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# ARTS CPA Review

## (Academic Review and Training School, Inc.)

2F & 3F Crème Bldg., Abella St., Naga City
Tel No.: (054) 472-9104; E-mail: artscparev@yahoo.com.

CONSOLIDATED TOPICS
PRACTICAL ACCOUNTING I MICHAEL B. BONGALONTA,CPA,MICB,MBA

## A. BORROWING COST (PAS 23)

Problem 1 (adapted): The following transaction pertain to the general borrowings made during 2014 by Victory
Company in connection with the construction of the company’s new warehouse:

## Principal Borrowing Costs

8% bank loan P2,400,000 P192,000
6% short-term note 1,600,000 96,000
8% long-term note 2,000,000 160,000

The construction started on January 1, 2014 and the warehouse was completed on December 31, 2014.
Expenditures on the warehouse were as follows:

## January 1 P 400,000 September 30 P1,000,000

March 31 1,000,000 December 31 400,000
June 30 1,200,000

## A. How much is the capitalizable borrowing cost of Victory Company?

B. Compute the cost of the new warehouse.

## Total borrowing costs (192,000 + 96,000 + 160,000) P 448,000

÷ Total borrowings (2,400,000 + 1,600,000 + 2,000,000) 6,000,000
Average capitalization rate 7.47%

Principal Average
Date Cost Incurred Rate Time Interest
01/01 P400,000 x 7.47% x 12/12 P29,880
04/01 1,000,000 x 7.47% x 09/12 56,025
07/01 1,200,000 x 7.47% x 06/12 44,820
10/01 1,000,000 x 7.47% x 03/12 18,675
12/31 400,000 x 7.47% X 00/12 0
Total borrowing cost to be capitalized P149,400

Problem 2 (adapted):Moses Company borrowed P4, 000, 000 on a 10% note payable to
finance a new warehouse which the entity is constructing for its own use. The only other
debt of Moses’ books is a P6, 000, 000.00, 12% mortgage payable on an office building. At
the end of the current year, average accumulated expenditures on the new warehouse
totaled P4, 750, 000. What amount should Moses capitalize as interest for the current
year?

a. 400, 000
b. 475, 000
c. 490, 000
d. 522, 500

## Average expenditures 4, 750, 000

Specific borrowing (4, 000, 000)
General borrowing 750, 000

## Specific borrowing ( 4, 000, 000x10%) 400, 000

General borrowing (750, 000x12%) 90, 000
490, 000

## B. GOVERNMENT GRANT (PAS 20)

Problem 3 (adapted): On January 2, 2007, Brand Company received a grant of P60,000,000 to
compensate it for costs it incurred in plating trees over a period of five years. Brand Company
will incur such cost in this manner:
Year Costs
2007 P2,000,000
2008 P4,000,000
2009 P6,000,000
2010 P8,000,000
2011 P10,000,000

What amount of income should Brand Company recognize at the end of year 2010?
Year Grant Ratio Income Recognized
2007 P60,000,000 x2/30 = P4,000,000
2008 P60,000,000 x4/30 = P8,000,000
2009 P60,000,000 x6/30 = P12,000,000
2010 P60,000,000 x8/30 = P16,000,000
2011 P60,000,000 x10/30 = P20,000,000

## Problem 4 (adapted): On January 2, 2011, Dumont Company received a consolidated grant of

P240,000,000. Three-fourths of the grant is to be utilized to purchase a college building for
students from underdeveloped or developing countries. The balance of the grant is for
subsidizing the tuition costs of those students for four years from the date of the grant. The
expected college life of the building is 10 years and the company uses the straight line
method of depreciation.

What amount of the grant is recognized as income for the year ended December 31, 2011?

Grant related to asset
P240,000,000 x ¾ = P180,000,000 ÷ 10 years = P18,000,000
Grant related to income
P240,000,000 x ¼ = P60,000,000 ÷ 4 years = 15,000,000
Total P33,000,000
C. WASTING ASSETS(PFRS 6)

Problem 5 (adapted): In January 1, 2011, HUFF MINING COMPANY purchased a mineral mine for P36,000,000 with
removal ore estimated by biological survey at P2,160,000 tons. The property has an estimated value of P3,600,000 after
the ore has been extracted. Huff incurred P10,800,000 of development cost preparing the property for the extraction of
ore. During 2011, P270,000 tons were removed and P240,000 tons were sold. For the year ended December 31, 2011,
what amount of depletion should be included in cost of goods sold?

Solution:

## Purchase price P 36,000,000

Development cost 10,800,000
Total cost of ore property P 46,800,000
Residual value (3,600,000)
Depletable amount P 43,200,000
Rate per ton (43,200,000/2,160,000) 20
Depletion for 2011 (270,000x20) P 5,400,000
Depletion in cost of goods sold (240,000x20) P 4,800,000

## Problem 6 (adapted):BATON CORPORATION acquires a coal mine at a cost of

P5,000,000. Intangible development costs total P1,200,000. After extraction has
occurred, Baton must restore the property (estimated fair value of the obligation
is P600,000), after which it can be sold for P1,700,000. Baton estimates that
P50,000 tons of coal can be extracted.
If P9,000 tons were extracted during the first year, which of the following would
be included in the journal entry to record depletion?
A. Debit to Accumulated Depletion for P918,000
B. Debit to Inventory for P918,000
C. Credit to Inventory for P900,000
D. Credit to Accumulated Depletion for P1,530,000

Cost of coal mine P5,000,000
Development cost 1,200,000
Fair value of restoration cost 600,000
Salvage value (1,700,000)
Depletable cost P5,100,000
÷ total estimate 50,000
Depletion per ton P 102
X Tons extracted 9,000
Debit to inventory P 918,000

## D. REVALUATION AND IMPAIRMENT OF ASSETS (PAS 36)

Problem 7 (adapted): On June 30, 2011, the statement of financial position of Louisiana Company reported the following:

## Equipment at cost 5,000,000

Accumulated depreciation 1,500,000

The equipment was measured using the cost model and depreciated on straight line basis over a 10-year period. On December 31, 2011, the management
decided to change the basis of measuring the equipment from cost model to the revaluation model. The equipment was revalued to its fair value of
P4,550,000 with remaining useful life of 5 years. Ignoring the income tax, what amount should Louisiana report as revaluation surplus on December 31,
2011?

Solution

## Cost – June 30, 2011 5,000,000

Accumulated Depreciation (1,500,000)
Carrying amount – June 30, 2011 3,500,000
Depreciation from July 1 to December 31, 2011
(5,000,000/10 x 6/12) ( 250,000)
Carrying amount – December 31, 2011 3,250,000

## Fair value – December 31, 2011 4,550,000

Carrying amount – December 31, 2011 3,250,000
Revaluation surplus – December 31, 2011 1,300,000

The fair value is already the sound value or revalued amount of the equipment.
Subsequent annual depreciation for 2011 (4,550,000/5) 910,000

Problem 8 (adapted): A division of Vixen Company has following non-current assets, which are stated at their carrying
amounts ate December 31, 2012:

## Land and Buildings P320,000,000

Plant and machinery 110,000,000
Goodwill 70,000,000

The management of Vixen believes that the value in use of these assets may have become impaired, because a major
competitor has developed a superior version of the same product. As a result, sales are expected to fall. The following
additional information is relevant: The land and buildings are carried at a valuation. The depreciated historical cost is
P265,000,000 at December 31, 2012. All other non-current assets are carried at historical cost. The goodwill does not
have a market value. It is estimated that the land and buildings could be sold for P270,000,000 and the plant and
machinery could be sold for P50,000,000, net of direct selling costs. The value in use of the assets has been calculated at
P385,000,000. What is the impairment loss to be recognized by Vixen Company?

## Fair value less cost to sell (P270,000,000 and P50,000,000) P320,000,000

Value in use 385,000,000
Recoverable amount ( the higher between the
fair value less cost to sell and value in use) P385,000,000

## Carrying amount P500,000,000

Less: Recoverable amount 385,000,000
Impairment loss P115,000,000

Problem 9 (adapted): Foster Company acquires 80% of the shares of Roster Ltd. on January 2, 2010 for Pj1,600,000.
At this date, the identifiable net asset of Roster Ltd. have a fair value of P1,500,000. Roster Ltd. is the smallest group of
assets that generate cash inflows from continuing use that are largely independent of the cash flows from other assets.
Roster Ltd. is a cash-generating-unit. During the year 2010, the amount of depreciation in relation to the identifiable
assets of Roster Ltd. is P150,000. At December 31, 2010, Foster Company determines that the recoverable amount of
roster Ltd. is P1,000,000.

## a. What is the total amount of impairment loss on Roster Ltd?

b. What amount of the impairment loss should be charged agjainst the goodwill of foster Company?
c. What amount of the impairment loss should Foster Company recognize on the identifiable assets of Foster
Ltd.?

Solution:
Acquisition cost P1,600,000
Net asset acquired (P1,500,000 x 80%) 1,200,000
Goodwill P 400,000

In order to test Roster Ltd for impairment, the goodwill has to be grossed up. If goodwill of
P400,000 relates to 80%, then P500,000 (P400,000/80%) goodwill relates 100%. In other words,
the P400,000 goodwill is grossed up to P500,000.

Test of impairment:
Identifiable
Particulars Goodwill assets Total
Gross carrying amount P400,000 P1,500,000 P1,900,000
Accum. Dep. (150,000) (150,000)
Carrying amount, 12/31/10 P400,000 P1,350,000 P1,750,000
Minority interest 100,000 100,000
Notionally adjusted carrying value P500,000 P1,350,000 P1,850,000
Less: recoverable amount P1,000,000
Total impairment loss P 850,000

## Allocation of Impairment Loss:

Identifiable
Particulars Goodwill assets Total
Gross carrying amount P400,000 P1,500,000 P1,900,000
Accum. Dep. (150,000) (150,000)
Carrying amount, 12/31/10 P400,000 P1,350,000 P1,750,000
Impairment loss 400,000 350,00 750,000
Carrying amount after impairment -0- P1,000,000 P1,000,000

Problem 10 (adapted): Marcus Company operates an oil platform in the sea. Marcus Company has provided the
amount of P10,000,000 for the financial costs of the restoration of the seabed, which is the present value of such costs.
Marcus Company has received an offer to buy the oil platform for P16,000,000 and the disposal costs would be
P2,000,000. The value in use of the oil platform is approximately P24,000,000 before the restoration costs. The carrying
value of the oil platform is P20,000,000.

What amount of impairment loss should Marcus Company recognize related to the oil platform?
a. None
b. P4,000,000
c. P6,000,000
d. P8,000,000

Fair value less cost to sell (P16,000,000-
2,000,000) 14,000,000
Value in in use (P24,000,000-10,000,000) 14,000,000
Carrying value (P20,000,000-10,000,000) 10,000,000

## Recoverable amount 14,000,000

Impairment loss None

## E. R&D COST AND INTANGIBLE ASSET (PAS38)

Problem 11 (adapted): On December 31, 2011, Kate Conde Company exchanged 100,000 ordinary shares of P50 par
value for the following assets:
* A trademark valued at P1,500,000.
* A building, including land, valued at P6,500,000 (20% of the value is for the land).
* A franchise right. No estimate of the value is available at the date of exchange.
The ordinary share of Kate Conde Company is selling at P90 at the date of exchange.
What amount should be recognized as measurement of the franchise on the date of exchange?
a. 1,500,000
b. 1,000,000
c. 2,000,000
d. 0

Fair value of shares issued (100,000 x 90) 9,000,000
Fair value of land (20% x 6,500,000) (1,300,000)
Fair value of building (80% x 6,500,000) (5,200,000)
Measurement of franchise 1,000,000
Problem 12 (adapted): Rose Anne Company developed a new machine that reduces the time required to insert the
fortune into its fortune cookies. Because the process is considered very valuable to the fortune cookie industry, Rose Anne
Company patented the machine. The following expenses were incurred in developing and patenting the machine:

## Research and development laboratory expense 500,000

Metal used in the construction of the machine 160,000
Blueprint used to design the machine 60,000
Legal expenses to obtain patent 240,000

## Wages paid for the employees’ work on the research and

development, and building of the machine (60% of the
time was spent on actually building the machine) 600,000
Expense of the drawing required by the patent office to
be submitted with the patent application 30,000
Fee paid to government patent office to process application 50,000

At year end, Rose Anne Company paid P350,000 in legal fees to successfully defend the patent against the infringement
suit by another entity. What total amount of the expenditures should be capitalized as cost of patent?

## Legal expenses to obtain patent 240,000

Expense of drawing required by patent office 30,000
Fee paid to patent office 50,000
Total cost of patent 320,000
Metal used 160,000
Blueprint used to design machine 60,000
Wages paid (60% x 600,000) 360,000
Cost of machine 580,000
Laboratory expense 500,000
Wages paid (40% x 600,000) 240,000
R and D expense 740,000

Problem 13 (adapted): On January 1, 2011, RAM Company purchased MAR Company at a cost that result in recognition
of goodwill of P2,000,000. During the first quarter of 2011. RAM spent an additional P800,000 on expenditures designed to
develop and maintain goodwill by training and hiring new employees. Due to these expenditures, on December 31, 2011,
RAM estimated that the benefit period of goodwill was indefinite. In its December 31, 2011 statement of financial position,
what amount should RAM report ass goodwill?

Cost of goodwill – January 1, 2011 2,000,000

Problem 14 (adapted): On January1, 2010, Better Company bought a trademark for P400,000, having a n estimated
remaining useful life of 16 years . After16 years revenues expected from this intangible will be zero. In January 2014,
Better paid P60,000 for legal fees in a successful defense of trademark. What amount of expenses should better company
recognize and charge against income during 2014?

## Amortization Expense-original cost (P400,000÷ 16) P25,000

Cost of litigation 60,000
Total expense P85,000

Problem 15 (adapted): An intangible asset costs P300,000 on January 1,2011. On January 1,2012 ,the asset was
evaluated to determine if it was impaired. As on January 1,2012, the asst was expected to generate future cash flows of
P25,000 per year (at the end of year). The appropriate discount rate is 5%. What total amount should be charged against
income in 2012, assuming that the asset had a total useful life at 10 years from date of acquisition?

Solution of Problem 30-9:
Amortization expense-2012(P177,696 ÷ 9) P19,744
Impairment loss (Schedule) 92,304
Total amount to be charged against income in 2012 P112,048
Book Value: (P300,000 – P30,000) P270,000
Estimated fair value:
Value in use (P25,000 × 7.10782) 177,696
Impairment loss P 92,304

Problem 16 (adapted): Sarrah Company is interested in computing the goodwill to be recognized in the purchase of ABC Company in
January 2012. The following information was taken from the records of ABC.
Net income Net assets
2007 360,000 1,600,000
2008 388,000 1,800,000
2009 288,000 1,900,000
2010 380,000 2,000,000
2011 394,000 2,100,000
1,810,000 9,400,000

It is agreed that goodwill is measured by capitalizing excess earnings at 40% with normal return on average net assets at 10%.
What is the “purchase price” of ABC Company?
SOLUTION :
Average net assets ( 9,400,000 / 5 ) 1,880,000
Average earnings ( 1,810,000 / 5 ) 362,000
Less: Normal earnings (10% x 1,880,000) 188,000
Excess earnings 174,000
Divide by capitalization rate 40%
Goodwill 4 3 5 ,0 0 0
Net assets – 2011 2,100,000
Total purchase price 2,535,000
The purchase price or acquisition cost includes the payment for the 2011 net assets and the
goodwill.

Problem 17 (adapted): Phar-Ti-Ra Company incurred research and development costs in the current year as follows:
Equipment acquired for use in various R and D projects 975,000
Depreciation on the above equipment 135,000
Materials used 200,000
Compensation costs personnel 500,000
Outside consulting fees 150,000
Indirect costs appropriately 250,000

What total research and development costs should be recognized as expense for the current year?

Depreciation on the above equipment 135,000
Materials used 200,000
Compensation costs personnel 500,000
Outside consulting fees 150,000
Indirect costs appropriately 250,000
Total 1,235,000

## A. BIOLOGICAL ASSETS (PAS 40)

Problem 18 (adapted): Fortitude Company purchased cattle at an auction for P 200,000 on July
1, 2014. Cost of transporting the cattle back to the company’s farm was P 2,000 and the
company would have to incur cost similar transportation cost if it was to sell the cattle in the
auction, in addition an auctioneer’s fee of 2% of sales price.
What amount should the biological assets initially recognized?
Fair value P 200,000
Transportation costs (2,000)
Auctioneer’s fee (200,000 x 2%) (4,000)
Problem 19 (adapted): Creep Company purchased 100 beef cattle at an account for P 800,000
on July 1, 2014. Transportation costs if it had sold its cattle in the auction. In addition there
would be a 2% auctioneer’s fee on the market price of the cattle payable by the seller. Creep
Company also incurred P 4,000 veterinary expenses. On December 31, 2014, the fair value
of the cattle in the most relevant market increases to P 880,000. On May 2, 2015, Creep
Company sold 18 cattle at the auction for P 160,000 and incurred transportation charges of P
1,200.
On June 15, 2015, the fair value of the remaining cattle was P 662,560 but on the same day,
42 cattle were slaughtered with total cost of P 33,600. The fair value of the carcasses on that
day was P 386,400 and the estimated transportation cost to sell the carcasses is P 3,600. No
other selling costs are expected.
On June 30, 2015, the fair value of the remaining 40 cattle was P 358,400. The estimated
transportation cost is P 3,200.
Question 1: What amount should the biological asset should be initially recognized on July 1,
2014?
Question 2: What amount should the biological asset be reported on December 31, 2014?
Question 3: What amount of gain as a result in the change in value of the biological asset to
be reported in the statement of comprehensive income for the year ended December 31,
2014?
Question 4: What is the net proceeds from the sale of cattle on May 2, 2015?
Question 5: What is the fair value of the inventory (carcasses) on June 15, 2015?

Fair value in most relevant market P 800,000
Transportation costs ( 8,000)
Auctioneer’s fee (800,000 x 2%) ( 16,000)
Fair value at point of purchase P 776,000

## Fair value in most relevant market P 800,000

Transportation costs ( 8,000)
Auctioneer’s fee (880,000 x 2%) ( 17,600)
Fair value at point of purchase P 854,400

## Fair value at point of purchase P 854,400

Fair value at point of purchase P 776,000
Change in the fair value-to profit or loss P 78, 400

## Selling price P 160,000

Less: selling expense
Transportation 1,200
Auctioneer’s fee (160,000 x 2%) 3,200 4,400
Net proceed from sale P 155,600

## Fair value of remaining carcasses P 386,400

Less: Transportation costs 3,360
Fair value of inventory P 383,040
B. NON-CURRENT ASSET HELD FOR SALE (PFRS 5)

Problem 20 (adapted): On June 1, 2012, Starlet Company approved a plan to dispose of a business segment. It
is expected that the sale will occur on April 30, 2013. On December 31, 2012, the carrying value of net assets of
the segment was P4,000,000 and the net recoverable amount was P3,600,000. During 2012, the company paid
employees severance and relocation costs of P200,000 as a direct result of the discontinuing operation. The
revenues and expenses of the discontinuing segment during 2012 were:
Revenues Expenses
January 1 to June 1 3,000,000 4,000,000
June 1 to December 31 1,400,000 1,800,000
Income tax rate is 35%.

How much will be reported as loss from ordinary activities of the discontinued segment during 2012?

Revenue :
January to June 1 3,000,000
June 1 to December 31 1,400,000 4,400,000
Expenses:
January 1 to June 1 4,000,000
June 1 to December 31 1,800,000 ( 5,800,000 )
Impairment loss:
Carrying value of net assets 4,000,000
Recoverable amount 3,600,000 ( 400,000 )

Termination costs:
Severance & relocation costs ( 200,000 )
Loss from ordinary activities ( 2,000,000)
Tax savings (2,000,000 x 35% ) 700,000
Net 1,300,000

PFRS 5, paragraph 33, provides that an entity shall disclose a single amount comprising
the total of post-tax profit or loss of the discontinued operation and the post-tax gain or
loss recognized on the measurement to fair value less cost to sell or on the disposal of the
assets or disposal group constituting the discontinued operation.
The ff. are disclosed in the notes to financial statements:
a.) The amount of revenue, expenses and income or loss attributable to the
discontinued operation during the current period and the related income tax.
b.) Any impairment loss – the impairment loss is recognized when as of the end of
reporting period and before the sale of the discontinued operation, the fair value
less cost to sell of the discontinued operation is lower than the carrying amount
of the net assets.
If the fair value less cost to sell of the discontinued operation is higher than the
carrying amount of the net assets, the expected gain is not recognized but only
disclosed.
c.) Any gain or loss from the actual disposal of the assets and settlement of the
liabilities of a discontinued operation is recognized on the date of sale or date of
settlement. Such gain or loss is reported as part of the discontinued operation.
d.) The termination cost of employees and other costs which are directly incurred
as a result of the discontinuance are shown as part of discontinued operation.

Problem 21 (adapted): Camper Company acquires a subsidiary with a view to selling it. The subsidiary meets
the criteria to be classified as held for sale. At the balance sheet date, the subsidiary has not been sold and six
months have passed since its acquisition. At the balance sheet date, the carrying value of the subsidiary is
P4,500,000; its estimated selling price is P6,000,000 and estimated cost to sell is P1,200,000. At how much should
the subsidiary be valued at balance sheet date?

Estimated selling price P6,000,000
Less: Cost to sell 1,200,000
Fair value P4,800,000
Carrying value 4,500,000
Lower P4,500,000

Problem 22 (adapted): On July 1, 2012, Blazer Company has a building with cost of P4,000,000 and
accumulated depreciation of P1,600,000. On the same date, Blazer Company commits to a plan to sell the building
by February 1, 2013. The building has a fair value of P2,000,000 and it is estimated that the selling cost of the
building will be P150,000. As of July 1, 2012, the building has a remaining life of 15 years.
Question 1: What is the amount to be reported as the carrying value of the building-held for sale as of December
31, 2012?
Question 2: What is the amount of loss to be recognized by Blazer Company in its income statement as a result if
reclassification?

## Fair value date if reclassification P2,000,000

Less: Estimated selling cost 150,000
Adjusted fair value of the asset 1,850,000

## Adjusted fair value date of transfer P1,850,000

Less: Book value date of transfer:
Cost P4,000,000
Accumulated depreciation 1,600,000 2,400,000
Loss on transfer P 550,000

PFRS 5, paragraph 25, further provides that once a noncurrent asset was reclassified as
held for sale the asset is no longer subject to depreciation. The rationale behind this
concept is that because the asset is now designated for disposal, the key accounting
point is no longer long-term cost allocation using depreciation but instead proper current
valuation of the asset. Accordingly, if current estimate reveals that the fair value of the
asset differs from its original fair value at the time of reclassification, the difference
should be recognized as a gain or loss that is to be reported in the current year income
statement.
C. DERIVATIVES

Problem 23 (adapted): On January 1, 2011, Pasa Company entered to a two year P 3 M variable interest rate
loans on the prevailing rate of 12%. In 2012, the interest rate is equal to the prevailing interest rate at the
beginning of the year. The principal loan is payable on December 31, 2011 and the interest is payable on
December 31 of each year. On January 1, 2011, Pasa Company entered into a “receive variable, pay fixed” interest
swap agreement with a speculator bank designated as cash flow hedge. The prevailing interest rate on January 1,
2011 is 14% and the PV of 1 at 14% for 1 period is .877. What amount should be reported as “interest rate swap
receivable” on December 31, 2011?

Since the interest on January 1, 2012 is 14% which is 2% higher than the fixed rate of
12%, it means that Pasa company shall receive P60,000 from the bank on December 31,
2012. This receivable is recognized as a derivative asset on December 31, 2011 at a PV of
P52,620 as follows:

## Interest rate swap receivable 52,620

Unrealized Gain – interest rate swap
(60,000 x .877) 52,620

Problem 24 (adapted): On June 30 of the current year, Clary company entered into a firm commitment to
purchase specialized equipment from Shigezaki Company for ¥80 Million on August 21. The exchange rate n June
30 is ¥100 = \$1. To reduce the exchange rate risk that could increase the cost of the equipment in U.S. Dollars,
Clary pays \$12,000 for a call option contract. This contract gives the option to purchase ¥80M at an exchange rate
of ¥100 = \$1 on August 31. On August 31, the exchange rate is ¥93 = \$1.

What amount in U.S. Dollarsdid Clary company save by purchasing the call option?

## Dollar equivalent – Aug 31 (80,000,000/93) 860,215

Dollar equivalent – June 30 (80,000,000/100) 800,000
Total saving 60,215
Payment for call option 12,000
Net saving- gain on call option 48,215
Welch Co. purchased a put option on Reese common shares on
January 7, 2014, for P2,150. The put option is for 3000 shares, and the strike price is
P51. The option expires on July 31, 2014. The following data are available with respect
to the put option:
Date Market Price of Reese Shares Time Value of Put Option
March 31, 2014 P48 per share P1,200
June 30, 2014 P50 per share 540
July 6, 2014 P46 per share 160

If the change in fair value was recognized on March 31, 2014 and then again on June
30, 2014, what amount of loss the company recognize on the re-measurement of the
option on June 30, 2014?
a. P 660 c. P3,540
b. P2,150 d. P6,660

ANS: D
Fair value – June 30:
Time value P 540
Intrinsic value (P50 – P51) x 3,000 shares 3,000 P 3,540
Fair value – March 31:
Time value P1,200
Intrinsic value (P48 – P51) x 3,000 shares 9,000 P10,200
Loss P 6,660

G. CURRENT LIABILITIES

Problem 26 (adapted): Sample Company has the following selected accounts after posting adjusting entries:

## Accounts Payable \$ 50,000

Notes Payable, 3-month 80,000
Accumulated Depreciation—Equipment 14,000
Payroll and Benefits Payable 22,000
Notes Payable, 5-year, 8% 30,000
Estimated Warranty Liability 34,000
Payroll Tax Expense 6,000
Interest Payable 3,000
Mortgage Payable 200,000
Sales Tax Payable 16,000

## Compute the amount of Current Liability.

Sol.
Current Liabilities
Notes payable, 3-month \$ 80,000
Accounts payable 50,000
Estimated warranty liability 34,000
Payroll and benefits payable 22,000
Long-term debt due within one year 20,000
Sales tax payable 16,000
Interest payable 3,000
Total Current Liabilities \$225,000

Problem 27 (adapted): Toyo Company owns a car dealership that it uses for servicing cars under warranty. In
preparing its financial statements, the entity needs to ascertain the provision for warranty that it would be required
to recognized at the end of the year. The entity experience with warranty claims is as follows 60% of all car sold in
a year have zero defect, 25% of all cars sold in a wear have normal defect, and 15% of all cars sold in a year have
significant defect. The cost of rectifying a “normal defect” in a car is P10,000. The cost of rectifying a “significant
defect” in a car is P30,000. The entity sold 500 cars during the year. What is the “expected value” of the provision
for warranty for the current year?

Solution:
Normal defect (25%x500xP10,000) 1,250,000
Significant defect (15%x500xP30,000) 2,250,000
Provision for warranty 3,500,000

Problem 28 (adapted): Cob Department store sells gift certificates redeemable only when merchandised is
purchase. These gift certificates have an expiration date of two years after issuance dare. Upon redemption or
expiration, Cobb recognizes the unearned revenue as realized. Information for the current year is as follow:
Unearned revenue, January 1, 2011 650,000
Cost of gods sold 60%

On December 31, 2011, what amount should Cobb report as unearned revenue?

Solution:
Unearned revenue – January 1, 2011 650,000
Total 2,900,000
Unearned revenue – December 31, 2011 850,000

Problem 29 (adapted): Black Company requires advance payments with special orders for machinery
constructed to customer specifications. These advances are non refundable. Information for the current year is as
follows:

## Advances from costumer – January 1 1,180,000

Advances applied to orders shipped 1,640,000
Advances applicable to orders canceled 500,000

In Black’s December 31 statement of financial posit, what amount should be reported as current liability for

Solution:
Advances from costumer – January 1 1,180,000
Total 3,020,000
Less: Advances applied to orders shipped 1,640,000
Advances applicable to orders canceled 500,000
Advances from costumer – December 31 880,000

Problem 30 (adapted): Kent Company, a division of National Realty Corporation maintains escrow accounts and
pays real states taxes for National’s mortgage costumers. Escrow funds are kept in interest-bearing accounts.
Interest, less a 10% service fee, is credited to the mortgagee’s account and use to reduce future escrow payments.
Escrow accounts liability, January 1 700,000
Real estate taxes paid 1,720,000
Interest on escrow funds 50,000

What amount should Kent report as escrow accounts liability in its December 31, 2011 statement financial
position?

Solution:
Escrow accounts liability – January 1 700,000
Interest on escrow funds 50,000 1,630,000
Total 2,330,000
Less: real estate taxes paid 1,720,000
Service fee (10% x 50,000) 5,000 1,725,000
Escrow accounts liability – December 31 605,000

## H. LONG TERM LIABILITIES

Problem 31 (adapted): On June 30, 2002, Wayne, Inc., sold \$600,000 (face value) of bonds. The bonds are dated June 30, 2002, pay
interest semiannually on December 31 and June 30, and will mature on June 30, 2005. The following schedule was prepared by the accountant for
2002.

## Semi-Annual Interest to Interest Unamortized Bond

Interest Period be Paid Expense Amortization Amount Carrying Value
\$30,000 \$570,000
1 \$24,000 \$28,500 \$4,500 25,500 574,500

Instructions
On the basis of the above information, answer the following questions. (Round your answer to the nearest dollar or percent.)
1. What is the stated interest rate for this bond issue?
2. What is the market interest rate for this bond issue?
3. What was the selling price of the bonds as a percentage of the face value?
4. Prepare the journal entry to record the sale of the bond issue on June 30, 2002.
5. Prepare the journal entry to record the payment of interest and amortization on December 31, 2002.

Solution
1. \$24,000 ÷ \$600,000 = .04 × 2 = 8%
2. \$28,500 ÷ \$570,000 = .05 × 2 = 10%
3. \$570,000 ÷ \$600,000 = .95 The bonds sold at 95.

## 4. June 30, 2002

Cash .................................................................................. 570,000
Discount on Bonds Payable ................................................... 30,000
Bonds Payable ............................................................. 600,000

## 5. December 31, 2002

Interest Expense ................................................................. 28,500
Discount on Bonds Payable ........................................... 4,500
Cash .......................................................................... 24,000

Problem 32 (adapted): On July 1 2011 Tara Company issued 4000 of its 8%, 1,000 face value bonds payable for
3,504,000.The bond were issued to yield 10%.The bonds are dated July 1, 2011 and mature on July 1
2021.Interest is payable semiannually on January 1 and July 1. Using the effective interest method, what amount
of the bond discount should be amortized for the six months ended December 31 2011?

Solution:

## Interest expense (3,504,000x10%x6/12) 175,200

Interest paid (4,000,000x8%x5/12) (160,000)
Discount amortization for six months 15,200

Problem 33 (adapted): On January 1 2011, West Company issued 9% bonds in the face amount of P5000000,
which mature on January 1 2021. The bonds were issued for P4695000 to yield 10% Interest is payable annually
on December 31. West uses the interest method of amortizing bond discount. In the December 31 2011 statement
of financial position, what is the carrying amount of the bond payable?

Solution:

## Interest expense (4,695,000x10%) 469,500

Interest paid (5,000,000x9%) 450,000
Amortization of discount for 2011 19,500
Bond Payable 5,000,000
Discount on bond Payable (305,000-,19,500) (285,500)
Carrying amount-December 31 2011 4,714,500

Problem 34 (adapted): On January 1, 2011,Colt Company issued ten-year bonds with a face amount of P5 000
000 and a stated interest rate of 8% payable annually on January 1.The bonds were price to yield 10%
PV of 1 for 10 periods at 10% 0.3855
PV of an ordinary annuity of 1 for 10 periods10% 6.145
What is the issue price of the bonds?

Solution:
PV of principal (5 000 000 x .3855 ) 1 927 500
PV of annual interest payments (400 000 x 6.145) 2 458 000
Total Present Value or issue price of bonds 4 385 500

Problem 35 (adapted): Susan company issued 5,000 convertible bonds on Jan.1,2011,the bond have a three
years term and are issued at the 110 with a face value of P1,000 per bond. Interest is payable annually in arrears
at a nominal 6% interest rate.Each bond is convertible at anytime up to maturity into 100 ordinary shares with par
value of the P5.When the bonds are issued,the prevailing market interest rate for similar debt instrument without
conversion option is 9%.The present value of 1 at 9% for 3 periods is .77 and the present value of an ordinary
annuity of 1 at 9% for 3 periods is 2.53.What is the equity component of the issuance of the convertible bonds on
Jan.1,2011?

Solution:
PV of principle (5,000,000 x .77) 3,850,000
PV of annual interest payments (300,000 x 2.53) 759,000
Total present value of bonds 4,609,000
Issue price of convertible bonds (5,000,000 x 110) 5,500,000
Present value of bonds 4,609,000
Equity component – share premium 891,000
Problem 36 (adapted): On march .1,2011,case company issued P5,000,000 of 12% nonconvertible bonds at
103.Which are due on Feb.28,2016.In addition, each of which entitled the bondholder to purchase, for P50,on
ordinary share of case company ,par valueP25.On March.1,2011,the quoted market value of each warrant was
P4.The market value of the proceeds from the bond issue should be recognized as a increase in shareholders’
equity?

Solution:
Issue price of bonds with warrants (5,000,000 x 103%) 5,150,000
Market value of bonds without warrants (5,000,000 x 95%) 4,750,000
Residual amount allocated to warrants-equity components 400,000
I. ACCOUNTING FOR INCOME TAX (PAS 12)

Problem 37 (adapted): The following differences between financial and taxable income were reported by Dider
Corporation for the current year:

## (a) Excess of tax depreciation over book depreciation .... \$60,000

(b) Interest revenue on municipal bonds .................. 9,000
(c) Excess of estimated warranty expense over actual
expenditures ......................................... 54,000
(d) Unearned rent received ............................... 12,000
(e) Fines paid ........................................... 30,000
(f) Excess of income reported under percentage-of-completion accounting for
financial reporting over
completed-contract accounting used for tax reporting . 45,000
(g) Interest on indebtedness incurred to purchase tax-exempt securities
.................................... 3,000
(h) Unrealized losses on marketable securities recognized
for financial reporting .............................. 18,000

## Compute the taxable income for the current year.

ANS:
Pretax financial income ................................ \$900,000
(b) Tax-exempt interest ........................... (9,000)
(e) Fines paid .................................... 30,000
(g) Interest expense on funds used to purchase tax-exempt 3,000
securities .........................
Subtotal ................................... \$924,000

(a) Excess of tax over book depreciation .......... (60,000)
(c) Excess of warranty expense over actual expenditures 54,000
..................................
(d) Unearned rent received ........................ 12,000
(f) Excess of percentage-of-completion income over (45,000)
completed contract income .....................
(h) Unrealized loss on marketable securities ...... 18,000
Taxable income ............................. \$903,000

Problem 38 (adapted): Bart, Inc., a newly organized corporation, uses the equity method of accounting for its
30% investment in Rex Co.’s common stock. During 2003, Rex paid dividends of \$300,000 and reported earnings

• The dividends received from Rex are eligible for the 80% dividends received deductions.
• All the undistributed earnings of Rex will be distributed in future years.
• There are no other temporary differences.
• Bart’s 2003 income tax rate is 30%.
• The enacted income tax rate after 2003 is 25%.
In Bart’s December 31, 2003 balance sheet, the deferred income tax liability should be

(b) The deferred income tax liability is the result of the undistributed earnings of an equity
investee, which are expected to be distributed as dividends in future periods. For accounting
purposes, investment revenue is \$270,000 (\$900,000 x 30%). For tax purposes, dividend
revenue is \$90,000 (\$300,000 x 30%), which will be partially offset by the 80% dividends
received deduction. Because of this 80% deduction, the difference (\$270,000 − \$90,000 =
\$180,000) is partially a permanent difference (80% x \$180,000 = \$144,000 which will
never be subject to taxes) and partially a temporary difference (20% x \$180,000 = \$36,000
which will be taxable in future years). This future taxable amount of \$36,000 will become
taxable after 2003, when the expected tax rate is 25%. Therefore, the deferred tax liability
is \$9,000 (25% x \$36,000). The entry to record the liability
is as follows:
Income tax expense—deferred 9,000
Deferred tax liability 9,000

## J. ACCOUNTING FOR LEASES (PAS 17)

Problem 39 (adapted): Presented below are three different aircraft lease transactions that occurred for Midwest
Airways in 2002. All the leases start on January 1, 2002. In no case does Midwest receive title to the aircraft
during or at the end of the lease period; nor is there a bargain purchase option.

Lessor
Unruh Insurance Maris Leasing Gregg Leasing
Type of property 747 Aircraft 727 Aircraft L-1011 Aircraft
Yearly rental \$5,908,781 \$4,954,021 \$2,851,861
Lease term 15 years 15 years 20 years
Estimated economic life 25 years 25 years 25 years
Fair market value of
leased asset \$55,000,000 \$49,000,000 \$32,000,000
Present value of lease
rental payments \$50,000,000 \$42,000,000 \$28,000,000

Instructions
(a) Which of the above leases are operating leases and which are capital leases? Explain your answer.
(b) How should the lease transaction with Unruh Insurance be recorded in 2002?
(c) How should the lease transaction with Maris Leasing be recorded in 2002?

Solution
(a) The Unruh Insurance lease is a capital lease since it meets one of the four criteria; i.e., the present value of
the lease payments exceeds 90% of the fair market value of the leased asset. The Gregg Leasing lease is a
capital lease since the lease term, 20 years, exceeds 75% of the estimated economic life of the leased asset.
The Maris Leasing lease is an operating lease since it meets none of the criteria.

## (b) Leased Asset ...................................................................................... 50,000,000

Lease Liability ........................................................................... 50,000,000

## Lease Liability .................................................................................... 5,908,781

Cash ........................................................................................ 5,908,781

## (c) Rental Expense ................................................................................... 4,954,021

Cash ........................................................................................ 4,954,021

Problem 40 (adapted): On January 1, 2003, Day Corp. entered into a ten-year lease
agreement with Ward, Inc. for industrial equipment. Annual lease payments of \$10,000 are
payable at the end of each year. Day knows that the lessor expects a 10% return on the lease.
Day has a 12% incremental borrowing rate. The equipment is expected to have an estimated
useful life of ten years. In addition, a third party has guaranteed to pay Ward a residual value of
\$5,000 at the end of the lease.

## The present value of an ordinary annuity of \$1 at

12% for ten years is 5.6502
10% for ten years is 6.1446
The present value of \$1 at
12% for ten years is .3220
10% for ten years is .3855
In Day’s October 31, 2003 balance sheet, the principal amount of the lease obligation was:

(b) This is a capital lease since the lease term (ten years) is the same as the useful life of
the leased asset. In a capital lease, the lessee records an asset and a liability based on the
PV of the minimum lease payments. The minimum lease payments includes rentals and a
guaranteed residual value, if guaranteed by the lessee. In this case the minimum lease
payments include only the rentals, since the residual value is guaranteed by a third party.
The minimum lease payments are discounted using the lower of the lessee’s incremental
borrowing rate or the implicit rate used by the lessor, if known. In this case, the lessee
knows the implicit rate is 10%, which is lower than the incremental borrowing rate of 12%.

Thus, the present value or principal amount of the lease obligation is \$61,446 (\$10,000 x
6.1446) through the first year. Although accrued interest would be recognized at 10/31/03,
the principal amount does not change until 1/1/04.

Problem 41 (adapted): On July 1, 2014, Radium Inc. leased a delivery truck from Titanium Corp. under a 3-year
operating lease. Total rent for the term of the lease will be P360,000 payable as follows:
12 months at P5,000 per month P60,000
12 months at P7,500 per month 90,000
12 months at P17,500 per month 210,000
All payments were made when due. In Radium’s June 30, 2016 balance sheet, what amount should be reported as
accrued rent payable?

Solution:
Total rentals P360,000
Lease term (3 years) ÷36months
Monthly rental P10,000
July 1, 2014 to June 30, 2016 24 months
Monthly rentals ×P10,000
Rent expense for 2 years P240,000
Less: Payment (1st and 2nd years) 150,000
Accrued rent P90,000
If the operating lease agreement provides for varying periodic rentals, rent expense/income
should be recognized on a straight-line basis unless a systematic and rational basis is more
appropriate , meaning the total cash rental throughout the duration of the lease contract
must be determined and amortized over the lease term. The difference between the rent
expense (lessee) or rent income (lessor) over the cash paid (lessee) or cash received
(lessor) is either a prepaid or accrued rent (lessee) or either an accrued unearned income
(lessor).

Problem 42 (adapted): As an inducement to enter a lease, Athena, a lessor, grants Zeus Corp. a lessee, months
of free rent under a 5-year operating lease. The lease is effective July 1, 2014 and provides for a monthly rental of
P20,000 to begin April 1, 2015.In Zeus income statement for the year ended June 30, 2015. How much should be
reported as rent expense?
Solution:
Lease term (5 years) 60 months
Less: rent free months 9 months
Number of lease payments 51 months
Monthly rental ×P20,000
Total rentals P1,020,000
Lease term ÷ 5
Annual rent expense P204,000
If the lease agreement provides for a rent free months or holiday, the total cash rental must
be determined and amortized on a straight-line basis (over the lease term) unless another
systematic and rational basis is more appropriate.

Problem 43 (adapted): On January 1, 2014, Peter Pan Company sold equipment with the carrying amount of
P1,000,000 and a remaining economic life of 10 years to Koko Drilling for P1,500,000. Peter Pan immediately
leased the equipment back under a 10-year finance lease payment of P244,120 in December 2014.
In December 31, 2014 statement of financial position, how much should be the adjusted unearned gain on
equipment sale?
Solution:
Selling price P1,500,000
Carrying value 1,000,000
Deferred gain P 500,000
Less: Realized gain (P500,000÷10) 50,000
Deferred gain, Dec. 31, 2014 P450,000
The sale and leaseback is a finance lease, any gain is deferred and amortized over the lease
term.

Problem 44 (adapted): The following information pertains to a sale and operating leaseback of equipment by
Germanium Co. on December 31, 2014:
Sale price P640,000
Carrying amount P500,000
Monthly lease payment P 24,457
Estimated remaining life 25 years
Lease term 2 years
Implicit rate 12%
Fair value P540,800
What amount of deferred gain on the sale should Germanium report at December 31, 2014?
Solution:
Sales price P640,000
Fair value 540,800
Deferred P99,200
Fair value P540,800
Carrying value 500,000
Realized gain P40,800
If a state and leaseback transaction results in an operating lease and sales price is above
the fair value, the excess over fair value should be deferred and amortized over the period
for which the asset is expected to be used, while the excess of the fair market value over its
carrying value should be recognized immediately as a realized gain.
Problem 45 (adapted): On June 30, 2014, Potassium Company sold an equipment with an estimated economic
life of 10 years and immediately leased it back for 8 years. The equipment’s carrying amount was P450,000, the
sales price was P430,000. What amount should Potassium report as deferred loss on its June 30, 2014 statement
of financial position?
Solution:
Selling price P430,000
Carrying value 450,000
Loss recognized outright P20,000
Any loss on a finance lease sale and leaseback is recognized immediately in the company’s
income statement.

Problem 46 (adapted): Camia Company is in the business of leasing new sophisticated equipment. As a lessor,
Camia expects a 12% return on its net investment. All leases are classified as a direct financing lease. At the end
of the lease term, the equipment will revert to Camia Company.
On January 1, 2011 an equipment is leased to another entity with the following information.
Cost of equipment to Camia 5, 500, 000
Residual value-unguaranteed 400, 000
Annual rental payable in advance 959, 500
Useful life and lease term 8 years
Implicit interest rate 12%
First lease payment January 1, 2011

## 1. What is the unearned interest income on January 1, 2011?

2. What is the interest income for 2011?

Solutions:
Gross rentals (959, 500 x 8) P7, 676, 000
Residual value 400, 000
Gross investment 8, 076, 000
Net investment-equal to the cost of the equipment 5, 500, 000
Unearned interest income-january 1, 2011 P2, 576, 000

The difference between gross investment and net investment in the lease is the unearned
interest income. The gross investment is the sum in absolute amount of the gross rentals
and residual value, whether guaranteed or unguaranteed.
In indirect financing lease, the net investment is simply the cost of the leased asset plus any
initial direct cost.
Whether guaranteed or unguaranteed, the residual value is included in computation of total
financial income if the leased asset will revert to the lessor at the end of the lease term.
Otherwise, the residual value is ignored if title passes to the lesse at the end of lease term.
PV of rentals- equal to the cost of the equipment
or net investment 5, 500, 000
First payment on January 1, 2011(all principal payment) 959, 500
Lease receivable- January 1, 2011 4, 540, 500

Interest income for 2011 (4, 540, 500 x 12%) 544, 860

1. P2, 576, 000
2. P594, 860
K. ACCOUNTING FOR EMPLYEE BENEFITS(IASR 19)
Problem 47 (adapted): You gathered the following information related to Jomalig Company’s the defined benefit
plan for the year ended December 31, 2013:
• Current service cost of providing benefits for the year to December 31, 2013: P54 million
• Average remaining working life of employees: 10 years
• Benefits paid to retired employees in the year: P55.8 million
• Contributions paid to the fund: P37.8 million
• Present value of obligation to provide benefits: P3,960 million at January 1, 2013, and P4,500 million at
December 31, 2013

• Fair value of plan assets: P3,780 million at January 1, 2013, and P4,320 million at
December 31, 2013
• Net cumulative unrecognized gains at January 1, 2013: P453.6 million
• Past service cost: P207 million. All of these benefits have vested.

## Discount rates and expected rates of return on plan assets:

1/1/13 1/1/14
Discount rate 5% 6%
Expected rate of return on plan assets 7% 8%

## 1. COMPUTE THE ACTUAL RETURN

2. COMPUTE THE NET INTEREST INCOME
3. COMPUTE THE BENEFIT EXPENSE

Unrecognized
Benefit Prepaid/ DBO FVPA Actuarial Past
expense (Accrued) Gains Service
Benefit (Losses) Cost
633.60 3,960.00 3,780.00 453.60
S 54.00 54.00
I 198.00 198.00
E
R (264.60) 558.00 293.40
A (5.76) (5.76)
P 207.00 207.00
Actuarial loss 136.80 (136.80)
Cash paid to employees (55.80) (55.80)
Cash paid to plan assets (37.80) 37.80
188.64 188.64
End 784.44 4,500.00 4,320.00 604.44
784.44

## UNDER IAS 19R

Unrecognized
Benefit OCI Prepaid/ DBO FVPA Actuarial Past
expense (Accrued) Gains Service
P/L Benefit (Losses) Cost
633.60 3,960.00 3,780.00 453.60
Retained
earnings
S 54.00 54.00
IE 198.00 198.00
II (189.00) 369.00 558.00
P 207.00 207.00
Actuarial loss (136.80) 136.80

## Cash paid to (55.80) (55.80)

employees
Cash paid to (37.80) 37.80
plan assets
270.00 232.20 270.00
(232.20)
End 180.00 4,500.00 4,320.00 - -
180.00

L. STOCKHOLDER’S EQUITY
Problem 48 (adapted): The following items were shown on the balance sheet of Herman Corporation on
December 31, 2002:

Stockholders’ Equity
Paid-In Capital
Capital Stock
Common stock, \$5 par value, 240,000 shares
authorized; ______ shares issued and ______ outstanding .................................... \$1,000,000

In excess of par value ........................................................................................ 120,000
Total paid-in capital ..................................................................................... 1,120,000

## Retained Earnings ....................................................................................................... 500,000

Total paid-in capital and retained earnings ............................................................ 1,620,000
Less: Treasury stock (10,000 shares) .............................................................................. (120,000)
Total stockholders' equity ................................................................................... \$1,500,000
Instructions
Complete the following statements and show your computations.
(a) The number of shares of common stock issued was _______________.
(b) The number of shares of common stock outstanding was ____________.
(c) The sales price of the common stock when issued was \$____________.
(d) The cost per share of the treasury stock was \$_______________.
(e) The average issue price of the common stock was \$______________.
(f) Assuming that 25% of the treasury stock is sold at \$20 per share, the balance in the Treasury Stock
account would be \$_______________.

Solution
(a) The number of shares of common stock issued was 200,000.
\$1,000,000 ÷ \$5 par value = 200,000 shares issued.
(b) The number of shares of common stock outstanding was 190,000.
200,000 issued less 10,000 in treasury = 190,000 shares outstanding
(c) The sales price of the common stock when issued was \$1,120,000.
Common stock \$1,000,000
Plus: In excess of par value 120,000
Total \$1,120,000
(d) The cost per share of the treasury stock was \$ 12.
\$120,000 ÷ 10,000 = \$12 per share.
(e) The average issue price of the common stock was \$5.60.
\$1,120,000 ÷ 200,000 shares = \$5.60 per share.
(f) Assuming 25% of the treasury stock is sold at \$20 per share, the balance in the
Treasury Stock account would be \$90,000.
7,500 shares × \$12 = \$90,000.

## Problem 49 (adapted):Blue Company has 2,000,000 shares of ordinary shares outstanding on

December 31, 2010. An additional 100,000 shares are issued on April 1, 2011, and 240,000
more on September1. On October 1, Blue issued P3, 000,000 of 9% convertible bonds. Each
P1, 000 bond is convertible into 40 shares of ordinary shares. At the time of issue of the
convertible bonds, the market rate of the bonds without the conversion option is equal to its
nominal rate. No bonds have been converted.
The number of shares to be used in computing basic earnings per share and diluted per
share on December 31, 2011 would be:
Solution:
Average # of shares for basic EPS:
01/01/11 2,000,000x12/12 = 2,000,000
04/01/11 100,000x 9/12 = 75,000
09/01/11 240,000x 4/12 = 80,000
2,155,000
Diluted EPS = Average # of shares
Basic EPS Diluted EPS
Average 2,155,000 2,155,000
Average ordinary shares issued as if
Converted (3,000,000/1,000x40x3/12) 30,000
Number of shares 2,155,000 2,185,000
Final Answer: 2,155,000&2,185,000 DILUTED EARNINGS PER SHARE
Problem 50 (adapted): On January 1, 2002, Yount Corporation had Retained Earnings of \$478,000. During the
year, Yount had the following selected transactions:
1. Declared stock dividends of \$30,000.
2. Declared cash dividends of \$80,000.
3. A 2 for 1 stock split involving the issuance of 200,000 shares of \$5 par value common stock for 100,000
shares of \$10 par value common stock.
4. Suffered a net loss of \$50,000.
5. Corrected understatement of 2001 net income because of an inventory error of \$42,000.
Instructions
Compute the balance of retained earnings statement for the year.

Solution
YOUNT CORPORATION
Retained Earnings Statement
For the Year Ended December 31, 2002

## Balance, January 1, as reported ............................................... \$478,000

Correction for understatement of 2001 net income (inventory error)
42,000
Balance, January 1, as adjusted ............................................... 520,000
Less: Net loss ...................................................................... (50,000)
470,000
Less: Cash dividends ............................................................. \$80,000
Stock dividends ............................................................ 30,000 (110,000)
Balance, December 31 ............................................................ \$360,000

Problem 51 (adapted): The accounts shown below appear in the December 31, 2014 trial balance of
HALLOW CORPORATION:

## Preference share authorized, P50 par P10,000,000

Unissued preference share 3,600,000
Ordinary share authorized, P20 par 4,000,000
Unissued ordinary share 2,000,000
Subscription receivable, preference share 380,000
Subscription receivable, ordinary share 360,000
Subscribed preference share 600,000
Subscribed ordinary share 440,000
Treasury share, preference share, at cost 1,360,000
Accumulated profits and losses 2,000,000

## All subscription receivables are due in year 2015

How much is the total shareholders’ equity of Hallow Corporation?

Solution

## Preference share issued (P10,000,000-3,6000,000) P6,400,000

Ordinary share issued (4,000,000-2,000,000) 2,000,000
Subscribed preference share 600,000
Subscribed ordinary share 440,000
Accumulated profit 2,000,000
Treasury shares (1,360,000)
Shareholders’ equity P11,780,000
Problem 52 (adapted): Hallway Company issued 20,000 shares of its P10 par value ordinary shares and 40,000
share of its P10 par value convertible preference share for a total amount of P1,800,000. At this date, Hallway’s
ordinary share was selling P20 per share and the convertible preference share was selling for P30 per share. What
amount of proceeds should be allocated to the ordinary share?

Solution: When two classes of securities are issued at a single/basket price, then the
proceeds are allocated using the market value ratio of the securities.

## Market value Ratio Allocation

Preference share (40,000xP30) P1,200,000 12/16 P1,350,000
Ordinary share (20,000xP20) 400,000 4/16 450,000

## Journal entry to record the transaction:

Cash P1,800,000
Ordinary share capital P200,000
Preference share capital 400,000

Problem 53 (adapted): The following balances are shown in the shareholders equity of Kalinga Company on
January 1,2011.

## Preference share capital, 100,000 share, P100 par P1,000,000

Ordinary share capital, 500,000 share, P10 par 5,000,000
Retained earnings 1,000,000

During 2011, the following transactions were completed retirement of 5,000 preference shares at P11 per share.
Purchase of 5,000 ordinary shares of treasury at P12 per share.

## Share split ordinary share 2-for-1

Reissue of 2,000 shares of treasury at P8 per share
Net income for the year, P300,000

Solution

## Shareholders equity – January 1 P6, 350,000

Retirement of Preference share (5,000 x 11) ( 55,000)
Purchase of treasury share (5,000 x 12) ( 60,000)
Share split – no effect -
Reissue of treasury shares (2,000 x 8) 16,000
Net income 300,000
Shareholders equity – December 31 P6,551,000

Problem 54 (adapted): The Accumulated Profits and Losses account of Gabby Company shows the following
postings:

Debit:
Share dividends P500,000
Uninsured fire loss 175,000
Prior years error 214,000
Reserve for bond redemption 300,000

Credit:
Beginning balance 1,120,000
Net income for years 760,000
Excess of par value 250,000
Gain on sale of treasury shares 150,000

## Ending balance P1,091,000

What is the correct balance of the Accumulated Profits account to be reported in the company’s year-end financial
system?

Solution

## Balance per ledger P1,091,000

Less: Items that were erroneously credited
to Accumulated Profits and Losses:
Excess of par P250,000
Gain on sales of treasury 150,000 400,000
Correct Accumulated Profits P 691,000

The uninsured fire loss, which is a nominal account, was not included in the reported net
income computation: as a result, income reported was over stated. Sa far as the effect on
the accumulated profits is concerned, the net income and the correction were properly
accounted for.
Allocation and Cash Dividends
Problem 55 (adapted): Generic Corporation paid dividends of P200,000 and 300,000 at the end of 2010 and
2011, respectively. The corporation has not paid any other dividends since its organization on January 2, 2010. The
outstanding shares are 20,000, 12% preference shares, par P100 and 30,000 ordinary shares, par P100.

Question 1: If preference shares is non-cumulative and nonparticipating, how much would be received in
2010 by the preference and ordinary shareholders, respectively?

Solution:

## Dividends due to preference shares should be P240,000 (20,000 shares x P100 x

12%). However, since the dividends paid in 2010 was only P200,000, then the total amount
will be given to the preference shareholders and none to the ordinary shareholders.

## Final Answer: d) P200,000 and 0

Question 2: If preference shares were cumulative and nonparticipating, how much would be the preference
and ordinary shareholders, respectively, receive in 2011?

Solution:

## Total amount paid as dividends at the end of 2011 P300,000

Less: Dividends payable to the preference shares:
Unpaid dividends in 2010
(P240,000 – P200,000) P 40,000
Dividends for the current year (2011) 240,000 280,000
Dividends due to ordinary shares P 20,000

## Final Answer: c) P280,000 and P 20,000

Problem 56 (adapted): On January 2, 2013, Mining Corporation declared a cash dividend of P600,000 to
shareholders to record on January 19, 2013 and payable on February 14, 2013. The following data pertain to 2012:

Net income for the year ended December 31, 2012 P190,000
Share premium, December 31, 2012 675,000
Accumulated profits, December 31, 2012 425,000

Solution:

## Amount of dividends paid P600,000

Accumulated profits, December 31, 2012 425,000
Dividends out of capital/liquidating dividends P175,000

The net income for 2012 of 190,000 should not be added to the accumulated profits and
losses since the accumulated profits already include the net income.

## Problem 57 (adapted): The following information pertains to Martial Corporation:

● Dividends on its 1,000 shares of 6%, P10 par value cumulative preference shares have not been declared or paid
for 3 years.
● Treasury shares that cost P15,000 were reissued for P8,000.

## What amount of accumulated profits should be appropriated as a result of these items?

Solution:

● As a legal requirement, the company should appropriate accumulated profits equal to the
remaining coast of treasury shares. Since the treasury shares had been reissued, hence, no
appropriation is needed.
● Undeclared dividends do not require appropriation; only a disclosure is necessary in the
notes to financial statements.
● Reasons for appropriation are the following:

## - As a legal requirement that the company should appropriate equal to the

remaining cost of the treasury shares;
- As a contractual restriction because there are bond indentures that require
appropriation of accumulated profits at a specified amount over the term of
the bonds;
- As a protection of working capital because it is necessary to maintain a strong
current position, hence, the company should disclose that the working capital
is not available for dividend distribution equal to the amount of appropriation.
- For the existence of possible or expected losses – appropriations may be created
for estimated losses arising from lawsuits, unfavorable contractual obligations
and other contingencies.

Problem 58 (adapted): The shareholders’ equity of Diskette Corporation’s December 31, 2011 balance sheet
consisted of the following account balances:

## Ordinary shares, P50 par, 100,000

Authorized and outstanding P5,000,000
Accumulated profits and losses (2,000,000)

On January 2, 2012, the company put into the effect a shareholders-approved quasi-reorganization by reducing the
par value of the stock to P25 and eliminating the deficit against share premium. Immediately, after the quasi-
reorganization, what amount should the company report as share premium in its statement of financial position?

Solution:

## Share premium prior to quasi-organization P3,000,000

(P50 – P25 x 100,000) 2,500,000
Less: Amount of deficit charged to share premium 2,000,000
Share premium after the quasi-reorganization thru
Recapitalization P3,500,000

Problem 59 (adapted): Tarr Company’s shareholders’ equity on December 31, 2011 consisted of the following:

## Preference share capital-12%, P50 par, 20,000 shares issued 1,000,000

Ordinary share capital, P25 par, 100,000 share issued 2,500,000
Retained earnings 400,000
Retained earnings appropriated 100,000
Revaluation surplus 300,000

Dividends on preference share have not been paid since 2009. The preference share has a liquidating value of P55
and a call price of P58. What is the book value per preference share?

Solution:

## Preference share capital 1,000,000

Over par (20,000 x 5) 100,000
Preference dividend for current year only
(1,000,000 x 12%) 120,000
Total preference shareholders’ equity 1,220,000
Divide by preference shares outstanding 20,000
Book value per preference share 60

In the absence of any contrary statement, the preference share is noncumulative and
nonparticipating. Thus, it is entitled to current year dividend only. The liquidating value of
the preference share is used instead of the call price because book value computation is on
the premise that the entity will dissolve and liquidate.

Problem 60 (adapted): Smart Company is an entity listed in a recognized stock exchange. Below is an extract
from its financial statement of comprehensive income for the year ended December 31, 2010.
Profit before tax 5,800,000
Income tax expense 1,500,000
Profit after tax 4,300,000
In addition, the entity paid during the year an ordinary dividend of P400,000 and a preference dividend of
P500,000 on its redeemable preference share.
An entity had P1,000,000 of P5 par value ordinary share in issue throughout the year and authorized share capital
of 500,000 ordinary shares. What amount should be reported as retained earnings per share for the year ended?
Solution:
Ordinary share (1,000,000/5) 200,000
Basic earnings per share (4,300,000/200,000) 21.50

Problem 61 (adapted): Night Company had 500,000 Ordinary shares issued and outstanding at December 31,
2013. During 2014, no additional ordinary shares were issued. On January 1, 2014, night issued 400,000
nonconvertible preference shares. During 2014, Night declared and paid 180,000 cash dividends on the ordinary
shares and 150,000 on the nonconvertible preference shares. Net income for the year ended Dec. 31, 2014 was
960,000. What should be the 2014 earnings per ordinary share of Night Company?

Solution:
Net income P 960,000
Less: Preference dividend 150,000
Net P 810,000
Divide Ordinary share Outstanding 500,000
Basic Earnings Per share P 1.62

on January 1, 2011, the entity had issued 10,000 convertible cumulative 5% preference shares with P100, par. The
preference shares were converted on September 1, 2011. Each preference shares were converted into six ordinary
shares. The preference dividends for the entire year were paid in full before the conversion. The entity has no other
potentially dilutive securities. Net income for 20011 was P2,000,000.What is the amount of diluted earning per
share?
Solution:
January 1 outstanding 100,000
September 1 conversion (100,000x6) 60,000
Total ordinary shares 160,000
Diluted EPS (2,000,000/160,000) 12.50
The issuance of ordinary shares on September 1 is not “averaged” anymore because the
convertible preference shares are outstanding on January 1. Under diluted EPS, the annual
dividend on convertible preference share is no longer deducted from net income.

Problem 63 (adapted): On January 1, 2011, G Company grants 5,000 shares to each member of its sales
department, conditional upon the employee’s remaining in the company’s employ for three years, and the
department selling more than 60,000 units of product Zip over the three-year period. The company estimates that
the fair value of the option on January 1, 2011 is P30 per option. During 2012, G Company increases the sales
target to 80,000 units. By the end of 2013, the company has sold 70,000 units, and share options are forfeited.
And there were 10 members remaining in the sales department for the three-year period. What amount of
remuneration expense should the company recognize in its December 31, 2013 profit or loss?

Solution:
Option shares 5,000
× Number of employees 10
Total option share 50,000
× Fair value of option, date of grant P30
Total value of remuneration P1,500,000
÷ Vesting period 3 years
Remuneration cost per year P 500,000
Irrespective of any modifications to the terms and conditions on which the equity
instruments were granted, or a cancellation or settlement of that grant of equity
instruments, the entity should recognize, as a minimum, the services received, measured at
the fair value of the instrument (which is the fair market value on the date of grant date)
unless those instruments do not vest because of failure to satisfy a vesting condition (other
than market condition) that was specified at the grant date. Furthermore, if the company
modifies the vesting conditions in a manner that is not beneficial to the employee/s does
not take the modified vesting conditions into account. And since the modification to the
performance condition is not beneficial to the employees, the company should not take into
account the modified performance condition, but continue to measure the services received
based on the original vesting conditions.

Problem 64 (adapted): On January 2, 2014, X Company grants 50 shares to 400 employees, conditional upon
the employees’ remaining in the company’s employ during the vesting period. The share will vest at the end of
2014 if the company’s earnings increased by more than 15%; or at the end of 2015 if the earnings increased by an
average of 12% over the two-year period; or at the end of 2015 if the earnings increased by an average of 10%
over the three-year period. The shares have fair value of P25 on January 2, 2014, which is equal to the share price
on the grant date. At the end of 2014, earnings had increased by 13% and the company expects that earnings will
continue to increase at a similar rate in 2015 and expects to vest in 2015. At the end of 2015, earnings increased
by only 9% and therefore shares do not vest at the end of 2015. The company expects that earnings will continue
to increase at similar rate. At the end of 2016, earnings increased by 9%. What amount of remuneration expense
should the company recognize in its December 31, 2016 profit or loss?
Solution:

## Year 2014 400 x 50 shares x P25 x 1/2 = P250,000

Year 2015 400 x 50 shares x P25 x 2/3 = P333,333
Year 2016 400 x 50 shares x P25 x 3/3 = P500,000

## 2014 2015 2016

Required balance P250,000 P333,333 P500,000
Beginning balance 0 250,000 333,333
Remuneration costs P250,000 P 83,333 P166,667

Problem 65 (adapted): On January 1, 2011, Morey Company granted Dean, its president, 20,000 share
appreciation rights for past services. These rights are exercisable immediately and expire on January 1, 2013.
On exercise, Dean is entitled to receive cash for the excess of the share market price on the exercise date over the
market price on the grant date. Dean did not exercise any of the rights during 2011. The market price of Morey’s
share was ₱30 on January 1, 2011 and ₱45 on December 31, 2011. As a result of the share appreciation rights,
what amount should be recognized as compensation expense for 2011?
Solution:
Market price- December 31, 2011 45
Predetermined price on January 1, 2011 30
Fair value of share appreciation right 15
Compensation for 2011 (20,000 x 15) 300,000
The total compensation is recognized as expense entirely in 2011 because the share
appreciation rights are exercisable immediately.

Problem 66 (adapted): On January 1, 2011 Module Company granted 100 share appreciation rights to each of its
500 employees on condition that the employees remain in its employ for the next three years. No employees left
the entity during the three- year vesting period. The employees exercised their share appreciation rights as
follows:
December 31, 2013 100 employees
December 31, 2014 250 employees
December 31, 2015 150 employees
The fair value and intrinsic value of the share appreciation right are as follows:
Fair value Intrinsic value
December 31, 2011 15
December 31, 2012 18
December 31, 2013 20 15
December 31, 2014 21 20
December 31, 2015 25

The intrinsic value of the share appreciation right on the date of exercise is the amount paid out to the
employees. Determine the compensation expense for each year from 2011 to 2015 as a result of the share
appreciation rights.
Solution:
2011
Dec. 31 Salaries 250,000
Accrued salaries payable 250,000
Share appreciation rights
(500 employees x 100) 50,000
Multiply by fair value 15
Total fair value 750,000
Accrued liability- 12/31/2011 (750,000/3) 250,000

2012
Dec. 31 Salaries 350,000
Accrued salaries payable 350,000
Share appreciation rights 50,000
Multiply by fair value 18
Total fair value 900,000

## Accrued liability- 12/31/2012 (900,000/3 x2) 600,000

Accrued liability- 12/31/2011 (250,000)
Compensation expense for 2012 350,000
2013
Dec. 31 Salaries 200,000
Accrued salaries payable 200,000
Share appreciation rights not yet
exercised (500-100 x 100) 40,000
Multiply by fair value 20
Accrued liability- 12/31/2013 800,000
Accrued liability- 12/31/2012 (600,000)
Compensation expense for 2012 200,000
Salaries 150,000
Cash 150,000

## Share appreciation rights exercised (100 x 100) 10,000

Multiply by intrinsic value 15
Total payment 150,000
Compensation related to rights not
yet exercised 200,000
Exercised 150,000
Total compensation expense for 2013 350,000
2014
Dec. 31 Accrued salaries payable 485,000
Salaries 485,000
Share appreciation rights not yet
exercised (400-250 x 100) 15,000
Multiply by fair value 21
Accrued liability- 12/31/2014 315,000
Accrued liability- 12/31/2013 (800,000)
Decrease in accrued liability (485,000)
Salaries 500,000
Cash 500,000

## Share appreciation rights exercised

(250 x 100) 25,000
Multiply by intrinsic value 20
Total payment 500,000

## Reversal of accrued liability related to

rights not yet exercised (485,000)
Exercised 500,000
Total compensation expense for 2013 15,000

2015
Dec. 31 Salaries 60,000
Accrued salaries payable 315,000
Cash 375,000
Share appreciation rights exercised
(150 employees x 100) 15,000
Multiply by intrinsic value 25
Total payment in 2015 375,000
Accrued liability- 12/31/2014 (315,000)
Net compensation expense for 2015 60,000

M. Supplementary topics

Problem 67 (adapted): Malampaya Company showed income before income tax of P 6,500,000 on December 31,
2009. The year- end verification of the transactions of the company revealed the following errors:

P 1,000,000 worth of merchandise was purchased in 2009 and included in the ending inventory. However,
the purchase was recorded only in 2010.
A merchandise shipment valued at P 1,500,000 was properly recorded as purchase at year- end. Since the
merchandise was still at the port area, it was inadvertently omitted from the inventory balance of
December 31, 2009.
Advertising for December 2009, amounting to P 500,000, was recorded when payment was made by the
firm in January 2010.
Rental of P 300,000 on an equipment, applicable for six months, was received on November 1, 2009. The
entire amount was reported as income in 2009.
Insurance premium covering the period from July 1, 2009 to July 1, 2010, amounting to P 200,000 was
paid and recorded as expense on July 31, 2009. The entity did not make any adjustment at the end of the
year.

## The corrected income before tax for 2009 should be:

Solution:
Net income per book 6,500,000
Unrecorded purchase of 2009 (1,000,000)
Merchandise shipment not included in December 31,
2009 inventory 1,500,000
Unrecorded advertising for December 2009 ( 500,000)
Unearned rent income (300,000 x 4/6) ( 200,000)
Prepaid insurance (200,000 x 6/12) 100,000_
Corrected net income 6,400,000

Problem 68 (adapted): The electricity account of Velvet Company for the year ended June 30, 2015 was as the
following:

Opening balances for the electricity accrual of July 1, 2014 P 30, 000
08/01/14- for three months to July 31, 2014 60, 000
11/01/14- for three months to October 31, 2014 72, 000
02/01/15- for three months to January 31, 2015 90, 000
06/30/15- for three months to April 30, 2015 84, 000

What amount of electricity expense should Velvet Company report in its June 30, 2015 Statement of
Comprehensive Income?

Solution:
Total payment made P 306, 000
Accrued electricity, end balance (84,000x2/3) 56, 000
Total P 362, 000
Accrued electricity, beginning balance 30, 000
Electricity Expense P 332, 000

Problem 69 (adapted): For the year ended December 31, 2014 Light Incorporation reported the following:

## Net Income P 180, 000

Preferrence Share Dividend declared 30, 000
Ordinary Share Dividend declared 6, 000
Unrealized holding loss, net of tax 3, 000
Retained Earnings 240, 000
Ordinary Share Capital 120, 000
Accumulated other Comprehensive Income
beginning balance, net of tax 15, 000

Whatwould Light report as its ending balance of Accumulated other Comprehensive Income?

Solution:
Beginning balance P 15, 000
Unrealized holding loss 3, 000
Ending balance P 12, 000

Problem 70 (adapted): On December 30, 2010, LUV U Company paid P1, 500,000 for land. On December 31,
2011, the current cost of the land was P3, 200,000. In January 2012, the land was sold for P2, 250,000. Under
current cost accounting, what is the increase in shareholders’ equity in 2011?

SOLUTION:

## Current cost- December 31, 2011 3,200,000

Historical cost 1,500,000
Unrealized holding gain in 2011 1,700,000

Problem 71 (adapted): Rice Company accounts for inventory on FIFO basis. There were 8,000 units in inventory
on
January 1, 2011.

## Historical cost Units Units sold

Purchased
First quarter 410,000 7,000 7,500
Second quarter 350,000 8,500 7,300
Third quart 425,000 6,500 8,200
Fourth quarter 630,000 9,000 7,000

Rice estimates that the current cost per unit of inventory was P57 on January 1, 2011 and P71 on December 31,
2011. In the statement of financial position restated to current cost, what amount should be reported as December
31, 2011 inventory?

## SOLUTION: Inventory-December 31 (9,000 x 71) 639,000

Problem 72 (adapted): Information with respect to cost of goods sold of Bar Company for 2011 is as follows:

## Inventory, January 1 1,060,000 20,000

Purchases during the year 5,580,000 90,000
Goods available for sale 6,640,000 110,000
Inventory, December 31 (2,520,000) 40,000
Cost of goods sold 4,120,000 70,000

Bar estimates that the current cost per unit of inventory was P58 on January 1, 2011 and P72 on December 31,
2011. In the income statement for 2011 restated to current cost, what amount should be reported as cost of goods
sold?

SOLUTION:

## Current cost per unit-January 1 58

Current cost per unit-December 31 72
TOTAL 130
Average current cost (130/2) 65
Cost of goods sold at average current cost (70,000 x 65) 4,550,000

In the income statement for 2011 restated to current cost, what amount should be reported as realized holding
gain from inventory sold?

## Cost of goods sold at average current cost 4,550,000

Cost of goods sold at historical cost 4,120,000
Realized holding gain 430,000

Problem 73 (adapted): The following assets appear on the statement of financial position of Gardenia Company:
Cash in bank 2,000,000
Accounts receivable 4,000,000
Inventory 1,500,000
Financial asset at fair value 500,000
Patent 1,000,000
Prepaid expense 100,000
In preparing financial statements in a hyperinflationary economy, what total amount should the entity classify as
monetary asset?

Solution:
Cash in bank 2,000,000
Accounts receivable 4,000,000
Total monetary asset 6,200,000

PAS 21 defines monetary asset as “money held and asset to be received in fixed or
determinable amount of money”. The essential feature of a monetary asset is the right to
receive a fixed or determinable amount of money. Monetary assets are those whose
amounts are fixed in the sense that the amounts ultimately realizable are the same
amounts that appear on the historical financial statements. Monetary asset are by their very
nature already expressed in terms of current pesos and therefore realizable at no more or
less than their face or stated amounts. Accordingly, the inventory, financial asset at fair
value, patent, advances to suppliers and prepaid expenses are nonmonetary because they
do not represent fixed amount to be received. Their ultimate realizable amounts definitely
will differ from their carrying amounts.
Problem 74 (adapted): The following liabilities appear on the statement of financial position of Sunflower
Company:
Accounts payable 1,000,000
Accrued expenses 500,000
Bonds payable 3,000,000
Finance lease liability 4,000,000
Unearned revenue 300,000
Estimated warranty liability 200,000
Deferred tax liability 400,000

In preparing financial statements in a hyperinflationary economy, what total amount should the entity classify as
monetary liabilities?

Solution:
Accounts payable 1,000,000
Accrued expenses 500,000
Bonds payable 3,000,000
Finance lease liability 4,000,000
Total monetary liabilities 8,500,000

## PAS 21 defines monetary liabilities as “liabilities to paid in fixed or determinable amount of

money”. The essential feature of a monetary liability is the obligation to deliver a fixed
or determinable amount of money. Monetary liabilities are those whose amounts are
fixed in the sense that the amounts ultimately payable are the same amounts that appear
on the historical financial statements. Stated differently, liabilities are classified as monetary
because by their very nature they are already expressed in current pesos and therefore
payable at no more or no less than their face or stated amounts. Accordingly, the unearned
revenue, advances from customers, estimated warranty liability and deferred tax liability
are nonmonetary because they do not represent fixed amount of money to be paid. Their
ultimate amounts payable will surely differ from their carrying amounts.

Problem 75 (adapted): Dahlia Company was formed on January 1, 2005. Selected balances from historical cost
statement of financial statement on December 31, 2011 were:
Land (purchased on January 1, 2005) 2,400,000
Investment in long-term bonds (purchased on January 1, 2008) 1,200,000
Long term debt (issued on January 1,2005) 1,600,000
The general price index was 120 on January 1,2005, 150 on January 1,2008 and 300 on December 31,2011.
What amount should be reported in a hyperinflationary statement of financial position?

Solution:
Land (2,400,000 X 300/120) 6,000,000
Investment in bond- monetary 1,200,000
Long-term debt- monetary 1,600,000

## Only nonmonetary items are restated when preparing hyperinflationary financial

statements. Monetary items are not restated anymore because they are automatically
stated in terms of current pesos at the end of the reporting period. The formula for
restatement is to multiply the historical amount by a fraction whose numerator is the
index number at the end of reporting period and whose denominator is the index number on
acquisition date.