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FINANCIAL ACCOUNTING II

SUBJECT REQUIREMENT

1. ACCRUED LIABILITIES
1. Chester Company reported payroll for the month of January 2018 as follows:
Total wages 500,000
Income tax withheld 60,000
All wages paid were subject to SSS. The SSS tax rates were 7% each for employee and
employer. Chester remits payroll taxes on the 15th of the following month.
In the financial statements for the month ended January 31,2018, what amount should be
reported respectively as total payroll tax liability and payroll tax expense?
2. Bloy Company pays all salaried employees on a biweekly basis. Overtime pay however is paid
in the next biweekly period. The entity accrues salaries expenses only at the December 31 year-
end.
Data relating to salaries earned in December 2018 are:
Last payroll was paid on December 26, 2018 for the 2-week period ended December 26, 2018
Overtime pay earned for the 2-week period ended December 26, 2018 was P420,000
Remaining work days in 2018 were December 29, 30 and 31 on which days there was no
overtime.
The recurring biweekly salaries totaled P7,500,000.
Assuming a 5-day work week, what amount should be recorded as accrued salaries payable on
December 31, 2019?
2. PROVISION AND CONTIGENT LIABILITY
1. On November 25,2018, an explosion occurred at a Rex Company plant causing extensive
property damage to area buildings. By March 10, 2019, claims had been asserted against the
entity.
The management and counsel concluded that it is probable that the entity would be responsible
for damages, and that P3,500,000 is a reasonable estimate of the liability.
Rex’s P10,000,000 comprehensive public liability policy has a P500,000 deductible clause. The
financial statements were issued on March 31, 2019.
What amount of loss from lawsuit should be reported for 2018?
What amount of liability from lawsuit should be reported on December 31, 2018?
2. Tone Company is the defendant in a lawsuit filed by Witt in 2018 disputing the validity of
copyright held by Tone.
On December 31, 2018, Tone determined that Witt would probably be successful against Tone
for an estimated amount of P400,000.
Appropriately, a P400,000 loss was accrued by a charge to income for the year ended December
31,2018.
On December 31, 2019, Tone and Witt agreed to a settlement providing for cash payment of
P250,000 by Tone and Witt, and transfer of Tone’s copyright to Witt.
The carrying amount of the copyright on Tone’s accounting records was P50,000 on December
31, 2019.
What would be the effect of the settlement on Tone’s income before tax in 2019?
3. NOTE PAYABLE (REFINANCING AND FAIR VALUE OPTION)
1. On September 1, 2018, Pine Company issued a note payable to National Bank in the amount
of P1, 800,000, bearing interest at 12% and payable in three equal annual principal payments of
P600,000. On this date, the bank’s prime rate was 11%.
The first interest and principal payment was made on September 1, 2019.
On December 31, 2019, what amount should be reported as accrued interest payable?
What amount should be reported as interest expense for 2019?
2. On January 1, 2018, Solemn Company sold land to Glory Company. There was no established
market price for the land. Glory gave Solemn a P2,400,000 noninterest bearing note payable in
three equal annual installments of P800,000 with the first payment due December 31, 2018.
The note has no ready market. The prevailing rate of interest for a note of this type is 10%.
The present value of a P2, 400,000 note payable in three equal annual installments of P800,000
at a 10% rate of interest is P1, 989,600.
What is the interest expense for 2018?
What is the carrying amount of the note payable on December 31, 2018?
4. DEBT RESTRUCTURE
1. Seal Company is experiencing financial difficulty and is negotiating debt restructuring with its
creditor to relieve its financial stress. Seal has a P2, 500,000 note payable to United Bank.
The bank accepted an equity interest in Seal Company in the form of 200,000 ordinary shares
quoted at P12 per share. The par value is P10 per share.
The fair value of the note payable on the date of restructuring is P2, 200,000.
1. what amount should be recognized as gain from debt extinguishment as a result of the equity
swap?
2. what amount should be recognized as share premium from the issuance of the shares?
3. If the shares have no fair value, what amount should be recognized as gain on extinguishment?

2. Due to extreme financial difficulties, Armada Company had negotiated a restructuring of a


10% P5, 000,000 note payable due on December 31, 2018. The unpaid interest on the note on
such date is P500,000.
The creditor had agreed to reduce the face value to P4, 000,000, forgive the unpaid interest,
reduce the interest rate to 8% and extend the due date three years from December 31, 2018.
The PV of 1 at 10% for three periods is 0.75 and the PV of an ordinary annuity of 1 at 10% for
three periods is 2.49.
1. What is the gain on extinguishment of debt in 2018?
2. What is the interest expense for 2019?

5. BONDS PAYABLE

1. On June 30, 2018, Huff Company issued at 99, five thousand bonds of 8%, P1,000 face
amount.
The bonds were issued through an underwriter to whom the entity paid bond issue cost of
P425,000.
On June 30, 2018, what amount should be reported as bond liability?

2. On January 1, 2018, Ezekiel Company received P1, 077,200 for 12% bonds with the face
amount of P1, 000,000. The bonds were sold to yield 10%. Interest is payable semiannually
every January 1 and July 1.
The entity has elected the fair value option for measuring the financial liability.
On December 31, 2018, the fair value of the bonds is determined to be P1, 064,600 due to market
and interest factors.
1. What is the carrying amount of the bonds payable on January 1, 2018?
2. What is the interest expense for 2018?
3. What is the gain or loss from change in fair value of the bonds for 2018?
4. What is the carrying amount of the bonds payable on December 31, 2018?

6. EFFECTIVE INTEREST METHOD


1. On January 1, 2018, West Company issued 9% bonds in the face amount of P5,000,000 which
mature on January 1, 2018. The bonds were issued for P4, 695,000 to yield 10%.
Interest is payable annually on December 31. The entity used the interest method of amortizing
bond discount.
1. what is the interest expense for 2018?
2. On December 31, 2018, what is the carrying amount of the bonds payable?

2. On January 1, 2018, Moon Company reported 9% bonds payable of P4, 000,000 less
unamortized discount of P320,000.
Further examinations revealed that these bonds were issued to yield 10%. The amortization of
the bond discount was recorded using the effective interest method.
Interest was paid on January 1 and July 1 of each year. On July 1, 2018, the entity retired the
bonds at 103 before maturity.
What is the loss on retirement of bonds payable to be recognized on July 1, 2018?

7. COMPOUND FINANCIAL INSTRUMENT


1. at year-end, Fort Company issued 5,000 8%, 10-year bonds, P1, 000 face amount with
detachable share warrants at 110.
Each bond carried a detachable warrant for ten ordinary shares of Fort Company at a specified
option price of P25 per share. The par value of the ordinary share is P20.
Immediately after issuance, the market value of the bonds without the warrants was P5, 400,000
and the market value of the warrants was P600,000.
1. What is the carrying amount of bonds payable at year-end?

2. On January 1, 2018, Arlene Company issued convertible bonds with a face amount of
P5,000,000 for P6,000,000.
The bonds are convertible into 50,000 shares with P100 par value. The bonds have a 5-year life
with 10% stated interest rate payable annually every December 31.
The fair value of the convertible bonds without conversion option is computed at P5, 399,300 on
January 1, 2018.
On December 31, 2020, the convertible bonds were not converted but fully paid for P5,550,000.
On Such date, the fair value of the bonds without conversion privilege is P5, 400,000 and the
carrying amount is P5, 178, 300.
1. what is the carrying amount of the bonds payable on January 1, 2018?
2. what is the premium on bonds payable on January 1, 2018?
3. what is the equity component arising from issuance of bonds payable on January 1, 2018?
4. what is the loss on the extinguishment of the convertible bonds payable on December 31,
2020?

8. LESSEE ACCOUNTING
1. At the beginning of current year, Lessee Company a machinery with the following
information:
Annual rental payable at the end of each year 1,000,000
Residual value guarantee 500,000
Payment to lessor to obtain a long-term lease 300,000
Cost of dismantling and restoring the asset as required
By contract at present value 390,000
Annual executory cost paid by lessee 50,000
Lease term 4 years
Useful life of machinery 8 years
Implicit interest rate 10%
Present value of an ordinary annuity of 1 at 10% for 4 periods 3.17
Present value of 1 at 10% for 4 periods 0.68

1. what is the initial lease liability?


2. what is the cost of right use asset?
3. what is the depreciation for current year?
4. what is the lease liability at year-end?

2. At the beginning of current year, Panaroma Company leased a building from a lessor with the
following pertinent information:
Annual rental payable at the end of each year 1,000,000
Initial direct cost paid 400,000
Lease incentive received 100,000
Leasehold improvement 200,000
Purchase option that is reasonably certain to be exercised 500,000
Lease term 5 years
Useful life of building 8 years
Implicit interest rate 10%
PV of an ordinary annuity of 1 for 5 periods at 10% 3.79
Present value of 1 for 5 periods at 10% 0.62

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


2. what is the depreciation for current year?
3. what is the interest expense for current year?
4. what is the lease liability at year-end?

9. LEASE LIABILITY
1. On December 31, 2018, Rafferty Company leased equipment with annual lease payments of
P200,000 due to December 31 for 10 years.
The equipment’s useful life is 10 years and the interested rate implicit in the lease is 10%.
The lease obligation was recorded on December 31, 2018 at P1, 350,000 and the first payment
was made on that date.
What amount should be included in current liabilities in relation to the lease on December
31,2018?

2. Yemen Company leased an equipment for 6 years from another entity on January 1, 2018.
The entity recorded the right of use asset at P4, 800,000 which included a purchase option of
P100,000. On this date, Yemen company is certain to exercise the option.
The equipment had an eight-year useful life and a fair value of P300,000 at end of the useful life.
On January 1, 2024, the entity did not exercise the purchase option.
What is the loss on finance lease to be recognized in 2014?

10. REMEASUREMENT OF LEASE LIABILITY

1. Alyanna Company entered into a lease of building on January 1, 2018 with the following
information:
Annual rental payable at the end of each year 500,000
Lease term 5 years
Useful life building 20 years
Implicit interest rate 10%
PV of an ordinary annuity of 1 at 10% for 5 periods 3.79

The lease contained an option for the lessee to extend for a further 5 years.
At the commencement date, the exercise of the extension option is not reasonably certain.
After 3 years on January 1, 2021, the lessee decided to extend the lease for a further 5 years.

New annual rental payable at the end of each year 600,000


New implicit interest rate 8%
PV of an ordinary annuity of 1 at 8 percent for 5 periods 3.99
PV of 1 at 8% for 2 periods 0.86
PV of an ordinary annuity of 1 at 8% for 2 periods 1.78

1. what is the lease liability on December 31, 2020?


2. what is the depreciation for 2018?
3. what is new lease liability on January 1, 2021?
4. what is the carrying amount of right of use asset on January 1, 2021?
5. what is the depreciation for 2021?

2. On January 1, 2018, Variety Company entered into an 8-year lease of a floor of a building
with useful life of 15 years with the following items:
Annual rental for the first three years payable at the
End of each year 300,000
Annual rental for the next five years payable at the
End of each year 400,000
Implicit interest rate 10%
PV of an ordinary annuity of 1 at 10% for three periods 2.49
PV of an ordinary annuity of 1 at 10% for five periods 3.79
PV of 1 at 10% for three periods

The lease provides for neither a transfer of title to the lessee nor a purchase option.
1. what is the lease liability on January 1, 2018?
2. what is the interest expense for 2018?
3. what is the interest expense for 2021?
4. what is the lease liability on December 31, 2021?
11. OPERATING LEASE-LESSOR
1. Wall Company leased office premises to Fox Company for a five-year term beginning January
1, 2018.
Under the terms of the operating lease, rent for the first year is P800,000 and rent for years 2
through 5 is P1, 250,000 per annum.
However, as an inducement to enter the lease, Wall granted Fox the first six months of the lease
rent-free.
1. what is the total rental income over the lease term?
2. what amount should be reported as rental income for 2018?
2. On July 1, 2018, Gee Company leased a delivery truck from Marr Company under a 3-year
operating lease.
Total rent for the term of the lease will be P360,000 payable as follows:
12 months at a P 5,000 = P60,000
12 months at a P7,500 = P90,000
12 months at a P17,500 = P210,000
All payments were made when due.
1. what is the rent revenue for the year ended June 30, 2019?
2. on June 30, 2020, what amount should be reported as accrued rent receivable?

12. SALES TYPE LEASE- LESSOR


1. Vanderbilt Company is a dealer in machinery. On January 1, 2018, a machinery was leased to
another entity with the following provisions:
Annual rental payable at the end of each year 3,000,000
Lease term and useful life of machinery 5 years
Cost of machinery 8,000,000
Residual value-unguaranteed 1,000,000
Implicit interest rate 12%
PV of an ordinary annuity of 1 for 5 periods at 12% 3.60
PV of 1 for 5 periods at 12% 0.57
At the end of the lease term on December 31, 2022, the machinery will revert to Vanderbilt.
Vanderbilt incurred initial direct cost of P300,000 in finalizing the lease agreement.
1. what is the unearned interest income on January 1, 2018?
2. what amount should be reported as gross profit on sale in 2018?
3. what is the interest income for 2018?

2. Marianas Company adopted the policy of leasing as the primary method of selling its
products. The entity’s main product is a small helicopter that is very popular among politicians
and entity managers.
Marianas Company constructed such a helicopter for Jade Company at a cost of P8,500,000.
The terms of the lease provided for annual advance payments of P2,500,000 to be paid over 10
years with the ownership transferring to the lessee at the end of the lease period.
It is estimated that the helicopter will have a residual value of P1,600,000 at that date.
The lease payments began January 1, 2018. Marianas Company incurred initial direct cost of
P500,000 in financing the lease agreement with Jade. The cash sale price of the helicopter is
P14,875,000.
Financing the construction was at a 14% rate. The present value of an annuity due of 1 at 14%
for 10 periods is 5.95.
1. what is the gross profit on sale that should be recognized by Marianas company?
2. what is the unearned interest income on January 1, 2018?
3. what is the interest income for 2018?

13. DIRECT FINANCING LEASE-LESSOR


1. Camia Company is in the business of leasing new sophisticated equipment. As lessor, the
entity expects a 12% return.
At the end of the lease term, the equipment will revert to Camia Company.
On January 1, 2018 an equipment is leased to another entity under a direct financing lease.

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, 2018

1. what is the gross investment in the lease?


2. what is the unearned interest income on January 1, 2018?
3. what is the interest income for 2018?
2. At the beginning of current year, Lessor Company leased a machine to Lessee Company. The
machine had an original cost of P6,000,000. The lease term was five years and the implicit
interest rate on the lease was 15%.
The lease is properly classified as a direct financing lease. The annual lease payments of P1,
750,000 are made each December 31.
The machine reverts to Lessor at the end of the lease term, at which time the residual value of the
machine will be P275,000. The residual value is unguaranteed.
1. At the commencement of the lease, what would be the net lease receivable on the part of the
lessor?
2. What is the gross investment in the lease?
3. What is the total unearned interest income?
4. What is the interest income for the current year?

14. SALE AND LEASEBACK


1. At the beginning of current year, Easy Company sold an equipment with remaining life of 10
years and immediately leased it back for 4 years at the prevailing market rental.
Sale price at fair value 6,000,000
Carrying amount of equipment 4,500,000
Annual rental payable at the end of each year 800,000
Implicit interest rate 10%
Present value of an ordinary equity of 1 at 10% for
four periods 3.17

1. What is the initial lease liability?


2. What is the cost of right of use asset?
3. What is the gain on right transferred to the buyer-lessor?
4. What is the annual depreciation of the right of use asset?
5. What is the net annual rental income of the buyer-lessor?

2. At the beginning of current year, Hazel Company sold a machine are immediately leased it
back. The following data pertain to the sale and leaseback transaction:
Sale price at below fair value 4,000,000
Fair value of machine 4,500,000
Carrying amount of machine 3,600,000
Annual rental payable at the end of each year 500,000
Remaining life of machine 10 years
Lease term 3 years
Implicit interest rate 6%
Present value of an ordinary annuity of 1 at 6%
for 3 periods 2.67

1. What is the initial lease liability?


2. What is the cost of right of use asset?
3. What is the gain on right transferred to the buyer-lessor?
4. What is the net annual rent income of the buyer-lessor?

15. POSTEMPLOYMENT BENEFITS


1. A director of Easy Company shall receive a retirement benefit of P10% of the final salary per
annum for a contractual period of three years. The director does not contribute to the scheme.
The anticipated salary over three years is as follows:
2018 1,000,000
2019 1,200,000
2020 1,440,000

Present value of 1 at 5% discount rate


For one period .9524
For two periods .9070
1. what is the annual benefit that should be used in computing the estimated pension liability?
2. Using the projected unit credit method, what is the estimated pension liability on December
31, 2019?
2. At the beginning of current year, Shiela Company had the following balances related to a
defined benefit plan:
Fair value of plan assets 5,750,000
Projected benefit obligation 6,500,000
The actuary provided the following data for the current year:
Current service cost 600,000
Settlement discount rate 10%
Expected return on plan assets 8%
Actual return on plan assets 700,000
Contribution to the plan 900,000
Benefits paid to retirees 100,000

1. what is the employee benefit expense?


2. what is the measurement gain on plan asset?
3. what is the defined benefit cost?
4. what is the prepaid/ accrued benefit cost of December 31?

16. PROJECTED BENEFIT OBLIGATION FAIR VALUE OF PLAN ASSETS


PREPAID/ACCRUED BENEFIT COST
1. Bronson Company had an noncontributory defined benefit pension plan. The entity received
the projected benefit obligation report from the independent actuary at year-end.
Pension benefits paid 135,000
PBO on December 31 2,160,000
Interest expense 120,000
Discount rate 8%

1. what is the projected benefit obligation on January 1?


2. what is the current service cost for current year?
2. Elaine Company adopted a defined benefit plan on January 1, 2018. The pension funding
payment is made to the trustee on December 31 each year.
2018 2019
Service cost 1,500,000 1,650,000
Funding payment 1,700,000 1,850,000
Interest on defined benefit obligation 150,000
Interest income and actual return on plan assets 180,000
What is the prepaid pension cost on December 31, 2019?

17. OTHER EMPLOYEE BENEFITS


1. Vanessa Company has 35 employees who work 8 hours a day and are paid hourly.
On January 1, 2018, the entity began a program of granting the employees 10 days of paid
vacation each year. Vacation days earned in 2018 may first be taken on January 1, 2019.

Year Hourly Vacation days earned Vacation days used


Wage by each employee by each employee
2018 129.00 10 0
2019 135.00 10 8
2020 142.50 10 10
The entity has chosen to accrue the liability for compensated absences at the current rate of pay
in effect when the compensated time is earned.
1. what is the vacation pay expense for 2018?
2. what is the accrued liability on December 31,2020?
3. what is the accrued liability on December 31, 2020 assuming the policy is to accrue liability at
the end of each year at the wage rate for that year?

2. At the beginning of current year, an entity announced the decision to close the factory located
in Mindanao and terminate all 200 employees as a result of economic downturn. The entity shall
pay P20,000 per employee upon termination.
However, to ensure that the windup of the factory occurs smoothly and all remaining customer
orders are completed, the entity needs to retain at least 20% of employees until closure of the
factory in eight months.
As a result, the entity announced that employees who agree to stay until the closing of the factory
shall receive P60,000 payment at the end of eight months in addition to receiving their current
wage throughout the period of closure instead of the P20,000. Based on this offer, the entity
expected to retain 50 employees until the factory is closed.

What is the amount of termination benefit?

18. ACCOUNTING FOR INCOME TAX


1. Canterbury Company made an accounting profit of P4,000,000 for the current year which
included the following items of income and expense:
Donation to political parties (nondeductible) 1,000,000
Depreciation -20% 1,600,000
Annual leave expense 700,000
Rent revenue 1,200,000
Income tax rate 30%
For tax purposes, the depreciation rate is 25%, the annual leave paid is P800,000 and the rent
received is P1,000,000. The entity followed the cash basis for tax purposes.
What is the current liability at year-end?

2. Dunn Company reported in the income statement for the current year P900,000 income before
provision for income tax.
Rent receive in advance 150,000
Interest income on time deposit 200,000
Depreciation deducted for income tax purposes
in excess of financial depreciation 100,000
Income tax rate 30%

1. what is the current provision for income tax for the current year?
2. what is the total tax expense?

19. DEFFERED TAX ASSET AND LIABILITY


1. Shear Company began operations in 2018. Included in the 2018 financial statements were bad
debt expense of P400,000 and profit from an installment sale of P1,000,000.
For tax purposes, the bad debts will be deducted and the profit from the installment sale will be
recognized in 2019. The tax rate is 30%.
What amount should be reported as deferred tax expense in the income statement for 2018?

2. Lion Company reported in the income statement for the first year of operations pretax
accounting income of P6,000,000. The current year tax rate is 30% and the enacted rate for
future years is 25%.
The following differences existed between the tax return and accounting record:
Tax return Accounting record
Uncollectible accounts expense 200,000 300,000
Depreciation 800,000 500,000
Tax-exempt interest revenue 50,000
1. what is the current tax expense?
2. what is the net deferred tax expense?

20. COMPREHENSIVE INCOME TAX


1. Zeff Company prepared the following reconciliation of pretax financial statement income to
taxable income for the first year of operations:
Pretax financial income 1,600,000
Nontaxable interest received (50,000)
Long-term loss accrual in excess of deductible amount 100,000
Depreciation in excess of financial depreciation (250,000)
Taxable income 1,400,000
Income tax rate 30%

1. what amount should be reported as income tax expense current portion in the income
statement?
2. what amount should be reported as deferred tax liability at year-end?
3. what amount should be reported as deferred tax asset at year-end?
4. what amount should be reported as total expense for the first year?

2. On January 1, 2015, Easy Company acquired an equipment for P8,000,000. The equipment is
depreciation using straight line method based on a useful life of 8 years with no residual value.
On January 1, 2018, after 3 years, the equipment was revalued at a replacement cost of
P12,000,000 with no choice of useful life.
The pretax accounting income before depreciation for 2018 is P10,000,000. The income tax rate
is 30% and there are no other temporary differences at the beginning of the year.
1. what is the deferred tax liability on January 1, 2018 arising from the revaluation?
2. what is the current tax expense for the current year?
3. what is the deferred tax liability on December 31, 2018 arising from revaluation?
4. what is the total tax expense for the current year?
5. what is the revaluation surplus on December 31, 2018?

21. SHAREHOLDERS’ EQUITY


1. At the beginning of the current year, Ria Company issued 10, 000 ordinary shares of
P120 par value and 20, 000 convertible preference shares of P20 par value for a total of
P800,000.
At this date, the ordinary share was selling for P36 and the convertible preference share
was selling for P27.

1. What amount of the proceeds should be allocated to the preference shares?


2. What amount of the proceeds should be allocated to the ordinary shares?
3. What is the share premium from the issuance of preference shares?
4. What is the share premium from the issuance of ordinary shares?

2. On January 1, 2018, Penn Company began operations by issuing at P15 per share one-
half of the 950,000 ordinary shares of P1 par value that had been authorized for issue.
In addition, the entity had 500,000 authorized preference shares of P5 par value.
During 2018, the entity had P1,025,000 of net income and declared P230,000 of
dividend.
During 2019, the entity had the following transactions:
 Issued 100,000 ordinary shares for P17 per share.
 Issued 150, 000 preference shares for P8 per share.
 Authorized the purchase of a custom-made machine to be delivered in January
2020. The entity restricted P300, 000 of retained earnings for the purchase of the
machine.
 Issued additional 50,000 preference shares for P9 per share.
 Reported P1,215,000 of net income and declared on December 31, 2019 a
dividend of P635,000 to shareholders of record on January 15, 2020 to be paid on
February 1, 2020.
1. What is the total shareholders’ equity on December 31, 2018?
2. What is the total shareholders’ equity on December 31, 2019?

22. SHAREHOLDERS’ EQUITY


(Treasury shares, outstanding shares, share split)
1. At the beginning of current year, Hanna Company reported the following shareholders’
equity:
Share capital, P10 par, outstanding 225,000 shares 2,250,000
Share premium 1,500,000
Retained earnings 2,000,000

During the current year, the entity had the following transactions:
 Acquired 10,000 treasury shares for P50 per share or P500,000.
 Sold 5,000 treasury shares at P60 a share.
 Sold 2,000 treasury shares at P45 per share.
 Net income for the year was P2,500,000.
1. What is the total amount of share premium at year-end?
2. What is the share capital at year-end?
3. What is the total shareholders’ equity at year-end?
2. Juan Company was organized at the beginning of current year with 100,000 authorized
shares of P100 par value. The following transactions occurred during the year:
January 15 Sold 30,000 shares at P150 per share
February 14 Issued 2,000 shares for legal services with a fair value of
P250,000. The shares on this date are quoted at P140 per share
March 27 Purchased 5,000 treasury shares at a cost of P120 per share
October 31 Issued P5,000,000 convertible bonds at 120. The bonds are
quoted at 98 without the conversion feature.
November 5 Declared a 2-for-1 share split when the market value of the share
share was P160.
December 15 sold 20,000 shares at P75 per share.
December 31 Net income for the year was P2,000,000.

1. What amount should be reported as share capital at year-end?


2. What amount should be reported as share premium at year-end?
3. What is the total shareholders’ equity at year-end?

23. RETAINED EARNINGS


1. Global Company, a real estate developer, is owned by five founding shareholders.
On December 1, 2018, the entity declared a property dividend of a “one-bedroom flat”
for each shareholder. The property dividend is payable on January 31, 2019.
On December 1, 2018, the carrying amount of a one-bedroom flat is P1, 000,000 and the
fair value is P1,500,000.
However, the fair value is P1,800,000 on December 31, 2018 and P1,900,000 on January
31, 2019.

1. What is the dividend payable on December 1,2018?


2. What is the dividend payable on December 31,2018?
3. What amount of gain is included in profit or loss as a result of the settlement of the
property dividend on January 31, 2019?

2. On November 1, 2018, Grande Company declared a property dividend of equipment


payable on March 1, 2019.
The carrying amount of the equipment is P3,000,000 and the fair value is P2,500,000 on
November 1, 2018.
However, the fair value less cost to distribute the equipment is P2,200,000 on December
31, 2018 and P2,000,000 on March 1, 2019.

1. What is the dividend payable on December 31, 2018?


2. What is the measurement of the equipment on December 31, 2018?
3. What amount of loss on distribution of property dividend is recognized on March 1,
2019?

24. APPROPRIATION AND QUASI-REORGANIZATION


1. Adverse financial and operating circumstances warrant that Solid Company should
undergo a quasi-reorganization.
The following information may be relevant in accounting for the quasi-organization:
 Inventory with a fair value of P2,000,000 is currently recorded in the accounts at
cost of P2,500,000.
 Plant assets with a fair value of P7,000,000 are currently recorded at P8,500,000
net of accumulated depreciation.
 Individual shareholders contribute P4,000,000 to create additional capital to
facilitate the reorganization. No new shares are issued.
 The par value of the share is reduced from P25 to P5.
The shareholders’ equity before the quasi-reorganization comprised the following:
Share capital, P25 par value, 100,000
shares authorized and outstanding 2,500,000
Share premium 1,750,000
Retained earnings (deficit) (3,000,000)
1,250,000

After the quasi-organization, what is the balance of the share premium?


2. Jade Company reported the following shareholders’ equity on January 1, 2018.
Share capital, 1,500,000 shares 1,500,000
Share premium 15,000,000
Retained earnings 8,100,000
Treasury shares, 100,000 at cost (900,000)

All of the outstanding and treasury shares were originally issued for P11 per share.
During 2018, the following events or transactions occurred relating to shareholders’
equity:
 February 15 –issued 400,000 shares for P12.50 per share.
 June 15-Declared a cash dividend of P0.20 per share to shareholders of record on
April 1 and payable on April 15. This was the first dividend ever declared.
 September 15-The president retired. The entity purchased from the retiring
president 100,000 shares for P13.00 per share which was equal to market value on
this date. These shares were canceled.
 December 15 –declared a cash dividend of P0.20 per share to shareholders of
record on January 2,2019 and payable on January 15, 2019.
 On December 31,2018, the entity is being sued by two separate parties for patent
infringement.
The management and outside legal counsel share the following opinion regarding these suits:

Suit Likelihood Estimated


Of losing the suit loss
#1 Reasonably possible 600,000
#2 Probable 400,000

1. What is the increase in share premium arising from the issuance of 400,000 shares on
February 15?
2. What is the decrease in share premium arising from the retirement of 100,000 shares on
September 15?
3. What amount of loss contingencies should be appropriated by a charge to unappropriated
retained earnings?
4. What amount of cash dividend should be charged against unappropriated retained
earnings in 2018?
5. What amount should be reported in the notes to financial statements as restriction on
retained earnings because of acquisition of treasury shares?
SHARE-BASED COMPENSATION
25. SHARE OPTION

1. On January 1, 2018, Alterra Company granted 60,000 share options to employees.


The share options will vest at the end of three years provided the employees remain in
service until then. The option price is P60 and the par value per share is P50.
At the date of grant, the entity concluded that the fair value of the share options cannot be
measured reliably.
The share options have a life of 4 years which means that the share options can be
exercised within one year after vesting.
The share prices are P62 on December 31, 2018, P66 on December 31, 2019, P75 on
December 31,2020 and P85 on December 31, 2021.
All share options were exercised on December 31, 2021.
1. What is the compensation expense for 2018?
2. What is the compensation expense for 2019?
3. What is the compensation expense for 2020?
4. What is the compensation expense for 2021?

2. On January 1, 2018, Easy Company granted 30,000 share options to employees.


The share options vest at the end of three years provided the employees remain in
service until then.
The option price is P60 and the share price is also P60 at the date pf grant. The par
value of the share is P50.
At the date of grant. The entity concluded that the fair value of the share options
cannot be estimated reliably.
The share options have a life of 6 years. This means that the options can be exercised
within three years after vesting.
All share options vested at the end of three years and no employees left during the
three-year period.
The share prices and the number of share options exercised are set out below.

Share price Share options exercised at year-end


2018 63
2019 66
2020 75
2021 88 10,000
2022 100 15,000
2023 90 5,000
Required:
Determine the compensation expense for each year from 2018 to 2023 using the intrinsic value
method.
26. SHARE APPRECIATION RIGHTS
1. On January 1, 2018 Module Company granted 100 share appreciation rights to each of
the 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, 2020 100 employees


December 31, 2021 250 employees
December 31, 2022 150 employees

The fair value and intrinsic value of the share appreciation right are:

Fair value Intrinsic value


December 31, 2018 15
December 31, 2019 18
December 31, 2020 20 15
December 31, 2021 21 20
December 31, 2022 25

The intrinsic value of the share appreciation right on the date of exercise is the amount
paid out to the employees.

1. What is the compensation for 2018?


2. What is the compensation for 2019?
3. What is the compensation for 2020?
4. What is the compensation for 2021?
5. What is the compensation for 2022?

2. On January 1, 2018, Indigenous Company granted to an employee the right to choose


either:
a. 12, 000 shares (share or equity alternative)
b. Cash payment to market value of 10,000 shares (cash alternative)

The grant is conditional upon the completion of three years of service.


If the employee chooses the share alternative, the shares must be held for three years
after vesting date.
The par value of the share is P25 and at grant date on January 1, 2018, the share price
is P51.

The share prices for the three-year vesting period are:

December 31, 2018 54


December 31, 2019 60
December 31, 2020 65

After taking into account the effects of post-vesting restrictions, the entity has
estimated that the fair value of the share or equity alternative is P 48 per share.

1. What is the compensation expense for 2018?


2. What is the compensation expense for 2019?
3. What is the compensation expense for 2020?
4. What is the share premium if the employee has chosen the share alternative?
5. What is the share premium if the employee has chosen the cash alternative?

27. BOOK VALUE AND PREFERENCE


1. Retro Company provided the following data at year-end:
12% preference share capital, 20,000 shares, P100 par value 2,000,000
14% preference share capital, 10,000 shares, P300 par value 3,000,000
Ordinary share capital, 50,000 shares, P100 par value 5,000,000
Retained earnings
2,240,000
Share premium
1,500,000
The 12% preference share is cumulative and participating. The 14% preference share is
noncumulative and participating. Dividends are in arrears for 3 years.
What is the book value per ordinary share?

2. Bonanza Company provided the following shareholders’ equity on December 31, 2018:

Preference share capital, P100 par, 80,000 shares issued,


12% cumulative and fully participating 8,000,000
Ordinary share capital, P50 par, 200,000 shares issued 10,000,000
Share premium
5,000,000
Retained earnings
7,000,000

Dividends on the preferences shares are in arrears for two years including the current year.
On December 31, 2018, the entity intends to pay cash dividend of P10 per share to the ordinary
shareholders.

What is the total amount of dividends to be declared for the preference and ordinary
shareholders?

28. BASIC EARNINGS PER SHARE (simple)


1. On January 1, 2018, Gina Company had 300,000 ordinary shares outstanding, P100 par
or a total par value of P30, 000,000.
During 2018, the entity issued rights to acquire one ordinary share at P100 in the ratio of
one share for every 5 shares held.
The rights are exercised on March 31, 2018. The market value of each ordinary share
immediately prior to March 31, 2018 was P160.
The net income for 2018 was P6, 000,000.
What amount should be reported as basic earnings per share?
2. Excel Company had 600,000 ordinary shares outstanding on January 1, 2018. During
2018, the entity issued rights to acquire one ordinary share at P10 in the ratio of one new
share for every 4 shares outstanding.

The market value of the ordinary share immediately prior to the rights issue is P35. The
rights were exercised on October 1, 2018.
The net income for the year is P8, 550,000.

What amount should be reported as basic earnings per share?

29. BASIC EARNINGS PER SHARE (average shares)

1. Wisconsin Company had 250,000 ordinary shares outstanding on January 1, 2018.


During 2018 and 2019, the following transactions took place:

2018 March 1 sold 24,000 shares


July 1 issued a 20% share dividend
October 1 sold 16,000 shares
December 1 purchased 15,000 shares to be held in
treasury

2019 June 1 3 for 1 share split


September 1 Sold 60,000 shares

 What is the weighted average number of shares for 2018 to be used in the
earnings per share computation for comparative financial statements of
2019?
 What is the weighted number of shares for 2019 to be used in the earnings
per share computation for comparative financial statements of 2019?

2. Precise Company had a net income of P15, 000,000 for the current year. The
following appropriations have not been considered in this amount:

Arrears of cumulative preference dividend for 2 years 4, 000,000


Ordinary dividends 5,
000,000
Preference share premium payable on redemption 1, 000,000
Exceptional profit, net of tax 4,
000,000
The entity had 3, 000,000 ordinary shares of P1 par value outstanding at the
beginning of the year. The following share transactions occurred during the current
year:

Jan. 1 Issued at P5 per share, P1 paid to date and


entitled to participate in dividends to the
extend paid up
250,000
April 1 Full market price P3 per share issue 600,000
July 1 Purchase of own shares
400,000

What amount should be reported as basic earnings per share?

30. DILUTED EARNINGS PER SHARE (CONVERTIBLE PREFERENCE SHARES,


CONVERTIBLE BONDS PAYABLE)
1. Vios Company had 100,000 ordinary shares outstanding on January 1, 2018.
In addition, on January 1, 2018, the entity had issued 10,000 convertible cumulative 5%
preference shares with P100 par.
These preference shares were converted on September 1, 2018.
Each preference share was 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 the current year was
P2, 000,000.

What amount should be reported as basic earnings per share?

What amount should be reported as diluted earnings per share?

2. At the beginning of current year, Atlantic Company had the following capital:
Ordinary share capital, P10 par value, 800,000 shares 8,000,000
12% convertible bonds, each P1,000 bond
is convertible into 80 ordinary shares
5,000,000

May 1 Issued 60,000 ordinary shares for P30 per share.


July 1 Purchased 100,000 shares of treasury at P35 per share.
Oct. 1 Converted P2,000,000 face value of bonds.
Dec. 31 Net income for the current year was P9, 500,000. The income tax rate is 30%.

1. What amount should be reported as basic earnings per share?


2. What amount should be reported as diluted earnings per share?