Applied Auditing Asuncion Solman

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A guide in applying auditing procedures to specific

accounts of the financial statements.

TEACHERS MANUAL

2015

Edition

By

DARRELL JOE O. ASUNCION, MBA, CPA

RAYMUND FRANCIS A. ESCALA, MBA, CPA

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Dear fellow teacher,

This “Teacher’s Manual” should be used solely by the

teacher and for classroom purposes only. This manual

should NOT be reproduced either manually (e.g.,

printing or photocopy) or electronically (e.g., copying or

uploading in the net) without our written consent (or the

publisher’s written authorization).

If you have comments, queries or suggestions, please do

not hesitate to contact us at:

Telephone: 074-2441894

Mobile No.: Darrell Joe O. Asuncion – 0923-424-8286

Raymund Francis A. Escala – 0917-715-1226

Mark Alyson B. Ngina – 0915-510-7281

Email ad:

[email protected]

.

Thanks and God bless.

Sincerely,

Darrell Joe O. Asuncion, MBA, CPA

Raymund Francis A. Escala, MBA, CPA

Mark Alyson B. Ngina, CMA, CPA

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Chapter 25 INTRODUCTION To LIABILITIES ... 4

Chapter 26 FINANCIAL LIABILITIES AND DEBT RESTRUCTURING...17

Chapter 27 LEASE ...35

Chapter 29 SHAREHOLDERS' EQUITY...61

Chapter 30 BOOK VALUE AND EARNINGS PER SHARE ...85

Chapter 32 STATEMENT OF FINANCIAL POSITION...97

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CHAPTER 25: INTRODUCTION TO LIABILITIES

Note to the professor:

Page Existing data: Change to:

902 Illustration: Long-term debt falling due within one

year

Additional information no. 3

As of December 31, 2015,Rondo’s current ratio is 1.5:1. ChangetoRajon’sRondo’s 910 B = 10% x [(5.5x (1-30%] 1 - 10% + [10% x (1-30%)] Change5.5to 5.5M 925 Requirement No. 1

Warranty Sales in 2014 earned in 2015 (41% x

800 x P1,000) 328,000

Warranty Sales in 2015 earned in 2015 (22% x

800x P1,000) 198,000

Total warranty sales revenue earned in 2015 526,000

Change 800 to 900.

PROBLEM 25-1 Total Liabilities

Total liabilities

Current

Accounts payable P 1,000,000

Loan payable – current portion 1,000,000

Unearned rent income 300,000

Income tax payable 250,000

Dividends payable 100,000

Total current liabilities P 2,650,000

Non-current

Bonds payable P 5,000,000

Discount on bonds payable ( 500,000)

Loan payable – non-current portion 1,500,000

Deferred tax liability 15,000

Total non-current liabilities P 6,015,000

Total liabilities ( B ) P 8,665,000

Below items shall be presented as part of entity’s assets:

Current asset

Advances to employees P 45,000

Non-current asset

Cash surrender value of officers’ life insurance 75,000

Patent 50,000

Below item shall be disclosed in the notes to financial statements:

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Chapter 25: Introduction to Liabilities PROBLEM 25-2 Current Liabilities

Current liabilities

Accounts payable – unadjusted P 4,000,000

Add/(Deduct): Adjustments

Debit balances in suppliers’ accounts 100,000

Postdated checks of 50,000

Accounts payable – adjusted P 4,150,000

Credit balances in customers’ accounts 500,000

Premiums payable 600,000

Accrued expenses 150,000

Total current liabilities ( A ) P 5,400,000

Below items shall be presented as part of entity’s non-current liabilities:

Bonds payable 1,000,000

Premium on bonds payable 100,000

Mortgage payable 850,000

Deferred revenue 175,000

Below item shall be presented as part of shareholders’ equity:

Stock dividends payable 750,000

PROBLEM 25-3 Refinancing

Current liabilities

10% note payable, maturing 03/3 1/2015 P10,000,000

Annual sinking fund requirement 500,000

Total current liabilities ( C ) 10,500,000

Below items shall be presented as part of entity’s non-current liabilities:

12% note payable, maturing 06/30/2015 6,000,000

7% guaranteed debentures, due 2018 2,000,000

(A) The amount to be reported as current liabilities in 2014 is P2,000,000 since

the refinancing agreement was completed after the reporting date.

(A) The amount to be reported as current liabilities in 2014 is P2,000,000 since

the grace period was granted after the reporting date.

PROBLEM 25-6 Accounts payable

Accounts payable

Accounts payable – unadjusted P 8,000,000

Cost of goods lost in transit 500,000

Cost of returned goods ( 200,000)

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PROBLEM 25-7 Accounts payable

Amount of cash to eliminate accounts payable Accounts payable from:

*Purchases through March 15 (gross)(P4,900,000 / 98%) P 5,000,000 Merchandise inventory at cost(P1,500,000 / 150%) 1,000,000

Accounts payable ( B ) P 6,000,000

*The amount was grossed-up since the entity is no longer entitled to cash discount. The liability as of March 15, 2014 has been outstanding for more than 10 days.

PROBLEM 25-8 Bonus payable

Amount of bonus

Net income before bonus and income tax P 2,200,000

Less: Required income to earn bonus 880,000

Basis of bonus P 1,320,000

Multiply by: Bonus rate 10%

Total current liabilities ( C ) P 132,000

PROBLEM 25-9 Bonus payable

Amount of bonus

Net income before bonus and income tax P 1,600,000

Less: Required income to earn bonus 1,000,000

Amount of income subject to bonus (125%) P 600,000

Less: Bonus (25%) (squeeze) ( D ) 120,000

Basis of bonus (100%) (P600,000/125%) P 480,000

PROBLEM 25-10 Unearned Revenue

Unearned revenue – gift certificates

Unearned revenue

1,500,000 Balance, Beg. Gift certificate

redeemed 4,000,000 5,000,000 Cash receipts fromgift certificate sold Expired gift

certificate 300,000

4,300,000 6,500,000 Balance, End (B) 2,200,000

6,500,000 6,500,000

PROBLEM 25-11 Advances from Customers

Unearned revenue – Advances from customers

Unearned revenue

1,100,000 Balance, Beg. Advances applied to

shipments 1,600,000 1,800,000 Advancesreceived

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Chapter 25: Introduction to Liabilities

1,700,000 2,900,000

Balance, End (C) 1,200,000

2,900,000 2,900,000

PROBLEM 25-12 Escrow Liability

Deposits received – Escrow account

Escrow liability

600,000 Balance, Beg. Cash payments nine

months 4,200,000 4,500,000 Cash receipts fornine months 4,200,000 5,100,000

Balance, End (C) 900,000

5,100,000 5,100,000

PROBLEM 25-13 Container’s Deposits

Deposits received – Escrow account

Liability for Deposits

100,000 Balance, Beg. Cash refunds for

container returned in

2014 92,000 100,000 Cash depositsfrom deliveries

92,000 200,000

Balance, End (C) 108,000

200,000 200,000

PROBLEM 25-14 VAT payable

Provision - VAT payable

VAT Payable

- Balance, Beg.

Payment made 120,000 120,000 For October

84,000 For November 96,000 For December

120,000 300,000

Balance, End (A) 180,000

300,000 300,000

PROBLEM 25-15 Contingencies

(C) Since the outcome of the lawsuit remains uncertain, disclosure of the

contingency in the notes to financial statements would be the necessary.

PROBLEM 25-16 Contingencies

(B) Since it is probable that AAA will be liable to pay the P3,000,000 as

supported by BBB’s filing of a petition for bankruptcy, AAA should accrue and disclose the provision for guarantee on a loan of P3,000,000.

(8)

PROBLEM 25-17 Premiums Payable

Provision – Premiums liability

Premiums liability

- Balance, Beg.

**Coupons redeemed 50,000 80,000 *Premiums expense

50,000 80,000 Balance, End (D) 30,000 80,000 80,000 *(20,000 x 80%)/5 x (P30 + P5 - P10) **(10,000/5) x (P30 + P5 - P10) PROBLEM 25-18 Premiums Premiums liability (2014)

**Balance, End 200,000 - Balance, Beg.

*Coupons redeemed 800,000 1,000,000 Premiums expense (squeeze) 1,000,000 1,000,000 Premiums liability (2015)

**Balance, End 120,000 200,000 Balance, Beg.

*Coupons redeemed 2,000,000 1,920,000 Premiums expense (squeeze) (D) 2,120,000 2,120,000

*Number of towels distributed x net cost of P40

**Number of towels yet to be distributed x net cost of P40

The beginning balance of the 5,000 towels is included as part of the 50,000 towels distributed in 2015. If the actual towels distributed from 2015 is different from that was recorded as of the end of 2014, this is considered as a change in accounting estimate which should be taken into account during 2015 and for the succeeding accounting period.

PROBLEM 25-19 Warranty Liability

Warranties liability (2014)

- Balance, Beg.

Actual expenditures 150,000 500,000 *Warranties expense

150,000 500,000

Balance, End 350,000

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Warranties liability (2015)

350,000 Balance, Beg. Actual expenditures 550,000 600,000 *Warranties expense

550,000 950,000

Balance, End (A) 400,000

950,000 950,000

*Sales x Total estimated warranty cost of 10%

PROBLEM 25-20 Warranty Liability

Warranties liability

- Balance, Beg. Actual expenditures 140,000 480,000 Warranties expense

140,000 480,000

Balance, End (C) 340,000

480,000 480,000

PROBLEM 25-21 Warranty - Sales are Made Evenly Pattern of Realized Revenues:

2014 SALES

From sales in: 2014 2015 2016 2017 Total

1st_{(40% x ½)} _0.20 _0.20 _0.40

2nd_{(36% x ½)} _0.18 _0.18 _0.36

3rd_{(24% x ½)} _0.12 _0.12 _0.24

Total 0.20 0.38 0.30 0.12 1

2015 SALES

From sales in: 2015 2016 2017 2018 Total

1st_{(40% x ½)} _0.20 _0.20 _0.40

2nd_{(36% x ½} _0.18 _0.18 _0.36

3rd (_{24% x ½)} _0.12 _0.12 _0.24

Total 0.20 0.38 0.30 0.12 1

Requirement No. 1 (A)

Warranty Sales in 2014 earned in 2015 (38% x 1,000 x P1,500) 570,000 Warranty Sales in 2015 earned in 2015 (20% x 1,200 x P1,500) 360,000

Total warranty sales revenue earned in 2015 930,000

Notes:

 The 38% represents the realized revenue in 2015 from 2014 Sales.  The 20% represents the realized revenue in 2015 from 2015 Sales.

Requirement No. 2 (B)

Total warranty sales revenue earned in 2015 (see No. 1) 930,000

Expenses relating to computer warranties 60,000

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Requirement No. 3 (A)

Unearned sales warranty from 2014 [(30% + 12% x 1,000 x

P1,500)] 630,000

Unearned sales warranty from 2015 [(100%-20%) x 1,200 x

P1,500)] 1,440,000

Total unearned sales warranty 2,070,000

Notes:

 The 30% and 12% represent the unrealized revenues in 2015 from 2014 Sales.

 The 20% represents the realized revenue in 2015 from 2015 Sales. So 100% minus 20% realized is equal to 80% unrealized revenue in 2015 from 2015 Sales.

SUMMARY OF ANSWERS: 1. A 2. B 3. A

1. P2,000,000 (Letter B). The entire amount is payable within one year from the reporting date thus presented as current liability.

2. Nil (Letter A). Since both parties are financially capable of honoring the agreement’s provisions and the debtor has the discretion to refinance or roll over the loan for at least twelve months from December 31, 2014 the entire amount is treated as Noncurrent liability.

3. Nil (Letter A). Since the company entered into a refinancing agreement with a bank to refinance the loan on a long-term basis before the reporting date, the entire amount of liability is treated as noncurrent.

4. P2,000,000 (Letter B). Since the company entered into a refinancing agreement with a bank to refinance the loan on a long-term basis after the reporting date, the entire amount of liability is treated as current.

PROBLEM 25-23 Obligations Payable on Demand, Breach of Loan Agreement

1. P2,000,000 (Letter C). Only if an enforceable promise is received by the

end of the reporting period from the creditor not to demand payment for at least 12 months from the end of the reporting period that the note may be classified as noncurrent.

2. Nil (Letter A). The entire amount of loan is noncurrent liability since there

was an agreement on the reporting date not to demand payment in order for the debtor to rectify the breach with 12 months from the reporting date.

3. P2,000,000 (Letter B). The entire amount of loan is current liability since

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Chapter 25: Introduction to Liabilities PROBLEM 25-24 Contingencies 1. A 2. D 3. B 4. B

5. A (Amount of accrual is P2,040,000 using expected value method which is calculated as (P1.6M x 20 + (2M x 50%) + (2.4M x 30%)

6. A (Amount of accrual is P2,250,000 using midpoint of the range which is calculated as (P1.5M+3M)/2) PROBLEM 25-25 Contingencies 1. A 2. B (Disclose an amount of P1,500,000) 3. B (Disclose an amount of P1,500,000) 4. B (Disclose an amount of P1,000,000) 5. D

6. A (It is virtually certain that the company will be receiving the P1,5000,000.)

PROBLEM 25-26 Bonus Computation

1. Net income before bonus but before tax

B = NY x BR

= 3,090,000 x 20%

= 618,000

2. Net income after bonus but before tax

B = BR x NY

100% + BR

= 20% x 3,090,000

100% + 20% = 515,000

3. Net income after bonus and tax

B = BR X (NY – B – T) B = 20% x (3,090,000-B-(927,000-3.B) B = 20% x (3,090,000-B-927,000+.3B) B = 618,000-.2B-185,400+.06B 1B+.2B-.06B = 618,000-185,400 1.14B = 432,600 1.14 1.14 B = 379,474

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T = 30% X (3,090,000 – B) = 927,000-.3B OR B = BR x [NY x (1-TR)] 1 + [BR x (1-TR)] = 20% x (3,090,000 x (1-30%) 1+[20% x (1-30%)] = 20% x (3,090,000 x 70%) 1+(20% x 70%) = 20% x (2,163,000) 1.14 = 379,474 Where:

NY = Net income before bonus and tax B = Bonus BR = Bonus Rate T = Tax TR = Tax Rate SUMMARY OF ANSWERS: 1. D 2. B 3. C PROBLEM 25-27 Question Nos. 1 and 2

Estimated liability from Warranties

Disbursement for

warranties 164,000 44,800 Beginning balance Balance end 212,000 240,000 Warranty expense.

Total 376,000

Warranty expense 240,000

Divide by % age of warranty 4%

Sales from musical instruments and sound

reproduction equipment (Question No. 1) 6,000,000 Question No. 3 Premium expense = P2,000,000 X 1 coupon x 90% P34-P20 P2 200 coupons

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Chapter 25: Introduction to Liabilities Question No. 4

Inventory of Premium

Beg. Balance 39,950 56,950 Balance end

Net Purchases (6,500 x

P34) 221,000 Cost of issued premium

204,000 (1.2M coupons.200 coupons x P34

Total 260,950

Question No. 5

Estimated liability for Premiums

Disbursement for premiums (1.2M coupons/200 coupons

x P(34-P20) 84,000

44,800 Beginning balance

Balance end 23,800 63,000 Premium expense.

Total 107,800

SUMMARY OF ANSWERS:

1. A 2. A 3. C 4. D 5. D

PROBLEM 25-28 Refinancing of Loan, Notes Payable Interest and Non-Interest Bearing

Note to the Professor: This problem should be discussed after the discussion

in Chapter 26.

Question No. 1

Periodic payment-NP Delivery equipment

(P2M/4) 500,000

Multiply by PV of ordinary annuity 3.0373

Present value of NP-delivery equipment 1,518,650 Amortization table:

Date Payment ExpenseInterest AmortizationDiscount Presentvalue

01/01/2015 1,518,650

12/31/2015 500,000 182,238 317,762 1,200,888

12/31/2016 500,000 144,107 355,893 844,995

Question Nos. 2 and 3

Noncurrent Current

12% Note payable 1,400,000 700,000

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Note payable-del.

Equipment 844,995 355,893

Total 4,244,995 1,055,893

Question No. 4

Accrued interest payable-12% Note payable

=P2,100,000 x 12% x 8/12 =P168,000 Question No. 5 Interest expense: 12% Note payable 1/1-5/1 (2.8M x 12% x 4/12) 112,000 5/1-12/31 (2.1M x 12% x 8/12) 168,000 10% Note payable (2M x 10%) 200,000

Note payable - Delivery. Equipment

(see amortization table) 182,238

Total 662,238

1. A 2. B 3. B 4. B 5. C

PROBLEM 25-29 Warranty, Premiums and Bonus

Note to the professor: The last sentence should be: Premium expense of

P270,000(not P120,000).

Question No. 1

Warranty expense (P150 x 1,200) 180,000

Less: Warranty paid 85,000

Estimated Premiums payable 95,000

Question No. 2

Premium expense

(P1,200,000 x 1 coupon/P1)/400 x 60% x (P45-P20) 45,000 Less: Net cost of redeemed coupons

(500,000/400)x( P45-P20) 31,250

Estimated Premiums payable 13,750

Question No. 3

Unadjusted net income 1,935,000

Warranty expense under, Net income over (P180,000-P85,000) (95,000) Premium expense over, Net income under (P270,000-P45,000) 225,000

Adjusted Net income 2,065,000

4. Net income after bonus but before tax

B = BR x NY

100% + BR

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100% + 20% = 344,167

5. Net income after bonus and tax

B = BR x (NY – B – T)

T = TR x (NY – B)

OR

B = BR x [NY x (1-TR)] 1 + [BR x (1-TR)] Net income after bonus and tax

B = BR X (NY – B – T) B = 20% x (2,065,000-B-(9619,500-3.B) B = 20% x (2,065,000-B-619,500+.3B) B = 413,000-.2B-123,900+.06B 1B+.2B-.06B = 413,000-123,900 1.14B = 289,100 1.14 1.14 B = 253,596 T = 30% X (2,065,000 – B) = 619,500-.3B OR B = BR x [NY x (1-TR)] 1 + [BR x (1-TR)] = 20% x (2,065,000 x (1-30%) 1+[20% x (1-30%)] = 20% x (2,065,000 x 70%) 1+(20% x 70%) = 20% x (1,445,500) 1.14 = 253,596 Where:

NY = Net income before bonus and tax B = Bonus BR = Bonus Rate T = Tax TR = Tax Rate SUMMARY OF ANSWERS: 1. A 2. C 3. C 4. B 5. C

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PROBLEM 25-30 Comprehensive Question No. 1 (B)

SSS Payable 10,000

Philhealth payable 9,000

Estimated liabilities under guarantee agreement 110,000

Estimated warranties on goods sold 120,000

Utilities payable 6,000

Trade payables (170,000+30,000+20,000+12,000-8,000) 224,000

Notes payable arising from purchase of goods 200,000

Convertible bonds payable due July 1, 2014 1,000,000

Serial bonds payable (40,000 x 2) 80,000

Accrued interest expense 4,000

Advances from customers 25,000

Unearned rent income 36,000

Unearned interest on receivables 3,500

Income taxes payables 45,000

Cash dividends payable 100,000

Property dividends payable 120,000

Credit balance of notes payable 40,000

Overdraft with PNB 80,000

Container's deposit 45,000

Loans payable-12% 270,000

Financial liability designated as FVTPL 200,000

Current liabilities 2,727,500

Question No. 2 (A)

Notes payable

Arising from 4-year bank loan 400,000

Arising from advances by officers, dune in 3 years 300,000 Serial bonds payable (800,000 minus (40,000 x 2) 720,000

Security deposit received from lessee 89,000

Loans payable-10% 150,000

Total noncurrent liabilities 1,699,000

Question No. 3 (B)

Total liabilities

Current liabilities 2,727,500

Total noncurrent liabilities 1,699,000

Total liabilities 4,426,500

SUMMARY OF ANSWERS: 1. B 2. A 3. B

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Chapter 26: Financial Liabilities and Debt Restructuring

CHAPTER 26 FINANCIAL LIABILITIES AND DEBT

RESTRUCTURING

Note to professor:

Page Existing data: Change to;

953 Note: In amortizing these bonds, a new effective rate

shall be computed thru interpolation.Refer to the previous chapter for sample computation of effective interest rate.

(Kindly delete the second sentence)

957 Note: Alternatively ….

Total present value=P5,588,332 Total present value=P5,788,332

974 Requirement No. 2

Date on the third journal entry- Dec. 31,2017 Date on the third journal entry- Dec. 31, 2016

Fifth journal entry:

Preference shares 150,000 Premium on redemption of bonds 30,000

Cash 180,000

Fifth journal entry: Bonds payable 200,000 Premium on redemption of bonds 10,000 Cash 210,000

975 Statement of Comprehensive Income (2015)

Interest expense P23,580 Should beP29,174

986 To record transaction

Note payable 1,600,000 Accrued interest payable 200,000

Land 1,500,000

Gain on extinguishment of debt 500,000

Change 500,000 to 300,000

988 ILLUSTRATION: Modification of Terms

Mandaue Company has an overdue notes payable to National Bank of P8,000,000 and recorded accrued interest ofP640,000

Change P640,000 to P840,000

BONDS PAYABLE

PROBLEM 26-1 Financial Liabilities at FVTPL (Interest Expense and Unrealized gains or losses)

Question No. 1

Face value 3,000,000

Multiply by: nominal rate 8%

Multiply by: months outstanding/12 12/12

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Question No. 2

Fair value of the bonds 3,090,000

Less: Carrying value 2,850,756

Unrealized loss (or gain)-P&L (B) 239,244

SUMMARY OF ANSWERS: 1. A 2. B

PROBLEM 26-2 Unrealized Gain or Loss of FVTPL with Change Due To Credit Risk

Question No. 1

Market price of the liability, end of the period 2,159,740 Less: Fair value of liability using the sum observed interest rate

and instrument specific IRR 2,077,740

Unrealized loss (or gain)-OCI (B) 82,000

Internal rate of return at the start of the period - yield or

effective rate 10%

Less: Observed (benchmark) interest rate, date of inception 7%

Instrument specific IRR 3%

Observed (benchmark) interest rate, end of period 6.00%

Add: Instrument specific-IRR 3%

Discount rate 9.00%

Question No. 2

Market price of the liability, end of the period 2,159,740

Less: Carrying amount of FVTPL 2,000,000

Increase (or decrease) in FVTPL 159,740

Less: Unrealized loss (or gain) in the OCI 82,000

Unrealized loss (or gain) in the P&L 77,740

Present value market rate of 8%

Present value of Principal (2,000,000 X 0.6806 ) 1,361,200 Add: Present value of interest payments (2,000,000 x 10% x

3.9927) 798,540

Market price of the liability, end of the period 2,159,740

Present value using 9%

Present value of Principal (2,000,000 X 0.6499 ) 1,299,800 Add: Present value of interest payments (2,000,000 x 10% x

3.8897 ) 777,940

Fair value of liability using the sum observed interest rate and

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Chapter 26: Financial Liabilities and Debt Restructuring Journal entry end of the period is:

Unrealized loss-OCI 82,000

Unrealized loss-P&L 77,740

Financial liability at FVTPL

(Increase in FV of the liability) 159,740

SUMMARY OF ANSWERS: 1. B 2. C

PROBLEM 26-3 Derecognition of Held for Trading Debt Securities

Retirement Price 3,120,000

Less: Carrying value 3,090,000

Loss on sale (D) 30,000

PROBLEM 26-4 Financial Liabilities at Amortized Cost-Term Bonds Question No. 1

Present value of Principal (1,200,000 X 0.7513 ) 901,560 Add: PV of interest payments (96,000 X 2.4869 ) 238,742

Present value of the investment bonds (C) 1,140,302

Question No. 2 Amortization Table

Date paymentInterest expenseInterest AmortizationPremium Presentvalue

01/01/2015 1,140,302 12/31/2015 96,000 114,030 (B) 18,030 1,158,333 12/31/2016 96,000 115,833 19,833 1,178,166 12/31/2017 96,000 117,867 21,835 1,200,000 SUMMARY OF ANSWERS: 1. C 2. B

PROBLEM 26-5 Financial Liabilities at Amortized Cost-Serial Bonds Question No. 1

Principal paymentInterest paymentTotal Preset valuefactor Total PV

400,000 96,000 496,000 0.9091 450,914

400,000 64,000 464,000 0.8264 383,450

400,000 32,000 432,000 0.7513 324,562

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Question No. 2

Date PaymentInterest ExpenseInterest AmortizationDiscount Princi-pal Presentvalue

01/01/2015 1,158,925 12/31/2015 96,000 115,892 19,892 400,000 778,817 12/31/2016 64,000 77,882 13,882 400,000 392,699 12/31/2017 32,000 39,301 7,301 400,000 -SUMMARY OF ANSWERS: 1. A 2. A

PROBLEM 26-6 Financial Liabilities at Amortized Cost-Term Bonds

Issue Price (110% x 5,000 x P1,000) 5,500,000

Less: Bond issue cost 300,000

Net cash received from issuance (D) P5,200,000

PROBLEM 26-7 Financial Liabilities at Amortized Cost - Term Bonds with Transaction Costs

Issue Price (5,000,000 x 98%) 4,900,000

Present value on January 1, 2015 4,760,000

Add: Discount amortization

Nominal interest (5M x 10%) 500,000

Effective interest (4,760,000 x 12%) 571,200 71,200

Carrying value – 12/31/2015 (D) 4,831,200

PROBLEM 26-8 Financial Liabilities at Amortized Cost - Term Bonds with Transaction Costs

Issue Price (5,000,000 x 110%) 5.500,000

Present value on January 1, 2015 5,420,000

Less: Premium amortization

Nominal interest (5M x 8%) 400,000

Effective interest (5,420,000 x 6%) 325,200 74,800

Carrying value – 12/31/2015 (B) 5,345,200

PROBLEM 26-9 Bonds payable with warrants

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Chapter 26: Financial Liabilities and Debt Restructuring PROBLEM 26-10 Bonds Payable with Warrants

Present value of principal (8M x .61) 4,880,000

Add: Present value of interest (8M x 6% x 7.72) 3,705,600 Net cash received from issuance – initial carrying amount (B) P8,585,600

Suggested Answer: B

PROBLEM 26-11 Issuance of Convertible Bonds

Total Proceeds (5M X 110%) 5,500,000

Less: Present value of the bonds without conversion option Present value of Principal (5M x. 77) 3,850,000 Add: Present value of int. payments

(5M x 6% x 2.53) 759,000 4,609,000

Residual amount allocated to Equity component (B) 891,000

PROBLEM 26-12 Issuance of Convertible Bonds

Carrying amount of the bonds 6,000,000

Less: Par value of issued shares (50,000 x P50) 2,500,000

Share issue cost 100,000

Total 3,400,000

Add: Share Premium - conversion option 1,500,000

Total Share Premium (C) 4,900,000

PROBLEM 26-13 Issuance of Convertible Bonds Question No. 1

Total Proceeds (P1,000 x 1,000) 1,000,000

Less: Fair value of the bonds without conversion privilege 900,000

Total Share Premium (A) 100,000

Using 7.48%

Present value of Principal (1,000,000 x 0.7 ) 700,000

Add: Present value of interest payments (50,000 x 4 ) 200,000

Total present value 900,000

Question No. 2 See amortization table below. Amortization Table

Date PaymentInterest ExpenseInterest AmortizationDiscount Presentvalue

01/01/2015 900,000

(22)

PROBLEM 26-14 Retirement of Bonds Payable Suggested Answer: A

PROBLEM 26-15 Conversion of Convertible Bonds Question No. 1 – Case No. 1

Nil. (A) No gain or loss on conversion of convertible bonds unless the

conversion is induced by the company. The journal entry to record the transaction would then be:

Share premium-conversion option 60,000

Ordinary shares (20000 X 50 ) 1,000,000

Share Premium 612,049

Question No. 2 - Case No. 2

Fair value of liability 1,600,000

Less: Carrying amount of the bonds payable 1,552,049

Loss on settlement (conversion) of liability (B) 47,951

Fair value of liability 1,600,000

Less: Total par value of the shares issued 1,000,000

The journal entry to record the transaction would then be:

Loss on settlement of liability 47,951

Ordinary shares (20,000 X 50 ) 1,000,000

PROBLEM 26-16 INDUCED CONVERSION

Face amount of debt securities converted 1,500,000

Divide by: New conversion price 20

Number of shares issued upon conversion 75,000

Multiply by: Fair value of shares on the conversion date 30

(23)

Divide by: Old conversion price 25

Number of shares issued under original conversion 60,000 Multiply by: Fair value of shares on the conversion date 30 Fair value of shares under original conversion 1,800,000

Fair value of shares converted 2,250,000

Less: Fair value of shares under original conversion 1,800,000 Debt conversion expense or loss on induced conversion (B) 450,000

Journal entry is:

Debt conversion expense or loss on

induced conversion 450,000

Ordinary shares (75,000 x 10 ) 750,000

Share premium 1,252,049

PROBLEM 26-17 Interest-Bearing Note Suggested Answer: C

PROBLEM 26-18 Non-Interest Bearing Note

Note to the professor: The July 31, 2015 due date should be July 31, 2016

Principal 2,000,000

Less: Discount on notes payable

(2M x 10.8% x 12/12) 216,000

Amortization (216,000/12 x 5) (90,000) 126,000

Carrying amount of the note payable (B) 1,874,000

PROBLEM 26-19 Interest-Bearing Note Suggested Answer: B

PROBLEM 26-20 Interest-Bearing Note Suggested Answer: A

PROBLEM 26-21 Loans Payable

Principal 1,500,000

Less: Direct origination fees paid (1.5M x 4%) 60,000

(24)

Suggested Answer: D

PROBLEM 26-23 Debt Restructuring Suggested Answer: D

PROBLEM 26-24 Debt Restructuring SUMMARY OF ANSWERS:

1. C 2. B

PROBLEM 26-25 Debt Restructuring

Principal P6,000,000

Add: Accrued interest – January 1, 2014 600,000

Accrued interest – 2014 600,000

Carrying amount of old liability 7,200,000

Less: Present value of new liability

Present value of principal (P4M x .6209) 2,483,600

Present value of interest (P4M x .08 x 3.7908) 1,213,056 3,696,656

Gain on extinguishment of liability (E) 3,503,344

Suggested Answer: 3,503,344 (None of the choices given)

COMPREHENSIVE PROBLEMS PROBLEM 26-26 Interest-Bearing Note – Lump Sum Question No. 1

Present value of Principal (1,200,000 x 0.7118 ) 854,160 Add: Present value of interest payments (36,000 x 2.4018 ) 86,465

Present value of the notes payable (A) 940,625

Amortization Table:

Date PaymentInterest ExpenseInterest AmortizationDiscount Presentvalue

01/01/2015 940,625 12/31/2015 36,000 112,875 76,875 1,017,500 12/31/2016 36,000 122,100 86,100 1,103,600 12/31/2017 36,000 132,432 96,400 1,200,000 Question No. 2 Interest Expense (940,625 x .12) = P112,875 (B)

(25)

Chapter 26: Financial Liabilities and Debt Restructuring P1,017,500. See amortization table above. (A) Question No. 4

Nil. (A) The entire note payable is noncurrent liability.

Question No. 5

Note to the professor: The requirement should be noncurrent portion of the

note on December 31, 2016.

The noncurrent portion as of December 31, 2016 is P1,103,600. See amortization table above. (D)

1. A 2. B 3. A 4. A 5. D

PROBLEM 26-27 interest-bearing note – non-uniform installments Note to the professor: The principal should be P2,000,000 not P1,200,000.

The interest is payable every December 31 while the principal shall be payable as follows: December 31, 2015 1,200,000 December 31, 2016 400,000 December 31, 2017 400,000 SOLUTION: Question No. 1

Principal paymentInterest paymentTotal Preset valuefactor PresentValue

1,200,000 60,000 1,260,000 0.8929 1,125,054

400,000 24,000 424,000 0.7972 338,013

400,000 12,000 412,000 0.7118 293,262

Total PV of notes payable (E) 1,756,328

Amortization Table

Date

Date PaymentInterest ExpenseInterest PrincipalPayment PresentValue

01/01/2015 1,756,328

12/31/2015 60,000 210,759 150,759 1,200,000 707,088

12/31/2016 24,000 84,851 60,851 400,000 367,938

12/31/2017 12,000 44,079 32,062 400,000

-Question No. 2

Interest expense (1,756,328 x .12) P210,759 (E)

(26)

Carrying amount – December 31, 2015 P707,088 (E) Question No. 4

Principal (payable Dec. 31, 2016 P400,000

Less: Discount on notes payable 60,851

Carrying amount-current liability (E) P339,149

Question No. 5

Carrying amount-noncurrent liability (E) P367,938

SUMMARY OF ANSWERS BASED ON REVISED CHOICES: 1. D 2. D 3. C 4. C 5. C

PROBLEM 26-28 Interest-Bearing Note –Uniform Installments Question No. 1

Principal paymentInterest paymentTotal Preset valuefactor PresentValue

400,000 36,000 436,000 0.8929 389,304

400,000 24,000 424,000 0.7972 338,013

400,000 12,000 412,000 0.7118 293,262

Total PV of notes payable (A) 1,020,579

Date PaymentInterest ExpenseInterest Amortization PrincipalPayment PresentValue

01/01/2015 1,020,579 12/31/2015 36,000 122,469 86,469 400,000 707,048 12/31/2016 24,000 84,846 60,846 400,000 367,894 12/31/2017 12,000 44,106 32,106 400,000 -Question No. 2 Interest expense (1,020,579 x .12) P122,469 (B) Question No. 3

Carrying amount – December 31, 2015 707,048 (A)

Question No. 4

Carrying amount-current liability (B) P339,154

(27)

Carrying amount-noncurrent liability (A) P367,894

1. A 2. B 3. A 4. B 5. A

PROBLEM 26-29 Noninterest-Bearing Note – With Cash Price Equivalent Question No. 1

The carrying amount of the note on initial recognition is equal to its cash price equivalent of P994,760. (C)

Coincidentally, the effective rate using the cash price equivalent is 12% and the amortization table is as follows:

Amortization Table at 12%

Date Principalpayment expenseInterest Amortization Presentvalue

01/01/2015 994,760

12/31/2015 400,000 99,476 300,524 694,236

12/31/2016 400,000 69,424 330,576 363,660

12/31/2017 400,000 36,340 363,660

-Question No. 2

Interest expense (994,760x .12) P99,476 (A)

Question No. 3

Carrying amount – December 31, 2015 P694,236 (A)

Question No. 4

Question No. 5

Carrying amount-noncurrent liability (C) P363,660

(28)

PROBLEM 26-30 Noninterest-Bearing Note – Lump Sum Question No. 1

Present value of Principal (1,200,000 x 0.7118 ) (B) 854,160 Amortization Table

Date Interest expense Present value

01/01/2015 854,160 12/31/2015 102,499 956,659 12/31/2016 114,799 1,071,458 12/31/2017 128,542 1,200,000 Question No. 2 Interest expense (854,160 x .12) P102,499 (B) Question No. 3

Carrying amount – December 31, 2015 P956,659 (A)

Question No. 4

Nil. The entire note payable is noncurrent liability since it is due beyond 12

months from the reporting date. (B)

Question No. 5

The total entire carrying amount of note payable is presented as noncurrent

liability. See Question No. 4. (A)

1. B 2. B 3. A 4. B 5. A

PROBLEM 26-31 Noninterest-Bearing Note – Installments Question No. 1

Present value of Principal (400,000 X 2.4018 ) (D) 960,720 Amortization Table

Date Interest

Payment expenseInterest Amortization Presentvalue

01/01/2015 960,720

12/31/2015 400,000 115,286 284,714 676,006

12/31/2016 400,000 81,121 318,879 357,127

12/31/2017 400,000 42,873 357,127

-Question No. 2

(29)

Chapter 26: Financial Liabilities and Debt Restructuring Question No. 3

P676,006. See amortization table above. (A) Question No. 4

Question No. 5

Carrying amount-noncurrent liability (C) P357,127

1. D 2. A 3. A 4. B 5. C

PROBLEM 26-32 Issuance, Retirement and Conversion of Non-Convertible Bonds

Question No. 1

Present value of Principal (10,000,000 x 0.5674 ) 5,674,000 Add: Present value of interest payments

(10,000,000 x 10% x 3.6048 ) 3,604,800

Present value of the bonds payable (D) 9,278,800

Amortization Table Date Interest

payment expenseInterest AmortizationDiscount Presentvalue

01/01/2013 9,278,800

12/31/2013 1,000,000 1,113,456 113,456 9,392,256

12/31/2014 1,000,000 1,127,071 127,071 9,519,327

Question No. 2

Retirement Price P5,200,000

Less: Carrying amount (9,519,327 x 1/2) 4,759,664

Loss on retirement (C) P440,336

Question No. 3 (C)

Amortization table:

Date paymentInterest expenseInterest Amortization Presentvalue

12/31/2014 4,759,663

(30)

Question No. 4

Fair value of the ordinary shares issued (50 x 50,000) P2,500,000 Less: Carrying amount of the liability (4,830,823 x 250/500) 2,415,412

Loss on conversion (D) P84,588

Question No. 5

Fair value of the ordinary shares issued (50 x 50,000) P2,500,000 Less: Total par value of the shares issued (40 x 50,000) 2,000,000

Share Premium (B) P500,000

1. D 2. C 3. C 4. D 5. B

PROBLEM 26-33 Issuance, Retirement and Conversion of Convertible Bonds

Question No. 1

Total Proceeds P5,000,000

Less: Present value of the bonds without the conversion option

Present value of Principal (5,000,000 x 0.5674 ) 2,837,000 Present value of interest payments (500,000 x

3.6048 ) 1,802,400 4,639,400

Residual amount to equity (C) P360,600

payment expenseInterest AmortizationDiscount Presentvalue

01/01/2014 4,639,400

12/31/2015 500,000 556,728 56,728 4,696,128

12/31/2016 500,000 563,535 63,535 4,759,663

Question No. 2

Fair value of liability using current rate 2,438,925

Less: Carrying amount (4,759,663 x ½) 2,379,832

Loss on settlement of liability (C) 59,093

Present value using 11% for 3 periods

Present value of Principal (2500000 x 0.7312 ) 1,828,000 Add: Present value of interest payments (250000 x 2.4437 ) 610,925

Present value of the bonds payable 2,438,925

Question No. 3

Retirement Price 2,600,000

Less: Fair value of liability using current rate 2,438,925

(31)

Chapter 26: Financial Liabilities and Debt Restructuring Question No. 4

Interest expense is P556,728 based on the amortization table above. (E) Question No. 5

Shares to be issued based on amended terms (2.5M/420) P5,952 Less: Shares to be issued based on amended terms (2.5M/450) 5,556

Incremental shares 397

Multiply by: Fair value 440

Debt settlement expense (C) P174,680

(P174,680 or P174,240) SUMMARY OF ANSWERS:

1. C 2. C 3. C 4. E 5. C

PROBLEM 26-34 Redeemable Preference Shares and Debentures Present value of the redeemable preference shares

Present value of Principal (15000 x 1.05 x 0.72161 ) 11,365 Add: Present value of interest payments (1500 x 2.42308 ) 3,635

Present value of the preference shares 15,000

Amortization table: Date Interest

Payment ExpenseInterest Amortization Presentvalue

01/01/2015 15,000

12/31/2015 1,500 1,723 223 15,223

12/31/2016 1,500 1,749 249 15,472

12/31/2017 1,500 1,778 246 15,718

Question No. 1

P1,723. See amortization table above. (B) Question No. 2

P1,749. See amortization table above. (C) Question No. 3

P1,778. See amortization table above. (D) Present value of the debentures

Present value of Principal (20,000 x 1.02 x 0.53884 ) 10,992 Add: Present value of interest payments (2400 x 3.5032 ) 8,408

(32)

Payment ExpenseInterest Amortization Presentvalue

12/31/2017 19,400

12/31/2018 2,400 2,554 (154) 19,554

Question No. 4

P2,554. See amortization table above. (B) Question No. 5

P19,554. See amortization table above. (B) SUMMARY OF ANSWERS:

1. B 2. C 3. D 4. B 5. B

PROBLEM 26-35 Question No. 1

Accounts payable, unadjusted P1,350,000

Good in transit FOB shipping point 75,000

Undelivered check 60,000

Accounts payable, adjusted (D) P1,485,000

Question No. 2 14% Note payable (1,250,000 x 14%) P175,000 16% Note payable (3,000,000 x 16%) 480,000 10% Note payable (2,000,000 x 10% x 6/12) 100,000 Interest expense (D) P755,000 Question No. 3 14% Note payable (1,250,000 x 14% x 3/12) P43,750 16% Note payable (3,000,000 x 16% x 9/12) 360,000 10% Note payable (2,000,000 x 10% x 6/12) 100,000 Interest expense (C) P503,750

Current Noncurrent

Accounts payable 1,485,000

14% Note payable 1,250,000

Accrued interest payable 503,750

Total P3,238,750 P5,000,000

(33)

Chapter 26: Financial Liabilities and Debt Restructuring SUMMARY OF ANSWERS:

1. D 2. D 3. C 4. C 5. C

PROBLEM 26-36 (Comprehensive)

Note to professor: The bonds will mature on July 1,2022instead of2015.

Question No. 1

Present value of Principal (10,000,000 X 0.3118 ) 3,118,000 Add: Present value of interest payments (500,000 X 11.46992 ) 5,734,960

Present value of the bonds payable (A) 8,852,960

Question No. 2

April 1, 2014 P 400,000

July 1, 2014 600,000

October 1, 2014 300,000

January 1, 2015 300,000

Notes payable-current liability (B) P1,600,000

Estimated liability from Warranties

Disbursement for

warranties 358,000 180,000 Beginning balance

Balance end (A) 342,000 520,000 Warranty expense (C)

Total 700,000

Question No. 5

(a) (b) ( c) d=b x c E=d-a Fixed

salary Net Sales Comm.Rate ExpenseComm.

Accrued Salaries Payable A 10,000 200,000 4% 8,000 0 B 14,000 400,000 6% 24,000 10,000 C 18,000 600,000 6% 36,000 18,000 Total (C) P28,000

Current Noncurrent

Int. payable - Bonds (10M x 10% x 3/12) 250,000

Int. payable - Note payable 600,000

Notes payable 1,600,000 5,400,000*

Estimated warranties payable 342,000

Trade payable 740,000

(34)

Cash dividends payable (6M x P.2) 1,200,000

Total P4,760,000 P14,370,751**

(B) (C) *(P7M-1.6M)

** or P14,370,783 which is the same as P8,952,185 x 100% +(Effective rate x months outstanding/12) minus payment

Or [(P8,952,185 x 103%) - P250,000] Amortization Table

Date PaymentInterest ExpenseInterest Amortization Presentvalue

07/01/2012 8,852,960 01/01/2013 500,000 531,178 31,178 8,884,138 07/01/2013 500,000 533,048 33,048 8,917,186 01/01/2014 500,000 535,031 34,999 8,952,185 03/31/2014 250,000 268,566 18,566 8,970,751 (8,952,185 x 12% x 3/12) SUMMARY OF ANSWERS: 1. A 2. B 3. A 4. C 5. C 6 B 7 C

(35)

Chapter 27 – Lease

CHAPTER 27: LEASE

Note to professor: Page 1015 SOLUTION: #6 Contingent rent: First P3,000,000 at 6% P 180,000 In excess of P3,000,000 at 5% 100,000 280,000

Total Rental Expense – 2015 P 520,000 Change to:

Contingent rent:

First P1,500,000 to P3,000,000 at 6% P 90,000

In excess of P3,000,000 at 5% 100,000 190,000

Total Rental Expense – 2015 P 430,000

1017 Unguaranteed residual value: Lessee's point of view

Guaranteed by a party other than the lessee or partyrelatedto the lessee Kindly changerelatedtounrelated.

1030 Requirement No. 3 Current

Asset NoncurrentAsset Lease receivable 467,273 1,601,819 Less: Unearned interest income 183,927 352,436 Present value of lease receivable 283,345 1,249,382

Kindly disregard this table.

1037 Journal entry No. 7

Expiration under Unguaranteed Residual Value

Add: Expiration under Unguaranteed Residual Value: Fair value is less

than the residual value

1040 2. To record the leaseback

Equipment xx

Cash xx

ChangeCashtoLease Liability

1043 Solution: Requirement No. 1

Gain on sale and leaseback=P80,000 ChangeP80,000toP100,000

Page 1024

CASE NO. 2

Requirement No. 1

Amount to be capitalized as machinery

Since the present value of minimum lease payments of P529,335 is higher than leased asset’s fair value of P515,000, the assets will be capitalized at P515,000. In addition, there is a need to compute for the new implicit rate using interpolation.

(36)

Recall the very basic principle in computing for present value that a lower rate will give higher present value. The previous implicit rate of 12% yielded a present value of P529,340 which is higher than P515,000. With that, the P515,000 fair value will mean higher effective rate. Applying trial and error, let us try 15%. Present value is as follows:

Present value of periodic rent payment (P150,000 x 3.2832) 492,480

Add: Present value of GRV (P30,000 x .5718) 17,154

Total present value of minimum lease payment 509,634

We can analyze the computation as follows:

Effective rate Present value Gapdifferences Gappercentage

12% P 529,335 3% P 14,335 X? P 515,000 P 5,366 15% 509,634

Total gap difference P 19,701

Computation using the lower rate as a starting point:

X = Lower rate + [(HR - LR) x PV of LR - PV of X_{PV of LR - PV of HR} ] X = 12% + [(15% - 12%) x 14,3_19,₇₀₁35 ]

X = 14.183%

Computation using the higher rate as a starting point:

X = Higher rate - [(HR - LR) x PV of X - PV of HR_{PV of LR - PV of HR} ] X = 15% - [(15% - 12%) x _19,5,36₇₀₁6 ]

X = 14.183%

Alternative computation:

Using ratio and proportion, the computation is as follows: 12% - X = 529,340 - 515,000

12% - 15% 529,340 - 509,636 We can simplify the equation by isolating X 12% - X = (12%-15%) x (14,335/19,701) 12% - X = (-3%) x (14,335/19,701) 12% + (3% x (14,335/19,701)) = X .12 + (.021829) = X

(37)

Page 1031

Gross Investment or lease receivable Unearned interest revenue to be recognized as

revenue using the effective interest method

= Total amount lessor receives = MLPs + URV

PV of MLPs + PV of URV = PV of net investment Fair market value

= Sales price Gross (dealer's) profit

= PV of MLPs - recognize immediately

= Sales

Net cost (move bracket downwards)

= Cost of goods sold minus Present value of URV 0

PROBLEM 27-1 Unequal rental payments

2013 20,000

2014 18,000

2015 16,000

2016 14,000

Total rent 68,000

Divide by: Number of years 4

Rent expense per year (C) 17,000

PROBLEM 27-2 Operating Lease - Unequal rental payments

07/01/2013 to 06/30/2014 60,000

07/01/2014 to 06/30/2015 90,000

07/01/2015 to 06/30/2016 210,000

Total 360,000

divide by 3

Rent income per year 120,000

Rent income to date (120,000 x 2) 240,000 Less: Collection to date (60,000 +

90,000) 150,000

(38)

PROBLEM 27-3 Operating Lease - Comprehensive CASE NO. 1 Question No. 1

Periodic rent-one year (B) 360,000

CASE NO. 2 Question No. 2

Periodic rent-one year 360,000

Amortization of lease bonus (200,000 / 4 ) 50,000

Rent expense (C) 410,000

Total lease payments [4 X (12 – 7) X 30,000] 1,230,000

Divide by: Lease term 4

Rent expense per year (D) 307,500

Question No. 4

Total payments to date, 2015 (2 x (12 – 7) X 30,000 ) 510,000 Less: Total expense to date, 2015 (307500 X 2 ) 615,000

Accrued rent payable (B) (105,000)

Total lease payments

(25000 X 2 X 12 ) 600,000

(30000 X 2 X 12 ) 720,000 1,320,000

Rent expense per year (A) 330,000

Question No. 6

Total payments to date, 2015 600,000

Less: Total expense to date, 2015 (330,000 X 2 ) 660,000

Accrued rent payable (C) (60,000)

Rent Revenue 360,000

Less: Amortization of Direct Cost (60,000 / 4 ) 15,000 Insurance and property tax expense on

leased asset 30,000

Depreciation of the leased asset 30,000

(39)

Period rent for one year 360,000

Add: Contingent rent

1st_{[(3,000,000 – 1,000,000) x 8%]} _160,000

2nd_{[(6,000,000 – 3,000,000) x 5%]} _150,000 _310,000

Total rent expense (A) 670,000

1. B 2. C 3. D 4. B 5. A 6. C 7. A 8. A

PROBLEM 27-4 Finance Lease - Lease Liability

The capitalized lease liability should be the annual lease payments less the executory cost (real estate taxes) times the present value factor for an ordinary annuity of 1 for nine years at 9%. The calculation would be: (P26,000 - 1,000) × 6.0 = P150,000. The real estate taxes are a period cost and should be charged to expense.

Answer: A

PROBLEM 27-5 (FINANCE LEASE WITH BARGAIN PURCHASE OPTION) Question No. 1 (A)

Present value of periodic payment (100,000 x 4.1699) 416,990 Add: Present value of bargain purchase option (30,000 x 0.6209) 18,627

Present value of minimum lease payments 435,617

Date paymentAnnual expenseInterest Amortization Presentvalue

12/31/2015 435,617 12/31/2015 100,000 - 100,000 335,617 12/31/2016 100,000 33,562 66,438 269,179 12/31/2017 100,000 26,918 73,082 196,097 12/31/2018 100,000 19,610 80,390 115,706 12/31/2019 100,000 11,571 88,429 27,277 12/31/2019 30,000 2,723 27,277 (0) Question No. 2 (B)

P33,562. See amortization table above.

(40)

1. A 2. B 3. C 4. B

PROBLEM 27-6 With Guaranteed Residual Value And Initial Direct Cost Note to the professor: The date for question Numbers 3 and 4 should be

December 31,2015and not December 31, 2016.

Present value of periodic payment (120,000 x 3.4869) 418,428 Add: Present value of guaranteed residual value (30,000 x 0.683) 20,490

Present value of minimum lease payments 438,918

Add: Initial direct cost 20,000

Cost of the Machinery (C) 458,918

12/31/2015 438,918 12/31/2015 120,000 - 120,000 318,918 12/31/2016 120,000 31,892 88,108 230,810 12/31/2017 120,000 23,081 96,919 133,891 12/31/2018 120,000 13,389 106,611 27,280 12/31/2019 30,000 2,720 27,280 -Question No. 2 (B)

Present value of periodic payment (120,000 x 3.4226) 410,712 Add: Present value of guaranteed residual value (30,000 x 0.647) 19,410 Present value of minimum lease payments = Fair value 430,122

Add: Initial direct cost 20,000

(41)

Amortization Table: Effective rate = 11.50%

12/31/2015 430,122 12/31/2015 120,000 - 120,000 310,122 12/31/2016 120,000 35,664 84,336 225,786 12/31/2017 120,000 25,965 94,035 131,751 12/31/2018 120,000 15,151 104,849 26,903 12/31/2019 30,000 3,097 26,903 (0) Question No. 6 (D)

Question No. 8 (D)

1. C 2. B 3. C 4. B 5. D 6. D 7. A 8. D

PROBLEM 27-7 Finance Lease - Depreciation Question No. 1

Cost of the lease asset 438,918

Less: Estimated residual value end of the useful life of the asset 50,000

Depreciable cost 388,918

Divide by: Useful life 10

Depreciation (A) 38,892

Question No. 2

Cost of the lease asset 438,918

Less: Gross amount of guaranteed residual value 30,000

Depreciable amount 408,918

Depreciation (B) 102,230

PROBLEM 27-8 Computation of Periodic Lease Payments

Fair value 4,000,000

Less: Present Value of Guaranteed Residual Value 1,024,500

Total 2,975,500

Divide by: Present value of Annuity Due 3.4869

(42)

PROBLEM 27-9 Direct Financing Lease - Lessor Question No. 1

Gross Investment:

Total Periodic Lease Payment (914,585 x 5) *4,572,927

Add Unguaranteed Residual value (URV) 300,000 4,872,927

Less: Cost of the equipment 4,000,000

Unearned interest income (A) 872,927

*4,573,927 OR 4,573,925 Amortization Table

Date CollectionAnnual InterestIncome Amortization Presentvalue

12/31/2015 4,000,000 12/31/2015 914,585 - 914,585 3,085,415 12/31/2016 914,585 308,541 606,044 2,479,370 12/31/2017 914,585 247,937 666,648 1,812,722 12/31/2018 914,585 181,272 733,313 1,079,409 12/31/2019 914,585 107,941 806,645 272,764 12/31/2020 300,000 27,235 272,765 (0)

PROBLEM 27-10 Direct Financing Lease - With Initial Direct Cost Question No. 1

Gross Investment:

Total Periodic Lease Payment (959,256 X 5) *4,796,278

Add Unguaranteed Residual value (URV) - 4,796,278

Less: Cost of the equipment 4,066,956

Unearned interest income (A) 729,322

*4,796,278 OR *4,796,280 Amortization Table

12/31/2015 4,000,000 12/31/2015 959,256 - 959,256 3,040,744 12/31/2016 959,256 304,074 655,181 2,385,563 12/31/2017 959,256 238,556 720,699 1,664,864 12/31/2018 959,256 166,486 792,769 872,095 12/31/2019 959,256 87,160 872,095 (0)

(43)

P655,181 See amortization table above.

PROBLEM 27-11 Direct Financing Lease - Sale Of Leased Asset CASE NO. 1

Question No. 1

Gross Investment:

Total periodic lease payments (6M X 5) 3,000,000

Add: Residual Value 100,000 3,100,000

Present value of the leased asset

Present value of minimum lease payments

(600,000 x 3.6048) 2,162,880

Add: Present value of residual value (100,000 x

.5674) 56,740 2,219,620

Unearned interest income (A) 880,380

01/01/2015 2,219,620 12/31/2015 600,000 266,354 333,646 1,885,974 12/31/2016 600,000 226,317 373,683 1,512,291 12/31/2017 600,000 181,475 418,525 1,093,766 12/31/2018 600,000 131,233 468,767 624,999 12/31/2019 700,000 75,001 624,999 0 Question No. 2

Question No. 3: Guaranteed

Sales 2,219,620

Less: Cost of goods sold 2,000,000

Initial direct cost 40,000

Dealer's profit (B) 179,620

Question No. 4

Nil. (A)

The journal entry is:

Inventory 90,000

Cash 10,000

(44)

1. A 2. A 3. B 4. A

Gross Investment:

Total periodic lease payments (6M X 5) 3,000,000

Add: Residual Value 100,000 3,100,000

Present value of the leased asset

Present value of minimum lease payments

(600,000 x 3.6048) 2,162,880

Add: Present value of residual value (100,000 x

.5674) 56,740 2,219,620

Unearned interest income (A) 880,380

Question No. 2 (A) Amortization Table

01/01/2015 2,219,620 12/31/2015 600,000 266,354 333,646 1,885,974 12/31/2016 600,000 226,317 373,683 1,512,291 12/31/2017 600,000 181,475 418,525 1,093,766 12/31/2018 600,000 131,233 468,767 624,999 12/31/2019 700,000 75,001 624,999 0

Question No. 3: Unguaranteed

Sales 2,162,880

Less: Net cost

Cost of goods sold 2,000,000

Less: Present value of URV 56,740 1,943,260

Initial direct cost 40,000

Dealer's profit (B) 179,620

P10,000.

The journal entry is:

Inventory 90,000

Loss on sales type 10,000

Lease receivable 100,000

(45)

PROBLEM 27-12 Sales-Type Lease

Net Selling Price 200,000

Less: Present value of lease receivable 227,436

Loss on sale (D) (27,436)

PROBLEM 27-13 Sale and Leaseback as Finance Lease

Sales Price 2,162,880

Less: Carrying amount 1,900,000

Deferred gain on sale 262,880

Answer A. Answer is zero, the gain on sale is to be deferred and amortize over

the lease term

PROBLEM 27-14 Sale and Leaseback as Operating Lease - Treatment of Gain

Sales Price = Fair value 1,400,000

Gain on sale - recognize immediately 400,000

Sales price 1,400,000

Gain on sale - recognize immediately 400,000

Question No. 3

Sales price 1,400,000

Less: Fair value 1,100,000

Deferred Gain 300,000

Fair value 1,100,000

Outright gain (D) 100,000

PROBLEM 27-15 Sale and Leaseback as Operating Lease - Treatment of Loss

Sales Price = Fair value 900,000

(46)

Sales price 900,000

Loss on sale - recognized immediately (100,000)

Nil. The entire loss is deferred since it will be compensated by below-market future rentals.

COMPREHENSIVE PROBLEMS PROBLEM 27-16

CASE NO. 1 Question No. 1 (A)

“Substantially all” test

Present value of Periodic Payment (200,000 x 6.75902) 1,351,805

% age 1,351,805 =68%

2,000,000 Not substantially all.

Major part test

% age 10 =50%

20

The lease term does not amount to major part of the economic life of the asset. Answer: Nil. The lease do not classify as finance lease.

Rent expense P200,000

Question No. 3 (A) Nil.

Question No. 4 (A) Nil.

Depreciation expense overstated, net income understated (115,181) Interest expense overstated, net income understated (135,181) Rent expense understated, net income overstated 200,000

Net income understated (50,362)

SUMMARY OF ANSWERS – CASE NO. 1: 1. A 2. B 3. A 4. A 5. D

(47)

CASE NO. 2 Question No. 1 (B)

“Substantially all” test

% age 1,351,805 =90%

1,500,000

The lease is a finance lease. The cost of the leased asset is lower between the fair value and the present value of minimum lease payment which is P1,351,805.

Date PaymentAnnual ExpenseInterest Amortization Presentvalue

12/31/2014 1,351,805 12/31/2014 200,000 - 200,000 1,151,805 12/31/2015 200,000 115,181 84,819 1,066,986 12/31/2016 200,000 106,699 93,301 973,684 12/31/2017 200,000 97,368 102,632 871,052 Question No. 2 (D) Depreciation expense (1,351,805/10) 135,181 Interest expense 115,181

Total lease- related expenses 250,362

P1,066,986. See amortization table above.

Nil. The company did not commit any error.

SUMMARY OF ANSWERS – CASE NO. 2: 1. B 2. D 3. C 4. B 5. A

PROBLEM 27-17

Lease is a finance lease thus any gain should be deferred and amortize over the lease term.

Selling Price 379,695

Less: Carrying amount 350,000

Deferred gain on sale and leaseback 29,695

(48)

Interest expense 38,363

Depreciation expense (379,695/10) 37,970

Rent expense (5,000 x 12) 60,000

Total lease related expenses 136,333

Date PaymentAnnual ExpenseInterest Amortization Presentvalue

01/02/2015 379,695

01/02/2015 60,000 - 60,000 319,695

01/02/2016 60,000 38,363 21,637 298,058

Sale and leaseback as finance lease

Lease liability, 01/02/2015 319,695

Add: Accrued interest 38,363

Total lease-related liability 358,058

Amortization of deferred gain on sale and leaseback (see No. 1) 2,970 Add: Gain on sale and leaseback as operating lease

(P400,000-P350,000) 50,000

Total gain on sale and leaseback 52,970

The deferred gain on sale and leaseback should be recognized immediately.

SUMMARY OF ANSWERS – CASE NO. 2: 1. B 2. D 3. C 4. B 5. B

PROBLEM 27-18

Present value of Periodic Payment (50,000 x 4.0373) - LOWER 201,865

Fair Value of the leased asset P213,213

PAR. 20 OF PAS 17 States that: At the commencement of the lease term, lessees shall recognise finance leases as assets and liabilities in their balance sheets at amounts equal to the fair value of the leased property or, if lower, the present value of the minimum lease payments, each determined at the inception of the lease. The discount rate to be used in calculating the present value of the minimum lease payments is the interest rate implicit in the lease, if this is practicable to determine; if not, the lessee’s incremental borrowing rate shall be used. Any initial direct costs of the lessee are added to the amount recognized as an asset.

Applied Auditing Asuncion Solman

A guide in applying auditing procedures to specific

accounts of the financial statements.

TEACHERS MANUAL

2015

Edition

By

DARRELL JOE O. ASUNCION, MBA, CPA

RAYMUND FRANCIS A. ESCALA, MBA, CPA

Dear fellow teacher,

This “Teacher’s Manual” should be used solely by the

teacher and for classroom purposes only. This manual

should NOT be reproduced either manually (e.g.,

printing or photocopy) or electronically (e.g., copying or

uploading in the net) without our written consent (or the

publisher’s written authorization).

If you have comments, queries or suggestions, please do

not hesitate to contact us at:

Telephone: 074-2441894

Mobile No.: Darrell Joe O. Asuncion – 0923-424-8286

Raymund Francis A. Escala – 0917-715-1226

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Email ad:

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Thanks and God bless.

Sincerely,

Darrell Joe O. Asuncion, MBA, CPA

Raymund Francis A. Escala, MBA, CPA

Mark Alyson B. Ngina, CMA, CPA

Table of Contents

Chapter 25 INTRODUCTION To LIABILITIES ... 4

Chapter 26 FINANCIAL LIABILITIES AND DEBT RESTRUCTURING...17

Chapter 27 LEASE ...35

Chapter 29 SHAREHOLDERS' EQUITY...61

Chapter 30 BOOK VALUE AND EARNINGS PER SHARE ...85

Chapter 32 STATEMENT OF FINANCIAL POSITION...97

CHAPTER 25: INTRODUCTION TO LIABILITIES

CHAPTER 26 FINANCIAL LIABILITIES AND DEBT

RESTRUCTURING

CHAPTER 27: LEASE