1,000 x (280 – 200)] 80,000
Gain on derecognition of debt 100,000

14. Solution:
Evanston Manufacturing

Interest Payable ............................ 125,000

Bonds Payable ............................... 2,000,000
Premium on Bonds Payable .................... 68,500
  Common Stock (60,000 x ₱10) ............... 600,000
  Paid-In Capital in Excess of Par
  (60,000 x ₱23.75) ......................... 1,425,000
  Gain on Derecognition of Debt ............. 168,500

Blue Ash Corporation

Investment in Evanston Common ...............

Stock (125/2,000 x ₱2,025,000) .............. 126,563
Loss on derecognition of investment in bonds ....... 10,531
  Investment in Evanston Bonds
(125/2,000 x ₱2,068,500) .................. 129,281
  Interest Receivable (125/2,000  ₱125,000) 7,813
15. Solutions:

Requirement (a):

  Original terms Modified terms

Principal 3,000,000 2,800,000
Accrued interest 200,000 -
Nominal rate 12% 8%
Maturity 1 yr. 5 yrs.

Present value of new liability

(Principal: 2.8M x PV of 1 @12%, n=5) + 2,396,265
(Interest: 2.8M x 8% x PV ordinary annuity @12%, n=5)
Carrying amount of old liability (3M + 200K) 3,200,000
Difference 803,735

Difference 803,735
Divide by: Carrying amount of old liability 3,200,000
Change in liability - Substantial 25%

Jan. 1, 20x1
Loan payable (old) 3,000,000
Interest payable 200,000
Discount on loan payable (new) 403,735
(2.8M – 2,396,265)
Loan payable (new) 2,800,000
Gain on modification 803,735

Requirement (b):

Date Payments Interest expense Amortization Present value

1/31/x1 2,396,265
12/31/x1 224,000 287,552 63,552 2,459,817
12/31/x2 224,000 295,178 71,178 2,530,995
12/31/x3 224,000 303,719 79,719 2,610,714
12/31/x4 224,000 313,286 89,286 2,700,000
12/31/x5 224,000 324,000 100,000 2,800,000

Dec. 31, 20x1

Interest expense 287,552
Discount on loan payable 63,552
Cash 224,000
16. Solution:

Requirement (a):

  Original terms Modified terms

4,000,000 4,000,000
Principal (due in lump sum) (due in installments)
Accrued interest 800,000* -
Nominal rate 10% -
Maturity due 4 annual installments

* (4M x 10% x 2 years) = 800,000

Present value of new liability

3,486,852
(1M x PV annuity due @10%, n=4)
Carrying amount of old liability (4M + 800K) 4,800,000
Difference 1,313,148

Difference 1,313,148
Divide by: Carrying amount of old liability 4,800,000
Change in liability - Substantial 27%

Jan. 1, 20x1
Loan payable (old) 4,000,000
Interest payable 800,000
Discount on loan payable (new)** 513,148
Loan payable (new) 4,000,000
Gain on modification 1,313,148

** (4,000,000 – 3,486,852) = 513,148

Jan. 1, 20x1
Loan payable (new) 1,000,000
Cash 1,000,000

Requirement (b):

Date Payments Interest expense Amortization Present value

12/31/x1 3,486,852
12/31/x1 1,000,000 - 1,000,000 2,486,852
12/31/x2 1,000,000 248,685 751,315 1,735,537
12/31/x3 1,000,000 173,554 826,446 909,091
12/31/x4 1,000,000 90,909 909,091 0
PROBLEM 4: CLASSROOM ACTIVITY
1. Solution:
Jan. 1, Cash on hand 1,903,927
20x1 Discount on bonds payable 96,073
Bonds payable 2,000,000

Interest
Interest expens Amortizatio Present
Date payments e n value
Jan. 1, 20x1 1,903,927

Dec. 31, 20x1 200,000 228,471 28,471 1,932,398

Dec. 31, 20x2 200,000 231,888 31,888 1,964,286

Dec. 31, 20x3 200,000 235,714 35,714 2,000,000

Dec. 31, 20x1 Interest expense 228,471

Cash in bank 200,000
Discount on bonds payable 28,471
Dec. 31, 20x2 Interest expense 231,888
Cash in bank 200,000
Discount on bonds payable 31,888
Dec. 31, 20x3 Interest expense 235,714
Cash in bank 100,000
Discount on bonds payable 35,714

Bonds payable 2,000,000

Cash in bank 2,000,000

2. Solution:
Jan. 1, Cash on hand 2,099,474
20x1 Bonds payable 2,000,000
Premium on bonds payable 99,474

Interest
Interest expens Amortizatio Present
Date payments e n value
Jan. 1, 20x1 2,099,474

Dec. 31, 20x1 240,000 209,947 30,053 2,069,421

Dec. 31, 20x2 240,000 206,942 33,058 2,036,364

Dec. 31, 20x3 240,000 203,636 36,364 2,000,000

Dec. 31, Interest expense 209,947

20x1 Premium on bonds payable 30,053
Cash in bank 240,000
Dec. 31, Interest expense 206,942
20x2 Premium on bonds payable 33,058
Cash in bank 240,000
Dec. 31, Interest expense 203,636
20x3 Premium on bonds payable 36,364
Cash in bank 240,000
 Bonds payable 2,000,000
Cash in bank 2,000,000

PROBLEM 25-5: MULTIPLE CHOICE - THEORY

1 11
D 6. B C
. .
2 12
C 7. C B
. .
3 13
D 8. A D
. .
4 14
C 9. D C
. .
5 10 15
C C A
. . .
PROBLEM 25-6: MULTIPLE CHOICE – COMPUTATIONAL
1. D
Solution:
9¾% registered debentures, callable in 2002, due in 2007 700,000
9½% collateral trust bonds, convertible into common stock
600,000
beginning in 2000, due in 2010
Total term bonds 1,300,000

2. A
Solution:
9.375% registered bonds (₱25,000 maturing annually beginning in 20x4) 275,000

10.0% commodity backed bonds (₱50,000 maturing annually beginning in 20x5) 200,000
Total Serial bonds 475,000

Unsecured

9.375% registered bonds (₱25,000 maturing annually beginning in 20x4) 275,000

11.5% convertible bonds, callable beginning in 20x9, due 2010 125,000
Total Debenture bonds 400,000

3. D (20,000 + 25,000 + 200,000) = 245,000

4. C (103,288 x 10% x 6/12) = 5,164

5. B
Solution:
Date Interest expense Payments Amortization Present value
1/2/01 469,500
6/30/01 23,475 22,500 975 470,475

6. B
Solution:
The carrying amount of the bonds on May 1, 1999 is determined as follows:
Face amount 1,000,000
Unamortized bond premium 62,000
Carrying amount - 5/1/99 1,062,000

The carrying amount of the bonds on October 31, 1999 is determined as follows:
Interest
Date expense Payments Amortization Present value
5/1/99 1,062,000
10/31/99 53,100 55,000 1,900 1,060,100

The unamortized bond premium on October 31, 1999 is determined as follows:

Face amount 1,000,000
Carrying amount - 10/31/99 1,060,100
Unamortized premium - 10/31/99 60,100

7. D
Solution:
The periodic cash flows are computed as follows:
 Due date Amounts due Periodic
  Principal Interest Cash flows
12/31/x1 40,000 16,000 56,000
12/31/x2 40,000 12,800 52,800
12/31/x3 40,000 9,600 49,600
12/31/x4 40,000 6,400 46,400
12/31/x5 40,000 3,200 43,200

The amortization table is prepared as follows:

Interest
Date expense Payments Amortization Present value
12/31/x0 190,280
12/31/x1 19,028 56,000 36,972 153,308
12/31/x2 15,331 52,800 37,469 115,839
12/31/x3 11,584 49,600 38,016 77,823
12/31/x4 7,782 46,400 38,618 39,205
12/31/x5 3,920 43,200 39,280 (75)

8. B (800,000 x 8% x 3/12) = 16,000

9. D
Solution:
Issue price of bonds (200 x 1,000 x 101%) 202,000
Accrued interest (200 x 1,000 x 9% x 5/12) 7,500
Total proceeds 209,500

10. C
Solution:
Present
Cash flows PV factors value
Principal 1,000 PV of 1 @9%, n=10 0.4224 422
Interest 60 PV ordinary annuity @9%, n=10 6.4177 385
Issue price 807