DE LA SALLE UNIVERSITY

COLLEGE OF BUSINESS
ACCOUNTANCY DEPARTMENT
ADVANCED TOPICS IN FINANCIAL ACCOUNTING AND REPORTING (MODADV3)
First Term 2011-2012
ADDITIONAL ACCOUNTING PROBLEMS

General Instructions:
1. Read the problems carefully. Answer the requirements and show all necessary computations.
2. For problems requiring calculation of present values, round-off the present value factor to four
decimal places for uniformity.
3. Place your answers in a columnar notebook. Make sure that you have your assignments with you
before coming to class.
UNIT 1. ACCOUNTING FOR BORROWING COSTS
Problem 1 Borrowing costs capitalization decision
The following are independent situations:
(a)
(b)

(c)

(d)
(e)

(f)

Mission Impossible, Inc. issued bonds to various investors at a discount. The proceeds of the bonds
will be used to purchase a land, where the company will construct its factory.
Zesty Berries Philippines, Inc. manufactures cement. During 2008, Zesty Berries obtained a US dollar
denominated loan from its parent company in Switzerland payable after three years. The loan bears
10% interest payable semi-annually (assume that this is equivalent to the market rate). The proceeds
of the loan will be partly used for the manufacture of cement and for the construction of its cement plant
in Cebu.
Harry Potter, Inc. obtained a loan from Indulgence Banking Corporation for P5 million bearing an
interest of 9% payable over 24 months. Harry paid documentary stamp tax (DST), bank charges and
commissions in securing the loan. The proceeds of the loan will be used for the construction of a piece
of equipment for sale. Total construction costs are expected to exceed P10 million with construction
period of about 12 months.
clair Philippines, Inc. obtained a 9% interest bearing Yen-loan from its Japanese parent company,
clair Japan, Inc. The proceeds of the loan will be used for the manufacture of lenses. These lenses
are sold by clair Philippines to clair Japan.
Brad Pitt Company is in the process of renovating its corporate office building. It obtained a loan
bearing an interest of 10% from a local bank to finance the renovation project. The loan is guaranteed
by its parent company, Michael Douglas, Inc. Brad Pitt paid guarantee fees to its parent company. The
renovation project will cost P13 million and will take about 15 months to complete. The building will
remain in use throughout the project.
Tristan Realty Company, a real estate developer, owns a piece of undeveloped land. The land was
originally acquired for P20 million for further development in connection with its real estate business.
Currently, Tristan is developing the said land. The development will take one year to complete. It plans
to construct a condominium building on the said land. A US dollar loan facility with 10% interest on the
amount availed, was obtained by Tristan from Isolde Corporation, an affiliate, to finance the
development of the land. Tristan will pay Isolde commitment fee for the unutilized portion of the credit
facility.

Required: For each of the above situations:

1. Identify the borrowing costs based on PAS 23 (revised).
2. Determine whether the borrowing costs should be capitalized under PAS 23 (revised). Explain your answer.

Problem 2 Borrowing costs capitalization: specific and general borrowings, interest earned
Vanilla Latte Company uses the fiscal year accounting period which ends on March 31. On April 1, 2008, Vanilla
Latte borrowed P5,000,000 at an interest rate of 11% specifically for the construction of its new building. The
interest on the loan is payable every April 1. Vanilla Latte incurred the following costs in connection with the loan
(assume incurred on April 1, 2008):
Commissions paid to its agent
Guarantee fees paid to its parent company, Espresso Mocca, Inc.
for the loan guarantee
Bank charges

P150,000
1.5% of the loan amount
1.0% of the loan amount

Interest earned from the temporary investment of the entire proceeds of the loan prior to their disbursement
amounted to P125,000. The investment was made on April 1, 2008 which matured on May 31, 2008.
Vanilla Latte had also the following other loans during the fiscal year 2008-2009 for general purposes, the proceeds
of these loans were used in part for the construction of the building:
Principal
14% Short-term Note
11% Long-term Loan

P5,000,000
7,000,000

Borrowing
Costs
P700,000
770,000

The interest on the above loans is payable every April 1.

The construction of the building began on April 1, 2008 and the building was completed on March 31, 2009.
Expenditures on the building were made as follows:
April 1, 2008
July 1, 2008
October 1, 2008
January 1, 2009
March 31, 2009

P 4,000,000
3,500,000
3,000,000
2,500,000
1,000,000

Required:
1. Compute the total capitalizable borrowing cost as of March 31, 2009.
2. Compute the total cost of the building as of March 31, 2009.
3. Prepare the necessary journal entries for each date stated in the problem for the fiscal year 2008-2009.
Record the interest earned and incurred at year-end.
Problem 3 Borrowing costs capitalization: specific borrowings, foreign exchange differential
On January 1, 2008, the Skywalker Manufacturing Company began construction of a building to be used as its office
headquarters. The building was completed on December 31, 2009.
Expenditures on the project were as follows:
January 1, 2008
March 31, 2008
June 30, 2008
October 31, 2008
January 31, 2009
March 31, 2009
May 31, 2009

P500,000
600,000
800,000
600,000
300,000
500,000
600,000

On April 1, 2008, Skywalker obtained a USD50,000 construction loan with a 10% interest rate. Interest is payable
every March 31. The loan was outstanding for the entire 2008 and 2009.

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Skywalkers other interest-bearing debt included a long-term note of P5,000,000 with a 12% interest rate, and a
mortgage of P3,000,000 on another building with an interest rate of 15%. The interest on these loans is payable
every December 31. The debts were outstanding during 2008 and 2009. The companys year-end is December 31.
The following are the foreign exchange rates:
January 1, 2008
April 1, 2008
December 31, 2008
March 31, 2009
December 31, 2009

USD1 = P40
USD1 = P40
USD1 = P43
USD1 = P44
USD1 = P41

Required:
1. Calculate the amount of borrowing costs that Skywalker should capitalize in 2008 and 2009. Do not
round-off the weighted average interest rate.
2. Determine the total cost of the building, as of December 31, 2008 and 2009.
3. Calculate the amount of interest expense and other expenses/income that will appear in the 2008 and
2009 income statements.
4. Prepare the necessary journal entries to record the expenditures, borrowing costs and other
expenses/income in 2008 and 2009.

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UNIT 2. IMPAIRMENT OF ASSETS

Problem 4 Recognition and reversal of impairment loss; value in use calculation using traditional approach
Deep South Company purchased a machinery for P1,000,000 on January 1, 2008 for cash. It is estimated that the
useful life of the machinery is 5 years, with P100,000 residual value. The Company uses the straight-line method of
depreciation. On December 31, 2008, the Company evaluated the machinery for possible impairment. It is
estimated that the machinery has a remaining useful life of only 3 years with no residual value. It is expected that
the cash flows from the machinery for the next three years (expected to be received at the end of each year) will be:
P300,000 for the first year, P250,000 for the second year, and P210,000 for the third year. The applicable pre-tax
discount rate is 12%. The fair market value of the machinery is P600,000. Cost associated with selling the
equipment is not significant. No goodwill was associated with the purchase of the machinery.
Deep South used the said asset efficiently. On December 31, 2009, Deep South believes that there is a possibility
that the said asset may no longer be impaired. It is expected that for the remaining life of the asset, it will generate
cash flows of P300,000 at the end of 2010 and P200,000 at the end of 2011. The applicable pre-tax discount rate is
still 12%. The fair market value of the machinery as of December 31, 2009 is P480,000. Cost to sell is not
significant.
Required:
1. Compute the carrying values of the asset as of December 31, 2008 and December 31, 2009, after
considering impairment loss/reversal of impairment loss, if any, and the amount of impairment
loss/reversal of impairment loss, if any.
2. Prepare the necessary journal entries in 2008, 2009 and 2010.
Problem 5 Treatment of future capital expenditure; reversal of impairment loss; cash flow calculation using the
expected value approach
On December 31, 2008, Vanity Fair Flying Company tests a plane for impairment. It was acquired 10 years ago for
P7,500,000. It has an estimated remaining life of 5 years. The planes fair value less cost to sell is not
determinable. It is estimated to generate cash flows for its remaining life as follows (assume that cash flows are
generated at the end of each year):
2009 It is estimated that the cash flows fall somewhere between P500,000 and P800,000. However, the
specific amount of the cash flows is not determinable.
2010 It is estimated that the cash flows fall somewhere between P500,000 and P700,000. However, the
most likely amount is P675,000. The probabilities attached to each amount are not known.
2011 There is 35% probability that the cash flows will be P600,000, 25% probability that it will be P700,000
and 40% probability that it will be P800,000.
2012 There 10% probability that the cash flows will be P400,000, 50% probability that it will be P500,000,
20% probability that it will be P600,000 and 20% probability that it will be P700,000.
2013 It is estimated that the cash flows fall somewhere between P300,000 and P500,000. However, no
amount in this range is more likely than any other amount.
Vanity Fair Flyings after-tax discount rate as of December 31, 2008 is 9.8%. The tax rate is 30%.
On January 1, 2011, the management approved budget of Vanity Fair Flying reflected that a capital expenditure of
P400,000 will be incurred to renew the engine of the plane, and this capital expenditure will improve the
performance of the plane by decreasing fuel consumption. The budgeted capital expenditure was actually incurred
as of December 31, 2011. The planes estimated future cash flows reflected in the most recent management
approved budgets are as follows (assume that cash flows are generated at the end of each year):
2012 It is estimated that the cash flows fall somewhere between P600,000 and P845,000. However, the
most likely amount is P700,000. The probabilities attached to each amount are not known.
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2013 There is 25% probability that the cash flows will be P500,000, 45% probability that it will be P600,000
and 30% probability that it will be P700,000. These are expected cash flows for the continued use
of the aircraft. It is expected that the aircraft will be sold for P500,000 at the end of 2013.
Vanity Fair Flyings after-tax discount rate as of December 31, 2012 is 9.1%. However, the tax rate is 35%.
Required:
1. Determine the following as of December 31, 2008 and December 31, 2011:
a. The amount of impairment loss/reversal of impairment loss, if any,
b. Carrying values of the asset after considering impairment loss/reversal of impairment loss, if any.
2. Prepare the necessary summary journal entries in 2008 and 2011. Prepare a disclosure in the financial
statements in 2008 and 2011.
Problem 6 Impairment of intangible assets
On December 31, 2007, Magily Company acquired the following three intangible assets:
a.
b.
c.

A trademark for P3,000,000. The trademark has 10 years remaining in its legal life. It is anticipated
that the trademark will be renewed in the future, indefinitely, without problem.
Goodwill for P1,500,000. The goodwill is associated with Magilys Abacus Manufacturing reporting
unit.
A customer list for P2,400,000. By contract, Magily has exclusive use of the list for 5 years.
Because of market conditions, it is expected that the list will have economic value for just 3 years.

On December 31, 2008, before any adjusting entries for the year were made, the following information was
assembled about each of the intangible assets:
a.
b.

Because of a decline in the economy, the trademark is now expected to generate cash flows of just
P275,000 per year. The useful life of the trademark still extends beyond the foreseeable horizon.
The cash flow expected to be generated by the Abacus Manufacturing reporting unit is P300,000
per year for the next 22 years. Liabilities were considered in computing the cash flows. Carrying
amounts and fair values of the assets and liabilities of the Abacus Manufacturing reporting unit are
as follows:
Identifiable assets
Goodwill
Liabilities

c.

Book Values
P 2,700,000
1,500,000
1,800,000

Fair Values
P3,000,000
?
1,800,000

The cash flows expected to be generated by the customer list are P800,000 in 2009 and P700,000
in 2010.

The appropriate pre-tax discount rate for all items is 10%.

Required: Prepare all journal entries necessary on December 31, 2008, in connection with these three intangible
assets.
(Source: Intermediate Accounting by Stice, et.al., 16th ed., P11-64, modified)

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Problem 7 Impairment of revalued asset

Bingham Mining Company has a copper mine in southern Philippines. The plant and equipment used in this
operation were acquired on January 1, 2004 for P2,000,000 and have been depreciated using straight-line
depreciation over a 20-year life. The revalued amount of the plant and equipment on December 31, 2007 was
determined to be P1,800,000. The plant and equipment was recorded in the books at revalued amount in
accordance with PAS 16. As of December 31, 2008, the controller estimates that the assets have a remaining
useful life of 15 years.
On December 31, 2008, the asset was tested for impairment. It is expected that for the remaining useful life of 15
years, it will generate cash as follows (assume that these are generated at the end of each year):
2009 to 2013 It is estimated that the annual cash flows fall somewhere between P300,000 and P100,000.
However, no amount in this range is more likely than any other amount.
2014 to 2018 It is estimated that the cash flows fall somewhere between P220,000 and P80,000.
However, no amount in this range is more likely than any other amount.
2019 to 2023 It is estimated that the cash flows fall somewhere between P180,000 and P60,000.
However, no amount in this range is more likely than any other amount.
However, the fair value less cost to sell of the asset as of the end of this year is P1,300,000.
The appropriate pre-tax discount rate is 12% for purposes of determining the value in use of the asset.
Required:
1. Determine the value in use, recoverable amount, amount of impairment loss, if any, and the carrying amount
of the asset after recognition of impairment loss.
2. Prepare the journal entry to record impairment loss.
Problem 8 Identification of cash-generating units (CGUs)
The following are independent scenarios about cash-generating units (CGUs):
Scenario 1
A significant raw material used for Tom Cruises final production is an intermediate product bought from Keanu
Reeves of the same entity. Keanu Reevess products are sold to Tom Cruise at a transfer price that passes all
margins to Keanu Reeves. Eighty per cent (80%) of Tom Cruises final production is sold to customers outside of
the entity. Sixty per cent (60%) of Keanu Reevess final production is sold to Tom Cruise and the remaining 40% is
sold to customers outside of the entity.
Keanu Reeves could sell the products it sells to Tom Cruise in an active market. Internal transfer prices are higher
than market prices.
Scenario 2
The same as scenario 1. However, there is no active market for the products Keanu Reeves sells to Tom Cruise.
Scenario 3
Cameron Diaz produces a single product and owns plants Meryl Streep, Renee Zellweger and Penelope Cruz. Each
plant is located in a different continent. Meryl Streep produces a component that is assembled in either Renee
Zellweger or Penelope Cruz. The combined capacity of Renee Zellweger and Penelope Cruz is not fully utilised.
Cameron Diazs products are sold worldwide from either Renee Zellweger or Penelope Cruz. For example, Renee
Zellwegers production can be sold in Penelope Cruzs continent if the products can be delivered faster from Renee
Zellweger than from Penelope Cruz. Utilization levels of Renee Zellweger and Penelope Cruz depend on the
allocation of sales between the two sites. There is an active market for Meryl Streeps products.
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Scenario 4
The same as scenario 3. However, there is no active market for Meryl Streeps products.
Scenario 5
Chris ODonnell owns 150 magazine titles of which 70 were purchased and 80 were self-created. The price paid for
a purchased magazine title is recognized as an intangible asset. The costs of creating magazine titles and
maintaining the existing titles are recognized as an expense when incurred. Cash inflows from direct sales and
advertising are identifiable for each magazine title. Titles are managed by customer segments. The level of
advertising income for a magazine title depends on the range of titles in the customer segment to which the
magazine title relates. Management has a policy to abandon old titles before the end of their economic lives and
replace them immediately with new titles for the same customer segment.
Required: For each of the above scenario, identify the cash-generating units (CGUs). Explain your answer.
Problem 9 Cash-generating units with goodwill, allocation of impairment loss
Harley Company owns an administration building with a cost of P5,000,000, and accumulated depreciation of
P2,000,000 as of December 31, 2008. This administration building does not generate cash flows or any income.
Based on the available information, it appears that the building may be impaired. Since it does not generate any
cash flows, Harley included the administration building as part of a cash-generating unit (CGU), which is composed
also of the following assets:
As of December 31, 2008
Cost
Accumulated Depreciation/
Amortization
Warehouse
P6,000,000
P 2,000,000
Machinery
2,500,000
500,000
Patent
3,000,000
1,000,000
The carrying amount of the goodwill associated with the above assets in the CGU amounts to P1,000,000, as of
December 31, 2008. Harley evaluated the CGU whether it is impaired on December 31, 2008. The fair value of the
entire CGU is P10,000,000. If the CGU is disposed, Harley expects to incur legal costs of P200,000, documentary
stamp tax of P150,000, transaction tax of P175,000, and employee termination costs of P300,000.
On the other hand, Harley expects to generate net cash flows from the CGU, as follows (generated at the end of
each year):
2009
2010
2011
2012
2013

P3,500,000
3,000,000
2,500,000
2,000,000
1,500,000

From 2014 to 2018, Harley expects to generate cash of P1,400,000 every end of the year. However, Harley is not
confident that the cash flows projection from 2014 to 2018 is reliable. Based on past experience, cash flows
projection beyond five years does not accurately present the forecast.
It is expected that Harley will incur capital expenditures of P1,000,000 related to the building in 2012. If these
expenditures will be incurred, the expected cash flows in 2013 will be P2,500,000 and the expected annual cash
flows from 2014 to 2018 will be P2,000,000.
Harleys after-tax discount rate as of December 31, 2008 is 9.6%. The income tax rate is 20%.

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Required:
1.
2.

Determine the amount of impairment loss, if any, and the carrying amounts after recognition of
impairment loss for each type of asset.
Prepare the necessary journal entries for 2008.

Problem 10 Allocation of corporate assets

Kelvin Corporation has three cash-generating units (CGU): Ampere, Bernoulli, and Cavendish. Currently, there are
adverse changes in the technological environment in which Kelvin operates.
On December 31, 2008, the carrying amounts and the estimated remaining useful lives of the CGUs are as follows:
Ampere
Bernoulli
Cavendish

P100,000
150,000
200,000

10 years
20 years
20 years

The above carrying amounts do not include any goodwill.

Kelvins operations are conducted from its headquarters. The carrying amount of the headquarters is P200,000,
which consists of a building with carrying amount of P150,000 and a research center with carrying amount of
P50,000. The relative carrying amounts of the CGUs are a reasonable indication of the proportion of the
headquarters building devoted to each CGU. The carrying amount of the research center cannot be allocated on a
reasonable basis to the individual CGUs.
The recoverable amounts of the CGUs are as follows:
Ampere
Bernoulli
Cavendish

P199,000
164,000
271,000

However, the recoverable amount of Kelvin as a whole is P720,000. The headquarters building is not expected to
generate cash flows while the research center is expected to generate additional future cash flows for Kelvin as a
whole. The appropriate pre-tax discount rate at the end of December 31, 2008 is 15%.
Required:
1. Compute the impairment loss of the CGUs and headquarters assets, if any.
2. Prepare the necessary journal entries on December 31, 2008.
Problem 11 Goodwill impairment, minority interest
Stash Tea Corporation is the parent company of two subsidiaries. It owns all the issued shares of Senses Tea, Inc.
and 80% of the issued shares of Green Tea, Inc.
On December 31, 2008, the carrying amounts of the assets of these entities within the group are as follows,
including the goodwill allocated to these entities as a result of the consolidation process:
Land
Plant
Accumulated depreciation
Inventory
Cash
Goodwill
Liabilities

Senses Tea
P4,000,000
3,000,000
(1,200,000)
700,000
300,000
200,000
(3,800,000)

Green Tea
P1,500,000
5,200,000
(2,800,000)
600,000
200,000
160,000
(2,200,000)

As a part of the impairment testing procedures undertaken by Stash Tea, Senses Tea and Green Tea are
considered as two separate cash-generating units. The recoverable amounts of Senses Tea and Green Tea are
P6,500,000 and P4,820,000, respectively.
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The fair value less cost to sell for inventory is greater than the carrying amount while for the land, the fair value less
cost to sell is P3,900,000 for Senses Tea and P1,550,000 for Green Tea.
Required:
1. Compute the impairment loss allocable or attributable to each asset of Senses Tea and Green Tea, if
any, to be recognized in the consolidated financial statements.
2. Prepare the necessary journal entries to record the impairment loss in the consolidated financial
statements.

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UNIT 3. AGRICULTURAL AND BIOLOGICAL ASSETS

Problem 12 Animals, change in fair value less costs to sell
As of January 1, 2008, Katie Holmes, Inc. had a herd of 10, two-year old animals, with fair value less costs to sell of
P1,000 each. On July 1, 2008, Katie Holmes purchased one 2.5 years old animal for P1,080. One animal was also
born on the same date. No animals were sold or disposed of during the period. The per-unit fair values less costs
to sell were as follows:
2 year old animal, January 1, 2008 . P1,000
New born animal, July 1, 2008
700
2.5 year old animal, July 1, 2008 1,080
New born animal, December 31, 2008 .
720
0.5 year old animal, December 31, 2008 .
800
2 year old animal, December 31, 2008 .
1,050
2.5 year old animal, December 31, 2008 ..
1,110
3 year old animal, December 31, 2008 .
1,200
The animals are raised by Katie Holmes for the purpose of processing them further into agricultural produce.
Required:
1. Prepare the necessary journal entries for the entire 2008.
2. Prepare a reconciliation of the beginning and ending balance of the fair value less costs to sell.
Segregate the effect of price and physical changes.
Problem 13 Animals, agricultural produce at the point of harvest, inventories
Justin Timberlake Dairy, Inc. is engaged in milk production for supply to various customers. As of January 1, 2008,
Justin held 420 cows able to produce milk (mature assets) and 140 heifers being raised to produce milk in the future
(immature assets). These biological assets have the following fair values less costs to sell as of January 1, 2008:
Dairy livestock immature
Dairy livestock mature

P 308,000
2,100,000

In addition, as of January 1, 2008, Justin has 5,000 kg. of milk on hand with carrying amount of P24,000.
The following occurred in 2008:

March 1, 2008 Justin purchased 35 cows able to produce milk for P5,100 each.
June 1, 2008 Justin sold 10 mature dairy livestock for P6,000 each.
During the year, 12 heifers were born on the following dates (Justin engaged a third party for breeding the
cows):
April 1
May 1
August 1
October 1
December 1

2
3
2
3
2

During the year, Justin produced 200,000 kg. of milk with total fair value less costs to sell of P1,000,000 at
the time of milking.
During the year, Justin sold 202,000 kg. of milk for P1,200,000. Justin uses the FIFO method and the
perpetual inventory system. On December 31, 2008, the net realizable value of milk inventory is P4.70 per
kg.

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During the year, 2 heifers (not newborn) and 3 mature cows (not purchased this year) died on the following
dates:
February 1
April 1
July 1

1 heifer
2 mature cows
1 heifer and 1 mature cow

These can longer be sold by Justin.

The fair value less costs to sell of the dairy livestock are as follows:
Date
January 1
February 1
March 1
April 1
May 1
June 1
July 1
August 1
September 1
October 1
November 1
December 1
December 31

Mature
P 5,000
5,000
5,100
5,150
5,150
5,200
5,200
5,250
5,250
5,150
5,150
5,300
5,200

Immature
P 2,200
2,250
2,300
2,300
2,300
2,350
2,350
2,350
2,350
2,150
2,150
2,200
2,150

New Born
P 1,000
1,100
1,200
1,250
1,250
1,200
1,250
1,250
1,250
1,200
1,200
1,250
1,150

For purposes of valuation, assume that newborns are classified as immature at December 31, 2008. Also, assume
that immature livestock on January 1, 2008 are still immature at the end of the year. Ignore the effect of physical
changes in biological assets, except otherwise stated.
Required:
1. Prepare the necessary journal entries for the entire 2008 (summary journal entry for each transaction,
including year-end adjustment to restate the values of biological assets at fair values less costs to sell).
2. Prepare a reconciliation of the beginning and ending balance of the fair value less costs to sell of
mature and immature biological assets.
Problem 14 Plants, changes in fair value less costs to sell, agricultural produce, inventories
Banana Foods Corporation has a banana plantation. It plants bananas, harvests its fruits and sells these. As of
December 31, 2007, Banana Foods financial statements contain the following information:

Inventories (current assets)

Biological assets
Standing crops (current assets)`
Bearer (non-current assets), one year remaining life

P6,000,000
4,000,000
3,800,000

Biological assets pertain to banana plants as follows:

a. Standing crops These are banana fruits which are still attached to the banana plants, and the
banana plant itself which are self-regenerating. The plant replaces itself through new shoots
coming out from its stem over time, which becomes its successor plant.
b. Bearer These pertain to costs of seedlings, planting, fertilizers and plant and fruit care incurred for
the banana plantation prior to commercial harvest which are capitalized. Since there is no active
market for these assets, there is an absence of reliable estimate to measure the fair value less
costs to sell of the assets. These assets are measured at cost less accumulated amortization and
any impairment in value. These are amortized over 2 years.

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Sales of bananas
Change in fair value less costs to sell (decrease)

12,000,000
(900,000)

The following transactions transpired in 2008:

a.
Purchased seedlings worth P300,000 and incurred other costs prior to commercial harvest of
standing crops as follows:
Fertilizers
P1,500,000
Fruit care
2,700,000
Labor
1,500,000
b.
Maintenance costs (e.g., cleaning costs) incurred for standing crops for the year amounted to
P3,000,000.
c.
Labor and other costs incurred after commercial harvest for bearer biological assets are as follows:
Labor
P1,000,000
Maintenance (e.g., land)
900,000
Utilities
600,000
d.
Additional banana fruits (standing crops) produced during the year (not yet harvested) had fair value
less costs to sell of P2,000,000.
e.
Fair value of existing banana fruits (standing crops) at beginning of the year increased by
P1,200,000.
f.
Banana fruits (standing crops) destroyed during the year due to floods had carrying amount of
P800,000.
g.
Harvested standing crops with carrying amount of P5,000,000 and fair value less costs to sell of
P6,300,000 prior to harvesting.
h.
Bearer biological assets destroyed during the year to due floods had carrying amount of P500,000
(from beginning balance).
i.
Sold bananas for P20,000,000 during the year with carrying amount of P8,000,000.
j.
At the end of the year, inventories had net realizable value of P3,600,000.
For purposes of calculating the amortization of bearer biological asset, assume that the additional costs in 2008
were incurred at the beginning of the year and reduction in costs or carrying amounts were made at the end of the
year.
In addition, Banana Foods applied for a government grant for locating its banana plantation in a less-developed
location. Under existing government rules, companies locating their banana plantation in less-developed areas are
entitled to government grants and incentives. Banana Foods application was granted effective January 1, 2008, with
the following incentives:
a. A government grant of P3,000,000 cash will be provided to Banana Foods during 2008. However, it is required
to maintain its banana plantation in that area for three years, exclusively for banana plants. In the event that
Banana Foods fails to maintain the plantation for three years, it will have to repay the government an amount in
proportion to the passage of time calculated based on the nearest month (e.g., if it maintains its plantation in said
area for two years only, it will repay the government in proportion to the one remaining year). The repayment
should be paid in cash to the government.
b. The government requires Banana Foods to produce at least 1,000,000 kg. of bananas every year. If it fails to
produce such amount, it will repay the government P200,000 for each year of failure. The repayment should be
paid in cash on January 31 of the subsequent year.
c. Banana Foods is granted an income tax holiday (ITH) incentive of two years from the date of approval of the
grant.
d. The government will also grant Banana Foods P500,000 tax credits every year provided it meets its production
requirement for a given year. These can be applied as payment of its income tax liability after the lapse of its
ITH incentive. The tax credits will expire five years from the lapse of the ITH.
Production for 2008 totaled, 2,000,000 kg. of bananas.

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Required:
1. Prepare the necessary journal entries for 2008 (including amortization).
2. Prepare a partial income statement and partial balance sheet for the year ended/as of December 31,
2008. Ignore tax effects.
3. Prepare a reconciliation of the beginning and ending balance of the fair value less costs to sell of
standing crops.

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UNIT 4. LEASES
Problem 15 Operating lease lessee and lessor
On January 1, 2008, Sweetwater Furniture Company leased a commercial space from Hunter Bayne Company
under a five-year operating lease agreement. The contract calls for annual rent payments as follows:

P100,000 for the first year which increase by P5,000 per year, this is payable in advance every January 1 of
each year.
5% of sales in excess of P2,000,000 payable every January 31 of the subsequent year.

Benefits expected from using the office space are expected to remain constant over the lease term.
Actual sales of Sweetwater Furniture are for the first three years of the contract are as follows:
For the year ended December 31, 2008
P1,500,000
For the year ended December 31, 2009
P2,500,000
For the year ended December 31, 2010
P4,000,000
Required:
1. Record the rentals on the books of Sweetwater and Hunter Bayne for 2008 to 2010.
2. Prepare schedule of future minimum lease payments for 2008 to 2010 for purposes of financial
statements disclosure for both Sweetwater and Hunter Bayne.
Problem 16 Criteria for classifying leases as finance lease
Henri Retail Stores is negotiating three leases for store locations. Henri'
s incremental borrowing rate is 12%. Each
store will have an economic useful life of 30 years. Lease payments will be made at the end of each year. Based on
the data below, properly classify each of the leases as an operating lease or a finance lease. The purchase price for
each property is listed as an alternative to leasing.
Location A
Location B
Location C

Location Lease Term

26 years
20 years
20 years

Lease Payment
P1,500,000
1,300,000
1,400,000

Purchase Price
P12,000,000
10,000,000
15,000,000

Required: Determine whether each of the leases should be classified by Henri as an operating lease or a finance
lease. Show computations and reasons to support your answers.
1.
Location A
2.
Location B
3.
Location C
Problem 17 Direct financing and sales-type lease; lessee and lessor
Rand Medical manufactures lithotripters. Lithotripsy uses shockwaves instead of surgery to eliminate kidney stones.
Physicians Leasing purchased a lithotripter from Rand for P2,000,000 and leased it to Mid-South Urologists Group,
Inc. on January 1, 2008.
Lease Description:
Quarterly rental payments
Lease term
No residual value; no bargain purchase option
Economic life of lithotripter
Implicit interest rate and lessees incremental
Borrowing rate
Fair value of the asset

P130,516 beginning each period

5 years (20 quarters)
5 years
12%
P2,000,000

Collectibility of the rental payments is reasonably assured, and there are no lessor costs yet to be incurred.
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Required:
1. How should this lease be classified by Mid-South Urologists Group and by Physicians Leasing?
2. Prepare appropriate entries for both Mid-South Urologists Group and Physicians Leasing from the
inception of the lease through the second rental payment on April 1, 2008. Depreciation is recorded
every end of the quarter.
3. Assume Mid-South Urologists Group leased the lithotripter directly from the manufacturer, Rand Medical,
which produced the machine at a cost of P1,700,000. Prepare appropriate entries for Rand Medical from
the inception of the lease through the second rental payment on April 1, 2008,
(Source: Intermediate Accounting by Spiceland, et.al., 2nd ed., P15-3 modified)

Problem 18 Guaranteed residual value; direct financing lease; lessee and lessor; executory costs
On January 1, 2008, X-Men Industries leased equipment to Robinhood Soya Co. for a four-year period ending
December 31, 2011, at which time possession of the leased asset will revert back to X-Men. The equipment cost XMen P365,760 and has an expected useful life of six years. Its normal sales price is P365,760. The lesseeguaranteed residual value at December 31, 2011, is P25,000. Equal payments under the lease are P104,000
(including executory cost of P4,000) and are due on December 31 of each year, except for the first payment which
was made on January 1, 2008. Collectibility of the remaining lease payments is reasonably assured, and X-Men has
no material cost uncertainties. Robinhood Soyas incremental borrowing rate is 12%. Robinhood Soya knows that
the interest rate implicit in the lease is 10%. Both companies use straight-line depreciation.
Required:
1.
2.
3.
4.
5.
6.
7.

Show how X-Men calculated the P100,000 annual rental payments.

How should this lease be classified by Robinhood Soya (the lessee) and by X-Men (the lessor)? Why?
Prepare the appropriate entries for both Robinhood Soya and X-Men on January 1, 2008.
Prepare an amortization schedule describing the pattern of interest over the lease term for the lessor and
lessee.
Prepare all appropriate entries for both Robinhood Soya and X-Men on December 31, 2008 (the second
rent payment and depreciation).
Prepare partial balance sheets for both Robinhood Soya and X-Men as of December 31, 2008.
Prepare the appropriate entries for both Robinhood Soya and X-Men on December 31, 2008 assuming
the equipment is returned to X-Men and the actual residual value on that date is P1,500.

(Source: Intermediate Accounting by Spiceland, et.al., 2nd ed., P15-5, modified)

Problem 19 Sales-type lease: bargain purchase option; lessee and lessor

Mid-South Auto Leasing leases vehicles to consumers. The attraction to customers is that the company can offer
competitive prices due to volume buying and requires an interest rate implicit in the lease that is 1% below alternate
methods of financing. On July 1, 2008, the company leased a delivery truck to a local florist, Anything Grows.
The lease agreement specified annual lease payments of P15,000 beginning July 1, 2008, the inception of the
lease, and each year (every July 1) through July 1, 2012 (five-year lease term). The florist had the option to
purchase the truck on June 30, 2013 for P8,000. The estimated useful life of the truck is six-years. Mid-South Auto
Leasings annual interest rate for determining payments was 12%. Mid-South paid P50,000 for the truck. Both
companies use straight-line depreciation.
Required:
1. Calculate the amount of dealers profit that Mid-South would recognize in this sales-type lease.
2. Prepare the appropriate entries for Anything Grows and Mid-South on July 1, 2008.
3. Prepare an amortization schedule describing the pattern of interest over the lease term for the lessor and
lessee.
4. Prepare the appropriate entries for Anything Grows and Mid-South Auto Leasing on December 31, 2008.
5. Prepare partial balance sheets for Anything Grows and Mid-South as of December 31, 2008.

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6.

Prepare the appropriate entries for Anything Grows and Mid-South on June 30, 2013 assuming the
bargain purchase option was exercised on that date.

(Source: Intermediate Accounting by Spiceland, et.al., 2nd ed., P15-12 modified)

Problem 20 Initial direct costs; direct financing and sales-type lease; lessee and lessor
Bidwell Leasing purchased a single engine plane for its fair-market value of P645,526 and leased it to Red Baron
Flying Club on December 31, 2008.
Terms of the lease agreement and related facts were:
a. Eight annual payments of P110,000 beginning December 31, 2008, the inception of the lease, and at
each December 31 through 2015. Bidwell Leasings implicit rate was 10%. The estimated useful life of
the plane is eight years.
b. Red Barons incremental borrowing rate is 11%.
c. Costs of negotiating and consummating the completed lease transaction incurred by Bidwell Leasing
were P18,099.
d. Collectibility of the rent payments by Bidwell Leasing is reasonably predictable and there are no costs
to the lessor that are yet to be incurred.
Both companies use straight-line depreciation.
Required:
1. How should the lease be classified by Bidwell Leasing (the lessor) and by Red Baron (the lessee)?
2. Prepare the appropriate entries for Red Baron and Bidwell Leasing on December 31, 2008.
3. Prepare an amortization schedule describing the pattern of interest expense over the lease term for Red
Baron.
4. Determine the effective rate of interest for Bidwell Leasing for the purpose of recognizing interest income
over the lease term.
5. Prepare an amortization schedule describing the pattern of interest revenue over the lease term for
Bidwell Leasing.
6. Prepare the appropriate entries for both Red Baron and Bidwell Leasing on December 31, 2009 (the
second rent payment).
7. Prepare partial balance sheets for Red Baron and Bidwell Leasing as of December 31, 2009.
8. Prepare the appropriate entries for Red Baron and Bidwell Leasing on December 31, 2015 (the final rent
payment).
9. Assume that Bidwell Leasing purchased the single-engine plane for P400,000 and leased it to Red Baron
for its fair market value of P645,526 on December 31, 2008.
a. How should the lease be classified by Bidwell Leasing?
b. Prepare the appropriate entries for Bidwell Leasing on the following dates:
i.
December 31, 2008
ii. December 31, 2009
iii. December 31, 2015
c. Prepare partial balance sheet for Bidwell Leasing as of December 31, 2009.
(Source: Intermediate Accounting by Spiceland, et.al., 2th ed., P15-14 and P15-15, modified)

Problem 21 Sale-leaseback of building; implicit interest rate

To raise operating funds, North American Courier Corporation sold its building on January 1, 2008 to an insurance
company for P500,000 (equivalent to the fair market value) and immediately leased the building back. The lease is
for a 10-year period ending December 31, 2017, at which time ownership of the building will revert to North
American Courier. The building has a carrying amount of P400,000 (original cost of P1,000,000). The lease
requires North American to make payments of P88,492 to the insurance company each December 31. The building
had a total original useful life of 30 years with no residual value and is being depreciated on a straight-line basis.
Required:
1. Determine the implicit rate on the lease.
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2.
3.

Prepare the appropriate entries for North American on January 1, 2008 to record the sale-leaseback and
December 31, 2008 to record necessary adjustments.
Show how North Americans December 31, 2008 balance sheet and income statement would reflect the
sale-leaseback.

(Source: Intermediate Accounting by Spiceland, et.al., 2th ed., P15-16, modified)

Problem 22 Sale and leaseback, operating lease

On January 1, 2008, Garden Ridge Company sold an office building with carrying amount of P2,000,000 (cost of
P3,000,000 and accumulated depreciation of P1,000,000) to Cosmopolitan Tower, Inc. for P2,500,000. This
building has a fair market value of P2,200,000. It has a remaining useful life of 20 years.
Garden Ridge immediately leased the said building from Cosmopolitan Tower for 10 years. Annual rentals amount
to P100,000 per year.
The rentals are payable in advance, every January 1 of each year. The first annual rental is payable on January 1,
2008.
Required: Prepare the necessary journal entries for 2008 (for each transaction date) on the books of Garden Ridge
and Cosmopolitan Tower. Indicate the correct dates of each journal entry. (Do not prepare one journal entry
covering more than one transaction date).
Problem 23 Lease of land and building
On January 1, 2008, Cook Textiles leased a building with two acres of land from Peck Development. The lease is
for 10 years. No purchase option exists and the property will revert to Peck at the end of the lease. The building
and land combined have a fair market value on January 1, 2008 of P1,450,000 and the building has an estimated
life of 20 years with a residual value of P150,000. The lease calls for Cook to assume all costs of ownership and to
make annual payments of P200,000 due at the beginning of each year. On January 1, 2008, the estimated value of
the land was P400,000. Cook uses straight-line method of depreciation and pays 10% interest on borrowed money.
Pecks implicit rate is unknown.
Required:
1. Prepare journal entries for Cook Textiles for 2008. Assume the land could be rented without the building
for P59,000 each year.
2. Assuming the land had a fair market value on January 1, 2008 of P200,000 and could be rented alone for
P30,000, prepare journal entries for Cook Textiles for 2008.
(Source: Intermediate Accounting by Spiceland, et.al., 2th ed., P15-17, modified)

Problem 24 Accounting for arrangements containing a lease

Pistachio Manufacturing Company entered into a Supply Agreement with Macadamia Gas Corporation for the
supply of gas which will be used by Pistachio in its manufacturing plant. Based on assessment of the Supply
Agreement, it was determined that the said agreement contains a lease since it provides that the supply of the gas
is solely dependent on the gas facility built by Macadamia adjacent to Pistachios manufacturing plant and the gas
produced in that gas facility is solely for the use of Pistachio. It is not economically feasible for Macadamia to source
gas from other facilities and it has no plans of selling gas to other customers. Selling gas to other customers will
require expansion of the gas facility.
The Supply Agreement is effective January 1, 2008. Macadamia guarantees to deliver a minimum 100,000 cubic
meters gas monthly to Pistachio for a period of 10 years. Each month, Pistachio will pay a fixed capacity charge of
P1,000,000 plus P10 per cubic meter delivered. The fixed capacity charged will be paid regardless of whether
Pistachio takes gas from Macadamia. The variable charge of P10 per cubic meter includes facilities actual energy
costs, which amount to about 90% of the facilitys total variable costs. Macadamia will incur high costs in case the
facility is operated inefficiently.

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During the month of January 2008, Pistachio purchased only 90,000 cubic meters of gas from Macadamia, which is
already sufficient to cover its needs for the month, although Pistachio can produce 100,000 cubic meters. In
February, Macadamia needed 120,000 cubic meters and Pistachio was able to supply the said amount. In March,
150,000 cubic meters were delivered to Macadamia. In April, no gas was delivered since Pistachio encountered a
labor problem. So, it shut down its operations during the month. In May, production resumed and it purchased
210,000 cubic meters of gas from Macadamia.
However, if Pistachio will obtain the gas from other suppliers which supply gas to not only one customer, the gas
price is P15 per cubic meter on January 1, 2008. The rental value of the gas plant cannot be determined.
Required:
1. Determine the amount of payments related to the lease and to the supply of gas from January to May
2008
2. Prepare journal entries for Pistachio and Macadamia from January to May 2008.
3. Assuming that in addition to the market price of the gas as given in the problem, the market rent for the
facility was determined to be P800,000 monthly, determine the amount of payments related to the lease
and to the supply of gas from January to May 2008.

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UNIT 5. EMPLOYEE BENEFITS

Problem 25 Payroll and short-term employee benefits
Mozart Company, Inc. has the following transactions related to payroll and employee benefits for the month of
December 2008:
a. The following information relates to the payroll of Mozart electronics for the second half-month of December
31, 2008:
Gross salaries and wages ...
Individual performance bonus
Withholding taxes on salaries and wages, and performance
bonus (P440,000 pertains to performance bonus) ...
Philhealth contribution employees share ..
Philhealth contribution employers share ..
SSS premium employees share
SSS premium employers share .
Union dues of employees (deductible from salaries) ..
SSS loan amortization of employees .
Car loan amortization of employees ..
th

P 10,000,000
2,000,000
2,640,000
800,000
800,000
1,000,000
1,000,000
150,000
200,000
350,000
nd

Mozart pays the salaries and wages of its employees every 7 and 22 of the month. The above will be paid
on January 7, 2009.
b.

Mozart has a profit-sharing plan. Under this plan, Mozart pays its employees additional bonus equivalent to
3%-5% of its net profit depending on its performance. The bonus is payable to the employees in March of the
succeeding year. Only employees who have worked with Mozart for two years, as of December 31 of the
current year, are entitled to receive the bonus. Mozart has a net profit of P15,000,000 for the year ended
December 31, 2008. On January 5, 2009, management decided that a bonus of 3.5% of net profit will be paid
to the employees on March 31, 2009. The bonus is subject to withholding tax. The estimated effective
income tax rate of the employees is 22%.

c.

Mozart also provides the following benefits to its employees:

th

Medical cash allowance (non-taxable)

P100,000 every month payable on the 7 of the

subsequent month; no entry was made to record the
allowance for the month of December.

Group insurance of employees (non-taxable) ...

P225,000 quarterly premiums paid on December 1

2008 for the group insurance of the employees for
three-months from December 1, 2008, entire amount
was recorded as group insurance premium expense.

Rice subsidy (non-taxable) ...

P110,000 monthly, given in cash every 7 of the

subsequent month, no entry was made to record the
subsidy for the month of December.

Rental of condominium units of expatriate .

employees (50% of rentals is subject to fringe
benefits tax of 32% based on grossed-up
monetary value)

P100,000 monthly rental payments, payable to the

lessor on the first day of the subsequent month, no
entry was recorded for rentals for the month of
December.

Meal subsidy (in kind, non-taxable) .

P150,000 actual expense for the month payable to the

concessionaire on the first day of the subsequent
month, no entry was recorded for expenses incurred in
December 2008.

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Mozarts practice is to record withholding taxes at the time the compensation, bonuses and other employee
benefits are paid or accrued, whichever comes first, in accordance with the tax rules.
Required: Prepare the necessary journal entries to record or adjust the above transactions in Mozarts books for
December 2008.
Problem 26 Compensated Absences
Ludwig Electronics, Inc. has plan to compensate its employees for certain absences. Each employee can receive 5
days sick leave each year plus 10 days vacation. The benefits carry over for 2 additional years, after which the
provision lapses on a FIFO basis. Thus, the maximum accumulation is 45 days. In some cases, the company
permits vacations to be taken before they are earned. Payments are made based current compensation levels, not
on the level in effect when the absence time was earned.
Employee
Andrew
Brad
Charles

Days Accrued
Jan 1, 2008
20
15
25

Daily Rate
Jan 1, 2008
P68
74
62

Days Earned
2008
15
15
7

Days Taken
2008
13
15
32

Denise
Emma
Frank

-5
40
Hired July 1

56
78
60

15
15
8

20
5
2

Required:
1.
2.

3.

Daily Rate
Dec 31, 2008
P70
76
Terminated,
June 15
Rate = P64
58
82
60

How much is the liability for compensated absences at December 31, 2008. Ignore impact of time value
of money.
Prepare a summary journal entry to record compensation absence payments during the year and the
accrual at the end of the year. Assume that the payroll liability account is charged for all payments
made during the year for both sick and vacation leaves. The average rate of compensation for the year
may be used to value the hours taken except for Charles, who took leaves at the date of termination.
The end-of-year rate should be used to establish the ending liability.
Assuming Ludwig estimates that one-third of the liability for compensated absences will be paid in
2009, and the remaining balance will be equally paid in 2010 and 2011. How much liability should be
recorded in Ludwigs books? Use 12% discount rate.

(Source: Intermediate Accounting by Stice, et.al., 16th ed., P17-43, modified)

Problem 27 Computation of service cost, interest cost, prior service cost, pension expense, PBO
Sachs Brands defined benefit pension plan specifies annual retirement benefits equal to: 1.6% x service years x
final years salary, payable at the end of each year. Angela Davenport was hired by Sachs at the beginning of 1994
and is expected to retire at the end of 2028 after 35 years service. Her retirement is expected to span 18 years.
Davenports annual salary is P900,000 at the end of 2008 and the companys actuary projects her salary to be
P2,400,000 at retirement. The actuarys discount rate is 7%.
At the beginning of 2009, the pension formula was amended to: 1.75% x service years x final years salary. The
amendment was made retroactive to apply the increased benefits to prior service years. Davenport is already
entitled to retirement benefits if she retires immediately.
Required:
1. Determine the companys projected benefit obligation (PBO) at the beginning of 2008 (after 14 years
service) with respect to Davenport.
2. Determine the portion of Davenports annual retirement payments attributable to 2008 service.
3. Determine the companys current service cost and interest cost for 2008 with respect to Davenport.
4. Determine the companys projected benefit obligation (PBO) at the end of 2008 (after 15 years service)
with respect to Davenport.
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5.
6.
7.
8.
9.

Determine the companys prior service cost at the beginning of 2009 with respect to Davenport after the
amendment.
Determine the amount of prior service cost that would be included in pension expense for 2009.
Determine the amount of current service cost and interest cost for 2009 with respect to Davenport.
Calculate pension expense for 2009 with respect to Davenport, assuming plan assets attributable to her
of P1,500,000 and a rate of return (actual and expected) of 10%.
Assume that the retirement benefits have not vested yet and the remaining vesting period is 5 years as
of January 1, 2009:
a. Determine the amount of prior service cost that would be included as part of pension expense in
2009.
b. Calculate pension expense for 2009 with respect to Davenport, assuming plan assets attributable to
her of P1,500,000 and a rate of return (actual and expected) of 10%.

(Source: Intermediate Accounting by Spiceland, et.al., 2nd ed., P17-3 and P17-4, modified)

Problem 28 Computation of pension gain, amortization of unrecognized gain

Herring Wholesale Company has a defined benefit pension plan. On January 1, 2008, the following pension-related
data were available:
Unrecognized net gain
P 170,000
Projected benefit obligation
1,400,000
Fair value of plan assets
1,100,000
Average remaining service period of active
employees expected to remain constant
for the next several years)
15 years
The rate of return on plan assets during 2008 was 9%, although it was expected to be 10%. The actuary revised
assumptions regarding the PBO at the end of the year, resulting in P23,000 decrease in the estimate of that
obligation.
Required:
1. Calculate any amortization of the net gain that should be included as a component of net pension
expense for 2008.
2. Assume the net pension expense for 2008, not including the amortization of the net gain component, is
P325,000, determine the pension expense for 2008.
3. Determine the unrecognized net loss or gain as of January 1, 2009.
4. Assume that Herring Wholesales policy is to recognize the entire actuarial gains or losses in the period
earned or incurred, determine the actuarial gain or loss that should be recognized in 2008. How will this
impact the financial statements?
(Source: Intermediate Accounting by Spiceland, et.al., 2nd ed., P17-7, modified)

Problem 29 Pension expense, pension asset (liability), limitation, PBO, plan assets
The following are the relevant information related to the pension costs of Philippine Metallurgical, Inc. (PMI) at
December 31, 2007:
Fair value of plan assets
P 400,000
Projected benefit obligation
420,000
Unrecognized actuarial loss
30,000
Unrecognized prior service cost
(remaining vesting period of 5 years)
50,000
Present value of available refunds
and reductions in future contributions
30,000

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PMIs actuary determined that 2008 service cost is P60,000. The expected rate of return on plan assets is 9% while
the actual rate of return is 7%. The interest rate on high yield corporate bonds is 5%. PMI contributed P120,000 to
the pension fund at the end of 2008, and retirees were paid P44,000 from the plan assets.
Required:
1. Determine the prepaid (accrued) pension cost at the end of 2007 and 2008.
2. Determine the pension expense for 2008, projected benefit obligation, and fair value of plan assets at the
end of 2008.
3. Prepare the journal entries for 2008 related to pensions.
4. Assume that PMI recognizes the actuarial losses in the period these are incurred.
a. Determine the prepaid (accrued) pension cost at the end of 2007 and 2008.
b. Determine the pension expense for 2008, projected benefit obligation, and fair value of plan assets
at the end of 2008.
c. Prepare the related journal entries for 2008.
Problem 30 Pension costs, reconciliation
The actuaries of Tiramisu Cable Company provided its accountant with the following information related to the
companys pension plan:
December 31, 2007:
Increase in PBO arising from the plans amendment P 732,000
Vesting period of prior service costs
8 years
January 1, 2008:
PBO 3,800,000
Fair value of the pension fund 2,530,000
Accrued pension cost .. 598,000
Market yield on high quality corporate bonds ..
12%
Interest on government bonds ...
15%
Average service life for amortization of gain or loss ... 12 years
Unamortized pension gain prior year .
60,000
Expected rate of return on pension fund ..
10%
For Year 2008:
Benefit payments to retirees ..
Contributions to pension plan

185,000
300,000

December 31, 2008:

PBO 4,161,000
Fair value of pension plan assets .. 2,865,000
Tiramisu amortizes any unamortized pension gain or loss.
Required:
1. Compute the various components of pension expense for 2008.
2. Reconcile the PBO balance as of January 1, 2008 with PBO balance as of December 31, 2008.
3. Reconcile the fair value of plan assets as of January 1, 2008 with the fair value as of December 31,
2008.
4. Prepare the necessary journal entries relative to Tiramisus pension cost for 2008.
5. Reconcile the pension asset (liability) with the memorandum records on December 31, 2008 (similar to
par. 54 of PAS 19).

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Problem 31 Long-term employee benefits, deferred performance bonus

On January 1, 2008, Mrs. Fields Company started granting performance bonus to its employees. On December 31,
2008, Mrs. Fields estimated that bonuses payable to the employees amount to P3,000,000. However, only
P1,200,000 of this will be paid on January 1, 2009 (which was the amount actually paid), while the remaining
balance will be paid equally on January 1, 2010 and January 1, 2011. It is expected that only 90% of the remaining
balance after January 1, 2009 payment will be paid to the employees.
However, on February 1, 2009, many employees resigned from the company. Some of them were already entitled
to receive the bonuses payable in 2010 and 2011 but these will be forfeited in favor of the company. Because of
this, only 70% of the bonuses will be paid in 2010 and 2011. The financial statements for 2008 were authorized for
issue on March 1, 2009. The appropriate discount rate is 12%.
On December 31, 2009, for 2008 bonuses, Mrs. Fields expects that only 65% of the amount payable on January 1,
2010 will be paid and only 60% of the remaining balance will be paid on January 1, 2011. No additional bonuses will
be granted during the year since Mrs. Fields did not meet its expectations. The financial statements for 2009 were
authorized for issue on February 15, 2010. The discount rate is still 12%.
Required: Prepare all the journal entries in 2008 and 2009. Show your supporting computations.

Advanced Accounting 3 (MODADV3)

Accounting Problems

First Term 2011-2012

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