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INTERMEDIATE ACCOUNTING 3
SHAREHOLDERS’
EQUITY
NATIONAL UNIVERSITY
JUNIOR PHILIPPINE INSTITUTE OF ACCOUNTANTS
SHAREHOLDERS’ EQUITY
PREPARED BY: Maga, Hyacinth T.
DISCLAIMER: This paper is prepared by bonafide NUJPIANS for A.Y. 2021-2022.

The National University Junior Philippine Institute of Accountants together with the BS
Accountancy students of National University made every effort to ensure and help every
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In no event will the National University Junior Philippine Institute of Accountants together
with the preparers and faculty members be liable to any violation committed by the users of
these handouts.
EXCLUSIVE FOR ACCOUNTANCY STUDENTS OF NATIONAL UNIVERSITY ONLY
1. Statement 1 A partnership is an artificial being created by operation of law, which

ownership can be transferred through succession and the powers, attributes, and
properties expressly authorized by law.
Statement 2 Persons who are licensed to practice a profession and partnerships or
associations organized for the purpose of practicing the profession shall always be
allowed to form a corporation.
Statement 3 A corporation is a legal or juridical person with a personality separate and
distinct from its shareholders and individual members.
a. False, True, True
b. True, False, True
c. False, False, True
d. True, False, False
NATIONAL UNIVERSITY
2. I. Treasury shares requires that the shares must be issued originally.

II. A corporation can acquire treasury shares only to the extent of retained earnings
balance.
III. Dividends are collection of capital to the shareholders in proportion to their past
shares in the entity.
IV. According to the GAAP, stock dividends may be declared from premium on par
value share.
V. Property dividends are distribution of earnings of the entity to the shareholders in
the form of noncash assets.
a. Only I and V are true
b. Only III and IV are false
c. Only I, II but not V are true
d. Only V is true except I
3. This arises from the fact that the terms of the bond issue and preference share issue
may impose restrictions on the payment of the dividends.
a. Contractual appropriation
b. Voluntary appropriation
c. Legal appropriation
d. Money market appropriation
4. Granted to officers and key employees to enable them to acquire share in the company
during a specified period upon fulfillment of the resolutory conditions at a specified
price.
a. Share based premium
b. Share compensation
c. Share Bonus
d. Share option
5. It is equal to the excess of the market value of liability to the excess of the market
value of share over a predetermined price for a given number of shares over a definite
vesting period.
a. par value
NATIONAL UNIVERSITY
b. fair value
c. fair value of asset
d. fair value of liability
6. Soriano Corp. provided the following data at the year-end:

Authorized share capital 6,000,000
Unissued share capital 2,500,000
Subscribes share capital 2,000,000
Subscription receivable 600,000
Share premium 800,000

Retained earnings unappropriated 250,000
Retained earnings appropriated 150,000
Revaluation surplus 138,000
Treasury shares, at cost 99,000
What total amount should be reported as shareholder’s equity?

a. 6,129,000
b. 6,139,000
c. 5,989,000
d. 6,088,000
7. Jeddy Co. began its operations on January 1, 2020 by issuing at P18 per share one-
half of the 969,000 ordinary shares of P1 par value that had been authorized for issue.
In addition, the entity had 500,000 authorized preference shares of P4 par value.
During 2020, the entity had P1,025,000 of net income and declared P230,000 worth
of dividends.
During 2021, the entity had the following transactions:
• Issued 100,000 ordinary shares for P22 per share
• Issued 150,000 preference shares for P9 per share
NATIONAL UNIVERSITY
• Authorized the purchase of a custom-made machine to be delivered in January

2021. The entity restricted P300,000 of retained earnings for the purchase of the
machine.
• Issued additional 50,000 preference shares for P10 per share
• Reported P1,213,000 of net income and declared on December 31, 2020 a
dividend of P696,000 to shareholders of record on January 15, 2021 to be paid on
February 1, 2021
What amount should be reported as total SHE on December 31, 2021?
a. 14,083,000
b. 11,500,000
c. 10,003,000
d. 14,779,000
8. Reyes Industries held 12,000 shares of P12 par value as treasury shares reacquired for
P115,000. At year-end the entity reissued all 12,000 shares for P180,000.
What is credited for the excess of the reissuance price over the cost of treasury
shares?
a. Share capital, P144,000
b. Retained earnings, P65,000
c. Fain on sale of investment, P65,000
d. Share premium, P65,000
9. Hybe Co issued 66,000 shares of P10 par value for P110 per share at the beginning of
the year.
During the period, the entity reacquired 2,000 shares at P150 per share and
immediately cancelled these 2,000 shares.
In connection with the retirement of shares, what amount should be debited to share
premium?
a. 200,000
b. 20,000
c. 80,000
d. 300,000
NATIONAL UNIVERSITY
10. At the beginning of 2020, YG Entertainment had 800,000 ordinary shares authorized
and 400,000 shares outstanding.
January 31 Declared 10% share dividend
July 30 Purchased 100,000 shares
August 1 Reissued 50,000 shares
November 30 Declared 2-for-1 share split
How many ordinary shares are outstanding at year-end?
a. 720,000
b. 680,000
c. 780,000
d. 390,000
11. SM Ent. issued 300,000 shares of P4 par value at P9 per share. On January 1, 2020,
the retained earnings amounted to P3,100,000.
In March 2020, the entity reacquired 50,000 treasury shares at P20 per share. In June
2020, the entity sold 12,000 of these shares to corporate officers for P25 per share.
The entity used the cost method to record treasury shares.
Net income for the period was P700,000. How much is the unappropriated retained
earnings at year-end?
a. 3,840,000
b. 3,800,000
c. 3,080,000
d. 3,040,000
12. At the beginning of the current year, JYP Entertainment declared a 12% share
dividend. The market price of the entity’s 330,000 outstanding shares of P50 par
value was P92 per share on that date.
The share dividend was distributed on July 1 when the market price was 100 per
share.
What amount should be credited to share premium for the share dividend?
a. 1,463,500
b. 1,663,200
c. 1,480,030
NATIONAL UNIVERSITY
d. 1,640,000
13. Cube Entertainment reported the following shareholder’s equity at the beginning of
the current year:
Share capital, P5 par, 600 shares authorized,
200,000 shares issued and outstanding 1,000,000
Share premium 6,000,000
Retained Earnings 2,800,000
Total shareholder’s equity 9,800,000
During the current year, the following chronological transactions affected the
shareholder’s equity:
• Reacquired 10,000 shares at P30 per share to be held as treasury.
• Declared and issued a 30% share dividend.
• Declared and paid cash dividend of P10 per share.
• Net income for the current year amounted to P3,000,000
What amount should be reported as unappropriated retained earnings?
a. 3.045,000
b. 2,745,000
c. 2,700,000
d. 2,600,000
14. TierOne Entertainment provided its shareholders’ equity at year-end:

Share capital, P30 par, 100,000 shares auth and outstanding 3,000,000
Retained Earnings (deficit) (2,100,000)
The entity put into effect a quasi-reorganization by reducing the par value of the share
to P5 and eliminating the deficit against the share premium.
Immediately after the quasi-reorganization, what amount should be reported as share
premium?
a. 1,500,000
b. 1,900,000
c. 4,000,000
d. 600,000
NATIONAL UNIVERSITY
15. Onic Philippines granted 30,000 share appreciation rights which entitled its
employees to receive cash equal to the difference between P20 and the market price of
the share on the date each right is exercised.
The service period is 2019 through 2021, and the rights are exercisable in 2022. The
market price of the share was P25 and P28 on December 31, 2019 and 2020,
respectively.
What amount should be recorded as compensation expense for 2020?
a. 120,000
b. 150,000
c. 110,000
d. 10,000
NATIONAL UNIVERSITY
ANSWER KEY
1. C
2. B
3. A
4. D
5.D
6. B
Authorized share capital 6,000,000
Unissued share capital (2,500,000)
Issued share capital 3,500,000
Subscribes share capital 2,000,000
Subscription receivable 600,000 1,400,000
Retained earnings:
Unappropriated 250,000
Appropriated 150,000 400,000
Revaluation surplus 138, 000
Total 6,238,000
Treasury shares, at cost (99,000)
Shareholders’ Equity 6,139,000
7. A
Issuance or ordinary shares in January
(969,000 x ½ x 18) 8, 721, 000
Net Income for 2020 1, 025,000
Dividend declared in 2020 (230,000)
Total SHE – December 31, 2020 9,516,000
NATIONAL UNIVERSITY
Shareholders’ Equity – 2020 9, 516,000

Issuance of ordinary shares (100,000 x 22) 2,200,000
Issuance of preference shares (150,000 x 9) 1,350,000
Issuance of preference shares (50,000 x 10) 500,000
Net income for 2021 1,213,000
Dividend declared in 2021 (696,000)
Total SHE – December 31, 2021 14,083,000
8. D
Cash 180,000
Treasury shares 115,000
Share Premium-TS 65,000
9. A
Share capital (2,000 x 10) 20,000
Share premium (2,000 x 100) 200,000
Retained earnings (squeezed) 80,000
Cash 300,000
10. C
Original shares 400,000
Share dividend 40,000
Total shares issued before split 440,000
Remaining treasury shares (50,000)
Outstanding shares before split 390,000
Shares issued after split (440,000 x 2) 880,000

Treasury shares before split (50,000 x 2 ) (100,000)
Outstanding shares after split 780,000
NATIONAL UNIVERSITY
11. D
Retained earnings January 1 3,100,000
Net income 700,000
Total retained earnings 3,800,000
Appropriated for treasury shares(38,000 x 20) (760,000)
Unappropriated retained earnings 3,040,000
12. B
Market value on date of declaration
(12% X 330,000 = 39,600 Shares x 92) 3,643,200
Par value of shares issued as share dividend
(39,600 x 50) (1,980,000)
13. B
Retained Earnings-beg 2,800,000
Share dividend (57,000 x 5) (285,000)
Cash dividend (247,000 x 10) (2,470,000)
Net Income 3,000,000
Appropriated for treasury shares (10,000x 30) (300,000)
Unappropriated balance-ending 2,745,000
14. B
To reduce the par value:
Share capital 2,500,000
To eliminate the deficit:

Retained earnings 2,100,000
Considering the adjustments, the share premium account should have a balance of
P1,900,000.
NATIONAL UNIVERSITY
15. C
Fair value of share appreciation right- Dec 31, 2019
(25-20) 5
Fair value of share appreciation right- Dec 31, 2020
(28-20) 8
Accrued compensation – 12/31/2020

(30,000 X 8= 240,000/3 X 2 YEARS) 160,000
Accrued compensation – 12/31/2019
(30,000 X 5 / 3 YEARS) (50,000)
Compensation Expense for 2020 110,000
CONTINGENT
LIABILITY
NATIONAL UNIVERSITY
CONTINGENT LIABILITY
PREPARED BY: Ventura, Kobe Christian B.

these handouts.
CONTINGENT LIABILITY
• a possible obligation depending on whether some uncertain future event occurs, or
• a present obligation but payment is not probable, or the amount cannot be measured
reliably
TREATMENT OF CONTINGENT LIABILITY

• a contingent liability shall not be recognized in the financial statements but shall be
disclosed only.
PROVISION
• a liability of uncertain timing or amount
NATIONAL UNIVERSITY
TREATMENT OF PROVISION
RECOGNIZED IN THE STATEMENT OF FINANCIAL POSITION WHEN, AND ONLY
WHEN
• an enterprise has a present obligation (legal or constructive) as a result of past events.
• it is probable that an outflow of resources embodying economic benefits will be required to
be settle the obligations and.
• a reliable statement can be made of the amount of the obligation
MEASUREMENT OF PROVISION
1. Best estimate – The amount recognized as a provision should be the best estimate of
the expenditure required to settle the obligation at the end of reporting period.
2. Most likely outcome – If a single obligation is being measured, the amount to be
recognized as a liability is the most likely outcome
3. Midpoint of the range – The provision being measured involves large population of
items; the obligation is estimated by weighing all possible outcomes by their
associated possibilities.
4. Present Value of Expenditures – Where the effect of time value of money is
material, the amount should be the present value of the expenditures expected to be
required to settle the obligation.
5. Actual Settlement – The amount shown in the statement of financial position
The Following illustrates the principles discussed

CASE 1. In August 2020, ABS Corporation filed a suit against HOR Company alleging
violation of labor laws and it is seeking payment for damages of P10,000,000. HOR
disclaims the charges and legal counsel advises that as of date of the issuance of HOR
Company’s financial statements, it is probable that the enterprise will not be found liable.
No provision is recognized, because based on the data available as of the financial statement
date, there is no obligation as a result of past events. The matter is disclosed as a contingent
liability unless the probability of any outflow is regarded as remote.
CASE 2. Lopez Mining Company operates in a municipality where there is no environmental
legislation. However, the company has a widely published policy in which it undertakes to
clean up all contamination it causes. As of date the issuance of its 2020 financial statements,
a reasonable estimate of the cost of this clean up related to 2020 operations is P6,000,000
A provision is recognized for the estimated amount of the costs of the clean-up, which is
P6,000,000. The obligating event is one of the constructive obligations. The entry for the
recognition of provision is:
Environmental Clean-Up Expense 6,000,000
Provision for Environmental Clean-Up 6,000,000
NATIONAL UNIVERSITY
CASE 3. As a result of uninsured unfortunate incident during 2020, personal injury case for
P1,000,000 has been filed against 3D Company. It is the judgement of the company’s legal
counsel that an unfavorable decision will result in a loss ranging from P500,000 to P900,000.
The lawyer believes that the most reasonable estimate is P700,000
A provision is recognized for the best estimate of the obligation: The best estimate is the most
likely outcome, which is P700,000. The entry for the provision is
Loss from Accident 700,000
Provision for Damages 700,000
Additional possible obligation of P200,000 (the difference between recorded amount of
P700,000 and the highest in the range of estimated amounts of P900,000) is to be disclosed in
the notes to the financial statements.
CASE 4. KCV Company sells imported products with a warranty under which customers are
covered for the cost of any manufacturing defects that become apparent within first year after
purchase. If minor defects were detected in all products sold, repair costs of P3 million would
result.
If major defects were detected in all products sold, repair costs of P7 million would result.
The enterprise’s experience and future expectations indicate 70% of the goods sold have no
defects, 20% of the goods sold have minor defects, and 10% of the goods sold have major
defects.
It is probable that the sale of defective merchandise will result in an outflow of economic
benefits. Thus, the sale created an obligation. The best estimate of the obligation is derived by
weighing all possible outcomes by their associated probabilities. Thus, the provision shall be
measured as follows:
No defects P0×70% P0
Minor defects P3m×20% 600,000
Major defects P7m×10%. 700,000
Amount Provision P1,300,000
CASE 5. CBN is charged with multiple lawsuits because of an accident that happened in July
2020, causing death of about 60 persons and sever injury to about 20 persons because of
stampede in a marketing program it was airing through Channel 2 on July 10, 2020. Based on
similar incidents suffered by other entities, CBN’s legal counsels are of the opinion that it is
probable that CBN would be found liable for the incident. As of the date of the issuance of
the 2020 financial statements, a reasonable estimate of the obligation is between P20,000,000
to P25,000,000. Each point within the range is as likely as any other.
The provision being measured above involves a large population of items and there is a
continuous range of possible outcomes. There is no better estimate in the range, and each
point within that range is as likely as any other point. Thus, the provision shall be measured
at the midpoint of the range. The midpoint is the simple average or the mean, thus
P45,000,000 (P20,000,000 + P25,000,000) divided by 2 equals P22,500,000
NATIONAL UNIVERSITY
The entry to set up the provision is
Loss from Damages P22,500,000

Provision for Damages P22,500,000
SUMMARY ANALYSIS OF PROVISIONS AND CONTINGENT LIABILITIES
PROVISIONS AND CONTINGENCIES DISPOSITION
There is a present obligation that probably A provision is recognized

requires an outflow of resources that can be
measured reliably Disclosures are required for the provision
There is a present obligation that probably No provision is required
requires an outflow of resources, but the
amount cannot be measured reliably Disclosures are required for the contingent
liability
There is a possible obligation or a present No provision is recognized
obligation that may, but probably will not,
require an outflow of resources Disclosures are required for the contingent
liability
There is a possible obligation or a present No provision is recognized
obligation where the likelihood of an outflow
of resources is remote No disclosure is required
REFERENCES:
Robles, N., Empleo, P., 2016. The Intermediate Accounting. 2016 ed.
Robles, N., 2016. Practical Accounting 1. 2016 ed.
Valix, C., Peralta, F., Valix, C., 2018. Conceptual Framework and Accounting
Standards. First Edition
LESSEE
ACCOUNTING
NATIONAL UNIVERSITY
LESSEE ACCOUNTING
PREPARED BY: Aguiluz, Kc Nicole L.

these handouts.
Accounting for Leases by the Lessee
All leases shall be accounted for by the lessee as a Finance lease.

At the commencement date, the lessee shall recognize a right of use assets and a lease
liability.
Measurement of Lease Liability
At the commencement date, the lessee shall measure the lease liability at the present
value of lease payments.
• The lease payments shall be discounted using the interest rate implicit in the
lease. If the implicit interest rate is not available, the incremental borrowing rate
of lessee shall be used.
Lease liability shall be subsequently measured using the effective interest method.
NATIONAL UNIVERSITY
INITIAL MEASUREMENT OF LEASE LIABILITY

Present Value of Lease Payments xx
Present Value of Guaranteed Residual Value xx
Present Value of Purchase Option Price xx
Lease Liability at Commencement Date xx
MEASUREMENT OF RIGHT-OF-USE ASSET

Initial Measurement of Lease Liability xx
Lease payments made to lessor on or before commencement, net of incentives xx
Initial direct costs incurred by the lessee xx
Dismantling cost (at present value) xx
Initial measurement of right-of-use asset xx
Right of use asset shall be subsequently measured using the cost model.
Depreciation of Right-of-Use Asset
Right of use asset shall be depreciated over the useful life of the asset under the
following conditions:
1. There is a transfer of ownership of the asset to the lessee at the end of the lease
term.
2. The lessee is reasonably certain to exercise purchase option
Cost – Residual Value

Useful life of the asset
Otherwise, the right of use asset shall be depreciated over the shorter
between the useful life of the asset and the lease term.
Cost – Guaranteed Residual Value

Lease term or useful life (shorter)
Executory Costs
Executory costs are the ownership expenses such as maintenance and taxes for the leased
asset.
• Such costs are expensed immediately when incurred.
NATIONAL UNIVERSITY
Financial Statement Presentation

Right of use asset is presented under non-current assets.
Lease liability is partly current and partly non-current liability.
PROBLEM 1:
At the beginning of current year, Conrad Company leased a building from a
lessor with the following pertinent information:
Annual rental payable at the end of each year 1,000,000

Initial direct cost paid 400,000
Lease incentive received 100,000
Leasehold improvement 200,000
Purchase option that is reasonably certain to be
exercised 500,000
Lease term 5 years
Useful life of building 8 years
Implicit interest rate 10%
PV of ordinary annuity of 1 for 5 periods at 10% 3.79
Present Value of 1 for 5 periods at 10% 0.62
1. What is the cost of the right of use asset?

PV of Annual Rental (1,000,000 x 3.79) 3,790,000
PV of purchase option (500,000 x 0.62) 310,000
Initial lease liability 4,100,000
Lease incentive received (100,000)
Cost of Right-of-use Asset 4,400,000
The leasehold improvement is not part of the cost of right of use asset but
accounted for separately as property, plant, and equipment.
2. What is the depreciation for current year?

Depreciation (4,400,000 / 8 years) 550,000
NATIONAL UNIVERSITY
The depreciation is based on the useful life of the underlying asset

because there is purchase option that is reasonably certain to be
exercised.
3. What is the interest expense for current year?

Interest expense for current year (10% x
4,100,000) 410,000
4. What is the lease liability at year-end?

Annual Rental 1,000,000
Applicable to interest (410,000)
Applicable to principal 590,000
Lease Liability – Jan. 1 4,100,000

Principal Payment (590,000)
Lease Liability – December 31 3,510,000
Operating Lease Model

A lessee is permitted to apply operating lease under two exemptions: Short-term Lease and
Low-value Lease
The lessee shall recognize the lease payments as expense in a straight-line basis over the
lease term.
PROBLEM 1:
On August 1, 2020, Zoey Co. leased a tablet from Conrad Company for a period of
one year. The rentals are payable at the beginning of each month starting August 1,
2020. The lease agreement called for the first 6 months’ rental to be P5, 000 per
month while the last 6 months’ rental is P6, 000 per month.
1. What is the lease expense for the year 2020?

First 6 months rental (5,000/month x 6 months) P30,000
Last 6 months rental (6,000/month x 6 months) 36,000
Total rental over the lease term 66,000
Divided by: Lease term /12 mos.
Lease Expense per month P5,500
NATIONAL UNIVERSITY
Lease expense – 2020 (P5,500/month x 5 months) P27,500
2. What amount shall be reported as operating lease liability on December 31, 2020?
Lease Expense to date, Dec. 31, 2020 27,500

Lease payments to date, Dec. 31, 2020 (5,000 x 5 months) (25,000)
Operating Lease Liability, Dec. 31, 2020 2,500
SOURCES:
Empleo, Patricia M., CPA, Ph.D., (2019). The Intermediate Accounting Volume 3.
COMPOUND
FINANCIAL
INSTRUMENTS
NATIONAL UNIVERSITY
COMPOUND FINANCIAL
INSTRUMENTS
PREPARED BY: Mabahin, Mharian Joy F.

these handouts.
COMPOUND FINANCIAL INSTRUMENT

- “a financial instrument that contains both liability and equity from the
perspective of the issuer”
- Accounting for compound instrument: the issuer should determine first if
the instrument contains both financial liability and equity component. If so,
split accounting shall apply wherein the two financial instrument is
accounted for separately. The fair value of the liability component is
determined first then the residual amount is applied to the equity
component.
Common examples:
1. Bonds Payable issued with share warrants
2. Convertible Bonds Payable
BONDS PAYABLE ISSUED WITH SHARE WARRANTS

NATIONAL UNIVERSITY
- the bondholders were given the right to acquire the shares of the issuing
entity at specifiedprice at a future time
- Could either be detachable (traded separately from the bonds) or non-
detachable (not traded separately from the bonds), either way the warrants
have a value and accounted forseparately
- Once exercised, bonds payable will still remain and it should be paid first
- Allocation of issue price:
ISSUE PRICE
If the market value of the bond ex-
warrant is unknown, the amount to be
used is the present value of principal and
present value of interest payments of the
Allocate first to the Allocate the similar bonds without warrants
fair value of bonds residualamount to
payable ex- the sharewarrants
warrants.
SAMPLE PROBLEM:
Rasl Company issued 4-year bonds with share warrants that have a face
amount of 3,000,000 for 3,300,000. The bondholders can purchase 50,000 equity
shares with a P10 par for P15. At the timeof issuance, the bond ex-warrant has a fair
value of 3,150,000. 50% of the share warrants were exercised.
Computation: Journal Entries:
Upon issuance:
ISSUE PRICE: Cash 3,300,000
Bonds Payable 3,000,000
3,300,000 Premium on Bonds Payable 150,000
Share Warrants Outstanding 150,00
Upon exercise of share
Bonds payable Share warrants: warrants:
ex-warrants: (3,300,000 - 3,150,000) Cash (50,000 x 50% x 15) 375,000
Share Warrants 75,000
3,150,000 150,000 Outstanding (150,000 x
50%)
Share Capital (50,000 x 250,000
10)
UponShare
expiration of the remaining share warrants:
Premium - Issuance 200,000
Share Warrants
Outstanding (150,000 – 75,000
75,000)
Share Premium 75,000
NATIONAL UNIVERSITY
CONVERTIBLE BONDS
– The bondholders were given the right to convert their bonds into share
capital or othersecurities of the issuing entity within specified time
– Two accounting scenarios that may arise with regard convertible bonds are:
1. When the bonds were converted into shares, bonds payable
will be derecognized inreplace of the share
2. When the bonds were not converted into shares rather paid
either at maturity orbefore its maturity
– Allocation of issue price:
ISSUE PRICE
If the market value of the bond ex-
conversion privilege is unknown, the
amount to be used is the present value of
Allocate first to the principal and present value of interest
Allocate the residual payments of the similar bonds without
fair value of bonds
amount to the
f payable ex- conversion privilege Page 2 o
conversion privilege
conversion privilege
SAMPLE PROBLEM:
Scenario 1 bonds were converted -
Breakdown Enterprise issued 4-year bonds with conversion privilege that has
a face amount of 7,000,000 for 7,500,000. The bondholders can covert the
bonds into 500,000 equity shares with a P5 par for P8. At the time of
issuance, the bond ex-conversion privilege has a fair value of 6,800,000. All
of the bonds payable were converted but there is still 50,000 unamortized
discounts on the same date. Also, there is still an accrued interest on bonds
payable amounting to 40,000 which was not yet paid.
Upon Issuance:
ISSUE PRICE: Cash 7,500,000
Discount on Bonds 200,000
7,500,000 Payable
Share Premium- Conversion 700,000
Bonds payable Conversion Privilege
ex- conversion privilege: Upon conversion of
privilege: (7,500,000 - bonds:
6,800,000) Bonds Payable 7,000,000
6,800,000
Share Premium-
700,000 700,000
Conversion
Privilege
Interest Expense 40,000
NATIONAL UNIVERSITY

Payable
Share Capital (500,000 2,500,000
x 5)
Share Premium- Issuance 5,150,000
(7,000,000 – 50,000 +
700,000 – 2,500,000)
Cash 40,000
Scenario 2 bonds were not converted but paid before maturity –

Breakdown Enterprise issued 4-year bonds with conversion privilege that has a face
amount of 7,000,000 for 7,500,000 which will mature at December 31, 2022. The
bondholders can covert the bonds into 500,000 equity shares with a P5 par for P8.
At the time of issuance, the bond ex- conversion privilege has a fair value of
6,800,000.
On December 31, 2020 the bonds payable were still not converted and the
enterprise decided to already pay the bonds. At the time of payment, a discount
amounting to 50,000 is still unamortized and a 40,000 accrued interest was still
unpaid. The fair value of the bonds with conversion privilege is 6,500,000 while the
fair value of the bonds without conversion Privilege is 6,200,000.
Computation:
Upon Issuance of Bonds Upon Payment of Bonds
ISSUE PRICE: FAIR VALUE:

7,500,000 6,500,000
Bonds payable Conversion

ex- conversion privilege:
privilege: (7,500,000 -
6,800,000) FV of bonds FV of conversion
6,800,000 payable ex- privilege:
700,000 conversion (7,500,000 -
privilege: 6,800,000)
6,200,000 300,000

Discount on Bonds Payable (50,000)
Carrying Amount of Bonds Payable 6,950,000
FV of bonds payable ex-conversion privilege: (6,200,000)
Gain on Extinguishment 750,000
NATIONAL UNIVERSITY
Journal Entries:
Upon issuance:
Cash 7,500,000
Discount on Bonds Payable 200,000
00 Upon payment of bonds before maturity:
Share Premium- Conversion 700,00 Bonds Payable 7,000,000
Privilege 0 Share Premium- 300,000
Conversion Privilege @
Upon closing of the remaining conversion FV
privilege: Interest Expense 40,000
Share Premium- 400,000 Discount on Bonds 50,000
Conversion Privilege Payable
(700,000 – 300,000) Cash (6,500,000 + 6,540,000
Share Premium- 400,00 40,000)
Issuance 0 Gain on Extinguishment 750,000
Scenario 3 bonds were not converted and paid at maturity -
Breakdown Enterprise issued 4-year bonds with conversion privilege that has a face
amount of 7,000,000 for 7,500,000 which will mature at December 31, 2020. The
bondholders can covert the bonds into 500,000 equity shares with a P5 par for P8.
At the time of issuance, the bond ex- conversion privilege has a fair value of
6,800,000. December 31, 2020 has come yet all of the bonds payable were not
converted and a 40,000 accrued interest was not yet paid.
ISSUE PRICE: Upon issuance:

Cash 7,500,000
7,500,000 Discount on Bonds Payable 200,000
Share Premium- Conversion 700,000
Privilege
Upon payment of bonds payable at maturity:
Interest Expense 40,00
Bonds payable Conversion 0
Cash 7,040,000
ex- conversion privilege:
privilege: (7,500,000 - Upon expiration of the conversion privilege:
6,800,000) Share Premium- Conversion 700,000
6,800,000 Privilege
700,000 Share Premium - Issuance 700,00
0
SOURCES:
Peralta, J., Valix, C. A., &Valix, C. (2019). Intermediate Accounting Vol. 2.
NATIONAL UNIVERSITY
JUNIOR PHILIPPINE INSTITUTE OF
ACCOUNTANTS
SHAREHOLDERS’
EQUITY
Page 1 of 22
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ACCOUNTANTS
SHAREHOLDER’S EQUITY
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3 Forms of Business Organization
Form of Business Owner’s claim against assets

Single Proprietorship Capital or Owner’s Equity
Partnership Partner’s Capital or Partner’s Equity
Corporation Shareholder’s Equity or Stockholder’s Equity
Sec 2 of the Corporation Code of the Philippines defines corporation as an artificial being
created by operation of law, having the right of succession and the powers, attributes and properties
expressly authorized by law or incident to its existence.
Corporation Code – is the general law which governs the creation of private corporations in the
Philippines.
Legal requirement
Corporation Code provides that five or more persons, not exceeding fifteen, a majority
of whom are residents of the Philippines, may form a private corporation.
Formal organization
This requires the adoption of by-laws which is defined as the rules of action adopted by the
corporation for its internal government that should be filed with the Securities and Exchange
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ACCOUNTANTS
Commission within one month from the date of incorporation and the election of officers by the
board of directors.
Pre-incorporation requirement
Corporation Code provides that SEC shall only register any stock corporation when “25% of its
authorized number of shares has been subscribed, and at least 25% of the subscription has
been paid”. However, in no case, shall the paid in capital be less than P5,000.
Components of corporation
• Corporators – are those who compose the corporation.
• Incorporators – are those corporators who originally formed and composed the
corporation. Only natural persons can be incorporators.
• Shareholders or stockholders – are owners of shares in a stock corporation. They may be
natural or juridical persons and must own at least one share of stock.
• Members – are the corporators in a non-stock corporation.
Shareholder’s Equity
It is the residual interest of owners in the net assets of a corporation measured by the excess of
assets over liabilities. This ownership in a corporation is divided into share capital.
Corporate Capital Structure
Share Capital – is the amount fixed in the articles of incorporation to be subscribed and paid in
or secured by the shareholders of the corporation, either in money or property or services at the
organization of the corporation. It is also called the authorized share capital.
Classes of Share Capital
Preference share – gives the holders a preference as to distribution of profits and assets in
the event of corporate liquidation. It is generally issued with a par value and an annual
dividend rated expressed in percentage or peso amount per share.
Ordinary share – is the primary issue of shares, normally entitling holders to all the basic
rights of a shareholder. When there is only one class of share, all the shares are deemed
ordinary share, whether so designated or not.
Authorized shares – is the maximum number of shares that a corporation can legally issue as
prescribed in its article of incorporation.
Par value – is the value of each share of stock specified in the articles of incorporation and in
the share certificate.
Share certificate – is the instrument or document that evidences the ownership of a share in the
corporation.
Subscribed share capital – is the portion of the authorized share capital that has been subscribed
but not yet fully paid and therefore still unissued.
Share Premium – is the portion of the paid in capital representing excess over the par or stated
value.
Sources of Share Premium
1. Excess over par value or stated value
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ACCOUNTANTS
2. Resale of treasury shares at more than cost

3. Donated capital
4. Issuance of share warrants

5. Distribution of share dividends
6. Quasi-reorganization and recapitalization
Retained earnings – represent the cumulative balance of periodic earnings, dividend distributions,
prior period errors and other capital adjustments.
Revaluation surplus – is the excess of revalued amount over the carrying amount of the revalued
asset.
Treasury shares – are the corporation’s own shares that have been issued and the reacquired but
not cancelled.
Legal Capital – is that portion of the paid in capital arising from issuance of share capital which
cannot be returned to the shareholders in any form during the lifetime of the corporation. Legal
capital is:
par value shares no-par value share
Ordinary / Preference share capital xxx xxx

Subscribed share capital + xxx + xxx
Excess over stated value xxx
Trust Fund Doctrine – holds that the share capital of a corporation is considered as trust fund for
the protection of creditors, that is why it is illegal to return such to its shareholders during the
lifetime of the corporation.
Accounting for Share Capital Transactions
(1) Memorandum entry method – only a memorandum entry is necessary to record the
authorization to issue share capital.
(2) Journal entry method – a formal journal entry is prepared upon authorization to issue
share capital, debiting Unissued Share Capital and crediting Authorized Share Capital.
Illustration:
Memorandum entry method Journal entry method
(a) Authorization to issue share capital
Authorized to issue xxx shares of capital Unissued share capital xxx

share with total par value of Pxxx. Authorized share capital xxx
(b) Issuance of share capital for cash
Cash xxx Cash xxx

Share capital xxx Unissued share capital xxx
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ACCOUNTANTS
(c) Subscription of share capital
Subscription receivable xxx Subscription receivable xxx

Subscribed share capital xxx Subscribed share capital xxx
NOTE: Subscription receivable account balance is generally reported as contra equity account.
(d) The subscription has been fully paid Cash
xxx Cash xxx
Subscription receivable xxx Subscription receivable xxx
(e) Issuance of the shares subscribed
Subscribed share capital xxx Subscribed share capital xxx

Share capital xxx Unissued share capital xxx
Issuance of share capital
A. Issuance of share capital at more than par value
Cash xxx When the amount of cash received from the

Share capital xxx issuance of share capital is greater than the
Share premium xxx par value, the excess is
recorded as share premium.
B. Issuance of share capital at less than par value (at a discount)
Cash xxx The discount is not considered a loss to the

Discount on share capital xxx issuing corporation but the shareholder is
Share capital xxx held liable therefore. The account Discount on Share Capital is
deduction from total shareholder’s equity.
NOTE: Corporation Code prohibits the issue of share at a discount
C. Issuance of share capital in exchange for non-cash assets or property
Asset xxx The asset is recorded at its fair market Share capital xxx value or the fair market
value of the shares Share premium xxx issued, whichever is clearly determinable.
D. Issuance of share capital in exchange for services rendered
Professional fees xxx An expense account is debited for the fair Share capital xxx
market value of the services rendered of
Share premium xxx the fair market value of the shares issued, whichever is clearly
determinable.
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ACCOUNTANTS
E. Issuance of preference and ordinary share capital for a lump-sum amount
Cash xxx
Ordinary share capital xxx The total amount received should be
Share premium – OS xxx allocated to the two classes of share capital
Preference share capital xxx based on the total fair market value of the
Share premium – PS xxx shares issued.
Organization Costs
1. Share issuance costs (recognized) – are directs costs to sell share capital which normally
include legal fees, CPA fees, underwriting fees, etc. Accordingly, PAS 32 provides that
these transactions costs which are directly attributable to the issuance of new shares
shall be deducted from equity. NOTE: Share issuance costs shall be debited to
- Share premium arising from share issuance, if insufficient
- Share issuance costs to be reported as contra equity account
2. Cost of public offering of shares (expensed) – are not incremental costs directly
attributable to the issuance of new shares such as road show presentation and public
relations consultant’s fees, shall be recorded as expense in the income statement.
3. Joint costs (allocated) – are costs that relate jointly to the concurrent listing and issuance
of new shares and listing of old existing shares, which shall be allocated on a prorate
basis.
Watered Share – is share capital issued for inadequate or insufficient consideration and is
recorded as fully paid. In this case, asset is overstated as well as the capital.
Secret Reserve – is the reverse of watered share. It arises when asset is understated or liability is
overstated with the understatement of capital.
Delinquent Subscription
This occurs when the payment for the shares sold on a subscription basis is called by the
board of directors and the subscriber failed to pay the price, the said subscription is deemed
delinquent and shall be advertised for sale in a public auction.
Interested buyers will bid for the smallest number of shares in exchange for the aggregate
amount of the following: (1) unpaid subscription price; (2) accrued interest; (3) expenses incurred
for the sales of shares.
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ACCOUNTANTS
Illustration:
DAC Corporation is authorized to issue P10 par ordinary share capital. Assume the
following transactions were completed by DAC Corporation with Mr. Danny, a subscriber.
(a) Received subscription from Mr. Cash 45,000

Danny for 10,000 shares at P15 Subscription receivable 105,000
per share. Terms: 30% down and Subscribed ordinary share 100,000
the balance is payable at the end Share premium - OS 50,000
of 60 days.
(b) After several calls, Mr. Danny

failed to pay the balance of his Receivable from highest bidder 105,000
subscription. The shares were Subscription receivable 105,000
deemed delinquent and now
open for bidding.
(c) Expenses for advertising the sale Receivable from highest bidder 3,000
amounted to P3,000, which were Cash 3,000
duly paid by the corporation.
(d) Received bids from the

following:
D 8,000 shares The highest bidder would be, A.
A 6,000 shares NOTE: Highest bidder is the person who is willing
C 7,000 shares to pay the offer price of the delinquent shares for the
smallest number of shares.
(e) The amount due from the highest Cash 108,000

bidder is collected, and Receivable from the highest bidder 108,000
certificates of share capital were Subscribed ordinary share 100,000
accordingly issued.
Ordinary share capital 100,000
Callable preference share Illustration:
– is one which be called in for An entity issued 10,000 callable preference shares
redemption at the option of the with par value of P100 at P120 per share.
corporation.
– has no definite redemption date Cash 1,200,000
– it is an equity instrument Preference share capital 1,000,000
Share premium - PS 200,000
Subsequently, the preference shares are called in at

P150 per share.
Preference share capital 1,000,000

Share premium – PS 200,000
Retained earnings 300,000
Cash 1,500,000
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ACCOUNTANTS
NOTE: When preference shared are called in: at more than the original issue price, the
excess is charged to the following:
(1) Share premium from original issuance of the preference share
(2) Retained earnings at less than the original price, the

difference is credited to:
(1) Share premium related to ordinary shares
Redeemable preference share Illustration:
– provides for mandatory An entity issued 10,000 preference shares at the par
redemption at the option of the issuer. value of P100 per share. The preference shares
– classified as current or noncurrent have a mandatory redemption by the issuer for
financial liability, depending on the P1,200,000.
redemption date. Cash 1,000,000
Redeemable preference shares 1,000,000
Subsequently, if the preference shares are redeemed

by the issuer for P1,200,000.
Redeemable - PS 1,000,000
Loss on redemption 200,000
Cash 1,200,000
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ACCOUNTANTS
Take Note:
Pro-Forma of Shareholder’s Equity
Share Capital xxx @par value

Subscribed Share Capital xxx
Subscription Receivable (xxx) contra-equity account
Share Premium xxx
Other Comprehensive Income xxx
Retained Earnings – Appropriated xxx
Retained Earnings – Unappropriated xxx
Treasury Shares (xxx)
TOTAL SHE xxx
- Corporation must formally organize and commence operations within 2 years from the
incorporation.
- Subscribed Share Capital is still unissued if not yet fully paid.
- General rule, share certificate is only issued when the subscription is fully paid.
- A non-par share cannot be issued for less than 5 pesos.
- If there is only 1 class of share capital, it is necessarily an ordinary share.
- It is illegal to pay dividends if the entity has deficit.
- A cash subscription is directly credited to the share capital account.
- A callable preference share has no definite redemption date, it depends on the “call” of the
issuer.
- If shares are issued to extinguish a financial liability, initial measurement should be the fair
value of the shares issued.
- Dividend paid on redeemable preference share shall be accounted as interest expense
– finance cost. Page 7 of 19
Treasury shares – are (1) entity's own share that have been (2) issued originally and then (3)
reacquired but not cancelled.
NOTE: Legal limitation - the corporation can acquire treasury shares only to the extent of
retained earnings balance.
Accounting for Treasury Shares
• Cost Method is used in accounting for treasury shares.

• If acquired for cash, cost is the cash payment.
• If acquired for noncash consideration, cost is the carrying amount of the noncash asset
surrendered.
NATIONAL UNIVERSITY
ACCOUNTANTS
NOTE: No gain or loss shall be recognized on the purchase, sale, issue or cancellation of an
entity’s equity instrument.
Retirement of treasury shares
Illustration:
Issuance of treasury shares
An entity acquired 2,000 shares with par
Treasury shares 300,000 of P100 at P150 per share.
Cash 300,000
Reissuance of treasury shares
A. Reissuance at cost
The treasury shares are subsequently
reissued at P150 per share.
Cash 300,000
Treasury shares 300,000
B. Reissuance at more than cost The treasury shares are subsequently

reissued at P200 per share. The excess of
Cash 400,000 the reissue price over the cost is treated
Treasury shares 300,000 as share premium.
Share premium - TS 100,000
C. Reissuance at below cost The treasury shares are subsequently

reissued at P100 per share. The excess of
Cash 200,000 the cost over the reissue price is charged
Retained earnings 100,000 to:
Treasury shares 300,000 (1) Share premium - TS (same class)
(2) Retained earnings Page
A. Retirement results in a gain – the par value exceeds the cost of treasury shares; such gain is
credited to share premium from treasury shares.
Share capital 100,000 1,000 ordinary shares with par of P100 Treasury shares 80,000
are held as treasury at cost of P80,000, Share premium - TS 20,000 subsequently
retired.
B. Retirement results in a loss – the cost of the treasury shares exceeds the par value; such loss
is debited to the following order of priority:
(1) Share premium from original issuance
(2) Share premium from treasury shares
(3) Retained earnings
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Illustration:
Ordinary share capital, 50,000 shares, P100 par 5,000,000

Share premium – original issuance 500,000
Share premium – treasury shares 100,000
Treasury shares, 5,000 shares at cost 750,000
Ordinary share capital 500,000

Share premium 50,000 NOTE: Share premium from original
Share premium – TS 100,000 issuance is cancelled on a prorata basis
Retained earnings 100,000 in the absence of specific amount
Treasury shares 750,000 identified with the treasury shares.
Disclosure of treasury shares include the following:

a. number of shares held in treasury
b. the restriction on the availability of retained earnings for distribution of dividends equal
to the cost of treasury shares.
Donated Shares – are shares received by the entity from the shareholders by way of donation. It
is actually treasury shares and may therefore be reissued at any price without any discount liability.
NOTE: the reissue or resale of donated shares increases assets and donated capital or share
premium.
Treasury share subterfuge – occurs when excessive shares are issued for a property with the
understanding that the shareholders shall subsequently donate a portion of their shares. Donation
of Capital
1. Received from the shareholders – shall be recorded at fair value with the credit to donated
capital.
2. Received from non-shareholders – gifts of grant of funds that are restricted for property
and equipment additions. It shall be recorded at fair value when received or receivable.
2.1 If given without condition – credited to income
2.2 If given with condition – credited to liability
Assessments on shareholders may be levied when:
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1. Shares are originally issued at discount 2. When the corporation is in dire need of
financial assistance
Share assessment receivable xxx Share assessment receivable xxx

Discount on share capital xxx Share premium - assessments xxx
Recapitalization – occurs when there is a change in the capital structure of the entity. The old
shares are cancelled and new shares are issued.
Typical recapitalizations
(a) Change from par to no-par
Ordinary share capital, P100 par, 50,000 shares 5,000,000

Ordinary share capital 5,000,000 Case 1: All the 50,000 shares are
Share premium 500,000 called in for cancellation. Instead,
Ordinary share capital 2,500,000 50,000 no-par shares with stated value
Share premium - recapitalization 3,000,000 of P50 are issued.
Share premium 500,000 called in for cancellation. Instead,
Retained earnings 2,000,000 Ordinary 50,000 no-par shares with stated value
share capital 7,500,000 of P150 are issued.
(b) Change from no-par to par value share
Ordinary share capital, no-par P100 stated value, 50,000 shares 5,000,000
Ordinary share capital 2,500,000 called in for cancellation. Instead,
Share premium - recapitalization 2,500,000 50,000 shares of P50 par value are
issued.
Retained earnings 2,500,000 Ordinary called in for cancellation. Instead,
share capital 7,500,000 50,000 shares of P150 par value are
issued.
(c) Reduction of par value
Ordinary share capital, 50,000 shares, P100 par 5,000,000

Page 12 of 22
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Ordinary share capital 5,000,000 A recapitalization is effected whereby

Share premium - recapitalization 3,000,000 the par value of P100 is reduced to P80
per share.
(d) Reduction of stated value
Ordinary share capital, 50,000 shares, P100 stated value 5,000,000

Ordinary share capital 1,000,000 A recapitalization is effected whereby

Share premium - recapitalization 1,000,000 the stated value of P100
is reduced to P80.
(e) Split up – is a transaction whereby the original shares are called in for cancellation and
replaced by a larger number accompanied by a reduction in the par value or stated value.
Example: An entity has 10,000 shares issued and outstanding, with P100 par value. If the
shares are split up 5 to 1, the new capitalization would be 50,000 shares with P20 par value.
(f) Split down – is the reverse of split up. It is a transaction whereby the original shares are
cancelled and replaced by a smaller number accompanied by an increase in the par value
or stated value.
Example: An entity has 10,000 shares issued and outstanding, with P100 par value. If the
shares are split down 5 to 1, the new capitalization would be 2,000 shares with P500 par
value.
Rights Issue – is granted to existing shareholders to enable them to acquire new shares at a
specified price during a specified period.
Share warrants – represent the certificate or instrument evidencing ownership over the rights
issue.
Right of preemption – is the legal right of shareholders to be offered first by the new issued shares
in proportion to their shareholdings before subscriptions are received from the public.
Issuance of rights
Only memorandum entry is required
Expiration of rights
Only memorandum entry is required
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Exercise of rights – a memorandum entry is made for the decrease in the number of shares
claimable through the exercise of rights.
Cash xxx The sale of shares through the
Share capital xxx exercise of rights is then recorded normally.
Take Note:
- The retained earnings must be appropriated to the extent of the cost of treasury shares.
- In reissuance of treasury share below cost, share premium from original issuance is
not touched.
- Treasury shares shall be deducted from total shareholder's equity.
- The receipt of donated shares is simply recorded by means of memorandum entry.
- Before and after the share split, share capital remains the same.
- Share warrants outstanding is reported as part of share premium.
- Under the par value method, any premium from original issuance is cancelled.
Retained earnings – represents the cumulative balance of the following:

A. Net income or loss for the period – net income is added because it increases retained
earnings and net loss is deducted.
B. Dividend distributions – the dividends declared or paid during the year shall be deducted
from retained earnings.
C. Prior period errors – are shown as adjustment to the beginning balance of retained earnings
to arrive at the corrected beginning balance.
D. Changes in accounting policy – this is shown as an adjustment to the beginning balance of
retained earnings.
E. Reclassifications of items of other comprehensive income – reclassified subsequently to
retained earnings.
F. Other capital adjustments
Statement of changes in equity – is a formal statement that shows the movements in the elements
or components of the shareholder’s equity.
A. Total comprehensive income for the period
B. For each component of equity, the effect of changes in accounting policies and correction of
errors.
C. For each component of equity, a reconciliation between the carrying amount at the beginning
and end of the period.
Components of comprehensive income

1. Net income or loss
2. Other comprehensive income which comprises items of income and expense that are not
recognized in profit or loss as required or permitted by PFRS.
a. Unrealized gain or loss on equity investment designated at fair value through other
comprehensive income
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b. Unrealized gain or loss on debt investment measured at fair value through other
comprehensive income
c. Gain or loss from translating the financial statements of a foreign operation
d. Change in revaluation surplus
e. Unrealized gain or loss from derivative contracts designated as cash flow hedge
f. Remeasurements of defined benefit plan, such as actuarial gain or loss recognized in the
current year
g. Change in the fair value attributable to the “credit risk” of a financial liability irrevocably
designated at fair value through profit or loss.
Quasi – reorganization – a permissive but not a mandatory procedure under which a financially
troubled entity restates its accounts and establishes a “fresh start” in accounting sense. Kinds of
Retained Earnings
1. Unappropriated – represent that portion which is free and can be declared as dividends
to shareholders.
2. Appropriated – represent that portion which has been restricted and therefore not
available for any dividend declaration.
3 Appropriation of Dividends
1. Legal appropriation – arises from the fact that the legal capital cannot be returned to the
shareholders until the entity is dissolved and liquidated. Accordingly, a portion of the
retained earnings must be appropriated for an amount equal to the cost of the treasury shares.
2. Contractual appropriation – arises from the fact that the terms of the bond issue and
preference share issue may impose restriction on the payment of dividends.
3. Voluntary appropriation – is a matter of discretion on the part of management.
Accounting for Appropriation

Establishment of appropriation Illustration:
Retained earnings xxx An entity purchased treasury shares at

Retained earnings appropriated xxx a cost of P500,000. Legally, if the
treasury shares are not yet reissued at
year-end, this would require legally an
appropriation of retained earnings.
When appropriation is no longer necessary
Retained earnings appropriated xxx If the treasury shares are subsequently

Retained earnings xxx reissued, the appropriated balance is
cancelled.
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Dividends – are distributions of earning or capital to the shareholders in proportion to their

shareholdings.
2 Classification of Dividends
1. Dividends out of earnings – when dividends are formally declared by the board of directors,
there are:
3 Essential Dates for Accounting Purposes
a. Date of declaration – directors authorized the payment of dividends to shareholders.
b. Date of record – no entry is made but a list of shareholders is made.
c. Date of payment – date which the dividend liability is to be paid.
Forms of dividends out of earnings
A. Cash dividends Illustration:
– are the most common type of dividend. It At the date of declaration

may be expressed: Retained earnings xxx
• certain amount of pesos Dividends payable xxx
• certain percent of the par or SV.
At the date of payment
Dividend payable xxx
Cash xxx
B. Property dividends Illustration:
– are distribution of earnings of the entity in Recognize the dividend payable

the form of noncash assets. Retained earnings xxx
Measurement of property dividend
payable is at fair value of asset to be Recognize if there is an increase (decrease)
distributed. Retained earnings xxx
Recognize gain (loss) on distribution

Investment in equity securities xxx
Gain on distribution xxx
Measurement of property dividend payable is at fair value of asset to be distributed.
NOTE: Dividend payable is initially recognized at the fair value of noncash asset on the date of
declaration and is increased or decreased as a result of change in fair value of the asset at year
end and date of settlement.
Gain on distribution = carrying amount of liability > carrying amount of the asset
Loss on distribution = carrying amount of liability < carrying amount of the asset
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Measurement of noncash asset distributed is at lower of carrying amount and fair value less
cost to distribute.
NOTE: If the fair value less cost to distribute is lower than the carrying amount of the asset, the
difference is accounted for as impairment loss.
C. Scrip dividend Illustration: – is like a note which is formal evidence of

indebtedness. At the date of declaration
Retained earnings xxx
Scrip dividends payable xxx
D. Bond dividend Illustration:
At the date of declaration

Retained earnings xxx
Bond dividends payable xxx
E. Share divide or bonus issue Illustration:
– are distributions in the form of entity’s At the date of declaration

own shares. Retained earnings xxx
Share dividends payable xxx
Issuance of share dividends

Share dividends payable xxx
Share capital xxx
NOTE: If share dividend is less than 20%, retained earnings is equal to the fair value at the date
of declaration.
If share dividend is 20% or more, the par or stated value is capitalized.
2. Dividends out of capital – when capital is returned to shareholders. It is also known as

liquidating dividend.
Dividend as expense – may be presented in the income statement either with interest on other
liabilities or as a separate line item.
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Take Note:
- Retained earnings is also called accumulated profits.
- When retained earnings has a debit balance, it is called deficit or accumulated losses.
- Legally, dividends can be declared only from retained earnings.
- Stock dividends may be declared from premium on par value share.
- The liability for dividend must be recognized on the date of declaration.
- If share dividend is less than 20%, it is small share dividend.
- If share dividend is 20% or more, it is large share dividend.
Share-based compensation plan – is a compensation arrangement whereby the entity’s

employees shall (1) receive shares of capital in exchange for their services or (2) incurs liabilities
to the employees based on the price of its shares.
Accounting for Share-based Compensation

I. Equity settled – entity issues equity instruments in consideration for services received, for
example, share options.
Share options – enables officers to acquire shares of the entity during a specified period upon
fulfillment of certain conditions at a specified price.
Measurement of compensation can be in two methods:
A. Fair value method – compensation is equal to the fair value of the share options, on the date
of grant. NOTE: this is mandated by Philippine Financial Reporting Standard 2 Recognition
of compensation
a. If the share options vest immediately – the employee is not required to complete a
specified period of service. The entity shall recognize the compensation in full, at the date
of grant.
Illustration:
On January 1, 2020, share options are granted to employees to purchase 100,000 ordinary
shares of P50 par value at P60 per share. On this date, the fair value of each share option is P20.
The options are exercisable Salaries – share options 2,000,000

immediately. The employees Share options outstanding 2,000,000
exercised all their share options on
December 31, 2020.
The exercise of the share options on Cash 6,000,000

December 31, 2020 is recorded as: Share options outstanding 2,000,000
Ordinary share capital 5,000,000
Page 18 of 22
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ACCOUNTANTS
b. If the share options do not vest immediately – the employee is required to complete a
specified service period. The compensation expense is recognized over the service period.
Illustration:
On January 1, 2020, share options are granted to officers to purchase 100,000 ordinary
shares of P50 par value at P60 per share. On this date, the fair value of each share option is P15.
The officers are entitled to the share options only after completing two years of service.
The options can only be exercised Salaries – share options 750,000

starting January 1, 2022 and expire Share options outstanding 750,000
one year after.
The exercise of the share options on Salaries – share options 750,000

December 31, 2020 is recorded as: Share options outstanding 750,000
All options are exercised Cash 6,000,000

on December 31, 2022 Share options outstanding 1,500,000
Ordinary share capital 5,000,000
B. Intrinsic value method – compensation is equal to the intrinsic value of the share options.
Intrinsic value – is the excess of the market value of the share over the option price.
NOTE: this can only be used only if the fair value of the share option cannot be estimated
reliably.
II. Cash settled – is a share-based payment transaction whereby an entity incurs liability for
services received, for example, share appreciation rights.
Share appreciation right – entitles an employee to receive cash which is equal to the excess
of market value of the entity’s share over a predetermined price for a stated number of shares.
Measurement of compensation
The compensation is based on the fair value of the liability at the reporting date and shall be
remeasured at every year-end until it is finally settled.
NOTE: The fair value of liability is equal to the excess of the market value of share over a
predetermined price for a given number of shares over a definite vesting period.
Recognition of compensation
a. If the share appreciation right vests immediately – the compensation is recognized
immediately on the date of grant.
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ACCOUNTANTS
b. If the share appreciation right do not vest immediately – the compensation is recognized
over the service or vesting period.
Illustration:
An entity granted a share appreciation right to the general manager on January1, 2020.
After a four-year service period, the employee is entitled to receive cash equal to the appreciation
in share over the market value on January 1, 2020. Thus, the market value in January 1, 2020 is
the predetermined price for purposes of determining the compensation.
The quoted prices of the entity’s share are:
January 1, 2020 200

December 31, 2020 210
December 31, 2021 220
December 31, 2022 240
December 31, 2023 250
2020
Salaries 50,000 Market value on (12/31/20) 210
Accrued salaries payable 50,000 Predetermined price 200
Excess 10
Multiply: number of shares
Total compensation
Compensation for 2020/4 50,000
2021
Excess 20 Multiply: number of shares 20,000
Cumulative compensation 400,000
Compensation for 200,000
2021/4x2
Accrued compensation
Compensation expense
2022
Excess 40
Multiply: number of shares 20,000
Cumulative compensation 800,000
Compensation for 600,000
2022/4x3
Page 20 of 22
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ACCOUNTANTS
Accrued compensation
Compensation expense
2023
Excess 50
Multiply: number of shares
Total compensation
Compensation for 2023 Compensation expense
2024
Accrued salaries payable 1,000,000
Cash 1,000,000
NOTE: An employee may have the right to choose between:

a. Cash alternative – cash payment equal to the market value of a certain number of shares
subject to certain conditions.
b. Share alternative – equity shares given to employees.
Accounting for Cash and Share Alternative

- If the entity has the choice of settlement, there is no accounting problem. The entity shall
account for the instrument initially either as liability or equity, but not both.
- If the employee has the right to choose the settlement, the entity is deemed to have issued
a compound financial instrument. Thus, a compound financial instrument is accounted
for as partly liability and partly equity.
“In Accountancy, it is always important to know what, how and why things have
happened.” - DAC
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NATIONAL UNIVERSITY
ACCOUNTANTS
SOURCES:
Peralta, J, Valix, C. A., & Valix, C. (2019). Intermediate Accounting Volume 2
Empleo, P., German, C., & Robles, N. (2014). Fundamentals of Accounting Volume 2:
Partnership and Corporation
Page 22 of 22
LIABILITIES
NATIONAL UNIVERSITY
LIABILITIES

these handouts.
1. These are the articles of values such as toys, dishes, silverware and other goods given to
customers as result of past sales or sales promotion activities.
a. Warranties
b. Premiums
c. Freebies
d. Cash Rebates
2. Cash register receipts, bar codes, rebate coupons and other proof of purchase often can be
mailed to the manufacturer for _____________.
a. Warranties
b. Premiums
c. Freebies
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d. Cash Rebates
3. It is the requirement that an outflow of resources embodying economic benefits would be
required to settle the obligation.
a. Possible
b. Actual
c. Estimate
d. Probable
4. This is given to customers of home appliances like television sets, stereo sets, radio sets,
refrigerators and the likes to provide free repair service or replacement during a specified
period if the products are defective.
a. Warranties
b. Premiums
c. Freebies
d. Cash Rebates
5. It is an income already received but not yet earned and may be realizable within one year or
in more than one year after the end of the reporting period.
a. Deferred expense
b. Revenue
c. Deferred revenue
d. Gross profit
6. These consists cash or properties received from customers but which are refundable after
compliance with certain conditions.
a. Refundable deposits
b. Refundable credits
c. Returns
d. Allowances
7. It is an existing liability of uncertain timing or uncertain amount
a. Contingent
b. Provision
c. Probable
d. Future events
8. It affects the amount required to settle an obligation and shall be reflected in the amount of a
provision where there is a sufficient evidence that they will occur.
a. Contingent
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b. Provision
c. Probable
d. Future events
9. This is a financial asset of the lender or creditor as notes receivable or loans receivable and a
financial liability of the borrower or the debtor as notes payable or loans payable.
a. Cash in Bank
b. Trade accounts
c. Notes and loans
d. Debt securities
10. This is a financial asset of the depositor and the financial liability of the depository bank.
a. Cash in Bank
b. Trade accounts
c. Notes and loans
d. Debt securities
PROBLEMS
Use the situation to answer item 11 and 12
In 2020, Abel Company sold 500,000 boxes of cake mix under a new sales promotionsl
program.
Each box contained 1 coupon, which entitled the customer to a baking pan upon remittance of
P45.
The entity paid P50 per pan and P6 for handling and shipping costs. They also
estimated that only 75% of the coupons will be redeemed, even though only 280,000
coupons had been processed during the year.
11. What amount should be reported as premium expense for the current year?
a. 1,375,000
b. 4,125,000
c. 1,395,000
d. 4,125,000
12. What mount should be reported as liability for unredeemed coupons at year-end?
a. 1,375,000
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b. 4,125,000
c. 1,395,000
d. 4,125,000
Use the situation to answer item 13

In 2020, Simbillo Company mailed coupons to consumers which may be represented at a
stated expiration date at retail food stores to obtain discounts on certain Simbillo products.
Retailers were reimbursed for the face value of coupons redeemed plus 10% of coupon face
value as compensation for handling costs.
The entity honored requests for coupon redemption by retailers received up to three months
after the expiration date. Based on past experience, 70% of the coupons issued ultimately are
redeemed.
The entity provided the following information with respect to the two separate series of
coupons issued during 2020:
Series A Series B
Consumer expiration date June 30, 2020 December 31,
2020
Total face value of coupons issued 1,000,000 2,000,000
Total payments to retailers on
12/31/2020 605,000 405,000
13. What amount should be reported as liability for unredeemed coupons on
December 31, 2019?
a. 1,135,000
b. 1,540,000
c. 1,405,000
d. 1,440,000
14. Montilla Co reported gross payroll of P600,000 for the month of January. The entity paid the
payroll net of the following deductions:
Income tax 70,000
SSS 15,000
Philhealth 8,000
Pag-ibig 7,000
In addition, the entity recognized its additional contributions for the following in relation to
January payroll:
SSS 20,000
Philhealth 9,000
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Pag-ibig 6,000
What amount should be reported as total payroll tax liability?
a.135,000
b. 100,000
c. 90,000
d. 65,000
15. Limheya Corporation has an incentive compensation plan under which a branch manager
received 10% of the branch income after deduction of the bonus but before deduction of the
income tax.
Branch income for the current year before the bonus and income tax was P3, 300,000. The tax
rate is 30%.
What amount should be reported as bonus for the current year?
a.3,000,000
b. 330,000
c. 300,000
d. 303,000
16. Mateos Realty Industries maintains an escrow account and pays real estate taxes for
the mortgage customers. Escrow funds are kept in interest-bearing accounts.
Interest, less a 10% service fee, is credited to the mortgagee’s account and used to
reduce future escrow payments.
Escrow account liability- January 1 800,000
Escrow payments received during the year 1,700,000
Real estate taxes paid during the year 1,800,000
Interest on escrow funds 60,000
a. 774,000
b. 407,000
c. 800,000
d. 754,000
17. On November 1, 2019, Lambino Company was awarded a judgment of P4,000,000 in
connection with a lawsuit. The decision is being appealed by the defendant and it is
expected that the appeal process will be completed by the end of 2020.
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The lawyer believed that it is highly probable that an award will be upheld on appeal
but that the judgment may be reduced by 40%.
What amount should be reported as a receivable on December 31, 2019?
a. 4,000,000
b. 1,600,000
c. 2,400,000
d. 0
18. During the latter part of the year, Haze Company won a litigation award for P2,
000,000 which was tripled to 6,000,000 to include punitive damages. The defendant,
who is financially stable, has appealed only the 4,000,000 punitive damages.
The entity was awarded 6,500,000 in an unrelated suit it filed, which is being
appealed by the defendant. Counsel is unable to estimate the outcome of these
appeals.
What amount should be reported as pretax gain for the year?
a. 2,000,000
b. 6,000,000
c. 4,000,000
d. 6,500,000
19. Intact Company had the following long-term debt:

Sinking funds, maturing in installments 4,000,000
Industrial revenue bonds, maturing on installments 2,000,000
Subordinated bonds, maturing on a single date 1,500,000
What is the total amount of serial bonds?
a. 6,000,000
b. 3,500,000
c. 1,500,000
d. 7,500,000
Use the situation to answer item 13

Use the situation to answer item 20 and 21
NATIONAL UNIVERSITY
Salighayag Co had a 5,000,000 note payable due June 30, 2021. On December 31,
2020, the entity signed an agreement to borrow up to P5, 000,000 to refinance the
note payable in a long-term basis.
The financing agreement called for borrowing notto exceed 80% of the value of the
collateral the entity was providing. On December 31, 2020, the value of the collateral
was P2, 000,000.
20. On December 31, 2020, what amount of the note payable should be reported as
current liability?
a. 2,000,000
b. 5,000,000
c. 3,400,000
d. 1,600,000
21. On December 31, 2020, what amount of the note payable should be reported as
noncurrent liability?
a. 2,000,000
b. 5,000,000
c. 3,400,000
d. 1,600,000
Use the situation to answer item 22 to 25
At the beginning of current year, Moses Company issued P5,000,000 face amount, 5-
year bonds at 109. Each 1,000 bond was issued with 50 detachable share warrants,
each of which entitled the bondholder to purchase one ordinary share of P5 par value
at P25. Immediately after issuance, the market value of each warrant was P5.
The stated interest rate on the bonds is 11% payable annually every December 31.
However, the prevailing market rate of interest for similar bonds without warrants is
12%.
The PV of 1 at 12% for 5 periods is 0.57 and the PV of an ordinary annuity of 1 at
12% for 5 periods is 3.60.
22. What was the initial carrying amount of the bonds payable?
a. 5,450,000
b. 4,830,000
c. 5,000,000
d. 4,380,000
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23. What amount should be recorded initially as discount or premium on bonds

payable?
a. 170,000 discount
b. 450,000 premium
c. 450,000 discount
d. 800,000 discount
24. What amount should be reported as equity component arising from the issuance of
bonds payable?
a. 450,000
b. 500,000
c. 620,000
d. 0
25. What amount should be recorded as share premium if all of the warrants are
exercised?
a. 1,250,000
b. 2,500,000
c. 5,000,000
d. 5,620,000
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ANSWER KEY
1. B
2. D
3. D
4. A
5. C
6. A
7. B
8. D
9. C
10. A
11-12. D and A
Net premium expense (50 + 6 – 45) 11
Coupons to be redeemed (75% x 500,000) 375,000

Coupons redeemed (280,000)
Coupons outstanding 95, 000
Premium Expense (375,000 x 11) 4,125,000
Liability for unredeemed coupons ( 125,000 x 11) 1,375,000

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13. B
Total face value of coupons- Series B 2,000,000
Multiply by x 70%
Coupons to be redeemed 1,400,000
Compensation for handling costs (10% x 140,000) 140,000
Total liability for coupons 1,540,000
Payments to retailers- Series B (405,000)
Estimated Liability 1,135,000
14. B
Salaries and wages 600,000
Withholding tax payable 70,000
SSS Payable-employee 15,000
Philhealth payable 8,000
Pag-ibig payable-employee 7,000
Cash 500,000
Payroll tax expense 35,000

SSS Payable-employee 20,000
Philhealth payable 9,000
Pag-ibig payable-employee 6,000
Total payroll liability (100,000 + 35,000) 135,000
15. C
Income after bonus before tax (3,300,000 / 110%) 3,000,000
Bonus (10% x 3,000,000) 300,000
16. D
Escrow accounts liability-Jan 1 800,000
Add: Escrow payments received during the year 1,700,000
Interest on escrow funds 60,000 1,760,000
Total 2,560,000
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Less: Real estate taxes paid during the year 1,800,000

Service fee ( 10% x 60,000) 6,000 1,806,000
Escrow accounts liability- December 31 754,000
17. D
The contingeant asset is only disclosed when probable and measurable. The asset and related
gain are recognized only when realized.
18. A
A gain of P2,000,000 should be reported.
However, the remainder 4,000,000 is only disclosed because the defendant has appealed the
said amount.
19. A
Serial bonds that mature in series or by installments.
Total serial bonds (4,000,000 +2,000,000) 6,000,000
20-21. C and D
Note payable 5,000,000
Refinanced on Dec 31m 2020-noncurrent
(80% x 2,000,000) 1,600,000
Note payable-not refinanced, current 3,400,000
22. B
23. A
24. C
25. D
PV of principal (5,000,000 x .57) 2,850,000
PV of annual interest payments (550,000 x 3.60) 1,980,000
Total PV of Bonds payable (#22) 4,830,000
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Bonds payable 5,000,000

PV of Bonds Payable 4,830,000
Discount on Bonds payable (#23) 170, 000
Issue price of Bonds with warrants (5,000,000 x 109%) 5,450,000

PV of Bonds payable 4,830,000
Residual amount allocated to warrants (#24) 620,000
Cash 5,450,000
Discounts on Bonds payable 170,000
Bonds payable 5,000,000
Share warrants outstanding 620,000
Cash (5,000 x 50 x 25) 6,250,000

Share warrants outstanding 620,000
Share Capital (250,000 x P5) 1,250,000
SOURCES:
Author. (200x). Book Title
PREMIUM
LIABILITY
NATIONAL UNIVERSITY
PREMIUM LIABILITY
PREPARED BY: Salut, Mary Rose R.

these handouts.
PREMIUM LIABILITY
• An estimated liability of an unknown amount that can be reasonably estimated.
• A known liability
I. Premiums
• Are articles of value such as toys, dishes, silverware and other goods given
to customers as a result of a past sales or sales promotion activities.
• It is offered in return for product labels, box tops, wrappers and coupons.
• When a merchandise is sold, an accounting liability for the future
distribution of the premium arises and should be given accounting
recognition.
Accounting Procedure
• When premiums are purchased.
Premiums xxx
Cash xxx
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• When premiums are distributed to customers.

Premium expense xxx
Premiums xxx
• At the end of the year if premiums are still outstanding.

Premium Expense xxx
Estimated Premium Liability xxx
Example:
ABC Company manufactures a special laundry soap.
A towel is offered as a premium to customers who send in two of purchase seals from the
soap boxes and a remittance of P20. Distribution cost is P5 per towel.
Data for the premium offer are:
2020 2021
Soap sales 2,500,000 3,125,000
Towel purchases, P100 per towel 175,000 200,000
Number of towels distributed as premium 1,000 1,800
Number of towels expected to be distributed in subsequent period 600 800
Journal entries
2020
• To record the sales

Cash 2,500,000
Sales 2,500,000
• For the purchase of premium
Premiums 2,500,000
Cash 2,500,000
• To record the distribution of premiums
Cash (1000 x 20) 20,000
Premium Expense (1,000 x 80) 80,000
Premiums 100,000
• To record the distribution cost
Cash 5,000
*Note: Distribution cost is treated as an expense account and is not capitalized to
the premium account.
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• To record estimate premium liability

Premium expense 51,000
Estimated premium liability (600 x 85) 51,000
Note: Estimated premium liability=Cost of premium + Distribution Cost –
Remittance
2021
• Reversal entry
Estimated premium liability 51,000
• To record sales
Cash 3,125,000
Sales 3,125,000
• To record purchase of premiums
Premium 200,000
Cash 200,000
• To record distribution of premium
Cash (1,800 x 20) 36,000
Premiums (1,800 x 100) 180,000
• To record distribution cost

Premium expense (1,800 x 5) 9,000
Cash 9,000
• To record estimated premium liability
Estimated premium liability 68,000
II. Cash Rebate Program

• It pays back the customer back for the sale (it could be some or all the purchase)
• It is a portion of the purchase price of a product or service that a seller gives back to
the buyer.
• Cash register receipts, bar codes, rebate coupons and other proof of purchase often
can be mailed to the manufacture for cash rebate.
• The estimated amount of cash rebate should be recognized both as an expense and an
estimated liability in the period of sale.
• To recognize the cash rebate program
Rebate Expense xxx
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Estimated rebate liability xxx

Note: To solve for the estimated rebate liability:
Rebate coupons issued xxx
Expected coupons to be redeemed x x%
Coupons rebate to be redeemed xxx
Cash rebate per coupon x xxx
• To record the payments to customers

Cash xxx
Example:
YG Company is a regional music media reseller. As a promotion, it offered P50

cash rebate on specific CDs. Customer must mail in a proof of purchase seal from
the package plus the cash register receipt to receive the rebate. Experience suggests
that 80% of the rebates will be claimed.
Twenty thousand of the CDs were sold in the current year. Total rebates to
customers amounted to P500,000.
Solution:
Rebate coupons issued 20,000
Expected coupons to be redeemed x 80%
Coupons rebate to be redeemed 16,000
Cash rebate per coupon x 50
Estimated rebate liability 800,000
• To record cash rebate program
Rebate expense 800,000

• To record payment to customers

Cash 500,000
III. Cash Discount Coupon

• A popular marketing tool to stimulates sales.
• An expense and an estimated liability for the expected cash
discount should be recognized in the period of sale.
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• To recognize the cash discount coupon offer
Cash discount coupon expense xxx
Estimated coupon liability xxx
Note: To solve the estimated coupon liability:
Face amount of coupons issued xxx
Multiply by: Expected coupons to be redeemed xxx
Face amount of coupons to be redeemed xxx
Multiply by: 100% face value + % of handling xx%
Total coupon liability xxx
• To record payments to retailers

Estimated coupon liability xxx
Cash xxx
Example:
During the current year, an entity inserted in each package sold a coupon offering
P300 off the purchase price of a particular brand of a product when the coupon is
presented to the retailers.
The retailers are reimbursed for the face amount of coupons plus 10% for
handling. Previous experience indicates that 30% of the coupons will be
redeemed.
During the current year, the entity issued coupons with face amount of
P5,000,000 and total payments to retailers amounted to 1,100,000.
• To recognize the cash discount coupon offer:

Cash discount coupon expense 1,650,000
Estimated coupon liability 1,650,000
Face amount of coupons issued 5,000,000

Multiply by: Expected coupons to be redeemed x 30%
Face amount of coupons to be redeemed 1,500,000
Multiply by: 100% face value + % of handling x 110%
Total coupon liability 1,650,000
• To record payments to retailers:

Estimated coupon liability 1,100,000
Cash 1,100,000
IV. Customer Loyalty Program

• It is used to build brand loyalty, retain their valuable customers and
increase sales volume.
• It is designed to reward customers for the past purchases and to
provide them with incentives to make further purchases.
• It grants the customers with award credits/points
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Measurement:
• An entity shall account for the award credits as a separately component
for the initial sale transaction.
• It is accounted as a “future delivery of goods or services”.
• The entity shall allocate the transaction price to each performance
obligation identified in the contract on a relative stand-alone selling price
basis (IFRS 15, par.74).
• The fair value of the consideration received with respect to the initial
sale shall be allocated between the award credits and sale based on
relative stand-alone selling price.
• The stand-alone selling price is the price at which an entity would sell a
promised good or service separately to a customer.
Recognition:
• The consideration allocated to the award credits is initially recognized
as a deferred revenue and subsequently recognized as revenue.
• The amount of revenue shall be based on the number of award credits
that have been redeemed relative to the total number expected to be
redeemed.
• The estimated redemption rate is assessed each period. Change in the
total number expected to be redeemed do not affect the total
consideration for the award credits.
• The calculation of the revenue to be recognized in any one period is made on a
cumulative basis in order to reflect the changes in estimate.
Example:
Noah Company operates a customer loyalty program. The entity grants loyalty
points for goods purchased. The loyalty points can be used by the customers in
exchange for goods of the entity. The points have no expiry date.
During 2020, the entity issued 100,000 award credits and expects 80% of these
award credits shall be redeemed. The total stand-alone selling price of the award
credits granted is reliably measured at P2,000,000.
In 2020, the entity sold goods to customers for a total consideration of P8,000,000
based on stand-alone selling price. The award credits redeemed and the total
award credits to be redeemed each year are as follows:
Redeemed Expected to be redeemed

2020 30,000 80%
2021 15,000 90%
Solution:
1. Allocation of transaction price
Product Sales 8,000,000
Points-stand-alone selling price 2,000,000
Total 10,000,000
Product Sales (8,000,000/10,000,000x8,000,000) 6,400,000

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Points (2,000,000/10,000,000x8,000,000) 1,600,000

2. Journal Entries
• To record initial sale
Cash 8,000,000
Sales 6,400,000
Unearned revenue-points 1,600,000
• To record redemption 30,000 points in 2020

Unearned revenue-points 600,000
Sales 600,000
Revenue to be recognized: ( 30,000/ 80% x 100,000/1,600,000) 600,000
• To record redemption of 15,000 points in 2021

Unearned revenue-points 200,000
Sales 200,000
Points redeemed in 2020 30,000

Points redeemed in 2021 15,000
Total points redeemed in 2021 45,000
Cumulative revenue on Dec.31,2021 : ( 45,000/ 90% x 100,000/1,600,000) 800,000

Revenue recognized in 2020 (600,000)
Revenue to be recognized in 2021 200,000
SOURCES:
Valix et. al. (2019). Intermediate Accounting 2019 Volume 2
BONDS PAYABLE
NATIONAL UNIVERSITY
BONDS PAYABLE

these handouts.
BONDS PAYABLE
– Used primarily by corporations and government
– "A bond is a formal unconditional promise, made under seal, to pay a specified
sum of money at a determinable future date and to make periodic interest
payment at a stated rate until the principalsum is paid"
– The bonds payable is evidenced by a certificate
– The details in the agreement between the issuer (borrower) and the investor
(lender) are containedin a document called "bond indenture"
CLASSIFICATIONS OF BONDS PAYABLE

* As to maturity
1. Term Bonds - bonds that has a single date of maturity
2. Serial bonds - bonds that has a series of maturity dates
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*As to security
1. Mortgage Bonds - bonds that were secured by a mortgage
2. Collateral Trust Bonds - bonds that were secured by either shares or bonds of other
corporations
3. Debenture Bonds - bonds that is neither secured nor have collateral attached to them
*As to Registration
1. Registered Bonds - the name of the bondholder (lender) is required for
registration in the booksof the corporation
2. Coupon or Bearer Bonds - considered as unregistered bonds because the name of
the bondholder(lender) is not recorded in the books of corporation
*Other Classification
1. Convertible Bonds - bonds that can be converted into shares of the issuer
2. Callable Bonds - bonds that can be redeemed before the maturity date
3. Guaranteed Bonds - bonds in which in case of nonpayment of the borrower, a third party
willdo so
4. Junk Bonds - bonds that were high-risk and high-yield because it was issued by an entity
thathas a weak financial condition
5. Zero-coupon Bonds - bonds that has no interest rather it offers a return with a huge
discountfrom the face amount
ACCOUNTING FOR BONDS PAYABLE
Initial Measurement Subsequent Measurement
a. If irrevocably designated at fair value Measured at either:

through P/L
@ fair value, the transaction costs directly a. FV through P/L
attributable to the bonds were expensed
b. Amortized cost, using effective
b. If not designated at fair value through P/L@ interest method
fair value (present value of expected future
cash payment) less the transaction costs
directly attributable to the bonds
NATIONAL UNIVERSITY
AMORTIZED COST OF BONDS PAYABLE
Initial measurement of bonds payable xxx

Less: principal repayment xxx
Add/Less: Cumulative amortization using effective interest xxx
Amortized Cost of Bonds Payable Xxx
BOND ISSUE COST
– The costs that is directly attributable to the issuance of bonds (printing and
engraving cost, legal and accounting fee etc.). These costs shall be deducted
from the FV or issue price ofthe bonds.
ISSUANCE OF BONDS @ PREMIUM, DISCOUNT, OR AT FAIR-VALUE
1. Premium on Bonds Payable

- this occurs when the selling price is greater than the face amount of the bonds
- in effect the issuing entity has a gain to be amortized over the life of the bonds
- this is presented in the Financial Statement as an adjustment or
addition to the bondspayable
- the bond issue cost incurred is netted against the premium
SAMPLE PROBLEM:
Quarantine Company was authorized to issue a 15%, 4-year bond with a
face amount of 2,000,000. The interest on bonds is payable semiannually on June
30and December 31. On July 1, 2020 the bonds were sold at an effective rate of
12%.
Computation:
PV of principal payment (2,000,000 x 0.6274) 1,254,800

PV of semi-annual interest payment (150,000 x 6.2098) 931,470
Total Present Value 2,186,270
Bonds Payable @ Present Value 2,186,270

Face Amount 2,000,000
Premium on Bonds 186,270
Schedule of Amortization:
NATIONAL UNIVERSITY
Interest Paid Interest Premium Carrying

Date
(15%) Expense (6%) Amortization Amount
July 1, 2020 2,186,270
December 31, 2020 150,000 131,176 18,824 2,167,446
June 30, 2021 150,000 130,047 19,953 2,147,493
December 31, 2021 150,000 128,849 21,151 2,126,342
June 30, 2022 150,000 127,581 22,419 2,103,923
December 31, 2022 150,000 126,235 23,765 2,080,158
June 30, 2023 150,000 124,809 25,191 2,054,967
December 31, 2023 150,000 123,298 26,702 2,028,265
June 30, 2024 150,000 121,735 28,265 2,000,000
2. Discount on Bonds Payable
- this occurs when the sales price is less than the face amount of the bonds
- in effect the issuing entity has a loss to be amortized over the life of the bonds
- this is presented in the Financial Statement as an adjustment or a
deduction to the bondspayable the bond issue cost incurred is lumped at
the discount
SAMPLE PROBLEM:
Social D. Corp. was authorized to issue a10%, 5-year bond with a face
amount of 5,000,000. The interest on bonds is payable annually every December
31. On January 1, 2021 the bonds were sold at an effective rate of 14%.
Computation:
PV of principal payment (5,000,000 x 0.5194) 2,597,000

PV of semi-annual interest payment (500,000 x 3.4331) 1,716,550
Total Present Value 4,313,550
Bonds Payable @ Present Value 4,313,550

Face Amount 5,000,000
Schedule of Amortization:
Interest Paid Interest Discount Carrying

Date
(10%) Expense (14%) Amortization Amount
January 1, 2021 4,313,550
December 31, 2021 500,000 603,897 103,897 4,417,447
December 31, 2022 500,000 618,443 118,443 4,535,890
December 31, 2023 500,000 635,025 135,025 4,670,915
December 31, 2024 500,000 653,928 153,928 4,824,843
December 31, 2025 500,000 675,157 175,157 5,000,000
NATIONAL UNIVERSITY
3. Bonds Payable Measured at Fair Value Option

- the entity could irrevocably measure the Bonds at fair Value through Profit or Loss
- In here, there is no amortization of any discount or premium rather the
bonds were remeasured at every year-end to adjust any changes in its fair
value. These changes areto be recognized in Profit or Loss.
- the bond issue cost incurred is an outright expense
SAMPLE PROBLEM:
On January 1, 2021, Snitizr Company issued an 8%, 3-year bond with a face
amount of 3,000,000 for 2,850,708. The interest on bonds is payable annually
every December 31. This bond yields an effective rate of 10%. At year-end, the fair
value of the bonds was said to be 3,100,000. The bond issue cost incurred in
connection with the transaction amounts to 100,000. The entity irrevocably chooses
to measure the bonds payable at fair value option.
Computation;
Bonds Payable at January 1, 2021 2,850,708

Bond issue cost incurred (outright expense) 100,000
Interest expense for year 2021 (3,000,000 x 8%) 240,000
Carrying amount of Bonds Payable at year-end (year-end FV) 3,100,000
Loss from change in FV of Bonds Payable (3,100,000-2,850,708) (249,292)
AMORTIZATION OF DISCOUNT OR PREMIUM IN BONDS

Approaches:
1. Straight Line Method– this method provides an equal amortization by
simply dividingthe bond premium or bond discount over the life of the
bonds
2. Bond Outstanding Method – applicable to serial bonds that have a series

of maturity dates. In here the amortization of premium or discount
decreases as time goes by becausethe outstanding bonds also decrease.
3. Effective Interest Method/ Interest Method/ Scientific Method - the

method requiredby PFRS 9 in which “the amount of bond discount or
premium is amortized to interest expense over the bond’s life”.
Formula:
NATIONAL UNIVERSITY
Interest Interest Discount Carrying

Date Paid (10%) Expense (12%) Amortization Amount
January 1, 2021 96,621

December 31,
2021 10,000 11,595 1,595 98,216
December 31, 100,000
2022 10,000 11,784 1,784
SUMMARY OF DIFFERENCE BETWEEN BOND DPREMIUM, DISCOUNT, AND

BONDS @ FV:
BONDS PAYABLE BONDS MEASURED BONDS PAYABLE

WITH A AT FAIR WITH A
PREMIUM VALUE DISCOUNT
Selling Price vs SP > FA SP = or ≠ FA SP <
Face FA
Amount
Carrying Bonds Payable + Bonds Bonds Payable –

Amount Unamortized Payable Unamortized
Premium Discount
Bond Issue Net Outright Lumped
Cost Expense
Nominal Rate NR > MR - NR <
vs Market MR
Rate
Cash xxx Cash xxx Cash xxx
Journal Bonds Payable xxx Bonds Payable xxx Discount xxx
Entries (upon Premium xxx Bonds Payable xxx
issuance)
Premium xxx Interest Expense xxx
Amortization -
Interest Expense xxx Discount xxx
Changes in Carrying Decreases until it reaches Increases until it reaches

Amount Face Amount -
Face Amount
SOURCES:
Nickolas, S. (2020). What Is the Effective Interest Method of Amortization?
Retrieved July 22, 2020, from
NATIONAL UNIVERSITY
https://www.investopedia.com/ask/answers/063015/what-effective-interest-
method-amortization.asp
Peralta, J., Valix, C. A., &Valix, C. (2019). Intermediate Accounting Vol. 2.
WARRANTY
LIABILITY
NATIONAL UNIVERSITY
WARRANTY LIABILITY
PREPARED BY: Salut, Mary Rose R.

these handouts.
WARRANTY
• An offer to provide free repair service or replacement during a specified period if the
products are defective.
RECOGNITION OF WARRANTY PROVISION

PAS 37, paragraph 14, provides that a provision shall be recognized as a liability in the
financial statements under the following conditions:
1. The entity has a present obligation, legal or constructive, as a result of past event
2. It is probable than an outflow of resources embodying economic benefits would be
required to settle the obligation
3. The amount of obligation can be measured reliably
NATIONAL UNIVERSITY
Accounting for Warranty

1. Accrual Approach
• To record the estimated warranty cost
Warranty expense xxx
Estimated warranty liability xxx
• To record the actual warranty cost when incurred and paid
Cash xxx
Note: Any difference between estimate and actual cost is a change in estimate and
therefore, treated currently or prospectively.
• To record the difference when the actual cost exceeds the estimate
Warranty Expense xxx
• To record the difference when the actual cost is less than the estimate
2. Expense as incurred Approach
• Expensing the warranty cost only when actually incurred
• To record warranty cost
Cash xxx
Example:
An entity sells 1,000 units of television sets at P9,000 each for cash. Each television set is
under warranty for one year. The entity has estimated from past experience that warranty cost
will probably average P500 per unit and that only 60% of the units sold will be returned for
repair. The entity incurs P180,000 for repairs during the year.
NATIONAL UNIVERSITY
Journal entries
Sales made evenly

• An assumption that half of the sales were made on January 1 and the other half on
July 1
Example:
An entity sells refrigerators that carry a 2-year warranty against the defects. The sales and
warranty repairs are made evenly throughout the year. Based on past experience, the entity
projects an estimated warranty cost as a percentage of sales as follows:
First year of warranty 4%
Second year of warranty 10%
2020 2021
Sales 5,000,000 6,000,000
Actual warranty repairs 140,000 300,000
Warranty expense related to 2020 sales

2020
First contract year of January 1, 2020 sales (2,500,000 x 4%) 100,000
First contract year of July 1, 2020 sales (2,500,000 x 4% x 6/12) 50,000
2021
Second contract year of January 1, 2020 sales (2,500,000 x 10%) 250,000
NATIONAL UNIVERSITY
Second contract year of July 1, 2020 sales (2,500,000 x 10% x 6/12) 125,000
2022
Total warranty expense 700,000
Warranty expense related to 2021 sales

2021
First contract year of January 1, 2021 sales (3,000,000 x 4%) 120,000
2022
Second contract year of January 1, 2021 sales (3,000,000 x 10%) 300,000
2023
Total warranty expense 840,000
Sale of warranty
- Warranty are sold separately from the product
- Usually for “extended warranty”
- Initially recognized as deferred revenue and subsequently amortized using straight line
over the life of the warranty contract.
- If costs are expected to be incurred in performing services, the revenue recognized in
proportion to the costs to be incurred annually.
SOURCES:
Valix et. al. (2019). Intermediate Accounting 2019 Volume 2
DIRECT
FINANCING LEASE
NATIONAL UNIVERSITY
DIRECT FINANCING LEASE

Intermediate Accounting 3
PREPARED BY: Aguiluz, Kc Nicole L.

these handouts.
RECOGNITION AND INITIAL MEASUREMENT
• At the commencement date, the lessor recognizes an asset from

finance lease as receivable measured at an amount equal to net
investment in the lease.
o The lessor shall use the interest rate implicit in
the lease to measure the net investment in the
lease.
Gross Investment in the Lease Net Investment in the Lease
• Annual Lease Payments • Annual Lease Payments

• Residual Value (guaranteed or • Residual Value (guaranteed or
unguaranteed) unguaranteed)
• Exercise Price of purchase option • Exercise Price of purchase option
(only if reasonably certain that the (only if reasonably certain that the
lessee will exercise the option) lessee will exercise the option)
NATIONAL UNIVERSITY
SUBSEQUENT MEASUREMENT
The net investment in the lease is subsequently measured using the effective interest
method.
DIRECT FINANCING LEASE

• The lessor is a financing company
• A direct financing lease recognizes only interest income
• No manufacturer’s/dealer’s profit is recognized because the fair value and
the cost of the leased asset are equal.
• Initial direct cost is capitalized.
• Net investment is simply equal to the sum of the:
o Cost of asset
o Initial direct cost
PROBLEM 1:
On January 1, 2019, Callista Company leased an equipment to another entity
under a sales type finance lease. Rentals are payable at the end of each year,
beginning December 31, 2019. The lease term is 6 years and the useful life of the
equipment is 8 years.
The fair value of the equipment is P1,273,800 while the cost is P800,000. The
implicit rate in the lease is 12% which is known to the lessee.
The lessee has the option to purchase the equipment for P80,000 at the end
term of the lease term. It is reasonably certain that the lessee will exercise the
purchase option.
The present value of 1 at 12% for 6 periods is 0.51 and the present value of an
ordinary annuity at 12% for 6 periods is 4.11.
1. What is the annual rental payment?

Fair Value of the asset 1,273,800
PV of the bargain purchase option (80,000 x
0.51) (40,800)
Net investments to be recovered from the
rentals 1,233,000
Divided by: PV of annuity factor 4.11
ANNUAL RENTAL 300,000
2. What amount should be reported initially as total financial revenue?
Gross Rentals (300,000 x 6) 1,800,000

Bargain purchase option 80,000
NATIONAL UNIVERSITY
Gross investment in the lease 1,880,000

Net investment in the lease – Fair value of the
asset (1,273,800)
TOTAL FINANCIAL REVENUE 606,200
3. What amount should be reported as gross income for the sale?

Sales – fair value of asset 1,273,800
Cost of good sold equals to cost of asset (800,000)
GROSS PROFIT 473,800
4. What amount should be reported as interest income for 2019?

Interest Income for 2019 (1,273,800 x 12%) 152,856
SOURCES:
Valix, Conrado T., (2019). Practical Finacial Accounting Volume 2.

DEFERRED
REVENUE
NATIONAL UNIVERSITY
DEFERRED REVENUE
PREPARED BY: Ventura, Kobe Christian B.

these handouts.
DEFERRED REVENUES
Deferred revenues are amounts collected in advance that have not yet been earned and
recorded as revenues pending satisfaction of performance obligation. Examples are
collections in advance for magazine subscriptions, royalties, tickets, tokens, gift certificates,
and service contracts. Thus, based on IFRS 15, no revenue yet is to be recorded when cash is
received in advance before satisfaction of performance obligations. The collection in advance
is, therefore, recorded in the following entry:
Cash xxx
Unearned Revenue xxx
When (or as) performance obligations are satisfied, the unearned account is transferred to a
revenue account; hence, this entry:
Unearned Revenue xx
Revenue xx
NATIONAL UNIVERSITY
Illustrative Problem: Unearned Service Contracts
ABS Service Company sells service contracts for laptop units that cover a two-year
period. The sales price of each contract is P1,500. ABS’s past experience shows that of the
total pesos spent for repairs in service contracts, 30% is incurred evenly during the first
contract year and 70% evenly during the second contract year. During 2020, ABS sold 2,000
contracts. Cost of servicing the units (direct labor, materials, etc.) during 2020 amounted to
100,000. Journal entries during 2020 are as follows:
Sale of Service Contracts
Cash 3,000,000
Unearned Service Contracts 3,000,000
Cost Incurred
Cost of Service Contracts 100,000

Cash, Materials. Etc. 100,000
Revenue for the period
Unearned Service Contract Revenue 900,000

Revenue from Service Contracts 900,000
(3,000,000 x 30%)
Profit from service contracts of P800,000 (900,000-100,000) is reported in profit of

loss portion of the statement of comprehensive income for the year ended December 31,
2020, while Unearned Service Contract of P2,100,000 is reported as a current liability in the
statement of financial position at December 31, 2020
REFERENCES:
Robles, N., Empleo, P., 2016. The Intermediate Accounting. 2016 ed.
IFRS. (n.d.). IFRS. https://www.ifrs.org/issued-standards/list-of-standards/ifrs-15revenue-
from-contracts-with-customers/
NOTES PAYABLE
NATIONAL UNIVERSITY
NOTES PAYABLE
INTERMEDIATE ACCOUNTING III
DISCLAIMER: This paper is prepared by bonafide NUJPIANS for A.Y. 2021-2022
student during this time of the pandemic. Acknowledgment for the owner/s of the copyrighted
material used in preparing these materials is properly given and cited in every handout. Thus,
the production of these constitutes a fair use of copyrighted material as provided in Sec. 185 of
Republic Act 8293 or the “Intellectual Property Code of The Philippines”, which states, “The
fair use of a copyrighted work for criticism, comment, news reporting, teaching including
multiple copies for classroom use, scholarship, research, and similar purposes is not an
infringement of copyright […]The purpose and character of the use, including whether such
use is of a commercial nature or is for non-profit educational purposes.” Hence, no part of this
handout may be subsequently distributed, uploaded, published, displayed, reproduced,
modified, and sold for profit in any form without permission from the preparers. Furthermore,
the violation of these acts is punishable by law. In no event will the National University Junior
Philippine Institute of Accountants together with the preparers and faculty members be liable to
any violation committed by the users of these handouts.
NOTES PAYABLE
“A promissory note is an unconditional promise in writing made by one person to
another, signed by the maker, engaging to pay on demand or at a fixed or
determinable future time a sum certain in money to order or to bearer.”
ACCOUNTING FOR NOTES PAYABLE

Initial Measurement Subsequent Measurement
a. If irrevocably designated at fair value Measured at either:

through P/L
@ fair value, the transaction costs directly a. FV through P/L
attributable to the note were expensed
b. Amortized cost, using effective
b. If not designated at fair value through P/L interest method
@ fair value (present value of expected future
cash payment) less the transaction costs
directly attributable to the note
NATIONAL UNIVERSITY
AMORTIZED COST OF NOTES PAYABLE
Initial measurement of Notes Payable xxx

Less: Principal repayment xxx
Add/Less: Cumulative amortization using effective interest xxx
Amortized Cost of Notes Payable xxx
MEASUREMENT OF PRESENT VALUE OF NOTES PAYABLE

1. Notes issued solely for cash – the present value is equal to cash proceeds
2. Interest bearing note issued for property – recorded at purchase price
3. Non-interest-bearing note issued for property – recorded at cash price of property
SOURCES:
Peralta, J., Valix, C. A., &Valix, C. (2019).
Intermediate Accounting Vol. 2.
OPERATING
LEASE
NATIONAL UNIVERSITY
OPERATING LEASE
Intermediate Accounting 3
PREPARED BY: Aguiluz, Kc Nicole
L.

these handouts.
ACCOUNTING FOR OPERATING LEASES

• The lessor shall recognized lease payments from operating lease as lease (or
rent) income on a straight-line basis over the lease term.
• Any lease bonus is recognized as unearned lease income to be amortized over
the lease term.
• Initial direct costs incurred by the lessor shall be capitalized as cost of the
leased asset and recognized as expense over the lease term on the same
basis as the lease term.
• Executor (or ownership) costs are recognized as expense.
• Depreciation of the depreciable asset shall be consistent with the lessor’s
depreciation policy.
• Any refundable security deposit shall be accounted for as financial liability by
the lessor.
NATIONAL UNIVERSITY
Problem 1
Salighayag Comapany purchased a tractor on January 1, 2020 at a cost of P3,200,000
for the purpose of leasing it. The tractor is estimated to have a useful life of 5 years
with residual value of P200,000. Depreciation is on a straight-line basis.
On April 1, 2020. Salighayag entered into a lease contract for the lease of the contractor
for a term of three years up to March 31, 2023. Under the lease contract, the lessee shall
pay the annual lease fee of P1,200,000 in advance every April 1 starting April 1, 2020.
Salighayag paid P240,000 commission associated with negotiating the lease, P30,000
minor repairs and P20,000 transportation of the tractor to the lesse during the year
2020.
1. What amount of gross lease income should be reported for 2020?

Annual lease fee 1,200,000
Divided by: 12
Monthly lease 100,000
Multiply by: No. of months from 4/1/2020 – 9
12/31/2020
GROSS LEASE INCOME - 2020 900,000
2. What amount of profit from lease should be reported for 2020?
Cost of Contractor 3,200,000

Gross lease income – 2020 900,000 Less: Residual value (200,000)
Less: Depreciation expense – 2020 (600,000) Depreciable cost 3,000,000
Amortization of initial direct cost
Divided by: Useful life 5
[(240,000/3) x 9/12 (60,000)
Repairs and maintenance expense (30,000) Annual depreciation 600,000
Transporation expense (20,000) Multiply by: 12/12
NET PROFIT FROM LEASE – 2020 190,000 Depreciation – 2020 600,000
3.What is the carrying amount of the leased asset in the books of the lessor on December 31,
2020?
Cost of tractor 3,200,000

Less: Accumulated depreciation, 12/31/2020 (600,000)
2,600,000
Add: Unamortized initial direct cost (240,000 – 180,000
60,000)
CV of leased asset, 12/31/2020 2,780,000
SOURCES:

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INTERMEDIATE ACCOUNTING 3

DISCLAIMER: This paper is prepared by bonafide NUJPIANS for A.Y. 2021-2022.

1. Statement 1 A partnership is an artificial being created by operation of law, which

2. I. Treasury shares requires that the shares must be issued originally.

6. Soriano Corp. provided the following data at the year-end:

Share premium 800,000

What total amount should be reported as shareholder’s equity?

• Authorized the purchase of a custom-made machine to be delivered in January

14. TierOne Entertainment provided its shareholders’ equity at year-end:

Shareholders’ Equity – 2020 9, 516,000

Shares issued after split (440,000 x 2) 880,000

To eliminate the deficit:

Accrued compensation – 12/31/2020

DISCLAIMER: This paper is prepared by bonafide NUJPIANS for A.Y. 2021-2022.

TREATMENT OF CONTINGENT LIABILITY

The Following illustrates the principles discussed

The entry to set up the provision is

Loss from Damages P22,500,000

SUMMARY ANALYSIS OF PROVISIONS AND CONTINGENT LIABILITIES

PROVISIONS AND CONTINGENCIES DISPOSITION

There is a present obligation that probably A provision is recognized

DISCLAIMER: This paper is prepared by bonafide NUJPIANS for A.Y. 2021-2022.

Accounting for Leases by the Lessee

All leases shall be accounted for by the lessee as a Finance lease.

Measurement of Lease Liability

INITIAL MEASUREMENT OF LEASE LIABILITY

MEASUREMENT OF RIGHT-OF-USE ASSET

Depreciation of Right-of-Use Asset

Cost – Residual Value

Cost – Guaranteed Residual Value

Financial Statement Presentation

Annual rental payable at the end of each year 1,000,000

1. What is the cost of the right of use asset?

2. What is the depreciation for current year?

The depreciation is based on the useful life of the underlying asset

3. What is the interest expense for current year?

4. What is the lease liability at year-end?

Lease Liability – Jan. 1 4,100,000

Operating Lease Model

1. What is the lease expense for the year 2020?

Lease expense – 2020 (P5,500/month x 5 months) P27,500

Lease Expense to date, Dec. 31, 2020 27,500

DISCLAIMER: This paper is prepared by bonafide NUJPIANS for A.Y. 2021-2022.

COMPOUND FINANCIAL INSTRUMENT

BONDS PAYABLE ISSUED WITH SHARE WARRANTS

– Allocation of issue price:

Discount on Bonds 50,000

Scenario 2 bonds were not converted but paid before maturity –

Upon Issuance of Bonds Upon Payment of Bonds

ISSUE PRICE: FAIR VALUE:

Bonds payable Conversion

Bonds Payable 7,000,000

Scenario 3 bonds were not converted and paid at maturity -

Computation: Journal Entries:

ISSUE PRICE: Upon issuance:

DISCLAIMER: This paper is prepared by bonafide NUJPIANS for A.Y. 2021-2022.

3 Forms of Business Organization

Form of Business Owner’s claim against assets

2. Resale of treasury shares at more than cost

4. Issuance of share warrants