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ap -liab

Problem

1. Angel Corporation is selling audio and video appliances. The company’s fiscal year ends on March
31. The following information relates to the obligations of the company as of March 31, 2018:

Notes payable
Angel has signed several long-term notes with financial institutions. The maturities of these notes
are given below. The total unpaid interest for all of these notes amounts to P340,000 on March 31,
2018.

Due date Amount


April 31, 2018 P 600,000
July 31, 2018 900,000
September 1, 2018 450,000
February 1, 2019 450,000
April 1, 2019 – March 31, 2020 2,700,000
P 5,100,000

Estimated warranties
Angel has a one-year product warranty on some selected items. The estimated warranty liability on
sales made during the 2016 – 2017 fiscal year and still outstanding as of March 31, 2017,
amounted to P252,000. The warranty costs on sales made from April 1, 2017 to March 31, 2018,
are estimated at P630,000. The actual warranty costs incurred during 2017 – 2018 fiscal year are
as follows:

Warranty claims honored on 2016 – 2017 sales P 252,000


Warranty claims honored on 2017 – 2018 sales 285,000
Total P 537,000

Trade payables
Accounts payable for supplies, goods, and services purchases on open account amount to
P560,000 as of March 31, 2018.

Dividends
On March 10, 2018, Angel’ board of directors declared a cash dividend of P0.30 per common share
and a 10% common stock dividend. Both dividends were to be distributed on April 5, 2018 to
common stockholders on record at the close of business on March 31, 2018. As of March 31,
2018, Angel has 5 million, P2 par value, common shares issued and outstanding.

Bonds payable
Angel issued P5,000,000, 12% bonds, on October 1, 2012 at 96. The bonds will mature on October
1, 2022. Interest is paid semi-annually on October 1 and April 1. Angel uses the straight line
method to amortize bond discount.

QUESTIONS:

Based on the foregoing information, determine the adjusted balances of the following as of March
31, 2018:
1. Estimated warranty payable
a. P252,000 b. P345,000 c. P630,000 d. P882,000

2. Unamortized bond discount


a. P110,000 b. P200,000 c. P100,000 d. P90,000

3. Bond interest payable


a. P0 b. P300,000 c. P150,000 d. P250,000

4. Total current liabilities


a. P6,445,000 b. P5,105,000 c. P5,445,000 d. P3,945,000

5. Total noncurrent liabilities


a. P7,700,000 b. P7,590,000 c. P7,500,000 d. P7,610,000

2. Tris, INC., a dealer of household appliances, sells washing machines at an average price of
P8,100. The company also offers to each customer a separate 3-year warranty contract for P810
that requires the company to provide periodic maintenance services and to replace defective parts.
During 2017, Tris sold 300 washing machines and 270 warranty contracts for cash. The company
estimates that the warranty costs are P180 for parts and P360 for labor.

Assume sales occurred on December 31, 2017. Tris’s policy is to recognize income from the
warranties on a straight-line basis. In 2018, Tris incurred actual costs relative to 2017 warranty
sales of P18,000 for parts and P36,000 for labor.

1. What liability relative to these transactions would appear on the December 31, 2017,
statement of financial position and how would it be classified?
Current Noncurrent
A. P145,800 P72,900
B. P72,900 P72,900
C. P72,900 P145,800
D. P0 P218,700

2. What amount of warranty expense would be reported for 2017?


A. P18,000 B. P 0 C. P 36,000 D. P54,000

3. What liability relative to the 2017 warranties would be reported on December 31, 2018, and
how would it be classified?
Current Noncurrent
A. P145,800 P72,900
B. P72,900 P72,900
C. P72,900 P145,800
D. P145,800 P0

3. On July 1, 2018, Sherub Co. borrowed P1,000,000 on a 10%, five year note payable. On December
31, 2018, the fair value of the note is determined to be 795,000 based on market and interest
factors. The entity has a fair value option for reporting the financial liability.

1. What is the carrying amount of the note payable On December 31, 2018?
A. 1,000,000
B. 795,000
C. 500,000
D. 397,500

2. What should be reported as interest expense for 2018?


A. 100,000
B. 79,500
C. 50,000
D. 48,750

3. What is the loss or gain to be recognized in 2018 as a result of the fair value option?
A. 205,000 loss
B. 205,000 gain
C. 102,500 gain
D. 0

4. Distress Corporation has an overdue Notes Payable to Country Finance with the face amount of
P10,000,000 and accrued interest on December 31, 2018 of P1,000,000 based on 10% interest
rate. Because of financial difficulty, Distress offered Country Finance to settle the obligation by
issuing 150,000 shares of its ordinary share capital. The par value of each share is P50 and the
market value on this date is P65. Country Finance accepted the offer.

What amount should Distress include in profit or loss for the year 2018 as a result of the settlement
of the obligation?
A. P0
B. P1,250,000
C. P2,500,000
D. P3,500,000

5. The Feather Corporation received the following report from its actuary at the end of the year:
01/01/2017 12/31/2017
Present value of benefit obligation 5,200,000 5,920,000
Fair value of pension plan assets 5,000,000 5,760,000
Remeasurement gain or loss on plan assets ?
Remeasurement gain or( loss) on obligation (36,000)
Settlement rate 12%
Benefits paid during the year 740,000
Contributions made during the year 500,000

1. What is the amount of current service cost?


a. 600,000
b. 700,000
c. 800,000
d. 900,000
2. What is the amount of net benefit expense to be charged against income for the year 2017?
a. 824,000
b. 724,000
c. 746,800
d. 874,000
3. What is the amount of actual return on plan assets during 2017?
a. 800,000
b. 900,000
c. 1,000,000
d.1,100,000
4.What is the net remeasurement gain or loss during 2017?
a. None
b. 36,000
c.364,000
d. 400,000
5. What is the balance of the Accrued pension account as of 2017?
a. 160,000
b. 534,400
c. 524,400
d. 633,400

6. On December 1, 2015, the Lawrz Corporation issued five-year, non-convertible P5,000,000 face
value 12% bonds for P5,386,072, a price that yields 10%. Interest is payable semi-annually on June
1 and December 1. On August 1, 2018, the Emerald Corporation retired P3,000,000 of the bonds at
105 plus interest. The Accounting period for the Lawrz Corporation is the calendar year.

Q1. What is the carrying value of the bonds on December 31, 2016?
a. 5,306,515
b. 5,309,000
c. 5,309,010
d. 5,317,505

Q2. What is the carrying value of the bonds retired on August 1, 2018?
a. 3,125,172
b. 3,127,008
c. 3,129,355
d. 3,200,061
e. 3,122,038

Q3. What is the gain or loss on redemption of the bonds on August 1, 2018?
a. 24,828 loss
b. 24,848 loss
c. 24,828 gain
d. 24,848 gain
e. 27,962 loss

7. When the LUAYON MANUFACTURING COMPANY was expanding its metal window division, it did not have
enough capital to finance the expansion. So, management sought and received approval from the board of
directors to issue bonds. The company planned to issue P5,000,000 of 8 percent, five-year bonds in 2017.
Interest would be paid on June 30 and December 31 of each year. The bonds would be callable at 104.

On January 1, 2017, the bonds were sold at 96 because the market rate of interest for similar investment
was 9 percent. The company decided to amortize the bond discount by using the effective interest method.

On July 1, 2019, management called and retired half the bonds.


1. Carrying value of the bonds at December 31, 2017 is:
a. P 4,840,000 b. P 4,832,720 c. P 4,832,000 d. P 4,816,000

2. Carrying value of the bonds at December 31, 2018 is:


a. P 4,880,000 b. P 4,868,451 c. P 4,866,880 d. P 4,850,000

3. Interest expense at December 31, 2018 is:


a. P 432,000 b. P 432,720 c. P 435,731 d. P 437,339

4. Carrying value of retired bonds is:


a. P 2,500,000 b. P 2,456,235 c. P 2,450,000 d. P 2,443,765

5. Loss on early retirement of bonds is:


a. P 156,235 b. P 150,000 c. P 143,765 d. P 100,000

6. Interest expense on the bonds at December 31, 2019 is:


a. P 438,161 b. P 400,000 c. P 219,080 d. P 200,000
e.
329,049
8. At December 31, 2016, the Core Corporation had the following liability and equity account
balances:
11% Bonds payable, at face value P2,500,000
Premium on bonds payable 176,190
Common stock 4,000,000
Additional paid in capital 1,147,500
Retained earnings 1,232,500
Treasury stock, at cost 162,500
Transactions during 2017 and other information relating to the Corporation’s liability and equity
accounts were as follows:
? The bonds were issued on December 31, 2015, for P2,689,000 to yield 10%. The bonds mature
on December 31, 2022. Interest is payable annually on December 31. The Corporation uses the
effective interest method to amortize bond premium.
? At December 31, 2016, the corporation had 1,000,000 authorized shares of P10 par common
stock.
? On November 2, 2017, the Corporation borrowed P2,000,000 at 9%, evidenced by a note
payable to Premium Bank. The note is payable in five equal annual principal installments of
P400,000. The first principal and interest payment is due on November 2, 2018.
1. How much is the bond premium amortization for 2017?
a. P 7,381 b. P 6,710 c. P 6,500 d. P 6,100

2. What is the carrying value of the bonds payable on December 31, 2017?
a. P 2,689,000 b. P 2,682,900 c. P 2,676,190 d. P 2,668,809

3. How much is the 2017 interest expense on bonds payable?


a. P 275,000 b. P 268,900 c. P 268,290 d. P 267,619

4. What is the treasury stock balance on December 31, 2017?


a. P 165,200 b. P 163,500 c. P 162,500 d. P 162,000

5. What is the long-term portion of the note payable to bank as of December 31, 2017?
a. P 2,000,000 b. P 1,600,000 c. P 1,400,000 d. P 1,000,000
6. What is the 2017 total interest expense?
a. P 305,000 b. P 298,900 c. P 298,290 d. P 297,619
ap -liab
Answer Section

PROBLEM

1. ANS:
SUGGESTED ANSWERS: B, D, B, C, D
1 Warranty payable, 3/31/2017 252,000
Add warranty expense accrued during 2017-2018 630,000
Total 882,000
Less payments during 2017-2018 537,000
Warranty payable, 3/31/2018 345,000 B

2 Bond discount, 10/1/2012 (P5,000,000 x .04) 200,000


Discount amortization, 10/1/2012 to 3/31/2018 (P200,000/10 x 5.5) (110,000)
Bond discount, 3/31/2018 90,000 D

3 Bond interest payable, 10/1/2017 to 3/31/2018 (P5,000,000 x 12% x 300,000 B


6/12)

4 Notes payable - current (maturing up to 3/31/2019) 2,400,000


Accounts payable 560,000
Estimated warranty payable (see no. 1) 345,000
Cash dividends payable (5 million shares x P0.30) 1,500,000
Accrued interest:
Notes payable 340,000
Bonds payable (see no. 3) 300,000 640,000
Total current liabilities 5,445,000 C

5 Bonds payable:
Face value 5,000,000
Unamortized bond discount (see no. 2) (90,000) 4,910,000
Notes payable - non current 2,700,000
Total non current liabilities 7,610,000 D

PTS: 1

2. ANS:
1. C Unearned warranty revenue:
Current (P810 x 270 x 1/3) P72,900
Non-current (P810 x 270 x 2/3) P145,800

2. D Parts P18,000
Labor 36,000
Total warranty expense P54,000
3. B Unearned warranty revenue:
Current (P810 x 270 x 1/3) P72,900
Non-current (P810 x 270 x 1/3) P72,900

PTS: 1

3. ANS:
1. B
Carrying amount P795,000

2. C
Interest expense (1,000,000x10%x6/12) P50,000

3. B
Note payable 1,000,000
Fair value 975,000
Gain 205,000

PTS: 1

4. ANS:
Answer is B
Carrying value of liability. (10M +1M) P11,000,000
Market value of shares issued (150,000 x65) 9,750,000
Gain on restructuring of debt. P1,250,000

PTS: 1

5. ANS:
1. ANSWER: C
PV of benefit obligation, 12/31/2017 P5,920,000
Payment of benefits during 2017 740,000 P6,660,000
Less: beg. Bal. of obligation, 1/1/2017 P5,200,000
Interest costs 624,000
Remeasurement loss on obligation 2017 36,000 5,860,000
Current service cost 800,000
2.ANSWER: A
Current service cost (Schedule 1) P800,000
Interest cost (5,200,000x12%) 624,000
Interest income (5,000,000x12%) (600,000)
Net benefit expense P824,000
3. ANSWER: C
FV of pension plan assets, December 31, 2017 P5,760,000
Payment of benefits during 2017 740,000
Total P6,500,000
Less: PV of pension plan assets, 1/1/14 P5,000,000
Contribution during 2017 500,000 5,500,000
Actual return on plan assets during 2017 P1,000,000
4. ANSWER: C
Actual return on plan asset P1,000,000
Less: interest income (P5,000,000 x 12%) 600,000
Remeasurement gain P400,000
Remeasurement loss on obligation (36,000)
Net remeasurement P364,000
5. ANSWER: A
PV of benefit obligation, 12/31/14 P5,920,000
Plan assets, 12/31/14 5,760,000
Balance of accrued pension as of 12/31/14 160,000

PTS: 1

6. ANS:

1. Answer: D
Solution:
Carrying value, December 1, 2016 (see, table) P5,323,145
Amortization for one month (33,843%x%1/6) ( 5,640)
Carrying value, December 31, 2016 P5,317,505
2. Answer: A
Solution:
Carrying value of bonds retired on June 1, 2018
5,216,455 x 3/5 P3,129,873
Amortization through August 1, 2018
(23,506x2/6x3/5) (4,701)
Carrying value of bonds retired on August 1, 2018 P3,125,172

3. Answer: A
Solution:
Carrying value of bonds retired P 3,125,172
Redemption price (3M x1.05) (3,150,000)
Loss on redemption of bonds P 24,828

PTS: 1

7. ANS:

Solution
July 1,
2019 Bonds payable 2,500,000
Loss on bond retirement 156,235
Discount on BP 56,235
Cash 2,600,000

Interest Carrying
Date expense Interest paid Amortization Value
4,800,000
June 2017 215,000 200,000 16,000 4,816,000
December
2017 216,720 200,000 16,720 4,832,720
June 2018 217,472 200,000 17,472 4,850,192
December
2018 218,259 200,000 18,259 4,868,451
June 2019 219,080 200,000 19,080 4,887,531

PTS: 1

8. ANS:

Solution
Interest
Interest Carrying
Paid Expense Amort. Value
Dec. 31,
2015 2,689,000
2016 275,000 268,900 6,100 2,682,900
2017 275,000 268,290 6,710 2,676,190
2018 275,000 267,619 7,381 2,668,809
Answer:
1. B 2. C 3. C 4. C 5. B
6. Notes Payable P2,000,000 x 9% x 2/12 = P 30,000
Bonds payable 268,290
Total 298,290

PTS: 1