Chapter 4 14

CHAPTER 4
Problem 4-3
Requirement 1
April
2011
1
Oct.
Dec.
31
31
Jan.
2012
1
April
Oct.
Dec.
31
31
Cash (7,000,000 x 106%)

Bonds payable
Premium on bonds payable
Interest expense (7,000,000 x 12% x 6/12)
Cash
Accrued interest payable
Premium bonds payable
Interest expense (420,000 / 10 x 9/12)
Interest expense
Interest expense
Cash
Interest expense
Cash
Interest expense
Interest expense (420,000 / 10)
7,420,000
7,000,000
420,000
420,000
420,000
210,000
210,000
31,500
31,500
210,000
210,000
420,000
420,000
420,000
420,000
210,000
210,000
42,000
42,000
Requirement 2
Noncurrent liabilities:
Bonds payable
Book value
7,000,000
346,500
7,346,500
Problem 4-4
Requirement 1
Jan.
2011
1
1
June
30
Dec.
31
31
June
Sept.
Dec.
2012
30
1
31
31
31
Unissued bonds payable

Authorized bonds payable
Cash (5,000,000 x 95%)
Discount on bonds payable
Cash
Interest expense
Cash
Interest expense
Cash
Cash
Interest expense
Cash (7,000,000 x 12% x 6/12)
Interest expense
Interest expense
8,000,000
8,000,000
4,750,000
250,000
5,000,000
300,000
300,000
300,000
300,000
25,000
25,000
300,000
300,000
2,100,000
2,000,000
60,000
40,000
420,000
420,000
25,000
25,000
2,400
2,400
120 months 20 = 100 months remaining

60,000 / 100 = 600 monthly
600 x 4 = 2,400
Requirement 2
Authorized bonds payable
Less: Unissued bonds payable
Issued bonds payable
Total
Book value
8,000,000
1,000,000
7,000,000
57,600
7,057,600
( 200,000)
6,857,600
Problem 4-5
Requirement 1
April
2011
1
Oct.
Dec.
31
Jan.
2012
1
April
July
Cash
4,850,000
100,000
Bond issue cost
Bonds payable
Interest expense
300,000
Cash (5,000,000 x 12% x 6/12)
Interest expense
150,000
Accrued interest payable (5,000,000 x 12% x 3/12)
Interest expense
22,500
Discount on bonds payable (100,000 / 5 x 9/12)
Bond issue cost (50,000 / 5 x 9/12)
Interest expense
Interest expense
Cash
Interest expense
Discount on bonds payable (20,000 x 6/12)
Bond issue cost (10,000 x 6/12)
Retirement price (2,000,000 x 99%)
Add: Accrued interest from April 1 to July 1, 2011
(2,000,000 x 12% x 3/12)
Total payment
Bonds payable retired
Less: Applicable discount (2/5 x 75,000)
Applicable issue cost (2/5 x 37,500)
Book value of bonds retired
Less: Retirement price
Loss on early retirement
July
Oct.
Dec.
31
Bonds payable
Interest expense
Loss on early retirement of bonds
Cash
Bond issue cost
Interest expense
Cash (3,000,000 x 12% x 6/12)
Interest expense
(3,000,000 x 12% x 3/12)
50,000
5,000,000
300,000
150,000
15,000
7,500
150,000
150,000
300,000
300,000
15,000
10,000
5,000
1,980,000
60,000
2,040,000
2,000,000
30,000
15,000
45,000
1,955,000
1,980,000
( 25,000)
2,000,000
60,000
25,000
2,040,000
30,000
15,000
180,000
180,000
90,000
90,000
31
Interest expense
Discount on bonds payable (12,000 x 6/12)
Bond issued cost (6,000 x 6/12)
Revised annual amortization:
Discount (3/5 x 20,000)
Issue cost (3/5 x 10,000)
9,000
6,000
3,000
12,000
6,000
Requirement 2
Bonds payable
Bond issue cost
Book value
3,000,000
( 39,000)
( 19,500)
2,941,500
Problem 4-6
Requirement 1
Jan.
Dec.
2011
1
31
31
31
Dec.
2012
31
31
Cash
4,200,000
Bonds payable
Interest expense
Cash (4,000,000 x 12%)
4,000,000
200,000
480,000
480,000

Bonds payable
Cash
Gain on early retirement of bonds
1,000,000
40,000
Face of bonds payable retired

Add: Applicable premium (1/4 x 160,000)
Book value
Less: Retirement price (1,000,000 x 95%)
Gain on retirement
1,000,000
40,000
1,040,000
950,000
90,000
Interest expense
Cash (3,000,000 x 12%)
Interest expense (40,000 x 3/4)
40,000
40,000
950,000
90,000
360,000
360,000
30,000
30,000
Requirement 2
Noncurrent liabilities
Bonds payable
Book value
3,000,000
90,000
3,090,000
Problem 4-7
1. Total bonds payable issued
Less: Face value bonds payable retired
Bonds payable December 31, 2011
6,000,000
3,000,000
3,000,000

Less: Amortization from 2004 to 2010 (300,000 / 10 x 7)
Balance January 1, 2011
Less: Discount applicable to bonds retired (3/6 x 90,000)
Adjusted balance
Less: Amortization for 2011 (3/6 x 30,000)
Discount on bonds payable December 31, 20011
300,000
210,000
90,000
45,000
45,000
15,000
30,000
2. Interest (3,000,000 x 12%)

Amortization of discount for 2011
Interest expense for 2011
360,000
15,000
375,000
3. Adjusting entries on December 31, 2011:

a. Retained earnings
210,000
210,000
b. Bonds payable
Gain on early retirement of bonds
300,000
45,000
255,000
Bonds payable retired

Less: Applicable discount
Book value
Less: Retirement price
Gain on early retirement
3,000,000
45,000
2,955,000
2,700,000
255,000
c. Interest expense
Amortization for 2011.
15,000
15,000
d. Interest expense
Accrued interest payable (3,000,000 x 12% x 1/2)
Problem 4-8
1. Cash
Bonds payable new
180,000
180,000
3,900,000
100,000
4,000,000
2. Bonds payable old

Cash
3,000,000
50,000
180,000
10,000
3,240,000
Bonds payable old

Carrying amount
Less: Retirement price (3,000,000 x 102)
Loss on early retirement
3,000,000
50,000
3,050,000
3,060,000
10,000
Retirement price
Add: Accrued interest payable
Total payment
3,060,000
180,000
3,240,000
Problem 4-9
a. Amortization table
Year
2009
2010
2011
2012
2013
2014
2015
Bond
outstanding
8,000,000
8,000,000
7,000,000
6,000,000
5,000,000
4,000,000
2,000,000
40,000,000
Fraction
8/40
8/40
7/40
6/40
5/40
4/40
2/40
Discount
amortization
64,000
64,000
56,000
48,000
40,000
32,000
16,000
320,000
Interest
paid
960,000
960,000
840,000
720,000
600,000
480,000
240,000
4,800,000
Interest
expense
1,024,000
1,024,000
896,000
768,000
640,000
512,000
256,000
5,120,000
b. Journal entries
2008
Dec. 31
Cash
Bonds payable
2009
Dec. 31
Interest expense
Cash
31
Interest expense
2010
Dec. 31
Interest expense
Cash
31
Interest expense
31
Bonds payable
Cash
2011
Dec. 31
Interest expense
Cash
31
Interest expense
31
Bonds payable
Cash
7,680,000
320,000
8,000,000
960,000
960,000
64,000
64,000
960,000
960,000
64,000
64,000
1,000,000
1,000,000
840,000
840,000
56,000
56,000
1,000,000
1,000,000
Problem 4-10
Amortization table
Year
2009
2010
2011
2012
2013
2014
2015
Dec.
2011
31
Bond
outstanding
7,000,000
6,000,000
5,000,000
4,000,000
3,000,000
2,000,000
1,000,000
28,000,000
Fraction
7/28
6/28
5/28
4/28
3/28
2/28
1/28
Cash
Premium
amortization
105,000
90,000
75,000
60,000
45,000
30,000
15,000
420,000
Interest
paid
840,000
720,000
600,000
480,000
360,000
240,000
120,000
3,360,000
7,420,000
Bonds payable
Dec.
2012
31
31
31
Dec.
2013
31
Dec.
31
31
31
Interest
expense
735,000
630,000
525,000
420,000
315,000
210,000
105,000
2,940,000
Interest expense
Cash
Interest expense
Bonds payable
Cash
Interest expense
Cash
Interest expense
Bonds payable
Cash
Bonds payable
Cash (1,000,000 x 105)
420,000 / 28,000,000 = .015 per year
1,000,000 x .015 x 2 = 30,000
7,000,000
420,000
840,000
840,000
105,000
105,000
1,000,000
1,000,000
720,000
720,000
90,000
90,000
1,000,000
1,000,000
1,000,000
30,000
20,000
1,050,000
CHAPTER 5
Problem 5-3
Requirement 1
Jan.
Dec.
1
31
31
Cash
6,737,000
Bonds payable
Interest expense (6,000,000 x 12%)
6,000,000
737,000
720,000
720,000
46,300
46,300
Interest paid
Interest expense (10% x 6,737,000)
Premium amortization
720,000
673,700
46,300
Requirement 2
Bonds payable
Premium on bonds payable (737,000 46,300)
Book value
6,000,000
690,700
6,690,700
Problem 5-4
Requirement 1
Date
01/01/2011
06/30/2011
12/30/2011
06/30/2012
12/31/2012
Interest
paid
Interest
expense
Discount
amortization
150,000
150,000
150,000
150,000
192,740
194,450
196,228
198,082
42,740
44,450
46,228
48,082
Requirement 2:
2011
Jan.
1
Cash
Bonds payable
June 30
Interest expense
Cash
Dec. 31
Interest expense
Cash
2012
June
30
31
Carrying
amount
4,818,500
4,861,240
4,905,690
4,951,918
5,000,000
4,818,500
181,500
5,000,000
192,740
150,000
42,740
194,450
150,000
44,450
Interest expense
Cash
Bonds payable
Cash
196,228
150,000
48,082
5,000,000
5,000,000
Problem 5-5
a. Amortization table
Date
01/01/2011
06/30/2011
12/31/2011
06/30/2012
12/31/2012
06/30/2013
12/31/2013
Interest
paid
Interest
expense
Discount
amortization
240,000
240,000
240,000
240,000
240,000
240,000
273,868
277,255
280,980
285,078
289,586
294,551
33,868
37,255
40,980
45,078
49,586
54,551
Book
value
2,738,682
2,772,550
2,809,805
2,850,785
2,895,863
2,945,449
3,000,000
b. Journal entries
2011
Jan.
1
Cash
Bonds payable
June 30
Interest expense
Cash
2013
Dec. 31
Interest expense
Cash
Jan.
1
Bonds payable
Cash
2,738,682
261,318
3,000,000
273,868
240,000
33,868
294,551
240,000
54,551
3,000,000
3,000,000
Problem 5-6
1. Amortization table
Date
04/01/2011
10/01/2011
04/01/2012
10/01/2012
04/01/2013
10/01/2013
04/01/2014
Interest
paid
Interest
expense
Discount
amortization
120,000
120,000
120,000
120,000
120,000
120,000
105,076
104,330
103,546
102,724
101,860
100,944
14,924
15,670
16,454
17,276
18,140
19,056
2. Journal entries:
2011
Apr.
1
Cash
Oct.
Dec.
31
Jan.
2012
1
Apr.
1
1
Oct.
Dec.
31
31
2,101,520
Bonds payable
Interest expense
Cash
Interest expense
2,000,000
101,520
105,076
14,924
120,000
60,000
60,000
7,835
7,835

Interest expense
Interest expense
Cash
Interest expense
Interest expense
Cash
Interest expense
Problem 5-7
Requirement 1
Interest expense for 2008 (3,805,600 x 10%)
Interest paid for 2008
Discount amortization
Book
value
2,101,520
2,086,596
2,070,926
2,054,472
2,037,196
2,019,056
2,000,000
60,000
60,000
120,000
120,000
7,835
7,835
103,546
16,454
120,000
60,000
60,000
8,638
8,638
380,560
320,000
60,560
Bonds payable
Issue price proceeds from issuance
Discount on bonds payable 12/31/2007
Amortization for 2008
Balance 12/31/2008
4,000,000
3,805,600
194,400
60,560
133,840
Bonds payable
Payment on 12/31/2008
Balance 12/31/2008
Carrying value 12/31/2008
4,000,000
( 800,000)
3,200,000
( 133,840)
3,066,160
Requirement 2
1. Cash
Bonds payable
2. Interest expense
Cash
3. Interest expense
4. Bonds payable
Cash
3,805,600
194,400
4,000,000
320,000
320,000
60,560
60,560
800,000
800,000
Problem 5-8
1.
December 31, 2008
Principal payment
Interest payment (6,000,000 x 6%)
Total payment 12/31/2008
2,000,000
360,000
2,360,000
December 31, 2009

Principal payment
2,000,000
240,000
2,240,000
December 31, 2010

Principal payment
2,000,000
120,000
2,120,000
2.
Present value
December 31, 2008 (2,360,000 x .9259)
December 31, 2009 (2,240,000 x .8573)
December 31, 2010 (2,120,000 x .7938)
Total present value
Cash
Bonds payable
Interest expense
Cash (6% x 6,000,000)
Interest expense
Interest paid
Bonds payable
Cash
3.
Bonds payable 1/1/2008

2,185,124
1,920,352
1,682,856
5,788,332
5,788,332
211,668
6,000,000
360,000
360,000
103,067
103,067
463,067
360,000
103,067
2,000,000
2,000,000
6,000,000
( 108,601)
Principal payment on 12/31/2008

Book value 12/31/2008
(2,000,000)
3,891,399
Problem 5-9
Requirement 1
PV of interest payment on 6/30/2008 (240,000 x .9615)
PV of principal and interest payment on 12/31/2008
(2,000,000 + 240,000 x .9246)
PV of interest payment on 6/30/2009 (120,000 x .8890)
PV of principal and interest payment on 12/31/2009
(2,000,000 + 120,000 x .8548)
Total present value
230,760
2,071,104
106,680
1,812,176
4,220,720
Requirement 2
Date
01/01/2008
06/30/2008
12/31/2008
06/30/2009
12/31/2009
Interest
paid
Interest
expense
Premium
amortization
240,000
240,000
120,000
120,000
168,829
165,982
83,021
81,448
71,171
74,018
36,979
38,552
Requirement 3
01/01/2008
Cash
06/30/2008
06/30/2008
12/31/2008
06/30/2009
12/31/2009
2,000,000
2,000,000
Book
value
4,220,720
4,149,549
2,075,531
2,038,552
-
4,220,720
Bonds payable
Interest expense
Cash
Interest
Interest expense
Cash
4,000,000
220,720
240,000
240,000
71,171
71,171
240,000
240,000

Interest
74,018
Bonds payable
Cash
Interest expense
Cash
Interest expense
Interest expense
Cash
Interest expense
Bonds payable
Cash
2,000,000
Problem 5-10
PV of principal (7,000,000 x 456)
PV of interest (350,000 x 13.59)
Total issue price
Date
03/01/2008
09/01/2008
03/01/2009
Principal
payment
74,018
2,000,000
120,000
120,000
36,979
36,979
120,000
120,000
38,552
38,552
2,000,000
2,000,000
3,192,000
4,756,500
7,948,500
Interest
paid
Interest
expense
Premium
amortization
750,000
350,000
317,940
316,658
32,060
33,342
Book
value
7,948,500
7,916,440
7,883,098
March
2011
1
Sept. 1
Dec. 31
Cash
7,948,500
Bonds payable
Interest expense
Cash
Interest expense
(7,000,000 x 10% x 4/12)
Interest expense
(33,342 x 4/6)
Problem 5-11
PV of principal (6,000,000 x .57)
Total issue price
Date
06/01/2008
06/01/2009
06/01/2010
2011
June 1
Dec. 31
Jan.
2012
1
June 1
Dec. 31
7,000,000
948,500
317,900
32,060
350,000
233,333
233,333
22,228
22,228
3,420,000
2,260,000
5,580,000
Interest
paid
Interest
expense
Premium
amortization
600,000
600,000
669,600
667,952
69,600
77,952
Book
value
5,580,000
5,649,600
5,727,552
Cash
Bonds payable
Interest expense
(600,000 x 7/12)
Interest expense
(69,600 x 7/12)
5,580,000

Interest expense
Interest expense
Cash
Interest expense
(69,600 x 5/12)
Interest expense
Interest expense
(77,952 x 7/12)
350,000
420,000
6,000,000
350,000
350,000
40,600
40,600
350,000
600,000
600,000
29,000
29,000
350,000
350,000
45,472
45,472
CHAPTER 6
Problem 6-3
1. Cash (5,000,000 x 120)
Bonds payable
Share warrants outstanding
6,000,000
5,000,000
735,000
265,000
Issue price with warrants (5,000,000 x 120)

Market price of bonds without warrants (5,000,000 x 1.147)
Equity component
6,000,000
5,735,000
265,000
2. Interest expense (5,000,000 x 8%)

Cash
3. Premium on bonds payable (400,000 344,100)
Interest expense (6% x 5,735,000 = 344,100)
4. Cash (20,000 shares x 30)
Share capital (20,000 x 25)
Share premium
400,000
400,000
55,900
55,900
600,000
265,000
500,000
365,000
Problem 6-4
Jan. 1 Cash
Bonds payable
Dec.31 Interest expense (5,000,000 x 12%)
Cash
Interest expense
5,100,000
343,000
5,000,000
443,000
600,000
600,000
51,980
51,980
Interest paid
600,000
651,980
51,980
Cash (25,000 x 1000

Share premium
2,500,000
443,000
1,250,000
1,693,000
Problem 6-5
Jan. 1 Cash
9,600,000
Bonds payable
Date
01/01/2008
06/30/2008
12/31/2008
8,000,000
585,600
1,014,400
(6% x FV)
Interest
paid
(5% x BV)
Interest
expense
Premium
amortization
480,000
480,000
429,280
426,744
50,720
53,256

Total PV of bonds payable
June 30 Interest expense
Cash
Dec. 31 Interest expense
Cash
Book
value
8,585,600
8,534,880
8,481,624
4,880,000
3,705,600
8,585,600
429,280
50,720
480,000
426,744
53,256
480,000
Dec.31 Cash (16,000 x 150)

Share premium
2,400,000
1,014,400
1,600,000
1,814,400
Problem 6-6
Present value of principal (2,000,000 x 0.77)
Present value of interest payments (120,000 x 2.53)
Total present value
Face value
1. Cash
Bonds payable
Share premium
2. Interest expense
Cash (6% x 2,000,000)
3. Interest expense
1,540,000
303,600
1,843,600
2,000,000
156,400
2,200,000
156,400
2,000,000
356,400
120,000
120,000
45,924
45,924
Interest paid
4. Bonds payable
Share premium conversion privilege
Share premium issuance
Problem 6-7
1. Cash (5,000,000 x 105%)
Bonds payable
2. Interest expense (14% x 4,700,000)
Cash (12% x 5,000,000)
3. Bonds payable
Share capital
Share premium - issuance
120,000
165,924
45,924
2,000,000
356,400
110,476
1,000,000
1,245,924
5,250,000
300,000
5,000,000
550,000
658,000
58,000
600,000
5,000,000
550,000
242,000
4,000,000
1,308,000
Bonds payable
Total consideration
Share capital issued (40,000 shares x 100)
Share premium - issuance
Problem 6-8
Bonds payable
Cash
5,000,000
( 242,000)
550,000
5,308,000
4,000,000
1,308,000
5,000,000
500,000
250,000
2,500,000
3,250,000
200,000
200,000
CHAPTER 7
Problem 7-3
Book of Marian Company (Lessor)
Jan. 1 Machinery
Cash
Mar. 1 Cash
Rent income
Dec.31 Repair and maintenance
Cash
Rent income
Unearned rent income (600,000 x 2/12)
Depreciation (2,400,000 / 6)
Accumulated depreciation
Book of Delia Company (Lessee)
Mar. 1 Rent expense
Cash
Dec.31 Prepaid rent
Rent expense
Problem 7-4
Requirement 1
Books of Lessor
1. Equipment
Cash
2. Cash (40,000 x 9)
Rent income
3. Cash
Unearned rent income
4. Repairs
Cash
5. Unearned rent income
Rent income (120,000 / 3 = 40,000 x 9/12)
6. Depreciation
Accumulated depreciation (3,000,000 / 10)
Books of Lessee
1. Rent expense
Cash
2. Prepaid rent
Cash
3. Rent expense
Prepaid rent
Requirement 2
Rent income (360,000 + 30,000)
Less: Repairs
Depreciation
Net income of lessor
Problem 7-5
Books of Lessor
1. Tractor
Cash
2. Cash
Rent income
3. Repairs
Transportation
Cash
4. Rent income
Unearned rent income (50,000 x 3)
5. Depreciation
2,400,000
2,400,000
600,000
600,000
30,000
30,000
100,000
100,000
400,000
400,000
600,000
600,000
100,000
100,000
3,000,000
3,000,000
360,000
360,000
120,000
120,000
20,000
20,000
30,000
30,000
300,000
300,000
360,000
360,000
120,000
120,000
30,000
30,000
390,000
20,000
300,000
320,000
70,000
1,600,000
1,600,000
600,000
600,000
15,000
5,000
20,000
150,000
150,000
300,000

Books of Lessee
1. Rent expense
Cash
2. Prepaid rent
Rent expense
Problem 7-6
Requirement 1
Books of Lessor
1. Machinery
Cash
2. Cash (36,000 x 9)
Rent income
3. Machinery
Cash
4. Amortization of initial direct costs
Machinery (120,000 / 4 = 30,000 x 9/12)
5. Depreciation
Accumulated depreciation (2,400,000 / 10 x 9/12)
Books of Lessee
1. Rent expense
Cash
300,000
600,000
600,000
150,000
150,000
2,400,000
2,400,000
324,000
324,000
120,000
120,000
22,500
22,500
180,000
180,000
324,000
324,000
Requirement 2
Machinery
Carrying amount
Deferred initial direct costs
Adjusted carrying amount
Problem 7-7
Books of Dorey Company
Jan.1 Machinery
Cash
Mar.1 Cash
Rent income
Lease expense
Cash
Dec.31 Depreciation
Accumulated depreciation (5,000,000 /10)
Rent income
Unearned rent income (1,200,000 x 2/12)
Books of Anne company
Mar.1 Rent expense
Cash
Dec.31 Prepaid rent expense
Rent expense
2,400,000
(180,000)
2,220,000
97,500
2,317,500
5,000,000
5,000,000
1,200,000
1,200,000
60,000
60,000
500,000
500,000
200,000
200,000
1,200,000
1,200,000
200,000
200,000
Requirement 2
Rent received
Lease expense
Depreciation
Net rent income
Problem 7-8
1. Rent expense
Prepaid rent
1,200,000
(200,000)
(60,000)
(500,000)
440,000
60,000
60,000
Rent deposit
Leasehold improvement
Cash
2. Depreciation
Accumulated depreciation (360,000 / 5 x 1/12)
Problem 7-9
1. Rent expense
Cash
2. Cash
Sales
3. Prepaid rent
Cash
4. Rent expense (5% X 1,000,000)
Accrued rent payable
5. Rent expense
Prepaid rent (250,000 / 10)
Problem 7-10
1. Machinery
Cash
2. Cash
Rent income
3. Cash
4. Insurance
Cash
5. Depreciation
6. Unearned rent income
Rent income (300,000 / 3)
Problem 7-11
2011
1. Equipment
Cash
2. Equipment
Cash
2012
1. Cash
Rent income
2. Repairs
Transportation
Cash
3. Depreciation
Accumulated depreciation (450,000 / 5)
4. Rent income
Unearned rent income (15,000 x 3)
Problem 7-12
2011 Rent receivable
Rent income
80,000
360,000
560,000
6,000
6,000
900,000
900,000
6,000,000
6,000,000
250,000
250,000
50,000
50,000
25,000
25,000
4,800,000
4,800,000
850,000
850,000
300,000
300,000
80,000
80,000
400,000
400,000
100,000
100,000
375,000
375,000
75,000
75,000
180,000
180,000
7,000
3,000
10,000
90,000
90,000
45,000
45,000
765,000
765,000
Total rent (100,000 x 51 months)

Average annual rent (5,100,000/5)
Rent from April 1 to Dec. 31, 2011 (1,020,000 x 9/12)
2012
2013
Cash (100,000 x 12)

Rent income
Rent receivable
Cash
5,100,000
1,020,000
765,000
1,200,000
1,020,000
180,000
1,200,000
Rent income
Rent receivable
2014
Cash
1,020,000
180,000
1,200,000
Rent income
Rent receivable
2015
Cash
2016
Rent income
Rent receivable
Cash (100,000 x 3)
Rent income (1,020,000 x 3/12)
Rent receivable
1,020,000
180,000
1,200,000
1,020,000
180,000
300,000
255,000
45,000
The rental for 2016 is for three months only, from Jan. 1 to April 1, 2016.
Books of Ronald Company (Lessee)
2011 Rent expense
Rent payable
2012 Rent expense
Rent payable
Cash
2013 Rent expense
Rent payable
Cash
2014 Rent expense
Rent payable
Cash
2015 Rent expense
Rent payable
Cash
2016 Rent expense
Rent payable
Cash
Problem 7-13
Books of Lessor
2011 Rent receivable
Rent income
765,000
765,000
1,020,000
180,000
1,200,000
1,020,000
180,000
1,200,000
1,020,000
180,000
1,200,000
1,020,000
180,000
1,200,000
255,000
45,000
300,000
877,500
877,500
Total rent (300,000 x 117 remaining months)

Average annual rent (35,100,000 /10)
Rent from Oct. 1 to Dec. 31, 2011 (3,510,000 x 3/12)
2012
2021
Cash (300,000 x 12)

Rent income
Rent receivable
Cash (300,000 x 9)
Rent income (3,510,000 x 9/12)
Rent receivable
35,100,000
3,510,000
877,500
3,600,000
3,510,000
90,000
2,700,000
2,632,500
67,500
The rent for the last year 2021 is for 9 months from Jan. 1 to Sept. 310, 2021.
Books of Lessee
2011 Rent expense
877,500
Rent payable
877,500
2012 Rent expense
3,510,000
Rent payable
90,000
Cash
3,600,000
2021 Rent expense
2,632,000
Rent payable
67,500
Cash
2,700,000
Problem 7-14
Books of Lessor
2011
Cash
Rent receivable
Rent income
600,000
600,000
1,200,000
Average annual rent (3,600,000 / 3)

2012
2013
Cash
Rent receivable
Rent income
Cash
Rent income
Rent receivable
Books of Lessee
2011 Rent expense
Cash
Rent payable
2012 Rent expense
Cash
Rent payable
2013 Rent expense
Rent payable
Cash
Problem 7-15
2011 Rent expense
Cash
Rent payable
1,200,000
900,000
300,000
1,200,000
2,100,000
1,200,000
900,000
1,200,000
600,000
600,000
1,200,000
900,000
300,000
1,200,000
900,000
2,100,000
460,000
300,000
160,000
Average annual rent (2,300,000 /5)

2012
2013
2014
2015
Rent expense
Cash
Rent payable
Rent expense
Cash
Rent payable
Rent expense
Rent payable
Cash
Rent expense
Rent payable
Cash
Problem 7-33
Books of German Company
1. Cash
Equipment
Gain on sale and leaseback
2. Rent expense
Cash
Books of Sterling Company
1. Equipment
Cash
2. Cash
Rent income
3. Depreciation (1,100,000 / 10)
460,000
460,000
300,000
160,000
460,000
450,000
10,000
460,000
90,000
550,000
460,000
240,000
700,000
1,100,000
1,500,000
2,500,000
100,000
40,000
40,000
1,100,000
1,100,000
40,000
40,000
110,000
110,000
Problem 7-34
Books of Canada Company
1. Cash
Loss on sale and leaseback
Machinery
2. Rent expense
Cash
Books of Saigon Company
1. Machinery
Cash
2. Cash
Rent income
3. Depreciation (500,000 / 10)
Problem 7-39
Books of Cuba Company
1. Cash
Building
Deferred gain on sale and leaseback
2. Building
Lease liability
3. Depreciation (2,415,000 / 15)
4. Deferred gain on sale and leaseback
Gain on sale and leaseback (815,000 / 10)
Lease liability
Cash
Books of Mexico Company
1. Building
Cash
2. Lease receivable (500,000 x 10)
Building
Unearned interest income
3. Cash
Lease receivable
4. Unearned interest income
Interest income
Problem 7-40
Books of Hook Company (Seller Lessee)
1. To record the sale on Jan.1, 2011:
Cash
Equipment
Deferred gain on sale and leaseback
2. To record the leaseback as a finance lease:
Equipment
Lease liability
3. To record the first rental payment on Dec. 31, 2011:
Interest expense
Lease liability
Cash
Rental payment
Applicable to interest (10% x 1,500,000)
Applicable to principal
4. To amortize the deferred gain over the lease term:
500,000
450,000
50,000
1,000,000
90,000
90,000
500,000
500,000
90,000
90,000
50,000
50,000
2,415,000
3,400,000
5,000,000
815,000
2,415,000
2,415,000
161,000
161,000
81,500
81,500
386,400
113,600
500,000
2,415,000
2,415,000
5,000,000
2,415,000
2,585,000
500,000
500,000
386,400
386,400
1500,000
1,000,000
500,000
1,500,000
1,500,000
150,000
94,120
244,120
244,120
150,000
94,120
Deferred gain on sale and leaseback (500,000 /10 years)

Gain on sale and leaseback (500,000/10 years)
5. To record the depreciation for 2011:
Depreciation
Accumulated depreciation (1,500,000 /10)
Books of Maco Drilling (Purchaser Lessor)
1. Equipment
Cash
2. Lease receivable (244,120 x 10)
Equipment
3. Cash
Lease receivable
Interest income
50,000
50,000
150,000
150,000
1,500,000
1,500,000
2,441,200
1,500,000
941,200
244,120
244,120
150,000
150,000
CHAPTER 8
Problem 8-6
2011
Jan. 1 Building (800,000 x 4.17)
Lease liability
3,336,000
3,336,000
1 Building
Cash
1 Lease liability
Cash
Dec.31 Depreciation (3,436,000 / 10)
31 Interest expense
Year
01/01/2008
01/01/2008
01/01/2009
01/01/2010
100,000
100,000
800,000
800,000
343,600
343,600
253,600
253,600
Payment
10% interest
Principal
800,000
800,000
800,000
253,600
198,960
800,000
546,400
601,040
31 Taxes
Present value
3,336,000
2,536,000
1,989,600
1,388,560
40,000
Cash
40,000
2012
Jan. 2 Accrued interest payable
Lease liability
Cash
Dec.31 Depreciation
31 Interest expense
253,600
546,400
800,000
343,600
343,600
198,960
198,960
31 Taxes
40,000
Cash
40,000
Problem 8-7
2011
1. Building (1,000,000 x 3.79)
Lease liability
2. Interest expense
Lease liability
Cash
Year
01/01/2008
12/31/2008
12/31/2009
3,790,000
379,000
621,000
1,000,000
Payment
10% interest
Principal
1,000,000
1,000,000
379,000
316,900
621,000
683,100
3. Taxes
Insurance
Cash
4. Depreciation (3,790,000 / 10)
2012
1. Interest expense
Lease liability
Cash
2. Taxes
Insurance
Cash
3,790,000
Present value
3,790,000
3,169,000
2,485,900
75,000
125,000
200,000
379,000
379,000
316,900
683,100
1,000,000
75,000
125,000
200,000
3. Depreciation
379,000
379,000
Problem 8-8
2011
Jan.1 Machinery
Lease liability
6,392,400
6,392,400
Present value of rentals (1,000,000 x 6.328)

Present value of bargain option (200,000 x .322)
Total cost
1
Lease liability
Cash
31 Interest expense
Year
01/01/2008
01/01/2008
01/01/2009
01/01/2010
6,328,000
64,400
6,392,400
1,000,000
1,000,000
426,160
426,160
647,088
647,088
Payment
12% interest
Principal
1,000,000
1,000,000
1,000,000
647,088
604,739
1,000,000
352,912
395,261
2012
Jan. 1 Accrued interest payable
Lease liability
Cash
Dec.31 Depreciation
Present value
6,392,400
5,392,400
5,039,488
4,644,277
647,088
352,912
1,000,000
426,160
426,160
31 Interest expense
604,739
604,739
Problem 8-9
1. Building (1,000,000 x 7.606)
Lease liability
2. Depreciation
7,606,000
7,606,000
507,067
507,067
The term of the lease is at least 75% of the life of the asset (15/20). Since this is the basis of the finance
lease, the depreciation is computed using the term of the lease, which is shorter than the life of the asset.
Lease liability
Cash
760,600
239,400
1,000,000
Problem 8-10
Requirement 1
Present value of rentals (1,000,000 x 3.2743)
Present value of guaranteed residual value (474,060 x .4761)
Total present value
3,274,300
225,700
3,500,000
The lease is accounted for as finance lease because the present value of rentals is 100% of the fair value of
the leased asset.
Year
01/01/2008
12/31/2008
12/31/2009
Payment
16% interest
Principal
1,000,000
1,000,000
560,000
489,600
440,000
510,400
Present value
3,500,000
3,060,000
2,549,600
12/31/2010
12/31/2011
12/31/2012
1,000,000
1,000,000
1,000,000
407,936
313,206
203,318
592,064
686,794
796,682
Requirement 2
2011
Jan.1 Equipment
Lease liability
1,957,536
1,270,742
474,060
3,500,000
3,500,000
Dec.31 Interest expense

Lease liability
Cash
31 Depreciation
(3,500,000 474,060 / 5)
560,000
440,000
1,000,000
605,188
605,188
2012
Lease liability
Cash
31 Depreciation
489,600
510,400
1,000,000
605,188
605,188
Requirement 3
Accumulated depreciation (605,188 x 5)
Lease liability
Equipment
3,025,940
474,060
Requirement 4
Lease liability
Equipment
3,025,940
474,060
3,500,000
3,500,000
Loss on finance lease

Cash (474,060 300,000)
174,060
174,060
Requirement 5
Lease liability
Equipment
3,025,940
474,060
3,500,000
Problem 8-11
Requirement 1
Percentage of lease term (6 years/8)
75%
PV of rentals (500,000 x 4.7908)

PV of guaranteed residual value (400,000 x .5645)
Total present value
2,395,400
225,800
2,621,200
Percentage of present value to fair value (2,621,200 / 2,800,000)
93.61%
In conclusion, the lease is a finance lease. The asset and liability should be recorded at the lower between
the present value of rentals and the fair value of the asset.
Requirement 2
Date
Payment
1/1/2011
1/1/2011
500,000
1/1/2012
500,000
1/1/2013
500,000
1/1/2014
500,000
1/1/2015
500,000
Interest
Principal
212,120
183,332
151,665
116,832
500,000
287,880
316,668
348,335
383,168
Present value
2,621,200
2,121,200
1,833,320
1,516,652
1,168,317
785,149
1/1/2016
1/1/2017
500,000
500,000
78,515
36,336
421,485
363,664
363,664
-
Requirement 3
2011
Jan.1 Machinery
2,621,200
Lease liability
1 Lease liability
500,000
Cash
212,120
31 Depreciation
370,200
Accumulated depreciation (2,621,200 400,000/6)
2012
Jan.1 Accrued interest payable
212,120
Lease liability
287,880
Cash
183,332
31 Depreciation
370,200
Requirement 4
2017
Jan.1 Accumulated depreciation (370,000 x 6)
Lease liability
Machinery
2,621,200
500,000
212,120
370,200
500,000
183,332
370,200
2,221,200
363,664
36,336
2,621,200
Requirement 5
2017
Jan.1 Accumulated depreciation (370,200 x 6)
Lease liability
Machinery
2,221,200
363,664
36,336
2,621,200

Cash
100,000
100,000
Problem 8-12
Requirement 1
PV of rentals (420,000 20,000 x 3.6243)
PV of guaranteed residual value (200,000 x .7629)
Total present value
1,449,720
152,580
1,602,300
Percentage of present value to fair value (1,602,300 / 1,700,000)
94.25%
Since the present value is at least 90% of the fair value and the lease carries a huge penalty, the
cancellable lease is a finance lease.
Requirement 2
Date
Payment
12/31/2011
12/31/2011
400,000
12/31/2012
400,000
12/31/2013
400,000
12/31/2014
400,000
12/31/2015
200,000
Requirement 3
2011
Dec.31 Equipment
Interest
Principal
84,161
62,052
38,396
13,091
400,000
315,839
337,948
361,604
186,909
Present value
1,602,300
1,202,300
886,461
548,513
186,909
-
1,602,300
Lease liability
31 Prepaid insurance
Lease liability
Cash
2012
Jan.1
Insurance expense
Prepaid insurance
Dec.31 Prepaid insurance
Interest expense
Lease liability
Cash
31 Depreciation
Accumulated depreciation (1,602,300 200,000 /4)
1,602,300
20,000
400,000
420,000
20,000
20,000
20,000
84,161
315,839
420,000
350,575
350,575
The guaranteed residual value of 200,000 is deducted from the cost to get the depreciable amount.
Requirement 4
2015
Dec.31 Accumulated depreciation (350,575 x 4)
Interest expense
Lease liability
Equipment
Cash
1,402,300
13,091
186,909
1,602,300
150,000
150,000
Problem 8-13
1. Annual rental
Multiply by PV of an ordinary annuity of 1 at 12% for 5 periods
PV of rentals
600,000
3.60
2,160,000
The residual value is not included in present value of rentals because it is unguaranteed by the lessee.
The lease is a finance lease because the present value is at least 90% of the fair value of asset.
The asset and liability should be recognized at 2,160,000 because this amount is lower than the fair value.
2. Equipment
Lease liability
2,160,000
2,160,000

Lease liability
Cash
259,200
340,800
Depreciation
Accumulated depreciation (2,160,000/5)
432,000
3. Accumulated depreciation (432,000 x 5)

Equipment
600,000
432,000
2,160,000
2,160,000
The lessee has no obligation for the lower fair value because the residual value is unguaranteed by the
lessee. The lessor will suffer the loss from a lower fair value.
Problem 8-14
1. 2012
2013
2014
Remaining future lease payments
Executory costs (30,000 x 3 years)
Guaranteed residual value
2. Machinery
300,000
300,000
300,000
900,000
90,000
50,000
1,040,000
985,150
Lease liability
3. Interest expense
Lease liability
Cash
Executory cost
Cash
4. Depreciation
985,150
98,515
201,485
300,000
30,000
30,000
233,788
233,788
Cost of asset
Guaranteed residual value
Depreciable amount
985,150
(50,000)
935,150
Annual depreciation (935,150/ 4 years)
233,788
5. Interest expense
Lease liability
Cash
Executory cost
Cash
6. Lease liability
Accumulated depreciation (233,788 x 4)
Machinery
Problem 8-15
Equipment
Lease liability
Equipment under finance lease
Cash
Equipment under finance lease
Carrying amount
Cash payment
Total consideration
Lease liability
Cost of equipment purchased
31,766
268,234
300,000
30,000
30,000
50,000
935,150
985,150
1,835,000
2,465,000
1,300,000
4,000,000
1,600,000
4,000,000
(2,465,000)
1,535,000
1,600,000
3,135,000
(1,300,000)
1,835,000
CHAPTER 9
Problem 9-2
2011
Jan.1 Lease receivable
Machinery
Cash
Lease receivable
Dec.31 Unearned interest income
Interest income
Year
01/01/2011
01/01/2011
01/01/2012
01/01/2013
2012
Jan.1
500,000
403,700
96,300
100,000
100,000
36,444
36,444
Payment
12% interest
Principal
100,000
100,000
100,000
36,444
28,817
100,000
65,556
71,183
Cash
Present value
403,700
303,700
240,144
168,961
100,000
Lease receivable
Interest income
100,000
28,817
28,817
Problem 9-3
1. Gross rentals (600,000 x 10)
Net investment in the lease:
Cost of equipment
Initial direct costs
Total financial revenue
2. Equipment
Cash
Lease receivable
Equipment
Cash
Lease receivable
Interest income (11% x 3,533,400)
6,000,000
(3,390,000)
(143,400)
2,466,600
143,400
143,400
6,000,000
3,533,400
2,466,600
600,000
600,000
388,674
388,674
PV factor (3,533,400/600,000)
5.889
This factor is applicable to 11%. Thus, this is the new implicit rate in computing interest income.
Problem 9-4
Requirement 1
Gross rentals (900,000 x 8)
Residual value
Gross investment debit to lease receivable
Net investment cost of equipment
Requirement 2
Date
Payment
1/1/2011
1/1/2011
900,000
1/1/2012
900,000
1/1/2013
900,000
1/1/2014
900,000
1/1/2015
900,000
1/1/2016
900,000
7,200,000
600,000
7,800,000
5,250,000
2,550,000
Interest
Principal
522,000
476,640
425,837
368,937
305,210
900,000
378,000
423,360
474,163
531,063
594,790
Present value
5,250,000
4,350,000
3,972,000
3,548,640
3,074,477
2,543,414
1,948,624
1/1/2017
1/1/2018
1/1/2019
900,000
900,000
600,000
7,800,000
233,835
153,895
63,646
2,550,000
666,165
746,105
536,354
1,282,459
536,354
-
Requirement 3
2011
Equipment
Cash
Lease receivable
Interest income
2012
Jan.1
7,800,000
5,250,000
2,550,000
900,000
900,000
522,000
522,000
Cash
900,000
Lease receivable
Interest income
900,000
476,640
476,640
Requirement 4
2018
Jan.1 Cash
900,000
Lease receivable
Interest income
900,000
63,646
63,646
Requirement 5
2019
Jan.1 Equipment
Lease receivable
500,000
100,000
600,000
Problem 9-5
Requirement 1
Cost
PV of residual value (200,000 x .5066)
Net investment to be recovered from rental
Divide by PV factor
Annual rental
Requirement 2
Date
Payment
Interest
01/01/2011
01/01/2011
629,490
12/31/2011
629,490
284,461
12/31/2012
629,490
243,058
12/31/2013
629,490
196,686
12/31/2014
629,490
144,749
12/31/2015
629,490
86,580
12/31/2016
200,000
21,406
3,976,940
976,940
Requirement 3
2011
Jan.1 Machinery
Cash
Lease receivable
Machinery
3,000,000
(101,320)
2,898,680
4.6048
629,490
Principal
629,490
345,029
386,432
432,804
484,741
542,910
178,594
Present value
3,000,000
2,370,510
2,025,481
1,639,049
1,206,245
721,504
178,594
-
3,000,000
3,000,000
3,796,940
3,000,000
976,940
3,776,940
Residual value
Gross investment debit to lease receivable
Net investment cost of machinery
1
200,000
3,796,940
3,000,000
976,940
Cash
629,490
Lease receivable
(First payment)
629,490
Dec.31 Cash
629,490
Lease receivable
31 Unearned interest income
Interest income
(2011 interest income)
629,490
284,461
284,461
Requirement 4
2016
Interest income
(2016 interest income)
21,406
21,406
Requirement 5
2016
Dec.31 Machinery
Lease receivable
200,000
200,000
If the entries from 2011 to 2016 are properly recorded and posted, the lease receivable has debit
balance of 200,000 equal to the unguaranteed residual value, and the unearned interest income has a zero
balance.
Requirement 6
2016
Dec.31 Cash
300,000
Lease receivable
Gain on sale of leased asset
200,000
100,000
The difference between the selling price and the carrying amount of the lease receivable is
recognized as gain or loss. The carrying amount of the lease receivable is equal to the balance of the lease
receivable minus the unearned interest income, if any.
Problem 9-6
Requirement 1
Net investment in the lease
Requirement 2
Date
Payment
1/1/2011
1/1/2011
400,000
1/1/2012
400,000
1/1/2013
400,000
1/1/2014
400,000
1,600,000
1,377,480
222,520
Interest
Principal
107,523
75,350
39,647
400,000
292,477
324,650
364,353
Requirement 3
2011
Machinery
2011
Jan.1
Cash
Present value
1,377,480
977,480
685,003
360,353
-
1,600,000
1,377,480
222,520
440,000
Lease receivable
400,000
Lease income
Interest income
2012
Jan.1
Cash
Cash
400,000
40,000
75,350
75,350
440,000
Lease receivable
Lease income
Interest income
2014
Jan.1
107,523
440,000
Lease receivable
Lease income
Interest income
2013
Jan.1
40,000
107,523
Cash
400,000
40,000
39,647
39,647
440,000
Lease receivable
Lease income
400,000
40,000
CHAPTER 10
Problem 10-2
1. Lease receivable
Sales
2. Cost of sales
Inventory
3. Cash
Lease receivable
5,000,000
3,072,500
1,927,500
2,000,000
2,000,000
500,000
500,000
307,250
307,250
Problem 10-3
2011
Jan.1 Lease receivable (600,000 x 8)
Sales
Cash
Cash
Lease receivable
Interest income
Date
1/1/2011
1/1/2011
1/1/2012
1/1/2013
2012
Jan.1
4,800,000
3,520,000
1,280,000
50,000
50,000
600,000
600,000
292,000
292,000
Payment
10% interest
Principal
600,000
600,000
600,000
292,000
261,200
600,000
308,000
338,800
Cash
600,000
Lease receivable
Interest income
600,000
261,200
261,200
Problem 10-4
Books of Fox Company (Lessor)
2011
Jan.1 Lease receivable (500,000 x 10)
Sales
Cost of sales
Inventory
Cash
Lease receivable
Interest income
Year
01/01/2008
01/01/2008
01/01/2009
01/01/2010
2012
Jan.1
Present value
3,520,000
2,920,000
2,612,000
2,273,200
5,000,000
3,165,000
1,835,000
2,675,000
2,675,000
500,000
500,000
319,800
319,800
Payment
12% interest
Principal
500,000
500,000
500,000
319,800
298,176
500,000
180,200
201,824
Cash
Lease receivable
Interest income
Present value
3,165,000
2,665,000
2,484,800
2,282,976
500,000
500,000
298,176
298,176
Books of Tiger Company (Lessee)

2011
Jan.1 Equipment
Lease liability
Lease liability
Cash
Interest expense
2012
Jan.1

Lease liability
Cash
Dec.31 Depreciation
Interest expense
Problem 10-5
Books of Universal Company (Lessor)
Unguaranteed residual value
Lease receivable
Present value:
Gross rentals (700,000 x 4.968)
Unguaranteed RV (400,000 x .404)
3,165,000
3,165,000
500,000
500,000
316,500
316,500
319,800
319,800
319,800
180,200
500,000
316,500
316,500
298,176
298,176
5,600,000
400,000
6,000,000
3,477,600
161,600
Cost of equipment sold

Less: PV of unguaranteed RV
Cost of sales
1. Lease receivable
Cost of sales
Sales (equal to PV of rentals only)
Inventory
2. Cash
Lease receivable
Books of National Company (Lessee)
1. Equipment
Lease liability
2,000,000
161,600
1,838,400
6,000,000
1,838,400
3,477,600
2,360,800
2,000,000
700,000
700,000
436,704
436,704
3,477,600
3,477,600
The residual value is unguaranteed, so it is not included in the computation of

Lease liability
Cash
3. Depreciation
Problem 10-6
Gross rentals (3,000,000 x 5)
Residual value guaranteed
Gross investment
Present value:
Rentals (3,000,000 x 3.60)
3,639,200
2,360,800
the lessees lease liability.
417,312
282,688
700,000
434,700
434,700
15,000,000
1,000,000
16,000,000
10,800,000
Residual value (1,000,000 x .57)

Total unearned financial revenue
570,000
Sales
Cost of sales:
Cost of machinery
Gross income
Books of Vanderbilt Company
1. Lease receivable
Cost of sales
Sales
Inventory
2. Cost of sales (Initial direct costs)
Cash
3. Cash
Lease receivable
Books of Thunder Company
1. Machinery
Lease liability
2. Interest expense
Lease liability
Cash
3. Depreciation
(11,370,000 1,000,000 / 5)
11,370,000
4,630,000
11,370,000
( 8,000,000)
( 300,000)
3,070,000
16,000,000
8,000,000
11,370,000
4,630,000
8,000,000
300,000
300,000
3,000,000
3,000,000
1,364,400
1,364,400
11,370,000
11,370,000
1,364,400
1,635,600
3,000,000
2,074,000
2,074,000
Problem 10-7
1. Lease receivable (3,328,710 x 5)
PV of gross rentals (3,328,710 x 3.605)
Total unearned financial revenue
16,643,550
12,000,000
4,643,550
The residual value of P500,000 is ignored by the lessor because ownership of the
lessee at the end of the lease term.
asset is transferred to the
2. Sales price (equal to present value of rentals)

Cost of sales:
Cost of equipment
Manufacturers profit
3. Interest income for first year (12% x 12,000,000)
12,000,000
Requirement 4 Journal entries

1. Lease receivable
Sales
2. Cost of sales
Inventory
3. Cost of sales (initial direct costs)
Cash
4. Cash
Lease receivable
Interest income
Problem 8-8
Requirement 1
( 8,000,000)
( 200,000)
3,800,000
1,440,000
16,643,550
12,000,000
8,000,000
8,000,000
200,000
200,000
3,328,710
3,328,710
1,440,000
1,440,000
5,600,000
Present value of rentals (700,000 x 5.868)

4,107,600
1,492,400
Requirement 2
Sales present value of rentals
Cost of sales cost of equipment
Gross profit on sale
4,107,600
3,760,000
247,600
Requirement 3
Date
Payment
4/1/2011
4/1/2011
700,000
4/1/2012
700,000
4/1/2013
700,000
Interest
Principal
340,760
304,836
700,000
359,240
395,164
2011
April 1 Lease receivable
Sales
Cost of sales
Inventory
Cash
Lease receivable
Interest income
(340,760 x 9/12)
Present value
4,107,600
3,407,600
3,048,360
2,653,196
5,600,000
4,107,600
1,492,400
3,760,000
3,760,000
700,000
700,000
255,570
255,570
2012
April 1 Cash
700,000
Lease receivable
Interest income
700,000
313,817
313,817
1/1/2012 to 3/31/2012 (340,760 x 3/12)

4/1/2012 to 12/31/2012 (304,836 x 9/12)
Total interest income for 2012
85,190
228,627
313,817
Problem 10-9
Requirement 1
Present value of rentals (900,000 x 9.36)
18,000,000
8,424,000
9,576,000
The residual value is ignored because ownership is transferred to the lessee at the lease expiration.
Requirement 2
Sales equal to present value of rentals
Cost of sales
Gross profit on sale
Requirement 3
Date
Payment
4/1/2011
4/1/2011
900,000
4/1/2012
900,000
4/1/2013
900,000
8,424,000
6,000,000
2,424,000
Interest
Principal
752,400
737,640
900,000
147,600
162,360
2011
April 1 Lease receivable
Sales
Cost of sales
Present value
8,424,000
7,524,000
7,376,400
7,214,040
18,000,000
8,424,000
9,576,000
6,000,000
Inventory
6,000,000
Cash
900,000
Lease receivable
Interest income (752,400 x 9/12)
900,000
564,300
564,300
2012
April 1 Cash
900,000
Lease receivable
Interest income
900,000
741,330
741,330
1/1/2012 to 3/31/2012 (752,400 x 3/12)

4/1/2012 to 12/31/2012 (737,640 x 9/12)
Total interest income for 2012
188,100
553,230
741,330
Problem 10-10
Requirement 1
Bargain purchase option
Gross investment
7,000,000
300,000
7,300,000
Present value of gross rentals (875,000 x 5.8684)

Present value of bargain purchase option (300,000 x .4665)
Total present value
5,134,850
139,950
5,274,800
Gross investment
Total present value
7,300,000
5,274,800
2,025,200
Requirement 2
Sales equal to total present value
Cost of sales
Gross profit
5,274,800
3,100,000
2,174,800
Requirement 3
Date
Payment
Jan. 1, 2011
Jan. 1, 2011
875,000
Jan. 1, 2012
875,000
Jan. 1, 2013
875,000
2011
Jan.1
Interest
Principal
439,980
396,478
875,000
435,020
478,522
Lease receivable
Cost of sales
Sales
Inventory
Cash
Lease receivable
Interest income
2012
Jan.1
Cash
Lease receivable
Interest income
Requirement 4
2018
Dec.31 Cash
Present value
5,274,800
4,399,800
3,964,780
3,486,258
7,300,000
3,100,000
5,274,800
2,025,200
3,100,000
875,000
875,000
439,980
439,980
875,000
875,000
396,478
396,478
300,000
Lease receivable
300,000
Requirement 5
2018
Dec.31 Inventory
Lease receivable
200,000
100,000
300,000
Problem 10-11
Requirement 1
Present value (500,000 x 3.60)
2,500,000
1,800,000
700,000
Requirement 2
Sales
Cost of sales
Gross profit
Date
Jan. 1, 2011
Dec.31, 2011
Dec.31, 2012
Dec.31, 2013
1,800,000
1,000,000
800,000
Payment
Interest
Principal
500,000
500,000
500,000
216,000
181,900
143,750
284,000
318,090
356,250
Requirement 3
2011
Sales
Dec.31 Cash
Lease receivable
Interest income
2012
Dec.31 Cash
Present value
1,800,000
1,516,000
1,197,920
841,670
2,500,000
1,800,000
700,000
500,000
500,000
216,000
216,000
500,000
Lease receivable
Interest income
2013
July 1 Unearned interest income
Interest income (143,750 x )
Cash
Loss on sale of leased asset
Lease receivable
500,000
181,920
181,920
71,875
71,875
1,200,000
230,205
69,795
1,500,000
Lease receivable 7/1/2013

Unearned interest income 7/1/2013
Carrying amount
Actual sales price
Loss on sale of leased asset
1,500,000
(230,205)
1,269,795
1,200,000
69,795
Unearned interest income -1/1/2011

Interest income recognized:
2011
2012
2013
Unearned interest income 7/1/2013
700,000
216,000
181,920
71,875
469,795
230,205
CHAPTER 11
Problem 11-5
1. Income tax expense
Income tax payable (30% x 1,500,000)
Deferred tax liability (30% x 500,000)
3. Income tax payable
Cash
450,000
450,000
150,000
150,000
200,000
200,000
Current tax expense

Deferred tax expense
Total income tax expense
Problem 11-6
2. Deferred tax asset
Income tax benefit (30% x 1,000,000)
3. Income tax payable
Cash
450,000
150,000
600,000
1,200,000
1,200,000
300,000
300,000
500,000
500,000
Current tax expense

Income tax benefit
Problem 11-7
2011
Income statement presentation
Income before income tax
Income tax expense:
Current tax expense
Income tax benefit
Net income
2012
Deferred tax asset
Income tax expense:
Current tax expense
Decrease in deferred tax asset
Net income
Problem 11-8
2011
Income tax expense:
1,200,000
( 300,000)
900,000
2,100,000
2,100,000
300,000
300,000
6,000,000
2,100,000
( 300,000)
1,800,000
4,200,000
2,400,000
2,400,000
300,000
300,000
9,000,000
2,400,000
300,000
2,700,000
5,850,000
1,500,000
1,500,000
150,000
150,000
5,500,000
Current tax expense

Net income
2012
2. Deferred tax liability
Income tax expense
Income tax expense:
Current tax expense
Decrease in deferred tax liability
Net income
1,500,000
150,000
2,250,000
2,250,000
150,000
150,000
7,000,000
2,250,000
( 150,000)
Problem 11-9
Accounting income
Permanent differences:
Nondeductible expenses
Nontaxable revenue
Accounting income subject to tax
Taxable temporary differences:
Deferred income
Excess tax depreciation
Deductible temporary differences:
Doubtful accounts
Estimated warranty cost
Taxable income
Income tax benefit (30% x 200,000)
4. Income before income tax
Income tax expense
Current tax expense
Income tax benefit
Net income
5. Tax expense from increase in deferred tax liability
Tax benefit from increase in deferred tax asset
Net deferred tax expense
Problem 11-10
2011
2012
Deferred tax liability (30% x 1,500,000)
2013
1,650,000
3,850,000
2,100,000
4,900,000
4,000,000
200,000
(300,000)
3,900,000
( 450,000)
( 50,000)
100,000
100,000
3,600,000
1,080,000
1,080,000
150,000
150,000
60,000
60,000
4,000,000
1,080,000
150,000
( 60,000)
1,170,000
2,830,000
150,000
(60,000)
90,000
720,000
720,000
180,000
180,000
1,080,000
1,080,000
450,000
450,000
1,860,000
1,860,000
Income before construction income

Construction income
Taxable income
3,200,000
3,000,000
6,200,000

Income tax expense (30% x 2,100,000)
630,000
630,000
Problem 11-11
Requirement 1
The current expense is computed as follows:
2011
Income before depreciation
4,000,000
Depreciation SYD
400,000
Taxable income
3,600,000
2012
4,000,000
300,000
3,700,000
2013
4,000,000
200,000
3,800,000
2014
4,000,000
100,000
3,900,000
Current tax expense (30%)
1,110,000
1,140,000
1,170,000
1,080,000
The deferred tax liability arising from the taxable temporary difference is computed as follows:
Temporary difference
Rate
Deferred tax liability
2011
150,000
30%
45,000
2012
50,000
30%
15,000
2013
(50,000)
30%
(15,000)
2014
(150,000)
(45,000)
Balance
2011
Income tax payable
1,080,000
1,080,000
45,000
45,000
2012
Income tax payable
1,110,000
1,110,000
15,000
15,000
2013
Income tax payable
Income tax expense
1,140,000
1,140,000
15,000
15,000
2014
Income tax payable
Income tax expense
1,170,000
1,170,000
45,000
45,000
Requirement 2 Balance sheet on December 31, 2009

60,000
Problem 11-12
Requirement 1
Accounting income
Doubtful accounts
Rent income
Warranty cost
2011
2,000,000
100,000
120,000
300,000
2012
3,000,000
( 100,000)
( 40,000)
( 20,000)
2013
4,000,000
2014
5,000,000
( 40,000)
( 80,000)
( 40,000)
(200,000)
Taxable income
Tax rate
Current tax expense
2011
2012
2013
2014
Balance
2,520,000
30%
756,000
Temporary difference
520,000
(160,000)
(120,000)
(240,000)
-
2011
Income tax payable
Income tax benefit
2012
Income tax payable
Deferred tax asset
2013
Income tax payable
Deferred tax asset
2014
Income tax payable
Deferred tax asset
2,840,000
30%
852,000
3,880,000
30%
1,164,000
Rate
30%
30%
30%
30%
4,760,000
30%
1,428,000
Deferred tax asset

156,000
( 48,000)
( 36,000)
( 72,000)
-
756,000
756,000
156,000
156,000
852,000
852,000
48,000
48,000
1,164,000
1,164,000
36,000
36,000
1,428,000
1,428,000
72,000
72,000
Requirement 2 Balance sheet on December 31, 2008

Noncurrent assets:
Deferred tax asset
108,000
Problem 11-13
Operating loss
Interest income on note receivable
Taxable income
(1,000,000)
1,100,000
100,000
The interest income is part of taxable income because it arises from note receivable and not from bank
deposit.
1. Income tax expense (30% x 100,000)
Income tax payable
2. Deferred tax asset (30% x 300,000)
Income tax benefit
Loss before income tax
Income tax expense:
Current tax expense
Income tax benefit
Net loss
30,000
35,000
90,000
90,000
(200,000)
( 30,000)
90,000
60,000
(140,000)
Problem 11-14
Requirement 1
Accounting income
Taxable temporary difference:
Tax depreciation
Deductible temporary differences:
Litigation loss
Warranty cost
Taxable income
3. Deferred asset
Requirement 2
Income tax expense:
Current tax expense
Income tax benefit
Net income
7,900,000
(1,000,000)
400,000
300,000
7,600,000
2,280,000
2,280,000
300,000
300,000
210,000
210,000
7,900,000
2,280,000
300,000
( 210,000)
Statement presentation
Noncurrent assets:
Deferred tax asset
Current liabilities:
Income tax payable
210,000
2,280,000
300,000
Requirement 3
Tax expense from increase in deferred tax liability
Problem 11-15
Income tax payable
2,370,000
5,530,000
300,000
(210,000)
90,000
2,100,000
2,100,000
600,000
600,000
2,400,000
2,400,000
Pretax accounting income

Future taxable amount
Future deductible amount
Taxable income
13,000,000
(7,000,000)
2,000,000
8,000,000
Current tax expense (30% x 8,000,000)
2,400,000
4. Income before income tax

Income tax expense:
Current tax expense
Income tax benefit
Net income
13,000,000
2,400,000
2,100,000
( 600,000)
3,900,000
9,100,000
Problem 11-16
1. Equipment
Revaluation surplus
Equipment
( 8,000,000 x 3/8)
(12,000,000 x 3/8)
BV / SV / RS
4,000,000
1,500,000
2,500,000
Cost
8,000,000
Replacement cost
12,000,000
Appreciation
4,000,000
4,500,000
7,500,000
1,500,000
2,500,000
3,000,000
5,000,000
2. Revaluation surplus
Income tax payable
750,000
750,000
2,700,000
2,700,000
Pretax income before depreciation

Depreciation on cost (5,000,000 / 5)
Taxable income
10,000,000
( 1,000,000)
9,000,000
2,700,000

Income tax expense
Equipment at replacement cost
Accumulated depreciation:
January 1, 2011
Depreciation on revalued amount
for 2011 (7,500,000 / 5)
Carrying amount 12/31/2011
Equipment at cost
Accumulated depreciation:
January 1, 2011
Depreciation on cost for 2011
Tax base 12/31/2011
Carrying amount 12/31/2011
Tax base 12/31/2011
Taxable temporary difference
150,000
150,000
12,000,000
4,500,000
1,500,000
8,000,000
3,000,000
1,000,000
6. Income before depreciation

Depreciation on revalued amount
Income tax expense:
Current tax expense
Net income
Problem 11-17
1. Motor vehicle:
Carrying amount
Tax base
4,000,000
4,000,000
6,000,000
4,000,000
2,000,000
Deferred tax liability 12/31/2008 (30% x 2,000,000)

Deferred tax liability 01/01/2008
5. Revaluation surplus (2,500,000 750,000 / 5)
Retained earnings
6,000,000
6,000,000
600,000
750,000
(150,000)
350,000
350,000
10,000,000
(1,500,000)
8,500,000
2,700,000
( 150,000)
2,550,000
5,950,000
1,650,000
1,250,000
400,000
120,000
There is a deferred tax liability when the carrying amount of an asset is higher the tax base.
2.
AR
Warranty
Deposits
Total deductible temporary differences
Carrying amount
1,500,000
120,000
150,000
Tax base
1,750,000
0
0
Deferred tax asset (30% x 520,000)
Deductible temporary
250,000
120,000
150,000
520,000
156,000
There is a deferred tax asset when the tax base of an asset is higher than the carrying amount or when the
tax base of liability is lower than the carrying amount.
3. Tax expense from increase in deferred tax liability
Net deferred tax benefit
120,000
(156,000)
(36,000)
4. Financial income
Deductible temporary differences
Taxable income
8,000,000
(400,000)
520,000
8,120,000
2,436,000
5. Current tax expense

Net deferred tax benefit
Total income tax expense (30% x 8,000,000)
2,436,000
(36,000)
2,400,000
Problem 11-18
Property
Plant and equipment
Inventory
Trade receivables
Trade payable
Cash
Carrying amount
10,000,000
5,000,000
4,000,000
3,000,000
6,000,000
2,000,000
Tax base
7,000,000
4,000,000
6,000,000
4,000,000
6,000,000
2,000,000
Difference
3,000,000
1,000,000
2,000,000
1,000,000
-
Property
Plant and equipment
3,000,000
1,000,000
4,000,000
1,200,000
Inventory
Trade receivables
2,000,000
1,000,000
3,000,000
900,000
Accounting income
Taxable income
Income tax payable
9,000,000
(4,000,000)
3,000,000
8,000,000
2,400,000
2,400,000
1,200,000
1,200,000

900,000
Deferred tax benefit
4. Net deferred tax expense (1,200,000 900,000)
5. Total income tax expense (2,400,000 + 300,000 or 30% x 9,000,000)
Problem 11-19
4. Tax expense from deferred tax liability
Tax benefit from deferred tax asset
900,000
300,000
2,700,000
2,100,000
2,100,000
300,000
300,000
60,000
60,000
300,000
(60,000)
240,000
2,100,000
240,000
2,340,000
Problem 11-20
1. No entry. There is no current tax expense because there is an operating loss carryover.
Pretax accounting income
Permanent differences:
Interest income
Insurance premium
Accounting income subject to tax
Temporary differences:
Gross profit on installment sale
Warranty liability
Operating loss carryover
Income tax benefit
2,000,000
(500,000)
100,000
1,600,000
(4,500,000)
2,000,000
(900,000)
1,350,000
1,350,000
870,000
870,000
Warranty liability (2,000,000 x 30%)

Operating loss carryover (900,000 x 30%)
Deferred tax asset
600,000
270,000
870,000
4. Tax expense from deferred tax liability

Tax benefit from deferred tax asset
1,350,000
(870,000)
480,000

0
480,000
480,000
Another computation (30% x 1,600,000)
480,000
Problem 11-21
1. Financial assets
Retained earnings
Retained earnings
Intangible assets
Retained earnings
Employee benefits payable
500,000
500,000
400,000
400,000
50,000
50,000
2.
Property, plant and equipment
Goodwill
Intangible assets
Financial assets
Trade receivables
Other receivables
Cash and cash equivalents
Loans payable
Trade payables
Current tax liability
Carrying amount
7,000,000
3,000,000
1,600,000
6,500,000
7,000,000
1,600,000
700,000
8,000,000
4,000,000
1,050,000
70,000
600,000
Tax base
1,400,000
NA
0
7,000,000
7,500,000
1,600,000
700,000
8,500,000
3,800,000
1,000,000
70,000
600,000
PPE
Intangible assets
Loans payable
Total taxable temporary differences
Difference
5,600,000
1,600,000
500,000
500,000
500,000
200,000
50,000
-
5,600,000
1,600,000
500,000
7,700,000
Taxable temporary differences arise when the carrying amount of an asset is higher than the tax base or
when the carrying amount of a liability is lower than the tax base.
Deferred tax liability as corrected (30% x 7,700,000)
Deferred tax liability per book
Increase in deferred tax liability
Retained earnings (tax expense)
2,310,000
600,000
1,710,000
1,710,000
1,710,000
The standard does not allow recognition of deferred tax liability on goodwill.
3. Financial assets
Trade receivables
Trade payables
Total deductible temporary differences
500,000
500,000
200,000
50,000
1,250,000
Deferred tax asset as corrected (30% x 1,250,000)
375,000
Deductible temporary differences arise when the tax base of an asset is higher than the carrying amount or
when the tax base of a liability is lower than the carrying amount.
Deferred asset
Retained earnings
375,000
375,000
CHAPTER 12
Problem 12-4
2011
Jan.1 Equipment
Note payable
Dec.31 Note payable
Interest expense (12% x 600,000)
Cash
2012
Dec.31 Note payable
Interest expense (12% x 300,000)
Cash
Problem 12-5
1. Land
Cash
Note payable
2. Interest expense (10% x 900,000)
3. Interest expense
Accrued interest payable (900,000 + 90,000 x 10%)
4. Note payable
Cash
Problem 12-6
1. Machinery
Discount on note payable
Cash
Note payable
2. Note payable
Cash
3. Interest expense
Year
2011
2012
2013
2014
Note payable
800,000
600,000
400,000
200,000
2,000,000
600,000
300,000
72,000
372,000
300,000
36,000
336,000
1,000,000
100,000
900,000
90,000
90,000
99,000
99,000
900,000
189,000
1,089,000
750,000
250,000
200,000
800,000
200,000
200,000
100,000
100,000
Fraction
8/20
6/20
4/20
2/20
Problem 12-7
1. Building (500,000 + 3,602,700)
Cash
Note payable
Face of note
Present value (1,500,000 x 2.4018)
Imputed interest
2. Note payable
Cash
3. Interest expense
Discount on note payable (12% x 3,602,700)
Problem 12-8
1. Land (1,250,000 + 2,847,200)
Cash
Note payable
600,000
Amortization
100,000
75,000
50,000
25,000
250,000
4,102,700
897,300
500,000
4,500,000
4,500,000
3,602,700
897,300
1,500,000
1,500,000
432,324
432,324
4,097,200
1,152,800
1,250,000
4,000,000
Face value of note payable

Present value (4,000,000 x .7118)
Imputed interest
2. Interest expense
Discount on note payable (12% x 2,847,200)
3. Note payable
Cash
Problem 12-14
1. Total liability
Less: Book value of property:
Land
Building
Gain
2. Mortgage payable
Land
Building
Gain on extinguishment of debt
Problem 12-15
1. Note payable
Investment in equity securities
2. Note payable
Investment in equity securities
Gain on exchange
Gain on debt restructuring
4,000,000
2,847,200
1,152,800
341,664
341,664
4,000,000
4,000,000
6,000,000
1,500,000
,200,000
5,700,000
300,000
5,000,000
1,000,000
1,800,000
1,500,000
6,000,000
300,000
1,000,000
200,000
600,000
600,000
1,000,000
200,000
600,000
500,000
100,000
Fair value
Book value
Gain on exchange
1,100,000
600,000
500,000
Note payable
Total liability
Less: Fair value of securities
1,000,000
200,000
1,200,000
1,100,000
100,000
Problem 12-16
Bonds payable
Premiums on bonds payable
Land
Problem 12-17
Note payable
Inventory
Problem 12-18
1. Mortgage payable
Loss on extinguishment of debt
5,000,000
150,000
300,000
3,200,000
2,250,000
6,000,000
600,000
3,600,000
3,000,000
4,000,000
300,000
250,000
Share capital
Share premium (35,000 x 30)
3,500,000
1,050,000
2. Mortgage payable
Loss on extinguishment of debt
Share capital
Share premium
4,000,000
300,000
200,000
3. Mortgage payable
Share premium
4,000,000
300,000
3,500,000
1,000,000
3,500,000
800,000
Problem 12-19
1. Note payable
Ordinary share capital
Share premium ordinary
Preference share capital
Share premium preference
2. Note payable
Ordinary
Preference
Market value
3,000,000
1,500,000
4,500,000
3. Note payable
Ordinary
Preference
5,000,000
400,000
1,500,000
1,500,000
250,000
1,250,000
900,000
5,000,000
400,000
1,500,000
1,700,000
250,000
1,350,000
600,000
Fraction
30/45
15/45
Issue price
3,200,000
1,600,000
4,800,000
5,000,000
400,000
1,500,000
2,100,000
250,000
1,550,000
Market value
3,000,000
1,500,000
4,500,000
Problem 12-20
1. Bonds payable
Share capital
Share premium
2. Bonds payable
Share capital
Share premium
Fraction
30/45
15/45
Issue price
3,600,000
1,800,000
5,400,000
5,000,000
250,000
200,000
2,500,000
2,000,000
550,000
5,000,000
250,000
200,000
2,500,000
2,100,000
450,000
3. Bonds payable
Share capital
Share premium
Problem 12-21
1. Note payable
Land
2. Note payable
Share capital
Share premium
Problem 12-22
Note payable
Carrying amount of liability
Restructured liability:
Principal
Interest
Note payable
Note payable
5,000,000
250,000
200,000
2,500,000
2,550,000
5,000,000
2,800,000
2,200,000
5,000,000
4,000,000
800,000
200,000
8,000,000
800,000
8,800,000
7,000,000
800,000
7,800,000
1,000,000
8,000,000
800,000
7,800,000
1,000,000
Problem 12-23
PV of interest payments (700,000 x 1.7833)
Total present value of new liability
6,001,100
1,248,310
7,249,410
Note payable
Accrued interest
Total old liability
PV of new liability
8,000,000
640,000
8,640,000
7,249,410
1,390,590
1. Note payable - old

Note payable new
Premium on note payable
Gain on debt extinguishment of debt
2. Interest expense
Cash
3. Premium on note payable
Interest expense
8,000,000
640,000
7,000,000
249,410
1,390,590
700,000
700,000
120,047
120,047
Interest paid
Amortization of premium
4. Interest expense
Cash
Interest expense (249,410 120,047)
Note payable
Cash
700,000
579,953
120,047
700,000
700,000
129,363
129,363
7,000,000
7,000,000
Problem 12-24
PV of new liability
Face value
3,495,250
1,336,412
4,831,662
5,500,000
668,338
Note payable old

Accrued interest (6,000,000 x 12%)
Total old liability
PV of new liability
6,000,000
720,000
6,720,000
4,831,662
1,888,338

Note payable new
Cash
Interest expense
6,000,000
720,000
668,338
5,500,000
1,888,338
440,000
440,000
139,799
139,799
Interest paid
440,000
579,799
139,799
Problem 12-25
PV of interest payments (800,000 x .8772)
Total present value of new liability
7,017,600
701,760
7,719,360
Old liability
New liability
8,500,000
7,719,360
780,640
The gain is less than 10% of the old liability of P8,500,000. Thus, the gain is not recognized.
1. Note payable old
Note payable new
Cash
Interest expense
8,500,000
8,000,000
500,000
800,000
800,000
500,000
500,000
Actually, using a financial calculator, the effective rate is 3.53%. Accordingly, the amortization of premium is
computed as follows:
Interest paid (10% x 8,000,000)
Interest expense (3.53% x 8,500,000) rounded
Amortization of premium
Note payable new
Cash
800,000
300,000
500,000
8,000,000
8,000,000
Problem 12-26
Total PV of new liability
Face value
3,718,800
937,170
4,655,970
4,500,000
155,970
Note payable old

Accrued interest
Total old liability
PV of new liability
Gain on extinguishment
5,000,000
1,000,000
6,000,000
4,655,970
1,344,030

Note payable new
2. Interest expense (4,500,000 X 12%)
Cash
5,000,000
1,000,000
4,500,000
155,970
1,344,030
540,000
540,000

Interest expense
74,403
74,403
Interest paid (4,500,000 x 12%)

Premium amortization
540,000
465,597
74,403
Problem 12-27
Present value of new principal (700,000 x .79719)
Present value of interest payment (8% x 700,000 = 56,000 x 1.69006)
Total present value of new note
558,033
94,643
652,676
Note payable old

Carrying amount
Present value of new note
1,000,000
120,000
1,120,000
652,676
467,324
Note payable new

Present value
700,000
652,676
47,324
Date
Dec.31, 2011
Dec.31, 2012
Dec.31, 2013
Nominal interest (8%) Effective interest (12%)

56,000
56,000
78,321
81,003*
22,321
25,003
*Adjusted for rounding figures.
Books of Jane Company (debtor)

2011
Dec.31 Note payable old
Note payable new
2012
Cash
31 Interest expense
Amortization
Present value
652,676
674,997
700,000
1,000,000
120,000
47,324
700,000
467,324
56,000
56,000
22,321
22,321
2013
Cash
31 Interest expense
31 Note payable new
Cash
Books of Mark Company (creditor)
2011
Dec.31 Note receivable old
Loss on debt restructuring
Note receivable old
Accrued interest receivable
2012
Dec.31 Cash
Interest income
Interest income
2013
Dec.31 Cash
Interest income
Interest income
31 Cash
Note receivable new
56,000
56,000
25,003
25,003
700,000
700,000
700,000
467,324
1,000,000
120,000
47,324
56,000
56,000
22,321
22,321
56,000
56,000
25,003
25,003
700,000
700,000
CHAPTER 13
Problem 13-7
2011 Benefit expense
Cash (4,000,000 x 5%)
Cash (4,200,000 x 5%)
200,000
200,000
210,000
210,000
Problem 13-8
Cash
Prepaid/accrued benefit cost
Cash
850,000
700,000
150,000
1,000,000
50,000
1,050,000
Noncurrent liability 12/31/2008

Accrued benefit cost
150,000
Noncurrent liability 12/31/2009

Accrued benefit cost
100,000
Problem 13-9
1. Annual pension payment PBO (300,000 x 1.48 x 3% x 12)
2. Annual pension payment ABO (300,000 x 3% x 12)
159,840
108,000
Problem 13-10
1. Annual pension payment ABO (500,000 x 2% x 10 years)
Multiply by PV of an ordinary annuity of 1 at 8% for 15 years
Present value 1/1/2034
Multiply by PV of 1 at 8% for 25 years
Accumulated benefit obligation 1/1/2009
100,000
8.559
855,900
0.146
124,961
2. Future salary PBO (500,000 x 2.094)
1,047,000
Annual pension payment PBO (1,047,000 x 2% x 10 years)

Multiply by PV of an ordinary annuity of 1 at 8% for 15 years
Multiply by PV of 1 at 8% for 25 periods
Projected benefit obligation 1/1/2009
209,400
8.559
1,792,255
0.146
261,669
Problem 13-11
Future salary (600,000 x 1.48)
888,000
Annual pension payment (2% x 888,000 x 15 years)

Multiply by PV of an ordinary annuity of 1 at 10% for 8 periods
Multiply by PV of 1 at 10% for 10 periods
PBO 12/31/2011
Problem 13-12
1. Annual retirement benefit (10% x 1,440,000)
Current service cost
2011
144,000
2012
144,000
2013
144,000
432,000
2.
Date
12/31/2011
12/31/2012
12/31/2013
Service cost
130,608
137,146
144,000
PV factor
.9070
.9524
1.0000
(5% x liability)
Interest cost
6,530
13,716
266,400
5.335
1,421,244
0.386
548,600
144,000
Discounted
130,608
137,146
144,000
411,754
Liability
130,608
274,284
432,000
Problem 13-13
Annual benefit (5% x 1,500,000)
75,000
2011
2012
2013
Service cost
75,000
75,000
75,000
PV factor
.361
.404
.452
Discounted
27,075
30,300
33,900
Date
12/31/2011
12/31/2012
12/31/2013
Service cost
27,075
30,300
33,900
(5% x liability)
Interest cost
3,249
7,275
Liability
27,075
60,624
101,799
Problem 13-14
1. Service cost
Interest cost (10% x 4,000,000)
Expected return (12% 5,000,000)
Benefit expense
2. Benefit expense
Cash
3. P/ABC January 1 (5,000,000 4,000,000)
Debit adjustment
Debit balance
4. FVPA January 1
Contribution
Actual return
Balance December 31
1,550,000
400,000
( 600,000)
1,350,000
1,350,000
150,000
1,500,000
1,000,000
150,000
1,150,000
5,000,000
1,500,000
600,000
7,100,000
PBO January 1
Service cost
Interest cost
Balance December 31
Prepaid/accrued benefit cost December 31
4,000,000
1,550,000
400,000
5,950,000
1,150,000
Problem 13-15
1. Current service cost
Expected return (8% x 5,750,000)
Benefit expense
2. Benefit expense
Cash
600,000
650,000
(460,000)
790,000
790,000
110,000
900,000
3. P/ABC January 1 (credit)

Debit adjustment
Balance December 31
(750,000)
110,000
(640,000)
4. FVPA January 1
Contribution
Actual return
Balance December 31
5,750,000
900,000
460,000
7,110,000
PBO January 1
Interest cost
Balance December 31
P/ABC December 31(credit)
6,500,000
600,000
650,000
7,750,000
( 640,000)
Problem 13-16
1. Current service cost
Benefit expense
1,450,000
760,000
(538,000)
1,672,000
Actual return
Expected return
Actuarial loss deferred
2. Benefit expense
Cash
500,000
538,000
( 38,000)
1,672,000
1,500,000
172,000
3. P/ABC January 1 (credit)

Credit adjustment
Balance December 31
875,000
172,000
1,047,000
4. FVPA January 1
Contribution
Actual return
Balance December 31
Actuarial loss
Total debits
6,725,000
1,500,000
500,000
8,725,000
38,000
8,763,000
PBO January 1
Interest cost
Balance December 31
P/ABC December 31 (credit)
7,600,000
1,450,000
760,000
9,810,000
(1,047,000)
Problem 13-17
1. Actual fair value of plan assets
Expected fair value
Actuarial gain -1/1/2008
7,200,000
5,400,000
1,800,000
2. Actuarial gain
Corridor (10% x 7,200,000)
Excess actuarial gain
1,800,000
720,000
1,080,000
Amortization of actuarial gain (1,080,000 / 10)
108,000
Problem 13-18
1. Expected return
2008 (12% x 5,000,000)
2009 (12% x 6,750,000)
600,000
810,000
2. Fair value of plan assets 1/1/2008

Add: Expected return in 2008
Expected fair value 1/1/2009
3. Actual fair value
Expected fair value
Actuarial gain
5,000,000
600,000
5,600,000
1/1/2008
5,000,000
5,000,000
0
1/1/2009
6,750,000
5,600,000
1,150,000
4. 2011 No amortization because there is no actuarial gain or loss on January 1, 2008.

2012 Actuarial gain 1/1/2009
1,150,000
Corridor (10% x 7,000,000)
700,000
Excess gain to be amortized
450,000
Amortization of actuarial gain (450,000 / 10)
45,000
Problem 13-19
Cumulative actuarial loss
Corridor 10% of greater
Aye (10% x 5,000,000)
Bee (10% x 6,500,000)
Cee (10% x 8,000,000)
Excess
Amortization of actuarial loss
Aye
Bee (250,000 / 8)
Cee (125,000 / 5)
Problem 13-20
1.
FVPA
PBO
Net actuarial gain - 1/1/2011
Aye
350,000
Bee
900,000
Cee
925,000
650,000
_______
250,000
800,000
125,000
500,000
_______
0
None
31,250
25,000
Expected
4,000,000
4,800,000
Actual
5,500,000
5,000,000
Gain (Loss)
1,500,000
( 200,000)
1,300,000
2.
FVPA January 1, actual

PBO January 1, actual
Deferred actuarial gain
Total credits
P/ABC January 1 (credit)
5,500,000
5,000,000
1,300,000
6,300,000
( 800,000)
3.

Interest cost
Amortization of actuarial gain
Total benefit expense
1,750,000
700,000
( 440,000)
( 75,000)
1,935,000
Deferred actuarial gain January 1

Corridor (10% x 5,500,000)
Excess over corridor
1,300,000
550,000
750,000
Amortization actuarial gain (750,000 / 10)

4. Benefit expense
Cash
5.
75,000
1,935,000
1,500,000
435,000
P/ABC January 1
Credit adjustment
Balance December 31
(800,000)
(435,000)
(1,235,000)
FVPA January 1
Contribution
Actual return
FVPA December 31
PBO January 1
Service cost
Interest cost
PBO December 31
Deferred actuarial gain December 31 (1,300,000 75,000)
Total credits
P/ABC December 31
5,500,000
1,500,000
440,000
7,440,000
5,000,000
1,750,000
700,000
7,450,000
1,225,000
8,675,000
(1,235,000)
Problem 13-21
1.
Interest cost
Expected return
2,100,000
240,000
(380,000)
Amortization of actuarial loss

Amortization of past service cost
2. Benefit expense
Cash
40,000
60,000
2,060,000
2,060,000
140,000
2,200,000
Problem 13-22
1.
Interest cost
Expected return
Amortization of past service cost (300,000 / 3)
2. Benefit expense
Cash
3.
800,000
450,000
(600,000)
100,000
750,000
750,000
500,000
250,000
P/ABC January 1
Credit adjustment
P/ABC December 31, debit
800,000
(250,000)
550,000
FVPA January 1
Contribution
Actual return
Total
Less: Benefits paid
FVPA December 31
6,000,000
500,000
600,000
7,100,000
150,000
6,950,000
PBO January 1
Interest cost
Total
Less: Benefits paid
PBO December 31
5,500,000
800,000
450,000
6,750,000
150,000
6,600,000
FVPA
Unamortized past service cost (300,000 100,000)
PBO
P/ABC December 31
6,950,000
200,000
(6,600,000)
550,000
4. Surplus reduction
Debit balance surplus
Limit (200,000 + 300,000)
Adjustment
50,000
50,000
550,000
500,000
50,000
The surplus must not exceed the total of the unamortized past service cost, unrecognized actuarial loss and
present value of future refund.
Problem 13-23
1.
Interest cost
Expected return
Amortization of PSC (1,250,000 / 10)
Amortization of actuarial gain
Actuarial gain January 1
Corridor (10% x 5,500,000)
925,000
660,000
(570,000)
125,000
( 30,000)
1,110,000
850,000
550,000
Excess over corridor
300,000
Amortization actuarial gain (300,000 / 10)

2. Benefit expense
Cash
3.
1,110,000
240,000
1,350,000
FVPA January 1
Contribution
Actual return
Total
Less: Benefits paid
FVPA December 31
4,750,000
1,350,000
570,000
6,670,000
995,000
5,675,000
Past service cost

Unamortized PSC December 31
1,250,000
( 125,000)
1,125,000
PBO January 1
Interest cost
Increase due to changes n actuarial assumptions
Total
Less: Benefits paid
PBO December 31
5,500,000
925,000
660,000
140,000
7,225,000
995,000
6,230,000
Unrecognized actuarial gain January 1

Balance
Actuarial loss due to increase in accrued benefit obligation
Net unrecognized gain December 31
850,000
( 30,000)
820,000
(140,000)
680,000
FVPA
Unamortized PSC
Total debits
5,675,000
1,125,000
6,800,000
PBO
Unrecognized actuarial gain
Total credits
P/ABC December 31
6,230,000
680,000
6,910,000
( 110,000)
P/ABC January 1
Debit adjustment
P/ABC December 31
( 350,000)
240,000
( 110,000)
Problem 13-24
1.
Amortization of PSC (350,000 / 10)
Amortization of actuarial loss (150,000 / 10)
2.
30,000
1,000,000
750,000
( 850,000)
35,000
15,000
950,000
Unamortized actuarial loss January 1

Corridor (10% x 8,500,000)
Excess loss to be amortized
1,000,000
850,000
150,000
P/ABC January 1
Overfunding (1,200,000 950,000)
P/ABC December 31
2,350,000
250,000
2,600,000
3.
FVPA January 1
Contribution
Actual return (12% x 8,500,000)
Total
Less: Benefits paid
FVPA December 31
8,500,000
1,200,000
1,020,000
10,720,000
1,500,000
9,220,000
Unamortized PSC January 1

Balance December 31
350,000
( 35,000)
315,000
Unrecognized actuarial loss January 1

Balance December 31
Actuarial gain due to decrease in accrued benefit obligation
Actuarial gain due to the difference in actual and expected
return (1,020,000 850,000)
Net unrecognized actuarial loss December 31
1,000,000
( 15,000)
985,000
( 200,000)
PBO January 1
Interest cost
Total
Less: Benefits paid
Decrease in obligation
PBO December 31
7,500,000
1,000,000
750,000
9,250,000
1,500,000
200,000
( 170,000)
615,000
1,700,000
7,550,000
Summary
FVPA
Unamortized PSC
Unrecognized actuarial loss
Total
PBO
P/ABC December 31
4.
Benefit expense
(2,600,000 930,000)
9,220,000
315,000
615,000
10,150,000
(7,550,000)
2,600,000
1,670,000
1,670,000
Surplus
Limit:
Unamortized PSC
Unrecognized actuarial loss
Adjustment
2,600,000
315,000
615,000
930,000
1,670,000
CHAPTER 14
Problem 14-6
Requirement a
1. Memo entry
The corporation was authorized to issue share capital of P5,000,000, divided into 100,000 shares with par
value of P50.
Subscriptions receivable
Subscribed share capital
(25% x 100,000 = 25,000 shares)
2. Cash (25% x 1,250,000)
3. Cash
Subscriptions receivable (15,000 x 50 x 75%)
4. Land
Share premium
5. Cash (5,000 x 60)
Share premium
6. Legal expenses
1,250,000
1,250,000
312,500
312,500
562,500
562,500
750,000
750,000
600,000
500,000
100,000
300,000
250,000
50,000
100,000
100,000
Requirement b
Shareholders equity:
Share capital, P50 par, 100,000 shares authorized,
32,000 shares issued
Share premium
Problem 14-7
Requirement a
1. Unissued share capital
Authorized share capital
(40% x 50,000 = 20,000 shares)
2. Cash (25% x 2,000,000)
3. Cash
Unissued share capital (10,000 shares x 100)
4. Patent (5,000 x 100)
Unissued share capital
5. Cash (15,000 x 120)
Unissued share capital (15,000 shares x 100)
Share premium
Requirement b
Authorized share capital, P100 par, 50,000 shares
Unissued share capital
Issued share capital, 30,000 shares
Share premium
1,600,000
500,000
(375,000)
150,000
1,875,000
5,000,000
5,000,000
2,000,000
2,000,000
500,000
500,000
750,000
750,000
1,000,000
1,000,000
500,000
500,000
1,800,000
1,500,000
300,000
5,000,000
(2,000,000)
3,000,000
1,000,000
(750,000)
300,000
3,550,000
Problem 14-8
1. Subscriptions receivable
(40,000 x 100)
2. Accounts receivable
Note receivable
Inventory
Accounts payable
3. Land
Building
4. Cash
5. Legal expenses
Share capital
6. Subscriptions receivable (1,000 x 120)
Share premium
Cash (1,000 x 40)
7. Cash
4,000,000
4,000,000
350,000
70,000
680,000
100,000
1,000,000
150,000
850,000
1,000,000
375,000
375,000
50,000
50,000
120,000
100,000
20,000
40,000
40,000
1,100,000
1,100,000
A
B
C (800,000 x 75%)
Total
200,000
300,000
600,000
1,100,000
3,300,000
3,300,000
Requirement b
Share capital, P100 par
Authorized 50,000 shares
Issued and outstanding 33,500 shares
Subscribed share capital 8,000 shares
Share premium
3,350,000
800,000
( 605,000)
20,000
3,565,000
Problem 14-9
1. Memo The company was authorized to issue share capital as follows:
Preference share capital, P100 par, 30,000 shares
Ordinary share capital, P50 par, 100,000 shares
Total authorized share capital
2. Cash
3,000,000
5,000,000
8,000,000
2,400,000

Share premium ordinary share
3. Cash
Subscribed preference share capital
5. Cash
6. Legal expenses
7. Property, plant and equipment
Share premium preference share
2,000,000
400,000
1,200,000
1,000,000
200,000
1,000,000
1,000,000
400,000
400,000
100,000
100,000
1,300,000
1,000,000
300,000
Subscribed ordinary share capital
9. Cash
10. Cash
11. Treasury ordinary shares
Cash
12. Retained earnings
Retained earnings appropriated for treasury shares
13. Profit and loss
Retained earnings
Brook Company
Shareholders equity
December 31, 2011
Share premium:
Preference share
Ordinary share
Retained earnings:
Unappropriated
Appropriated for treasury shares
Treasury ordinary shares
Shareholders equity
Problem 14-10
1. Unissued ordinary share capital
Authorized ordinary share capital
3. Cash
4. Cash
5. Subscribed ordinary share capital
Unissued ordinary share capital
6. Land
Building
Share premium
7. Loan payable
Share premium
8. Profit and loss
Retained earnings
750,000
750,000
300,000
300,000
600,000
600,000
1,000,000
1,000,000
200,000
200,000
200,000
200,000
2,000,000
2,000,000
2,100,000
3,000,000
750,000
(450,000)
200,000
700,000
1,800,000
200,000
900,000
2,000,000
( 200,000)
8,100,000
10,000,000
10,000,000
2,500,000
2,500,000
625,000
625,000
750,000
750,000
1,000,000
1,000,000
800,000
2,500,000
3,000,000
300,000
1,100,000
200,000
1,000,000
300,000
3,000,000
3,000,000
Shareholders equity
December 31, 2011
Authorized ordinary share capital
Issued ordinary share capital
Share premium
Retained earnings
10,000,000
(5,000,000)
5,000,000
1,500,000
(1,125,000)
600,000
3,000,000
8,975,000
Problem 14-11
1. Subscriptions receivable PS (20,000 x 100)
2. Subscriptions receivable - PS (4,000 shares x 120)
3. Cash (2,480,000 120,000)
Subscriptions receivable PS
4. Subscribed preference share capital
Preference share capital (22,000 x 100)
5. Land
Ordinary share capital (8,000 x 10)
6. Subscription receivable CS
Subscribed ordinary share capital (40,000 x 10)
Share premium ordinary (950,000 150,000)
2,000,000
2,000,000
480,000
400,000
80,000
2,360,000
2,360,000
2,200,000
2,200,000
230,000
80,000
150,000
1,200,000
400,000
800,000
Ordinary shares issued and outstanding

Ordinary shares subscribed
Total
Less: Ordinary shares issued to acquire land
Ordinary shares originally subscribed
7. Cash (1,200,000 360,000)
Subscriptions receivable ordinary
8. Subscribed ordinary share capital
Ordinary share capital (24,000 8,000 x 10)
Issued
Subscribed
Share premium
Contributed capital
Preference
2,200,000
200,000
80,000
(120,000)
2,360,000
Problem 14-12
Jan.1 Land
Organization expense
Ordinary share capital (10,000 shares)
Feb.20 Cash (15,000 x 120)
Cash
Mar.10 Cash (25,000 x 260)
Cash
April 1 Subscription receivable (20,000 x 350)
July 15 Cash (10,000 shares)
Building
Share premium ordinary (12,000 x 200)
Preference share capital (20,000 x 100)
24,000
24,000
48,000
8,000
40,000
840,000
840,000
160,000
160,000
Ordinary
240,000
240,000
950,000
(360,000)
1,070,000
2,500,000
500,000
1,000,000
2,000,000
1,800,000
1,500,000
300,000
50,000
50,000
6,500,000
2,500,000
4,000,000
200,000
200,000
7,000,000
2,000,000
5,000,000
3,000,000
1,000,000
2,000,000
7,000,000
1,200,000
2,400,000
2,000,000
1,400,000
Aug.1 Cash
Subscription receivable
Dec.31 Subscribed ordinary share capital (5,000 shares)
Share premium ordinary (5,000 x 2500
Share premium forfeited subscriptions
4,500,000
4,500,000
1,000,000
1,000,000
500,000
1,250,000
1,500,000
250,000
Requirement 2
Preference share capital, 100 par, 50,000 shares authorized, 35,000 shares
Issued and outstanding
Ordinary share capital, 100par, 100,000 shares authorized, 67,000 shares
Issued and outstanding
Subscribed ordinary share capital 5,000 shares
Share premium forfeited subscriptions
Retained earnings
Total shareholders equity
3,500,000
1,650,000
6,700,000
500,000
13,950,000
250,000
(1,000,000)
3,000,000
28,550,000
Problem 14-13
1. Preference share capital authorized (50,000 shares x P100 par)
Ordinary share capital authorized (200,000 shares x P15 stated value)
Total authorized share capital
5,000,000
3,000,000
8,000,000
2. Unissued preference share capital

Unissued ordinary share capital (20,000 x 15)
Total unissued share capital
1,800,000
300,000
2,100,000
3. Preference share capital issued (5,000,000 1,800,000)

Ordinary share capital issued
Total issued share capital
3,200,000
2,700,000
5,900,000
4. Preference share capital available for subscription:

Unissued preference share capital
Less: Subscribed preference share capital
Ordinary share capital available for subscription:
Less: Subscribed ordinary share capital
Ordinary share capital available for subscription
1,800,000
300,000
270,000
5. Authorized preference share capital

Unissued preference share capital
Issued preference share capital
Less: Subscription receivable
Less: Subscription receivable
Retained earnings
Treasury preference shares
Shareholders equity
Problem 14-14
1. a. Preference share capital (5,000 x 100)
Share premium - PS (5,000 / 50,000 x 500,000)
1,500,000
300,000
30,000
1,530,000
5,000,000
(1,800,000)
3,200,000
2,700,000
300,000
(200,000)
270,000
(170,000)
950,000
2,000,000
( 600,000)
8,450,000
500,000
50,000
250,000
300,000
b. Preference share capital

Share premium PS
Retained earnings
2. a. Preference share capital
Share premium PS
Retained earnings
Cash (5,000 x 120)
b. Preference share capital
Share premium PS
Cash (5,000 x 80)
Share premium redemption
Problem 14-15
2011
Jan.1 cash
500,000
50,000
450,000
1,000,000
500,000
50,000
50,000
600,000
500,000
50,000
400,000
150,000
5,000,000
Redeemable preference shares

Accrued interest payable (10% x 5,000,000)
500,000
2012
Accrued interest payable (10% x 5,500,000)
550,000
2013
Jan.1
Redeemable preference shares

Cash
Problem 14-16
1. Cash (4,000 x 60)
Ordinary share capital (20,000 rights/5 = 4,000 shares)
Share premium
2. Cash
Bonds payable
Cash (5,000 x 60)
Share premium
3. Sales price
Less: Market value of warrants (20,000 x 10)
Issue price of preference shares
Cash
5,000,000
500,000
550,000
5,000,000
1.050,000
6,050,000
240,000
200,000
40,000
2,600,000
2,000,000
400,000
200,000
300,000
200,000
250,000
250,000
2,500,000
200,000
2,300,000
2,500,000

Share premium PS
Cash (9,000 x 60)
Share warrants outstanding (18,000 / 20,000 x 200,000)
Share premium ordinary shares
Share premium unexercised warrants
4. Market value of ordinary share
Less: Option price
Excess
Multiply by
Value of warrants
2,000,000
300,000
200,000
540,000
180,000
450,000
270,000
20,000
20,000
80
60
20
25,000 shares
500,000
Cash
6,000,000
Share premium PS
5,000,000
500,000
500,000
Cash (25,000 x 60)

Problem 14-17
2011
May 31 Cash
1,500,000
500,000
1,250,000
750,000
6,000,000
Bonds payable
5,000,000
250,000
750,000
Sales price of bonds with warrants

Less: Market value of bonds ex-warrants
Issue price of warrants
6,000,000
5,250,000
750,000
Dec.31 Cash (10,000 x 120)

Share warrants outstanding (10,000 / 15,000 x 750,000)
(10,000 x 100)
Share premium
1,200,000
500,000
Dec.31 Profit and loss

Retained earnings
2,000,000
2012
July 15
1,000,000
700,000
2,000,000
Memo Issued 60,000 rights permitting shareholders to acquire 1 share at P130 for every 5 rights.
Dec.31 Cash (60,000 / 5 = 12,000 x 130)

31 Share warrants outstanding
Share premium unexercised share warrants
31 Profit and loss
Retained earnings
1,560,000
1,200,000
360,000
250,000
250,000
3,000,000
3,000,000
Shareholders Equity
December 31, 2012
Ordinary share capital, P100 par
Authorized 200,000 shares
Issued and outstanding 72,000 shares
Share premium
Retained earnings
Shareholders equity
Problem 14-18
Requirement 1
a. Treasury shares
Cash
b. Cash
Treasury shares
Share premium
c. Cash
Retained earnings
Treasury shares
7,200,000
2,310,000
8,000,000
17,510,000
800,000
800,000
1,000,000
800,000
200,000
700,000
100,000
800,000
Requirement 2
Share premium (5,000 / 50,000 x 200,000)
Retained earnings
Treasury share
500,000
20,000
280,000
800,000
Problem 14-19
Requirement a
1. Cash
Share premium
2. Cash
Share premium
3. Treasury shares
Cash
4. Cash
Treasury shares
Share premium
4,000,000
3,000,000
1,000,000
6,250,000
3,750,000
2,500,000
1,000,000
1,000,000
1,250,000
1,000,000
250,000
Requirement b
1. Cash
2. Cash
Share premium
3. Treasury shares
Cash
4. Cash
Treasury shares
Share premium
4,000,000
4,000,000
6,250,000
5,000,000
1,250,000
1,000,000
1,000,000
1,250,000
1,000,000
250,000
Problem 14-20
Requirement a
a. Cash
Share premium PS
b. Cash
c. Preference share (10,000 x 100)
Share premium PS
Cash (10,000 x 120)
Share premium redemption
d. Treasury shares (15,000 x 52)
Cash
e. Cash (10,000 x 60)
Treasury shares (10,000 x 52)
Share premium treasury share
f. Received 20,000 ordinary shares as donation from shareholders.
Cash (10,000 x 65)
Donated capital
g. Profit and loss
Retained earnings
h. Retained earnings
4,200,000
3,000,000
1,200,000
5,500,000
5,000,000
500,000
1,000,000
400,000
1,200,000
200,000
780,000
780,000
600,000
520,000
80,000
650,000
650,000
3,000,000
3,000,000
260,000
260,000
Shareholders Equity
December 31, 2011
Preference share capital, 12% P100 par
Ordinary share capital, P50, 100,000 shares issued, of which
5,000 shares are in treasury and 10,000 shares are donated
2,000,000
5,000,000
Share premium:
Preference share
Redemption of preference share
Ordinary share
Treasury share
Donated capital
Retained earnings:
Unappropriated
Treasury shares, at cost
Shareholders equity
800,000
200,000
500,000
80,000
650,000
2,740,000
260,000
2,230,000
3,000,000
(260,000)
11,970,000
Problem 14-21
Requirement a
1. Cash
1,000,000
1,000,000
2. Treasury shares
300,000
Cash
300,000
3. Memo Issued 140,000 new ordinary shares with par of P25 as a result of a 2 for 1 split of 70,000 original
shares with a par of P150.
4. Cash
120,000
Treasury shares (3,000 / 10,000 x 300,000)
90,000
Share premium treasury shares
30,000
5. Memo Received 15,000 ordinary shares by way of donation.
Cash (10,000 x 40)
400,000
Donated capital
400,000
6. Profit and loss
500,000
Retained earnings
500,000
7. Retained earnings
210,000
210,000
Shareholders Equity
December 31, 2011
Share premium:
Preference share
Ordinary share
Treasury share
Donated capital
Retained earnings:
Unappropriated
Treasury shares, at cost
Shareholders equity
500,000
3,500,000
200,000
500,000
30,000
400,000
2,290,000
210,000
( 210,000)
1,130,000
2,500,000
7,420,000
Problem 14-22
a. Share capital
3,000,000
Share premium
200,000
2,000,000
Share premium recapitalization
1,200,000
b. Memo Issued 100,000 new shares with par of P30 as a result of 5 for 1 split of 20,000 original shares with
par of P150.
c. Share capital (20,000 x 50)
1,000,000
1,000,000
d. Share capital (2,000 x 150)
300,000
Donated capital
300,000
e. Share capital
3,000,000
Share premium
200,000
Retained earnings
800,000
4,000,000
Problem 14-23
a. Share capital
Donated capital (5,000,000 x 10%)
Donated capital
Retained earnings
b. Share capital (50,000 x 50)
Share premium
Share premium
Retained earnings
c. Share capital
Share premium
Retained earnings
d. Share capital
Share premium
Share premium - recapitalization
Retained earnings
500,000
500,000
500,000
500,000
2,500,000
2,500,000
500,000
500,000
5,000,000
1,000,000
5,500,000
500,000
5,000,000
1,000,000
3,000,000
3,000,000
500,000
500,000

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CHAPTER 4

Cash (7,000,000 x 106%)

Unissued bonds payable

120 months 20 = 100 months remaining

Premium on bonds payable

Face of bonds payable retired

Discount on bonds payable

2. Interest (3,000,000 x 12%)

3. Adjusting entries on December 31, 2011:

Bonds payable retired

2. Bonds payable old

Bonds payable old

Accrued interest payable

December 31, 2009

December 31, 2010

Bonds payable 1/1/2008

Principal payment on 12/31/2008

Premium on bonds payable

Accrued interest payable

Issue price with warrants (5,000,000 x 120)

2. Interest expense (5,000,000 x 8%)

Cash (25,000 x 1000

PV of principal (8,000,000 x .61)

Dec.31 Cash (16,000 x 150)

Accumulated depreciation (1,500,000 / 5)

Total rent (100,000 x 51 months)

Cash (100,000 x 12)

Total rent (300,000 x 117 remaining months)

Cash (300,000 x 12)

Average annual rent (3,600,000 / 3)

Average annual rent (2,300,000 /5)

Deferred gain on sale and leaseback (500,000 /10 years)

Present value of rentals (1,000,000 x 6.328)

Dec.31 Interest expense

Loss on finance lease

PV of rentals (500,000 x 4.7908)

Percentage of present value to fair value (2,621,200 / 2,800,000)

Loss on finance lease

Percentage of present value to fair value (1,602,300 / 1,700,000)

Interest expense (12% x 2,160,000)

3. Accumulated depreciation (432,000 x 5)

Annual depreciation (935,150/ 4 years)

Books of Tiger Company (Lessee)

Accrued interest payable

Cost of equipment sold

The residual value is unguaranteed, so it is not included in the computation of

the lessees lease liability.

Residual value (1,000,000 x .57)

asset is transferred to the

2. Sales price (equal to present value of rentals)

Requirement 4 Journal entries

Present value of rentals (700,000 x 5.868)

1/1/2012 to 3/31/2012 (340,760 x 3/12)

1/1/2012 to 3/31/2012 (752,400 x 3/12)

Present value of gross rentals (875,000 x 5.8684)

Lease receivable 7/1/2013

Unearned interest income -1/1/2011

Current tax expense

Current tax expense

Current tax expense

Income tax payable (30% x 6,200,000)

Income before construction income

2. Deferred tax liability

Current tax expense (30%)