Answer Key (v1.

6)

APPENDIX
ANSWER KEY

CHAPTER 1 – LIABILITIES – INTRODUCTION

True or False
1. False 6. False 11. True
2. True 7. True 12. False
3. False 8. False 13. False
4. True 9. False 14. True
5. True 10. True 15. False

Multiple Choice – Theories

1. C 6. C
2. A 7. A
3. B 8. B
4. A 9. C
5. D 10. B

Straight Problems
1. PUPA Company

Current Noncurrent
Accounts payable P1,800,000
Unearned income 200,000
Warranty payable 500,000
Notes payable 800,000
Bonds payable 3,000,000
Lease liability 2,000,000
Pension liability 1,500,000
Income tax payable 900,000
P4,200,000 P6,500,000

2. SANSKRIT Company:
(Correction: P5M loan is bearing 10% interest, P7M loan is bearing 12% interest)
P5M loan P375,000 P5M x 10% x 9/12
P7M loan 350,000 P7M x 12% x 5*/12
P725,000 *7/31/23 – 12/31/23

1
Answer Key (v1.6)

3. DONBURI Company:
(Correction: All of the bonds and loan payable bear 9% interest)

P4M bond P90,000 P4M x 9% x 3/12

P10M loan 270,000 P6M* x 9% x 6/12
P7M bond 240,000 P8M x 9% x 4/12
P600,000

*P6M = P10M – P2M on 6/30/22 – P2M on 6/30/23

4. DARLING Company:

Current Noncurrent
Withholding tax payable P350,000
Accounts payable, (P2,500,000 + P50,000) 2,550,000
Unearned income 600,000
Credit balance in customer’s accounts 100,000
Mortgage payable P5,000,000
Bonds payable 7,000,000
Advances from customers 200,000
Income tax payable 900,000
Valued-added tax payable 450,000
Overdraft in Bank A 150,000
Salaries payable 300,000
Accrued utilities payable 240,000
Warranty liability 850,000
Accrued interest payable 500,000
Deferred tax liability 1,200,000
Dividends payable 750,000
P7,940,000 P13,200,000

5. MYSTERIOUS Company

Current Noncurrent
Accounts payable P1,200,000
Notes payable – trade 900,000
Income tax payable 700,000
6-year loan payable 5,000,000
Interest payable (P5M x 12% x 5/12) 250,000
7-year loan payable 7,000,000
Interest payable (P7M x 9% x 9/12) 472,500
4-year loan payable 6,000,000
Interest payable (P6M x 10% x 3/12) 150,000
8-year bond payable 4,000,000
2
Answer Key (v1.6)

Interest payable (P4M x 8% x 6/12) 160,000

5-year bond payable 1,200,000 1,800,000
P14,032,500 P14,800,000
6. VERONICA Company:
a. Current
b. Noncurrent
c. Current
d. Current
e. Noncurrent
f. Noncurrent
g. Current
h. Current, nevertheless, the extension shall be disclosed.

7. MECHANICAL Company
a. Current
b. Current, nevertheless, the granting of the grace period shall be disclosed.
c. Noncurrent
d. Current

8. VOLT Company

Current Noncurrent
Accounts payable (P1,900,000 + P70,000) P1,970,000
Credit balances in customers’ accounts 150,000
Overdraft in Bank B 160,000
Utilities payable 400,000
Loans payable:
Loan 1 – 5-year loan issued last October 1, 2022 5,000,000
Interest payable (P5M x 9% x 3/12) 112,500
Loan 2 – 10-year loan issued last January 1, 2017 6,000,000
Interest payable (P6M x 12% x 6/12) 360,000
Loan 3 – 7-year loan issued last June 30, 2017 8,000,000
Interest payable (P8M x 10% x 6/12) 400,000
Loan 4 – 20-year loan issued last April 1, 2015 4,000,000
Interest payable (P4M x 8% x 9/12) 240,000
P13,792,500 P13,000,000

9. APPLAUSE Company:

Current Noncurrent
Accounts payable P2,500,000
Income tax payable 900,000
Bonds payable:
Bond 1 – bears 8% interest 1,500,000 3,500,000
3
Answer Key (v1.6)

Interest payable (P5M x 8% x 6/12) 200,000

Bond 2 – bears 12% interest 7,000,000
Interest payable (P7M x 12% x 3/12) 210,000
Bond 3 – bears 9% interest 4,000,000
Bond 4 – bears 10% interest 6,000,000
Interest payable (P6M x 10% x 5/12) 250,000
P16,560,000 P9,500,000

Multiple Choice – Problems

1. C; A 6. D; C
2. B; D 7. B; B
3. A; C
4. B; D
5. A; B

CHAPTER 2 – ACCOUNTS PAYABLE AND NOTES PAYABLE

True or False
1. False 6. False
2. True 7. False
3. False 8. True
4. True 9. False
5. True 10. True

Multiple Choice – Theories

1. C 6. A
2. B 7. B
3. A 8. B
4. C 9. C
5. D 10. A

Straight Problems
1. CHERRY Company:

Accounts Payable
Payments to credit purchases P4,050,000 900,000 Beginning balance
(P2.45M + P1.6M)
Purchase discount 50,000 4,500,000 Gross credit purchases
(P2.45M/98%) x 2%
Purchase return or allowances 220,000
from unpaid credit purchases
Ending balance (squeeze) 1,080,000
Totals (should be equal) 5,400,000 5,400,000

2. MADONNA Company

4
Answer Key (v1.6)

Accounts Payable
Payments to credit purchases 5,708,000 1,400,000 Beginning balance
(P2,328K + P1,980K + P1,400K)
Purchase discount 92,000 5,400,000 Gross credit purchases
[(P2,328K/97%) * 3%] + (P600K/10%) – P600K
[(P1,980K/99%) x 1%]
Purchase return or allowances 340,000
from unpaid credit purchases
Ending balance (squeeze) 660,000
Totals (should be equal) 6,800,000 6,800,000

3. GRAY Company:

January 1, Building 5,000,000

2023 Note payable 5,000,000

December Interest expense 600,000

31, 2023 Cash (P5M x 12%) 600,000

December Interest expense 600,000

31, 2024 Cash (P5M x 12%) 600,000

4. CROCODILE Company:

Land 7,000,000
January 1,
Cash 1,000,000
2023
Note payable 6,000,000

December Interest expense 600,000

31, 2023 Cash (P6M x 10%) 600,000

December Note payable (P6M/4) 1,500,000

31, 2023 Cash 1,500,000

December Interest expense 450,000

31, 2024 Cash [(P6M – P1.5M) x 10%] 450,000

December Note payable (P6M/4) 1,500,000

31, 2024 Cash 1,500,000

5
Answer Key (v1.6)

5. SAMANTHA Company:

PV Cash Flow
PV Factor of Factor on Maturity Fair Value
Single payment for 5 periods at 9% 0.649931 P4,000,000 P2,599,724

Carrying Discount
Interest Amount/ on Notes
Date Expense Amort. Present Value Payable
Jan. 1, 2023 2,599,724 1,400,276
Dec. 31, 2023 233,975 233,975 2,833,699 1,166,301
Dec. 31, 2024 255,033 255,033 3,088,732 911,268

Transportation equipment 2,599,724

January 1,
Discount on notes payable 1,400,276
2023
Note payable 4,000,000

December Interest expense 233,975

31, 2023 Discount on notes payable 233,975

December Interest expense 255,033

31, 2024 Discount on notes payable 255,033

6. ANDREA Company:

(Correction: Change January 1, 2023 to May 1, 2023)

PV Cash Flow
PV Factor of Factor on Maturity Fair Value
Single payment for 6 periods at 8% 0.630170 P6,000,000 P3,781,020

Carrying Discount
Interest Amount/ on Notes
Date Expense Amort. Present Value Payable
May 1, 2023 P3,781,020 P2,218,980
April 30, 2024 302,482 302,482 4,083,502 1,916,498
April 30, 2025 326,680 326,680 4,410,182 1,589,818

Land (P3,781,020 + P2,000,000) 5,781,020

January 1,
Discount on notes payable 2,218,980
2023
Note payable 6,000,000
Cash 2,000,000

6
Answer Key (v1.6)

December Interest expense (P302,482 x 8/12) 201,655

31, 2023 Discount on notes payable 201,655

April 30, Interest expense (P302,482 x 4/12) 100,827

2024 Discount on notes payable 100,827

December Interest expense (P326,680 x 8/12) 217,787

31, 2024 Discount on notes payable 217,787

7. ROWENA Company

PV Periodic
PV Factor of Factor Payments Fair Value
Ordinary annuity for 5 periods at 10% 3.790787 P1,000,000 P3,790,787
Prin. Carrying Discount
Pmts Interest Amount/ Face on Notes
Date . Expense Amort. Present Value Amt. Payable
Jan. 1, 2023 3,790,787 5M 1,209,213
Dec. 31, 2023 1M 379,079 620,921 3,169,866 4M 830,134
Dec. 31, 2024 1M 316,987 683,013 2,486,853 3M 513,147

Equipment 3,790,787
January 1,
Discount on notes payable 1,209,213
2023
Note payable 5,000,000

December Interest expense 379,079

31, 2023 Discount on notes payable 379,079

December Note payable 1,000,000

31, 2023 Cash 1,000,000

December Interest expense 316,987

31, 2024 Discount on notes payable 316,987

December Note payable 1,000,000

31, 2024 Cash 1,000,000
8. LESLIE Company
PV Periodic
PV Factor of Factor Payments Fair Value
Ordinary annuity for 7 periods at 8% 5.206370 P1,200,000 P6,247,644
Note: P1,200,000 = P8,400,000/7 years
7
Answer Key (v1.6)

Carrying Discount
Prin. Interest Amount/ Face on Notes
Date Pmts. Expense Amort. Present Value Amt. Payable
Oct. 1, 2023 6,247,644 8.4M 2,152,356
Sept. 30, 2023 1.20M 499,812 700,188 5,547,456 7.2M 1,652,544
Sept. 31, 2024 1.20M 443,796 756,204 4,791,252 6.0M 1,208,748

Land 6,247,644
October 1,
Discount on notes payable 2,152,356
2023
Note payable 8,400,000

December Interest expense (P499,812 x 3/12) 124,953

31, 2023 Discount on notes payable 124,953

September Interest expense (P499,812 x 9/12) 374,859

30, 2024 Discount on notes payable 374,859

September Notes payable 1,200,000

30, 2024 Cash 1,200,000

December Interest expense (P443,796 x 3/12) 110,949

31, 2024 Discount on notes payable 110,949

9. JERICHO Company

PV Periodic
PV Factor of Factor Payments Fair Value
Single payment for 6 periods at 9% 0.596267 P7,000,000 P4,173,869
Ordinary annuity for 6 periods at 9% 4.485919 210,000 942,043
P5,115,912
Carrying Discount
Int. Interest Amount/ Face on Notes
Date Pmts. Expense Amort. Present Value Amt. Payable
Jan. 1, 2023 5,115,912 7M 1,884,088
Dec. 31, 2023 210K 460,432 250,432 5,366,344 7M 1,633,656
Dec. 31, 2024 210K 482,971 272,971 5,639,315 7M 1,360,685

Building 5,115,912
January 1,
Discount on notes payable 1,884,088
2023
Note payable 7,000,000

8
Answer Key (v1.6)

Interest expense 460,432

December
Discount on notes payable 250,432
31, 2023
Cash 210,000

Interest expense 482,971

December
Discount on notes payable 272,971
31, 2024
Cash 210,000

10. JAMES Company

April 1, Financial asset at FVTPL 6,000,000

2023 Financial liability 6,000,000

December Financial liability (P6M – P5.6M) 400,000

31, 2023 Unrealized gain – P/L 400,000

December Unrealized loss – P/L 150,000

31, 2024 Financial liability (P5.6M – P5.75M) 150,000

Multiple Choice – Problems

1. C 6. B; A; C; B
2. A; B 7. D; A; B; D
3. D 8. D; A
4. B; C 9. C; A; C
5. A; B; D; C

CHAPTER 3 – INTRODUCTION TO PROVISIONS

True or False
1. True 6. False 11. False
2. False 7. False 12. True
3. True 8. True
4. False 9. False
5. True 10. True

Multiple Choice – Theories

1. A 6. B 11. A
2. C 7. C 12. B
3. D 8. D 13. D
4. C 9. A 14. C
5. D 10. D 15. A

Straight Problems
1. *

9
Answer Key (v1.6)

Loss on provision 6,000,000

a
Provision (estimated liability) 6,000,000

No entry. Disclosure only

b
Reliable estimate cannot be made

Loss on provision (P4M x 80%) 3,200,000

c
Provision (estimated liability) 3,200,000

No entry. Disclosure only

d
Not probable.

No entry. Disclosure may be made

e
No present obligation

No entry. Disclosure may be made

f
No present obligation

2. *

No entry since the decision is yet to

a
reach the affected employees.

Loss on restructuring provision 8,000,000

b
Estimated liab. on restructuring 8,000,000

No entry since the costs are yet to be

c
incurred.

No entry since the costs are yet to be

d
incurred.

No entry since the costs are yet to be

e
incurred.

Loss on provision (P4M + P8M)/2 6,000,000

f
Provision (estimated liability) 6,000,000

3. MELANIE Company

Loss on provision 5,000,000

2023
Provision (estimated liability) 5,000,000

10
Answer Key (v1.6)

Provision (estimated liability) 2,700,000

2024
Cash 2,700,000

Loss on provision P2.8 M - (P5M – P2.7M ) 500,000

12/31/24
Provision (estimated liability) 500,000

4. VERONICA Company – No provision since it is not probable that the Company will
be held liable (i.e., probability of 35% is less than 50%).

5. PEREZ Company

Scenario 1:

[A] [B] [A] x [B]

Estimated Cash Outflow Probability Weighted Amounts
P1,800,000 30% 540,000
2,600,000 50% 1,300,000
3,500,000 20% 700,000
2,540,000

Scenario 2: (P1.8M + P3.5M)/2 = P2,650,000

6. December 31, 2023 – Disclosure only (only possible chance of liability)

December 31, 2024 – Recognition of provision (estimated liability) amounting to
P3,800,000.

7. DAMSEL Company

Loss on provision 1,200,000

2023
Provision (estimated liability) 1,200,000

Loss on provision (P1.5M – P1.2M) 300,000

2024
Provision (estimated liability) 300,000

8. SYLVESTER Company

Note disclosure only.

2023
Chance of loss is only possible.

Loss on provision 1,450,000

2024
Provision (estimated liability) 1,450,000

9. DRAGON Company

11
Answer Key (v1.6)

[A] [B] [A] x [B]

Estimated Cash Outflow Probability Weighted Amounts
P8,000,000 40% P3,200,000
6,000,000 40% 2,400,000
5,000,000 20% 1,000,000
6,600,000
Probability of loss (1 – 30%) 70%
4,620,000
Upward cash flow adj. (P4.62M x 10%) 462,000
5,082,000
PV factor of SP using 9% for 3 periods 0.772183
Provision, 12/31/23 P3,924,234
Interest expense (P3,924,234 x 9%) 353,181
Provision – unadjusted, 12/31/24 P4,277,415
Provision – adjusted, 12/31/24
(P7M x 100% x 0.857339) (6,001,372)
Loss on provision, 2024 P1,723,957

December Loss on provision 3,924,234

31, 2023 Provision (estimated liability) 3,924,234

December Interest expense 353,181

31, 2024 Provision (estimated liability) 353,181

December Loss on provision 1,723,957

31, 2024 Provision (estimated liability) 1,723,957

Multiple Choice – Problems

1. D 6. B
2. C
3. A
4. D
5. C

CHAPTER 4 – WARRANTIES
True or False
1. True 6. False
2. True 7. False
3. False 8. True
4. True 9. False
5. True 10. False

Multiple Choice – Theories

1. D 6. D
12
Answer Key (v1.6)

2. C 7. A
3. A
4. B
5. B

Straight Problems
1. JUMPSTART Company

Est. warranty expense (P36M x 4.50%) 1,620,000

2023
Est. warranty liability 1,620,000

Est. warranty liability 1,430,000

2023
Cash 1,430,000

Est. warranty liability = P1,500,000 + P1,620,000 – P1,430,000 = P1,690,000

2. DEMEANOR Company

80,000 x 4% x P600 P1,920,000

80,000 x 1% x P1,400 1,120,000
Est. warranty expense P3,040,000

Est. warranty expense 3,040,000

2023
Est. warranty liability 3,040,000

Est. warranty liability 3,220,000

2023
Cash 3,220,000

Est. warranty liability = P1,900,000 + P3,040,000 – P3,220,000 = P1,720,000

3. SANCTITY Company

Est. warranty expense (P24M x 3%) 720,000

2023
Est. warranty liability 720,000

Est. warranty liability 860,000

2023
Cash 860,000

Est. warranty expense (P29M x 3%) 870,000

2024
Est. warranty liability 870,000

Est. warranty liability 750,000

2023
Cash 750,000

13
Answer Key (v1.6)

Est. warranty liability, 12/31/23 = P930,000 + P720,000 – P860,000 = P790,000

Est. warranty liability, 12/31/24 = P790,000 + P870,000 – P750,000 = P910,000

4. SANCTUARY Company

Est. warranty expense (90K x 3% x 800) 2,160,000

2023
Est. warranty liability 2,160,000

Est. warranty liability 2,140,000

2023
Cash 2,140,000

Est. warranty expense (110K x 3% x 800) 2,640,000

2023
Est. warranty liability 2,640,000

Est. warranty liability 2,430,000

2023
Cash 2,430,000

Est. warranty liability, 12/31/23 = P850,000 + P2,160,000 – P2,140,000 = P870,000

Est. warranty liability, 12/31/24 = P870,000 + P2,640,000 – P2,430,000 =
P1,080,000

5. MESMERIZING Company (Correction: Ignore the requirements for the year 2024)

Cost of replacement product (P35M/100K) P350

Less: Net realizable value of defective product (80)
“Loss” to be absorbed by the entity P270
Add: Shipping costs shouldered by the entity 30
Total warranty cost per unit of replacement product P300

Est. warranty expense (80K x 2% x 300) 480,000

2023
Est. warranty liability 480,000

Est. warranty liability (1,050 x 300) 315,000

Inventory – defective (1,050 x 80) 84,000
2023
Inventory – new (1,050 x 350) 367,500
Cash (for shipping) (1,050 x 30) 31,500

Est. warranty liability, 12/31/23 = P72,000 + P480,000 – P315,000 = P237,000

6. AMBITIOUS Company

Est. warranty expense (P24M x 5%) 1,200,000

2022
Est. warranty liability 1,200,000

14
Answer Key (v1.6)

Est. warranty liability 680,000

2022
Cash 680,000

Est. warranty expense (P34M x 5%) –

2023 (P1.2M – 680K – 230K) 1,410,000
Est. warranty liability 1,410,000

Est. warranty liability 1,430,000

2023
Cash (1,200K + 230K) 1,430,000

Est. warranty expense (P32M x 5%) –

2024 [(P34M x 5%) – 1,200K – 400K] 1,500,000
Est. warranty liability 1,500,000

Est. warranty liability 1,450,000

2024
Cash (1,050K + 400K) 1,450,000

Est. warranty liability, 12/31/22 = 1,200,000 – 680,000 = 520,000

Est. warranty liability, 12/31/23 = 520,000 + 1,410,000 – 1,430,000 = 500,000
Est. warranty liability, 12/31/24 = 500,000 + 1,500,000 – 1,450,000 = 550,000

7. PROGRESSIVE Company

Est. warranty expense (P26M x 3%) 780,000

2023
Est. warranty liability 780,000

Est. warranty liability 900,000

2023
Cash 900,000

Est. warranty expense (P30M x 5%) 1,500,000

2024
Est. warranty liability 1,500,000

Est. warranty liability 1,650,000

2024
Cash 1,650,000

Est. warranty liability, 12/31/23 = 1,050,000 + 780,000 – 900,000 = 930,000

Est. warranty liability, 12/31/24 = 930,000 + 1,500,000 – 1,650,000 = 780,000

8. SAMARITAN Company

Allocation to P198,000
= P200,000 x = P180,000
Laptop P198,000 + P22,000

15
Answer Key (v1.6)

Allocation to P22,000
= P200,000 x = P20,000
Warranty P198,000 + P22,000

Cash 200,000
July 1,
Sales 180,000
2023
Contract liability – warranty 20,000

Contract liability – warranty

December
(20K/4) x 6/12 2,500
31, 2023
Income from warranty 2,500

Warranty expense 2,000

2024
Cash 2,000

December Contract liability – warranty (20K/4) 5,000

31, 2024 Income from warranty 5,000

Contract liability – warranty, 12/31/23 = P20,000 – P2,500 = P17,500

Contract liability – warranty, 12/31/24 = P17,500 – P5,000 = P12,500

9. POLARIS Company

January 1, Cash (P15K x 4) 60,000

2023 Contract liability – warranty 60,000

January 1, Cash (P18K x 5) 90,000

2023 Contract liability – warranty 90,000

April 1, Cash (P15K x 3) 45,000

2023 Contract liability – warranty 45,000

April 1, Cash (P18K x 2) 36,000

2023 Contract liability – warranty 36,000

October 1, Cash (P15K x 6) 90,000

2023 Contract liability – warranty 90,000

October 1, Cash (P18K x 4) 72,000

2023 Contract liability – warranty 72,000

December Contract liability – warranty 72,500

31, 2023 Income from warranty 72,500

16
Answer Key (v1.6)

2023 Warranty expense 15,000

Cash 15,000

Batch Income
January 1, 2023 [(P15K x 4)/3] x 12/12 P20,000
January 1, 2023 [(P18K x 5)/4] x 12/12 22,500
April 1, 2023 [(P15K x 3)/3] x 9/12 11,250
April 1, 2023 [(P18K x 2)/4] x 9/12 6,750
October 1, 2023 [(P15K x 6)/3] x 3/12 7,500
October 1, 2023 [(P18K x 4)/4] x 3/12 4,500
Total income from warranty, 2023 P72,500

Contract liability – warranty, 12/31/23 = P60,000 + P90,000 + 45,000 + 36,000 +

90,000 + 72,000 – P72,500 = P320,500

Batch Income
January 1, 2023 [(P15K x 4)/3] P20,000
January 1, 2023 [(P18K x 5)/4] 22,500
April 1, 2023 [(P15K x 3)/3] 15,000
April 1, 2023 [(P18K x 2)/4] 9,000
October 1, 2023 [(P15K x 6)/3] 30,000
October 1, 2023 [(P18K x 4)/4] 18,000
Total income from warranty, 2024 P114,500

December Contract liability – warranty 114,500

31, 2024 Income from warranty 114,500

2024 Warranty expense 20,000

Cash 20,000

Contract liability – warranty, 12/31/24 = P320,500 – P114,500 = P206,000

10. SIRIUS Company

January 1, Cash 3,600,000

2023 Contract liability – warranty 3,600,000

July 1, Cash 4,000,000

2023 Contract liability – warranty 4,000,000

2023 Cash 35,000,000

Sales revenue 35,000,000
17
Answer Key (v1.6)

2023 Est. warranty expense (P35M x 3%) 1,050,000

Est. warranty liability 1,050,000

2023 Warranty expense – service-type 800,000

Cash 800,000

2023 Est. warranty liability 1,200,000

Cash 1,200,000

December Contract liability – warranty 1,400,000

31, 2023 Income from warranty 1,400,000

Batch – Service-type Income

January 1, 2023 [(P3.6M)/4] P900,000
July 1, 2023 [(P4M)/4] x 6/12 500,000
Total income from warranty, 2023 P1,400,000

Estimated warranty liability, 12/31/23 = P640,000 + P1,050,000 – P1,200,000 =

P490,000
Contract liability – warranty, 12/31/23 = P3,600,000 + P4,000,000 – P1,400,000 =
P6,200,000

Multiple Choice – Problems

1. A; C 6. D; A
2. B; D 7. B; D; A; B
3. B; C
4. A; D; B
5. A; C; C; B

CHAPTER 5 – PREMIUMS AND OTHER DEFERRED INCOME ITEMS

True or False
1. False 6. False 11. True
2. False 7. True 12. False
3. True 8. False 13. True
4. True 9. False 14. False
5. True 10. True 15. False

Multiple Choice – Theories

1. B 6. A 11. C
2. E 7. C 12. C
3. C 8. A 13. B
4. A 9. D 14. C
5. C 10. A 15. A
18
Answer Key (v1.6)

Straight Problems
1. BULLFROG Company
Accounting under PAS 37:

Unit cost of item to be distributed as premiums P50

Expense or liability per unit of premium P50

Number of coupon or voucher included per unit of sold product 1

Multiply by: Total number of sold products 100,000
Total number of coupons (or its equivalent) distributed 100,000
Multiply by: Portion expected to be presented for redemption 40%
Total number coupons expected to be redeemed 40,000
Divide by: Number of coupons needed for one item of premium 4
Total number of premium items expected to be redeemed 10,000

Est. premium expense (10K x 50) 500,000

2023
Est. premium liability 500,000

Premium inventory (12K x 50) 600,000

2023
Cash 600,000

Est. premium liability 330,000

2023
Premium inventory 330,000

Accounting under PFRS 15:

Unit cost of item to be distributed as premiums P50

Discount per unit of premium P50

Number of coupon or voucher included per unit of sold product 1

Multiply by: Total number of sold products 100,000
Total number of coupons (or its equivalent) distributed 100,000
Multiply by: Portion expected to be presented for redemption 40%
Total number coupons expected to be redeemed 40,000
Divide by: Number of coupons needed for one item of premium 4
Total number of premium items expected to be redeemed 10,000

Discount per unit of premium P50

Multiply by: Expected number of premiums to be redeemed 10,000
Estimated stand-alone selling price of premiums P500,000

Total transaction price (also equal to stand-alone selling price of goods): 100,000 x
P75 = P7,500,000.
19
Answer Key (v1.6)

Allocation to P7,500,000
= P7,500,000 x = P7,031,250
Sold Goods P7,500,000 + P500,000
Allocation to P500,000
= P7,500,000 x = P468,750
Premium P7,500,000 + P500,000
Cash 7,500,000
2023 Sales revenue 7,031,250
Contract liability - premiums 468,750

Premium inventory (12K x 50) 600,000

2023
Cash 600,000

Premium expense 330,000

2023
Premium inventory 330,000

Contract liability – premiums 309,375

2023 Income from premiums
(468,750 x 6,600/10,000) 309,375

2. TOAD Company
Accounting under PAS 37:
Unit cost of item to be distributed as premiums P33.00
Add: Handling costs (e.g., shipping and other fees), if any 8.25
Less: Amounts to be received from redeeming customers, if any (10.00)
Expense or liability per unit of premium P31.25
Number of coupon or voucher included per unit of sold product 1
Multiply by: Total number of sold products 200,000
Total number of coupons (or its equivalent) distributed 200,000
Multiply by: Portion expected to be presented for redemption 80%
Total number coupons expected to be redeemed 160,000
Divide by: Number of coupons needed for one item of premium 10
Total number of premium items expected to be redeemed 16,000

Est. premium expense (16K x 31.25) 500,000

2023
Est. premium liability 500,000

Premium inventory (15K x 33) 495,000

2023
Cash 495,000

Est. premium liability (9.2K x 31.25) 287,500

2023
Cash (9.2K x 10) 92,000
20
Answer Key (v1.6)

Cash (tran. costs) (9.2K x 8.25) 75,900

Premium inventory (9.2K x 33) 303,600

Accounting under PFRS 15:

Unit cost of item to be distributed as premiums P33.00

Add: Handling costs (e.g., shipping and other fees), if any 8.25
Less: Amounts to be received from redeeming customers, if any (10.00)
Discount per unit of premium P31.25

Number of coupon or voucher included per unit of sold product 1

Multiply by: Total number of sold products 200,000
Total number of coupons distributed 200,000
Multiply by: Portion expected to be presented for redemption 40%
Total number coupons expected to be redeemed 80,000
Divide by: Number of coupons needed for one item of premium 5
Expected number of premiums to be redeemed 16,000

Discount per unit of premium P31.25

Multiply by: Expected number of premiums to be redeemed 16,000
Estimated stand-alone selling price of premiums P500,000

Total transaction price (also equal to stand-alone selling price of goods): 200,000 x
P47.50 = P9,500,000.

Allocation to P9,500,000
= P9,500,000 x = P9,025,000
Sold Goods P9,500,000 + P500,000
Allocation to P500,000
= P9,500,000 x = P475,000
Premium P9,500,000 + P500,000

Cash 9,500,000
2023 Sales revenue 9,025,000
Contract liability - premiums 475,000

Premium inventory (15K x 33) 495,000

2023
Cash 495,000

Premium expense (9.2K x 31.25) 287,500

Cash (9.2K x 10) 92,000
2023
Cash (tran. costs) (9.2K x 8.25) 75,900
Premium inventory (9.2K x 33) 303,600

2023 Contract liability – premiums 273,125

21
Answer Key (v1.6)

Income from premiums

(475,000 x 9,200/16,000) 273,125

3. MANGO Company
Accounting under PAS 37 (Year 2023):

Unit cost of item to be distributed as premiums P500

Expense or liability per unit of premium P500

Number of coupon or voucher included per unit of sold product 1

Multiply by: Total number of sold products (12M/150) 80,000
Total number of coupons (or its equivalent) distributed 80,000
Multiply by: Portion expected to be presented for redemption 25%
Total number coupons expected to be redeemed 20,000
Divide by: Number of coupons needed for one item of premium 20
Total number of premium items expected to be redeemed 1,000

Est. premium expense (1K x 500) 500,000

2023
Est. premium liability 500,000

Premium inventory (1.2K x 500) 600,000

2023
Cash 600,000

Est. premium liability (800 x 500) 400,000

2023
Premium inventory 400,000

Accounting under PAS 37 (Year 2024):

Unit cost of item to be distributed as premiums P500

Expense or liability per unit of premium P500

Number of coupon or voucher included per unit of sold product 1

Multiply by: Total number of sold products (15M/150) 100,000
Total number of coupons (or its equivalent) distributed 100,000
Multiply by: Portion expected to be presented for redemption 25%
Total number coupons expected to be redeemed 25,000
Divide by: Number of coupons needed for one item of premium 20
Total number of premium items expected to be redeemed 1,250

Est. premium expense (1.25K x 500) 625,000

2023
Est. premium liability 625,000

Premium inventory (1K x 500) 500,000

2023
Cash 500,000
22
Answer Key (v1.6)

Est. premium liability (1,100 x 500) 550,000

2023
Premium inventory 550,000

Accounting under PFRS 15 (Year 2023):

Unit cost of item to be distributed as premiums P500

Discount per unit of premium P500

Number of coupon or voucher included per unit of sold product 1

Multiply by: Total number of sold products (12M/150) 80,000
Total number of coupons (or its equivalent) distributed 80,000
Multiply by: Portion expected to be presented for redemption 25%
Total number coupons expected to be redeemed 20,000
Divide by: Number of coupons needed for one item of premium 20
Total number of premium items expected to be redeemed 1,000

Discount per unit of premium P500

Multiply by: Expected number of premiums to be redeemed 1,000
Estimated stand-alone selling price of premiums P500,000

Total transaction price (also equal to stand-alone selling price of goods):

P12,000,000.

Allocation to P12,000,000
= P12,000,000 x = P11,520,000
Sold Goods P12,000,000 + P500,000
Allocation to P500,000
= P12,000,000 x = P480,000
Premium P12,000,000 + P500,000
Cash 12,000,000
2023 Sales revenue 11,520,000
Contract liability - premiums 480,000

Premium inventory (1.2K x 500) 600,000

2023
Cash 600,000

Premium expense (800 x 500) 400,000

2023
Premium inventory 400,000

Contract liability – premiums 384,000

2023 Income from premiums
(480 x 800) 384,000

23
Answer Key (v1.6)

Accounting under PFRS 15 (Year 2024):

Unit cost of item to be distributed as premiums P500

Discount per unit of premium P500

Number of coupon or voucher included per unit of sold product 1

Multiply by: Total number of sold products (15M/150) 100,000
Total number of coupons (or its equivalent) distributed 100,000
Multiply by: Portion expected to be presented for redemption 25%
Total number coupons expected to be redeemed 25,000
Divide by: Number of coupons needed for one item of premium 20
Total number of premium items expected to be redeemed 1,250

Discount per unit of premium P500

Multiply by: Expected number of premiums to be redeemed 1,250
Estimated stand-alone selling price of premiums P625,000

Total transaction price (also equal to stand-alone selling price of goods):

P15,000,000.

Allocation to P15,000,000
= P15,000,000 x = P14,400,000
Sold Goods P15,000,000 + P625,000
Allocation to P625,000
= P15,000,000 x = P600,000
Premium P15,000,000 + P625,000
Cash 15,000,000
2023 Sales revenue 14,400,000
Contract liability - premiums 600,000

Premium inventory (1K x 500) 500,000

2023
Cash 500,000

Premium expense (1.1K x 500) 550,000

2023
Premium inventory 550,000

Contract liability – premiums 528,000

2023 Income from premiums
(480 x 1,100) 528,000

4. ORANGUTAN Company

24
Answer Key (v1.6)

Accounting under PAS 37 (Year 2023):

Unit cost of item to be distributed as premiums P120
Add: Handling costs (e.g., shipping and other fees), if any 20
Less: Amounts to be received from redeeming customers, if any (15)
Expense or liability per unit of premium P125
Number of coupon or voucher included per unit of sold product 1
Multiply by: Total number of sold products 200,000
Total number of coupons (or its equivalent) distributed 200,000
Multiply by: Portion expected to be presented for redemption 40%
Total number coupons expected to be redeemed 80,000
Divide by: Number of coupons needed for one item of premium 10
Total number of premium items expected to be redeemed 8,000

Est. premium expense (8K x 125) 1,000,000

2023
Est. premium liability 1,000,000

Premium inventory (7.5K x 120) 900,000

2023
Cash 900,000

Est. premium liability (6.4K x 125) 800,000

Cash (6.4K x 15) 96,000
2023
Cash (tran. costs) (6.4K x 20) 128,000
Premium inventory (6.4K x 120) 768,000

Accounting under PAS 37 (Year 2024):

Unit cost of item to be distributed as premiums P120
Add: Handling costs (e.g., shipping and other fees), if any 20
Less: Amounts to be received from redeeming customers, if any (15)
Expense or liability per unit of premium P125
Number of coupon or voucher included per unit of sold product 1
Multiply by: Total number of sold products 240,000
Total number of coupons (or its equivalent) distributed 240,000
Multiply by: Portion expected to be presented for redemption 40%
Total number coupons expected to be redeemed 96,000
Divide by: Number of coupons needed for one item of premium 10
Total number of premium items expected to be redeemed 9,600

Est. premium expense (9.6K x 125) 1,200,000

2023
Est. premium liability 1,200,000

2023 Premium inventory (12K x 120) 1,440,000

25
Answer Key (v1.6)

Cash 1,440,000

Est. premium liability (10K x 125) 1,250,000

Cash (10K x 15) 150,000
2023
Cash (tran. costs) (10K x 20) 200,000
Premium inventory (10K x 120) 1,200,000

Accounting under PFRS 15 (Year 2023):

Unit cost of item to be distributed as premiums P120

Add: Handling costs (e.g., shipping and other fees), if any 20
Less: Amounts to be received from redeeming customers, if any (15)
Discount per unit of premium P125

Number of coupon or voucher included per unit of sold product 1

Multiply by: Total number of sold products 200,000
Total number of coupons distributed 200,000
Multiply by: Portion expected to be presented for redemption 40%
Total number coupons expected to be redeemed 80,000
Divide by: Number of coupons needed for one item of premium 10
Expected number of premiums to be redeemed 8,000

Discount per unit of premium P125

Multiply by: Expected number of premiums to be redeemed 8,000
Estimated stand-alone selling price of premiums P1,000,000

Total transaction price (also equal to stand-alone selling price of goods): 200,000 x
P45 = P9,000,000.

Allocation to P9,000,000
= P9,000,000 x = P8,100,000
Sold Goods P9,000,000 + P1,000,000
Allocation to P1,000,000
= P9,000,000 x = P900,000
Premium P9,000,000 + P1,000,000

Cash 9,000,000
2023 Sales revenue 8,100,000
Contract liability - premiums 900,000

Premium inventory (7.5K x 120) 900,000

2023
Cash 900,000

Premium expense (6.4K x 125) 800,000

2023
Cash (6.4K x 15) 96,000
26
Answer Key (v1.6)

Cash (tran. costs) (6.4K x 20) 128,000

Premium inventory (6.4K x 120) 768,000

Contract liability – premiums 720,000

2023 Income from premiums (112.5
x 6,400) 720,000

Accounting under PFRS 15 (Year 2024):

Unit cost of item to be distributed as premiums P120

Add: Handling costs (e.g., shipping and other fees), if any 20
Less: Amounts to be received from redeeming customers, if any (15)
Discount per unit of premium P125

Number of coupon or voucher included per unit of sold product 1

Multiply by: Total number of sold products 240,000
Total number of coupons distributed 240,000
Multiply by: Portion expected to be presented for redemption 40%
Total number coupons expected to be redeemed 96,000
Divide by: Number of coupons needed for one item of premium 10
Expected number of premiums to be redeemed 9,600

Discount per unit of premium P125

Multiply by: Expected number of premiums to be redeemed 9,600
Estimated stand-alone selling price of premiums P1,200,000

Total transaction price (also equal to stand-alone selling price of goods): 240,000 x
P45 = P10,800,000.

Allocation to P10,800,000
= P10,800,000 x = P9,720,000
Sold Goods P10,800,000 + P1,200,000
Allocation to P1,200,000
= P10,800,000 x = P1,080,000
Premium P10,800,000 + P1,200,000

Cash 10,800,000
2023 Sales revenue 9,720,000
Contract liability - premiums 1,080,000

Premium inventory (12K x 120) 1,440,000

2023
Cash 1,440,000

Premium expense (10K x 125) 1,250,000

2023
Cash (10K x 15) 150,000
27
Answer Key (v1.6)

Cash (tran. costs) (10K x 20) 200,000

Premium inventory (10K x 120) 1,200,000

Contract liability – premiums 1,125,000

2023 Income from premiums (112.5
x 10,000) 1,125,000

5. LEMUR Company
Discount amount provided per point P1.00
Multiply by: Portion expected to be used by customers 75%
Stand-alone selling price of a point P0.75
Multiply by: Number of points distributed 1,000,000
Estimated stand-alone selling price of “points” P750,000
The total number of points that the entity expects to be redeemed is 750,000 points
(1,000,000 points x 75%).
Allocation to P100M
= P100M x = P99,255,583
Sold Goods P100M + P750K
Allocation to P750K
= P100M x = P744,417
Points P100M + P750K

2023 (180K/750K) x 744,417 P178,660

2024 (240K/750K) x 744,417 238,213

Cumulative income as of Dec. 31, 2025

[(180K + 240K + 120K)/800K] x 744,417 502,481
Income from 2023 and 2024 (178,660 + 238,213) (416,873)
2025 income from points P85,608

Year Beg. Contract Liab. Income from Points End. Contract Liab.
2023 P744,417 P178,660 P565,757
2024 565,757 238,213 327,544
2025 327,544 85,608 241,936

6. TARSIER Company
Discount amount provided per point P4.00
Multiply by: Portion expected to be used by customers 80%
Stand-alone selling price of a point P3.20
Multiply by: Number of points distributed (400M/200) 2,000,000
Estimated stand-alone selling price of “points” P6,400,000

28
Answer Key (v1.6)

The total number of points that the entity expects to be redeemed is 1,600,000
points (2,000,000 points x 80%).
Allocation to P400M
= P400M x = P393,700,787
Sold Goods P400M + P6.4M
Allocation to P6.4M
= P400M x = P6,299,213
Points P400M + P6.4M

2023 (200K/1,600K) x 6,299,213 P787,402

2024 (250K/1,600K) x 6,299,213 984,252
2025 (160K/1,600K) x 6,299,213 629,921

Cumulative income as of Dec. 31, 2025

[(200K + 250K + 160K + 220K)/1,500K] x 6,299,213 3,485,565
Income from 2023, 2024, 2025 (787,402 + 984,252 +629,921) (2,401,575)
2026 income from points P1,083,990

Year Beg. Contract Liab. Income from Points End. Contract Liab.
2023 P6,299,213 P787,402 P5,511,811
2024 5,511,811 984,252 4,527,559
2025 4,527,559 629,921 3,897,638
2026 3,897,638 1,083,990 2,813,648

7. GORILLA Company (Correction: Change June 30, 2024 to June 30, 2025)
Discount amount provided per coupon P250
Multiply by: Portion expected to be used by customers 70%
Stand-alone selling price of a coupon P175
Multiply by: Number of coupons distributed 10,000
Estimated stand-alone selling price of coupons P1,750,000
Estimated number of coupons to be used in redeeming free shirt is 7,000 coupons
(10,000 x 70%).
Transaction price of P10,000,000 (P250 x 40,000 shirts) shall be allocated as
follows:
Allocation to P10,000,000
= P10,000,000 x = P8,510,638
Sold Goods P10,000,000 + P1,750,000
Allocation to P1,750,000
= P10,000,000 x = P1,489,362
Coupons P10,000,000 + P1,750,000

Cash 10,000,000
2023 Sales revenue 8,510,638
Contract liability – coupons 1,489,362
29
Answer Key (v1.6)

Contract liability – coupons 957,447

2023 Income from coupons
(1,489,362 x 4,500/7,000) 957,447

Contract liability – coupons 425,532

2024 Income from coupons
(1,489,362 x 2,000/7,000) 425,532

Year Beg. Contract Liab. Income from Points End. Contract Liab.
2023 P1,489,362 P957,447 P531,915
2024 531,915 425,532 106,383

8. BABOON Company

Discount amount provided per stamp (500/5) P100

Multiply by: Portion expected to be used by customers 80%
Stand-alone selling price of a stamp P80
Multiply by: Number of stamps distributed 20,000
Estimated stand-alone selling price of stamps P1,600,000
Estimated number of stamps to be used in redeeming free meal pass is 16,000
stamps (20,000 x 80%).
Transaction price of P10,000,000 shall be allocated as follows:
Allocation to P10,000,000
= P10,000,000 x = P8,620,690
Sold Goods P10,000,000 + P1,600,000
Allocation to P1,600,000
= P10,000,000 x = P1,379,310
Stamps P10,000,000 + P1,600,000

Cash 10,000,000
2023 Sales revenue 8,620,690
Contract liability – stamps 1,379,310

Contract liability – stamps 1,034,483

2023 Income from stamps
(1,379,310 x 12,000/16,000) 1,034,483

Contract liability – stamps, 12/31/23 = P1,379,310 – P1,034,483 = P344,827

30
Answer Key (v1.6)

9. SAKI Company

Discount amount provided per rebate coupon P187.50

Multiply by: Portion expected to be used by customers 80%
Stand-alone selling price of a coupon P150
Multiply by: Number of coupons distributed 20,000
Estimated stand-alone selling price of coupons P3,000,000
Estimated number of stamps to be used in redeeming free meal pass is 16,000
stamps (20,000 x 80%).
Transaction price of P22,000,000 shall be allocated as follows:
Allocation to P22,000,000
= P22,000,000 x = P19,360,000
Sold Goods P22,000,000 + P3,000,000
Allocation to P3,000,000
= P22,000,000 x = P2,640,000
Rebates P22,000,000 + P3,000,000

Cash 22,000,000
2023 Sales revenue 19,360,000
Contract liability – rebates 2,640,000

Contract liability – rebates 1,320,000

2023 Income from rebates
(2,640,000 x 8,000/16,000) 1,320,000

Contract liability – rebates 742,500

2024 Income from rebates
(2,640,000 x 4,500/16,000) 742,500

Year Beg. Contract Liab. Income from Points End. Contract Liab.
2023 P2,640,000 P1,320,000 P1,320,000
2024 1,320,000 742,500 577,500

10. VERVET Company

Discount amount provided per rebate coupon P312.50

Multiply by: Portion expected to be used by customers 60%
Stand-alone selling price of a rebate P187.50
Multiply by: Number of rebates distributed 16,000
Estimated stand-alone selling price of rebates P3,000,000
Estimated number of stamps to be used in redeeming free meal pass is 9,600 stamps
(16,000 x 60%).
Transaction price of P27,000,000 shall be allocated as follows:
31
Answer Key (v1.6)

Allocation to P27,000,000
= P27,000,000 x = P24,300,000
Sold Goods P27,000,000 + P3,000,000
Allocation to P3,000,000
= P27,000,000 x = P2,700,000
Rebates P27,000,000 + P3,000,000
Cash 27,000,000
2023 Sales revenue 24,300,000
Contract liability – rebates 2,700,000

Contract liability – rebates 1,518,750

2023 Income from rebates
(2,700,000 x 5,400/9,600) 1,518,750

Year Beg. Contract Liab. Income from Points End. Contract Liab.
2023 P2,700,000 P1,518,750 P1,181,250

11. BONOBO Company

Cash 6,000,000
2023
Unearned income – gift cert. 6,000,000

Unearned income – gift cert. 4,116,000

2023
Sales revenue 4,116,000

Unearned income – gift cert. 84,000

2023
Income from breakage 84,000
Income from P4,116,000
= P120,000* x = P84,000
Breakage P5,880,000**
*P120,000 = P6,000,000 x 2%
**P5,880,000 = P6,000,000 x (1 – 2%)

Unearned Income
Actual usage by customers P4,116,000 P– Beginning balance
Income from breakage 84,000 6,000,000 Amounts received
Ending balance (squeeze) 1,800,000
Totals (should be equal) P6,000,000 P6,000,000
12. CHIMPANZEE Company

10/01/ Cash 10,000,000

2023 Unearned income – gift cert. 10,000,000

Oct. 2023 Unearned income – gift cert. 1,900,000

32
Answer Key (v1.6)

Sales revenue 1,900,000

Unearned income – gift cert. 2,850,000

Nov. 2023
Sales revenue 2,850,000

Unearned income – gift cert. 2,375,000

Dec. 2023
Sales revenue 2,375,000

Unearned income – gift cert. 375,000

12/31/23
Income from breakage 375,000
Income from P7,125,000**
= P500,000* x = P375,000
Breakage P9,500,000***
*P500,000 = P10,000,000 x 5%
**P7,125,000 = P1,900,000+P2,850,000+P2,375,000
***P9,500,000 = P10,000,000 x (1 – 5%)

Unearned Income
Actual usage by customers P7,125,000 P– Beginning balance
Income from breakage 375,000 10,000,000 Amounts received
Ending balance (squeeze) 2,500,000
Totals (should be equal) P10,000,000 P10,000,000

13. MARMOSET Company

Cash 7,000,000
2023 Sales revenue 6,650,000
Refund liability (7M x 5%) 350,000

Cost of goods sold (7M x 60%) 4,200,000

2023
Inventory 4,200,000

Asset for expected return 210,000

2023
Cost of goods sold (350K x 60%) 210,000

Refund liability 200,000

2023
Cash 200,000

Inventory (200K x 60%) 120,000

2023
Asset for expected return 120,000

14. COLUGO Company

33
Answer Key (v1.6)

Cash 30,000,000
2023 Sales revenue 28,200,000
Refund liability (30M x 6%) 1,800,000

Cost of goods sold (24M x 150K/200K) 18,000,000

2023
Inventory 18,000,000

Asset for expected return 1,320,000

2023
Cost of goods sold 1,320,000

Refund liability (30M x 6.4K/150K) 1,280,000

2023
Cash 1,280,000

Inventory (6.4K x 120) 768,000

2023 Cash (6.4K x 10) 64,000
Asset for expected return 704,000

Manufacturing cost per unit (P24M/200K) P120

Less: Cost per unit to recover the returned products (10)
Recovery asset per unit P110
Multiply by: Expected no. of books to be returned (200K x 6%) 12,000
Total recovery asset to be recognized P1,320,000

Multiple Choice – Problems

1. B; A; C; D 6. D; A; B
2. C; C; A; B; D 7. C; A
3. C; A 8. B; D
4. B; D 9. D; A; C
5. A; C

CHAPTER 6 – BONDS PAYABLE AND LOANS PAYABLE

True or False
1. False 6. False 11. False
2. True 7. True 12. False
3. False 8. True 13. True
4. True 9. False 14. True
5. False 10. True 15. True

Multiple Choice – Theories

1. B 6. A 11. A
2. D 7. B 12. A
3. A 8. A 13. B
4. C 9. D 14. C
5. D 10. D 15. A
34
Answer Key (v1.6)

Straight Problems
1. CONDOR Company

Cash 5,820,000
January 1,
Discount on bonds payable 180,000
2023
Bonds payable 6,000,000

Interest expense 525,000

December Discount on bonds payable
31, 2023 (180K/4 years) 45,000
Cash (P6M x 8%) 480,000

Interest expense 525,000

December
Discount on bonds payable 45,000
31, 2024
Cash 480,000

2. EAGLE Company

Cash (P4M x 105%) 4,200,000

January 1,
Premium on bonds payable 200,000
2023
Bonds payable 4,000,000

Interest expense 560,000

December
Premium on bonds payable (200K/5) 40,000
31, 2023
Cash (P6M x 10%) 600,000

Interest expense 560,000

December
Premium on bonds payable (200K/5) 40,000
31, 2024
Cash (P6M x 10%) 600,000

3. OSPREY Company

Cash (P5M x 94.60%) + 175K 4,905,000

July 1, Discount on bonds payable 270,000
2023 Bonds payable 5,000,000
Interest payable (P5M x 7% x 6/12) 175,000

Interest expense (P5M x 7% x 6/12) + 30K 205,000

Interest payable 175,000
December
Discount on bonds payable
31, 2023
(270K/4.5 years) x 6/12 30,000
Cash (P5M x 7%) 350,000

35
Answer Key (v1.6)

Interest expense 410,000

December Discount on bonds payable
31, 2024 (270K/4.5 years) 60,000
Cash (P5M x 7%) 350,000

4. HAWK Company
Initial premium of P900,000 shall be amortized as follows:

Year Beg. Bal. Ratio Amortization

2023 P10,000,000 10M/30M P300,000
2024 8,000,000 8M/30M 240,000
2025 6,000,000 6M/30M 180,000
2026 4,000,000 4M/30M 120,000
2027 2,000,000 2M/30M 60,000
P30,000,000 P900,000

Cash (P10M x 109%) 10,900,000

January 1,
Premium on bonds payable 900,000
2023
Bonds payable 10,000,000

Interest expense 700,000

December
Premium on bonds payable 300,000
31, 2023
Cash (P10M x 10%) 1,000,000

December Bonds payable 2,000,000

31, 2023 Cash 2,000,000

Interest expense 560,000

December
Premium on bonds payable 240,000
31, 2024
Cash (P8M x 10%) 800,000

December Bonds payable 2,000,000

31, 2024 Cash 2,000,000

5. OSPREY Company

Initial discount of P700,000 shall be amortized as follows:

36
Answer Key (v1.6)

Year Beg. Bal. Ratio Amortization

2023 P7,000,000 7M/28M P175,000
2024 6,000,000 6M/28M 150,000
2025 5,000,000 5M/28M 125,000
2026 4,000,000 4M/28M 100,000
2027 3,000,000 3M/28M 75,000
2028 2,000,000 2M/28M 50,000
2029 1,000,000 1M/28M 25,000
P28,000,000 P700,000

Cash 6,300,000
January 1,
Discount on bonds payable 700,000
2023
Bonds payable 7,000,000

Interest expense 805,000

December
Discount on bonds payable 175,000
31, 2023
Cash (P7M x 9%) 630,000

December Bonds payable 1,000,000

31, 2023 Cash 1,000,000

Interest expense 690,000

December
Discount on bonds payable 150,000
31, 2024
Cash (P6M x 9%) 540,000

December Bonds payable 1,000,000

31, 2024 Cash 1,000,000

6. BAZA Company

PV Periodic
PV Factor of Factor Payments Fair Value
Single payment for 6 periods at 12% 0.506631 P8,000,000 P4,053,048
Ordinary annuity for 6 periods at 12% 4.111407 800,000 3,289,126
P7,342,174
Carrying Discount
Int. Interest Amount/ Face on Bonds
Date Pmts. Expense Amort. Present Value Amt. Payable
Jan. 1, 2023 7,342,174 8M 657,826
Dec. 31, 2023 800K 881,061 81,061 7,423,235 8M 576,765
Dec. 31, 2024 800K 890,788 90,788 7,514,023 8M 485,977

37
Answer Key (v1.6)

Cash 7,342,174
January 1,
Discount on bonds payable 657,826
2023
Bonds payable 8,000,000

Interest expense 881,061

December
Discount on bonds payable 81,061
31, 2023
Cash 800,000

Interest expense 890,788

December
Discount on bonds payable 90,788
31, 2024
Cash 800,000

7. SWAN Company

PV Periodic
PV Factor of Factor Payments Fair Value
Single payment for 5 periods at 7% 0.712986 P9,000,000 P6,416,874
Ordinary annuity for 5 periods at 7% 4.100197 810,000 3,321,160
P9,738,034
Carrying Premium
Int. Interest Amount/ Face on Bonds
Date Pmts. Expense Amort. Present Value Amt. Payable
Jan. 1, 2023 9,738,034 9M 738,034
Dec. 31, 2023 810K 681,662 (128,338) 9,609,696 9M 609,696
Dec. 31, 2024 810K 672,679 (137,321) 9,472,375 9M 472,375

Cash 9,738,034
January 1,
Premium on bonds payable 738,034
2023
Bonds payable 9,000,000

Interest expense 681,662

December
Premium on bonds payable 128,338
31, 2023
Cash 810,000

Interest expense 672,679

December
Premium on bonds payable 137,321
31, 2024
Cash 810,000

8. GOOSE Company

Cash (P3M x 94%) 2,820,000

January 1,
Discount on bonds payable 180,000
2023
Bonds payable 3,000,000
38
Answer Key (v1.6)

January 1, Discount on bonds payable 100,000

2023 Cash 100,000

Interest expense 250,000

December Discount on bonds payable
31, 2023 (280K/4 years) 70,000
Cash (P3M x 6%) 180,000

Interest expense 250,000

December
Discount on notes payable 70,000
31, 2024
Cash 180,000

9. DUCK Company

PV Periodic
PV Factor of Factor Payments Fair Value
Single payment for 6 periods at 7% 0.666342 5,000,000 P3,331,710
Ordinary annuity for 6 periods at 7% 4.766540 500,000 2,383,270
P5,714,980
Less: Bond issue costs (252,690)
P5,462,290

[8%] Carrying Premium

Int. Interest Amount/ Face on Bonds
Date Pmts. Expense Amort. Present Value Amt. Payable
Jan. 1, 2023 5,462,290 5M 462,290
Dec. 31, 2023 500K 436,983 (63,017) 5,399,273 5M 399,273
Dec. 31, 2024 500K 431,942 (68,058) 5,331,215 5M 331,215

Cash 5,714,980
January 1,
Premium on bonds payable 714,980
2023
Bonds payable 5,000,000

January 1, Premium on bonds payable 252,690

2023 Cash 252,690

Interest expense 436,983

December
Premium on bonds payable 63,017
31, 2023
Cash 500,000

Interest expense 431,942

December
Premium on bonds payable 68,058
31, 2024
Cash 500,000
39
Answer Key (v1.6)

10. HUMMINGBIRD Company

Assumption 1 (Semi-annual interest payments)

EIR = 11%/2 = 5.5% Periods = 4 x 2 = 8

PV Periodic
PV Factor of Factor Payments Fair Value
Single payment for 8 periods at 5.5% 0.651599 4,000,000 P2,606,396
Ordinary annuity for 8 periods at 5.5% 6.334566 180,000 1,140,222
P3,746,618

Carrying Discount
Int. Interest Amount/ Face on Bonds
Date Pmts. Expense Amort. Present Value Amt. Payable
Jan. 1, 2023 3,746,618 4M 253,382
Jun. 30, 2023 180K 206,064 26,064 3,772,682 4M 227,318
Dec. 31, 2023 180K 207,498 27,498 3,800,180 4M 199,820
Jun. 30, 2024 180K 209,010 29,010 3,829,190 4M 170,810
Dec. 31, 2024 180K 210,605 30,605 3,859,795 4M 140,205

Cash 3,746,618
January 1,
Discount on bonds payable 253,382
2023
Bonds payable 4,000,000

Interest expense 206,064

June 30,
Discount on bonds payable 26,064
2023
Bonds payable 180,000

Interest expense 207,498

December
Discount on bonds payable 27,498
31, 2023
Cash 180,000

Interest expense 209,010

June 30,
Discount on bonds payable 29,010
2024
Cash 180,000

Interest expense 210,605

December
Discount on bonds payable 30,605
31, 2024
Cash 180,000

Assumption 2 (Quarterly interest payments)

EIR = 11%/4 = 2.75% Periods = 4 x 4 = 16

40
Answer Key (v1.6)

Periodic
PV Factor of PV Factor Payments Fair Value
Single payment for 16 periods at 2.75% 0.647874 4,000,000 P2,591,496
Ordinary annuity for 16 periods at 2.75% 12.804573 90,000 1,152,412
P3,743,908

[2.75%) Carrying Discount

Int. Interest Amount/ Face on Bonds
Date Pmts. Expense Amort. Present Value Amt. Payable
Jan. 1, 2023 3,743,908 4M 256,092
Mar. 31, 2023 90K 102,957 12,957 3,756,865 4M 243,135
Jun. 30, 2023 90K 103,314 13,314 3,770,179 4M 229,821
Sept. 30, 2023 90K 103,680 13,680 3,783,859 4M 216,141
Dec. 31, 2023 90K 104,056 14,056 3,797,915 4M 202,085
Mar. 31, 2024 90K 104,443 14,443 3,812,358 4M 187,642
Jun. 30, 2024 90K 104,840 14,840 3,827,198 4M 172,802
Sept. 30, 2024 90K 105,248 15,248 3,842,446 4M 157,554
Dec. 31, 2024 90K 105,667 15,667 3,858,113 4M 141,887

Cash 3,743,908
January 1,
Discount on bonds payable 256,092
2023
Bonds payable 4,000,000

Interest expense 102,957

March 31,
Discount on bonds payable 12,957
2023
Cash 90,000

Interest expense 103,314

June 30,
Discount on bonds payable 13,314
2023
Cash 90,000

Interest expense 103,680

September
Discount on bonds payable 13,680
30, 2023
Cash 90,000

Interest expense 104,056

December
Discount on bonds payable 14,056
31, 2023
Cash 90,000

Interest expense 104,443

March 31,
Discount on bonds payable 14,443
2024
Cash 90,000

41
Answer Key (v1.6)

Interest expense 104,840

June 30,
Discount on bonds payable 14,840
2024
Cash 90,000

Interest expense 105,248

September
Discount on bonds payable 15,248
30, 2024
Cash 90,000

Interest expense 105,667

December
Discount on bonds payable 15,667
31, 2024
Cash 90,000

11. KIWI Company

[A] Beg. [B] Interest Total Cash

Face Amounts Inflows
Year Amount [A] x 12% [B] + P1M
2023 8,000,000 960,000 P1,960,000
2024 7,000,000 840,000 1,840,000
2025 6,000,000 720,000 1,720,000
2026 5,000,000 600,000 1,600,000
2027 4,000,000 480,000 1,480,000
2028 3,000,000 360,000 1,360,000
2029 2,000,000 240,000 1,240,000
2030 1,000,000 120,000 1,120,000

Initial Fair
PV Factor of PV Factor Cash Flow Value
Single payment for 1 period at 10% 0.909091 1,960,000 1,781,818
Single payment for 2 periods at 10% 0.826446 1,840,000 1,520,661
Single payment for 3 periods at 10% 0.751315 1,720,000 1,292,262
Single payment for 4 periods at 10% 0.683013 1,600,000 1,092,821
Single payment for 5 periods at 10% 0.620921 1,480,000 918,963
Single payment for 6 periods at 10% 0.564474 1,360,000 767,685
Single payment for 7 periods at 10% 0.513158 1,240,000 636,316
Single payment for 8 periods at 10% 0.466507 1,120,000 522,488
Gross proceeds P8,533,014

[10%] Carrying Premium

Interest Amount/ Face on Bonds
Date Pmts. Expense Amort. Present Value Amt. Payable
Jan. 1, 2023 8,533,014 8M 533,014
Dec. 31, 2023 1,960K 853,301 (1,106,699) 7,426,315 7M 426,315
Dec. 31, 2024 1,840K 742,632 (1,097,368) 6,328,947 6M 328,947
42
Answer Key (v1.6)

Cash 8,533,014
January 1,
Premium on bonds payable 533,014
2023
Bonds payable 8,000,000

Bonds payable 1,000,000

December Interest expense 853,301
31, 2023 Premium on bonds payable 106,699
Cash 1,960,000

Bonds payable 1,000,000

December Interest expense 742,632
31, 2024 Premium on bonds payable 97,368
Cash 1,840,000

12. DODO Company

PV Periodic
PV Factor of Factor Payments Fair Value
Single payment for 6 periods at 9% 0.596267 7,000,000 4,173,869
Ordinary annuity for 6 periods at 9% 4.485919 490,000 2,198,100
6,371,969
[9%] Carrying
Interest Amount/
Date Pmts. Expense Amort. Present Value
Jan. 1, 2023 6,371,969
Dec. 31, 2023 490K 573,477 83,477 6,455,446
Dec. 31, 2024 490K 580,990 90,990 6,546,436

January 1, 2023 P6,371,969

Add: Partial amortization (83,477 x 3/12) 20,869
April 1, 2023 net proceeds P6,392,838
Add: Accrued interest payable (P7M x 7% x 3/12) 122,500
Total proceeds on April 1, 2023 P6,567,838

Cash 6,515,338
January 1, Discount on bonds payable 607,162
2023 Bonds payable 7,000,000
Interest payable 122,500

Interest expense (573,477 x 9/12) 430,108

December Interest payable 122,500
31, 2023 Discount on bonds payable 62,608
Cash (P7M x 7%) 490,000
43
Answer Key (v1.6)

Interest expense 580,990

December
Discount on bonds payable 90,990
31, 2024
Cash 490,000

13. NIGHTJAR Company

Principal P6,000,000
Less: Origination fees paid to bank (194,384)
Initial measurement of loan payable P5,805,616
Carrying Discount
Int. Interest Amount/ Face on Loans
Date Pmts. Expense Amort. Present Value Amt. Payable
Jan. 1, 2023 5,805,616 6M 194,384
Dec. 31, 2023 480K 522,505 42,505 5,848,121 6M 151,879
Dec. 31, 2024 480K 526,331 46,331 5,894,452 6M 105,548

Cash 5,805,616
January 1,
Discount on loans payable 194,384
2023
Loans payable 6,000,000

Interest expense 522,505

December
Discount on loans payable 42,505
31, 2023
Cash 480,000

Interest expense 526,331

December
Discount on loans payable 46,331
31, 2024
Cash 480,000

14. ROBIN Company

Principal P10,000,000
Less: Origination fees paid to bank (465,075)
Initial measurement of loan payable P9,534,925
Carrying Discount
Int. Interest Amount/ Face on Bonds
Date Pmts. Expense Amort. Present Value Amt. Payable
Jan. 1, 2023 9,534,925 10M 465,075
Dec. 31, 2023 3.00M 1,144,191 (1,855,809) 7,679,116 8M 320,884
Dec. 31, 2024 2.80M 921,494 (1,878,506) 5,800,610 6M 199,390

44
Answer Key (v1.6)

Cash 9,534,925
January 1,
Discount on loans payable 465,075
2023
Loans payable 10,000,000

Interest expense 1,144,191

December Loan payable 2,000,000
31, 2023 Discount on loans payable 144,191
Cash 3,000,000

Interest expense 921,494

December Loan payable 2,000,000
31, 2024 Discount on loans payable 121,494
Cash 2,800,000

Multiple Choice – Problems

1. B; C 6. B; D; D
2. D; C 7. A; B; C
3. A; B 8. B; D
4. C; D
5. B; C

CHAPTER 7 – COMPOUND FINANCIAL INSTRUMENTS

True or False
1. False 6. True
2. False 7. True
3. True 8. False
4. True 9. False
5. False 10. True

Multiple Choice – Theories

1. A 6. B
2. D 7. D
3. D 8. D
4. B 9. A
5. C 10. D

Straight Problems
1. OWL Company

Cash (P6M x 102%) 6,120,000

Discount on bonds payable (100% - 97%) x P6M 180,000
Bonds payable 6,000,000
Share premium – share warrants 300,000

45
Answer Key (v1.6)

2. PARROT Company

PV Periodic
PV Factor of Factor Payments Fair Value
Single payment for 6 periods at 6% 0.704961 7,000,000 4,934,727
Ordinary annuity for 6 periods at 6% 4.917324 560,000 2,753,701
Total proceeds 7,688,428

PV Periodic
PV Factor of Factor Payments Fair Value
Single payment for 6 periods at 7% 0.666342 7,000,000 4,664,394
Ordinary annuity for 6 periods at 7% 4.766540 560,000 2,669,262
Fair value of liability component 7,333,656

Cash 7,688,428
Premium on bonds payable 333,656
Bonds payable 7,000,000
Share premium – convertibility option
(7,688,428 – 7,333,656) 354,772

3. BLACKBIRD Company

Cash (3M x 98%) 2,940,000

Discount on bonds payable (100% - 94%) x P3M 180,000
Bonds payable 3,000,000
Share premium – share warrants 120,000

Allocation to Liability 2,820,000

= P125,000 x = 119,898
Component 2,940,000
Allocation to Equity 120,000
= P125,000 x = 5,102
Component 2,940,000

Share premium – share warrants 119,898

Discount on bonds payable 5,102
Cash 125,000

4. CHICKEN Company

Cash (5M x 109%) 5,450,000

Premium on bonds payable (105 – 100) x 5M 250,000
Bonds payable 5,000,000
Share premium – share warrants 200,000
46
Answer Key (v1.6)

Scenario 1:

Cash (100K x P35) 3,500,000

Share premium – share warrants 200,000
Share capital (100K x P30) 3,000,000
Share premium – issuance 700,000

Scenario 2:

Cash (40K x P35) 1,400,000

Share premium – share warrants
(40K/100K x 200K) 80,000
Share capital (40K x P30) 1,200,000
Share premium – issuance 280,000

Scenario 3:

Cash (70K x P35) 2,450,000

Share premium – share warrants
(70K/100K x 200K) 140,000
Share capital (70K x P30) 2,100,000
Share premium – issuance 490,000

5. BLUEBIRD Company

PV Periodic
PV Factor of Factor Payments Fair Value
Single payment for 6 periods at 9% 0.596267 9,000,000 5,366,403
Ordinary annuity for 6 periods at 9% 4.485919 900,000 4,037,327
Fair value of liability component 9,403,730

Cash (9M x 107%) 9,630,000

Premium on bonds payable 403,730
Bonds payable 9,000,000
Share premium – convertibility option
(9,630,000 – 9,403,730) 226,270

Carrying Premium
Int. Interest Amount/ Face on Bonds
Date Pmts. Expense Amort. Present Value Amt. Payable
Jan. 1, 2023 9,403,730 9M 403,730
Dec. 31, 2023 900K 846,336 (53,664) 9,350,066 9M 350,066
Dec. 31, 2024 900K 841,506 (58,494) 9,291,572 9M 291,572

47
Answer Key (v1.6)

Dec. 31, 2025 900K 836,241 (63,759) 9,227,813 9M 227,813

Dec. 31, 2026 900K 830,503 (69,497) 9,158,316 9M 158,316
Dec. 31, 2027 900K 824,248 (75,752) 9,082,564 9M 82,564
Dec. 31, 2028 900K 817,435 (82,564) 9,000,000 9M 0

Scenario 1:

Bonds payable 9,000,000

Premium on bonds payable 291,572
Share premium – conv. option 226,270
Share capital (9K x 20 x 40) 7,200,000
Share premium – issuance 2,317,842

Scenario 2:

Bonds payable (5K x 1,000) 5,000,000

Premium on bonds payable (291,572 x 5K/9K) 161,984
Share premium – conv. option (226,270 x 5K/9K) 125,706
Share capital (5K x 20 x 40) 4,000,000
Share premium – issuance 1,287,690

Scenario 3:

Bonds payable 9,000,000

Premium on bonds payable 227,813
Share premium – conv. option 226,270
Share capital (9K x 20 x 40) 7,200,000
Share premium – issuance 2,254,083

Scenario 4:

Bonds payable (6K x 1,000) 6,000,000

Premium on bonds payable (227,813 x 6K/9K) 151,875
Share premium – conv. option (226,270 x 6K/9K) 150,847
Share capital (6K x 20 x 40) 4,800,000
Share premium – issuance 1,502,722

6. CROW Company

PV Periodic
PV Factor of Factor Payments Fair Value
Single payment for 7 periods at 11% 0.481658 6,000,000 2,889,948
Ordinary annuity for 7 periods at 11% 4.712196 600,000 2,827,318
Fair value of liability component 5,717,266
48
Answer Key (v1.6)

Cash (6M x 101%) 6,060,000

Bonds payable 5,717,266
Share premium – convertibility option 342,734

Scenario 1:

Bonds payable (6M x 102%) 6,120,000

Share premium – conv. option 342,734
Share capital (3K x 100 x 15) 4,500,000
Share premium – issuance 1,962,734

Scenario 2:

Bonds payable (1,200 x 2,000 x 102%) 2,448,000

Share premium – conv. option (342,734 x 1.2K/3K) 137,094
Share capital (1.2K x 100 x 15) 1,800,000
Share premium – issuance 785,094

Scenario 3:

Bonds payable (6M x 98%) 5,880,000

Share premium – conv. option 342,734
Share capital (3K x 100 x 15) 4,500,000
Share premium – issuance 1,722,734

Scenario 4:

Bonds payable (2,400 x 2,000 x 98%) 4,704,000

Share premium – conv. option (342,734 x 2.4K/3K) 274,187
Share capital (2.4K x 100 x 15) 3,600,000
Share premium – issuance 1,378,287

7. PENGUIN Company

PV Periodic
PV Factor of Factor Payments Fair Value
Single payment for 7 periods at 8% 0.583490 8,000,000 4,667,920
Ordinary annuity for 7 periods at 8% 5.206370 480,000 2,499,058
Fair value of liability component, 1/1/23 7,166,978
Less: Proceeds 7,920,000
Share premium – share warrants 753,022

49
Answer Key (v1.6)

Carrying Discount
Int. Interest Amount/ Face on Bonds
Date Pmts. Expense Amort. Present Value Amt. Payable
Jan. 1, 2023 7,166,978 8M 833,022
Dec. 31, 2023 480K 573,358 93,358 7,260,336 8M 739,664
Dec. 31, 2024 480K 580,827 100,827 7,361,163 8M 638,837
Dec. 31, 2025 480K 588,893 108,893 7,470,056 8M 529,944

PV Periodic
PV Factor of Factor Payments Fair Value
Single payment for 4 periods at 7% 0.762895 8,000,000 6,103,160
Ordinary annuity for 4 periods at 7% 3.387211 480,000 1,625,861
Retirement price allocated to liability component, 12/31/25 7,729,021
Less: Proceeds 7,840,000
Reduction of share premium – share warrants 110,979

Bonds payable 8,000,000

Loss on retirement – P/L (7,729,021 – 7,470,056) 258,965
Share premium – share warrants 110,979
Discount on bonds payable 529,944
Cash 7,840,000

8. FINCH Company

PV Periodic
PV Factor of Factor Payments Fair Value
Single payment for 4 periods at 9% 0.708425 8,000,000 5,667,400
Ordinary annuity for 4 periods at 9% 3.239720 640,000 2,073,421
Fair value of liability component, 1/1/23 7,740,821
Less: Proceeds 8,350,000
Share premium – convertibility option 609,179

Carrying Discount
Int. Interest Amount/ Face on Bonds
Date Pmts. Expense Amort. Present Value Amt. Payable
Jan. 1, 2023 7,740,821 8M 259,179
Dec. 31, 2023 640K 696,674 56,674 7,797,495 8M 202,505
Dec. 31, 2024 640K 701,775 61,775 7,859,270 8M 140,730

50
Answer Key (v1.6)

PV Periodic
PV Factor of Factor Payments Fair Value
Single payment for 2 periods at 10% 0.826446 8,000,000 6,611,568
Ordinary annuity for 2 periods at 10% 1.735537 640,000 1,110,744
Retirement price allocated to liability component, 12/31/24 7,722,312
Less: Proceeds 8,050,000
Reduction of share premium – share warrants 327,688

Bonds payable 8,000,000

Share premium – share warrants 327,688
Gain on retirement – P/L
(7,859,270 – 7,722,312) 136,958
Discount on bonds payable 140,730
Cash 8,050,000

Multiple Choice – Problems

1. D; B; A; B
2. C; B; C; A
3. B; D; A; B
4. D; B
5. A; C

CHAPTER 8 – EXTINGUISHMENT OF FINANCIAL LIABILITIES

True or False
1. True 6. False 11. False
2. False 7. False 12. True
3. False 8. True 13. False
4. True 9. False 14. True
5. True 10. True 15. True
Multiple Choice – Theories
1. A 6. C
2. C 7. B
3. B 8. C
4. D 9. B
5. D 10. D
Straight Problems
1. WARBLER Company
PV Periodic
PV Factor of Factor Payments Fair Value
Single payment for 6 periods at 10% 0.564474 4,000,000 2,257,896
Ordinary annuity for 6 periods at 10% 4.355261 480,000 2,090,525
Initial carrying amount, 1/1/21 4,348,421

51
Answer Key (v1.6)

Carrying Premium
Int. Interest Amount/ Face on Bonds
Date Pmts. Expense Amort. Present Value Amt. Payable
Jan. 1, 2021 4,348,421 4M 348,421
Dec. 31, 2021 480K 434,842 (45,158) 4,303,263 4M 303,263
Dec. 31, 2022 480K 430,326 (49,674) 4,253,589 4M 253,589
Dec. 31, 2023 480K 425,359 (54,641) 4,198,948 4M 198,948
Dec. 31, 2024 480K 419,895 (60,105) 4,138,843 4M 138,843

Scenario 1:

Bonds payable 4,000,000

Premium on bonds payable 198,948
Loss on retirement – P/L 101,052
Cash 4,300,000

Scenario 2:

Bonds payable 4,000,000

Premium on bonds payable 138,843
Cash 4,120,000
Gain on retirement – P/L 18,843

Scenario 3:

Bonds payable 4,000,000

Premium on bonds payable 253,589
Cash 4,200,000
Gain on retirement – P/L 53,589

2. WARBLER Company
Periodic
PV Factor of PV Factor Payments Fair Value
Single payment for 7 periods at 7% 0.622750 5,000,000 3,113,750
Ordinary annuity for 7 periods at 7% 5.389289 450,000 2,425,180
Initial carrying amount, 1/1/22 5,538,930

52
Answer Key (v1.6)

Carrying Premium
Int. Interest Amount/ Face on Bonds
Date Pmts. Expense Amort. Present Value Amt. Payable
Jan. 1, 2022 5,548,930 5M 548,930
Dec. 31, 2022 450K 387,725 (62,275) 5,476,655 5M 476,655
Dec. 31, 2023 450K 383,366 (66,634) 5,410,021 5M 410,021
Dec. 31, 2024 450K 378,701 (71,299) 5,338,722 5M 338,722
Dec. 31, 2025 450K 373,711 (76,289) 5,262,433 5M 262,433

Scenario 1:

Bonds payable (5M/2) 2,500,000

Premium on bonds payable (410,021/2) 205,011
Cash 2,600,000
Gain on retirement – P/L 105,011

Scenario 2:

Bonds payable (5M x 40%) 2,000,000

Premium on bonds payable (338,722 x 40%) 135,489
Loss on retirement – P/L 114,511
Cash 2,250,000

Scenario 3:

Bonds payable (5M x 4K/5K) 4,000,000

Premium on bonds payable (262,433 x 4K/5K) 209,946
Cash 4,150,000
Gain on retirement – P/L 59,946

Scenario 4:

Bonds payable (5M x 3K/5K) 3,000,000

Premium on bonds payable (338,722 x 3K/5K) 203,233
Loss on retirement – P/L 196,767
Cash 3,400,000

3. CRANE Company’

PV Periodic
PV Factor of Factor Payments Fair Value
Single payment for 7 periods at 14% 0.399637 6,000,000 2,397,822
Ordinary annuity for 7 periods at 14% 4.288305 720,000 3,087,580
Initial carrying amount, 1/1/23 5,485,402
53
Answer Key (v1.6)

Carrying Discount
Int. Interest Amount/ Face on Bonds
Date Pmts. Expense Amort. Present Value Amt. Payable
Jan. 1, 2023 5,485,402 6M 514,598
Dec. 31, 2023 720K 767,956 47,956 5,533,358 6M 466,642
Dec. 31, 2024 720K 774,670 54,670 5,588,028 6M 411,972
Dec. 31, 2025 720K 782,324 62,324 5,650,352 6M 349,648
Dec. 31, 2026 720K 791,049 71,049 5,721,401 6M 278,599

Scenario 1:

Carrying amount, 12/31/23 5,533,358

Add: Partial amortization (54,670 x 3/12) 13,668
Carrying amount, 4/1/24 5,547,026

Interest expense (774,670 x 3/12) 193,668

Interest payable (6M x 12% x 3/12) 180,000
Discount on bonds payable 13,668

Interest payable 180,000

Bonds payable 6,000,000
Cash (5,480,000 + 180,000) 5,660,000
Discount on bonds payable
(466,642 – 13,668) 452,974
Gain on retirement (5.48M – 5,547,026) 67,026

Scenario 2:

Carrying amount, 12/31/23 5,533,358

Add: Partial amortization (54,670 x 9/12) 41,003
Carrying amount, 9/30/24 5,574,361

Interest expense (774,670 x 9/12) 581,003

Interest payable (6M x 12% x 9/12) 540,000
Discount on bonds payable 41,003

Interest payable 540,000

Bonds payable 6,000,000
Cash 5,940,000
Discount on bonds payable
(466,642 – 41,003) 425,639
Gain on retirement (5.94M – 5,574,361 – 540K) 174,361

54
Answer Key (v1.6)

Scenario 3:

Carrying amount, 12/31/24 5,588,028

Add: Partial amortization (62,324 x 6/12) 31,162
Carrying amount, 7/1/25 5,619,190

Interest expense (782,324 x 6/12) 391,162

Interest payable (6M x 12% x 6/12) 360,000
Discount on bonds payable 31,162

Interest payable 360,000

Bonds payable 6,000,000
Loss on retirement (5.75M – 5,619,190) 130,810
Cash (5.75M + 360K) 6,110,000
Discount on bonds payable
(411,972 – 31,162) 380,810

Scenario 4:

Carrying amount, 12/31/24 5,588,028

Add: Partial amortization (62,324 x 1/12) 5,194
Carrying amount, 2/1/25 5,593,222

Interest expense (782,324 x 1/12) 65,194

Interest payable (6M x 12% x 1/12) 60,000
Discount on bonds payable 5,194

Interest payable 60,000

Bonds payable 6,000,000
Cash 5,610,000
Gain on retirement 43,222
Discount on bonds payable
(411,972 – 5,194) 406,778

Scenario 5:

Carrying amount, 12/31/25 5,650,352

Add: Partial amortization (71,049 x 8/12) 47,366
Carrying amount, 9/1/26 5,697,718

Interest expense (791,049 x 8/12) 527,366

Interest payable (6M x 12% x 8/12) 480,000
Discount on bonds payable 47,366

55
Answer Key (v1.6)

Interest payable 480,000

Bonds payable 6,000,000
Cash 6,000,000
Gain on retirement 177,718
Discount on bonds payable
(349,648 – 47,366) 302,282

4. FALCON Company

Periodic
PV Factor of PV Factor Payments Fair Value
Single payment for 2 periods at 9% 0.841680 7,000,000 5,891,760
Ordinary annuity for 2 periods at 9% 1.759111 560,000 985,102
Carrying amount, 12/31/23 6,876,862
Discount on loans payable (7M – 6,876,862) 123,138

Scenario 1:

Loans payable 7,000,000

Discount on loans payable 123,138
Share capital (200K x 25) 5,000,000
Share premium (32 – 25) x 200K 1,400,000
Gain on extinguishment 476,862

Scenario 2:

Loans payable 7,000,000

Loss on extinguishment 523,138
Discount on loans payable 123,138
Share capital (200K x 25) 5,000,000
Share premium (37 – 25) x 200K 2,400,000

Scenario 3:

Loans payable 7,000,000

Discount on loans payable 123,138
Share capital (200K x 25) 5,000,000
Share premium (6.7M – 5M) 1,700,000
Gain on extinguishment 176,862

Scenario 4:

56
Answer Key (v1.6)

Loans payable 7,000,000

Loss on extinguishment 223,138
Discount on loans payable 123,138
Share capital (200K x 25) 5,000,000
Share premium (7.1M – 5M) 2,100,000

Scenario 5:
Loans payable 6,000,000
Discount on loans payable 123,138
Share capital (200K x 25) 5,000,000
Share premium 876,862

5. OSTRICH Company
Periodic
PV Factor of PV Factor Payments Fair Value
Single payment for 8 periods at 9% 0.501866 8,000,000 4,014,928
Ordinary annuity for 8 periods at 9% 5.534819 640,000 3,542,284
Initial fair value, 1/1/23 7,557,212

Carrying Discount
Int. Interest Amount/ Face on Bonds
Date Pmts. Expense Amort. Present Value Amt. Payable
Jan. 1, 2023 7,557,212 8M 442,788
Dec. 31, 2023 640K 680,149 40,149 7,597,361 8M 402,639
Dec. 31, 2024 640K 683,762 43,762 7,641,123 8M 358,877
Dec. 31, 2025 640K 687,701 47,701 7,688,824 8M 311,176
Dec. 31, 2026 640K 691,994 51,994 7,740,818 8M 259,182
Scenario 1:
Bonds payable 8,000,000
Discount on bonds payable 358,877
Share capital (650K x 10) 6,500,000
Share premium (11 – 10) x 650K 650,000
Gain on extinguishment 491,123
Scenario 2:
Bonds payable 8,000,000
Loss on extinguishment 191,176
Discount on bonds payable 311,176
Share capital (700K x 10) 7,000,000
Share premium (8M x 98.5%) – 7M 880,000

57
Answer Key (v1.6)

Scenario 3:
Carrying amount, 12/31/25 7,688,824
Add: Partial amortization (51,994 x 6/12) 25,997
Carrying amount, 7/1/26 7,714,821
Interest expense (691,994 x 6/12) 345,997
Interest payable (8M x 8% x 6/12) 320,000
Discount on bonds payable 25,997
Bonds payable 8,000,000
Interest payable 320,000
Loss on extinguishment 125,179
Discount on bonds payable (311,176 – 25,997) 285,179
Share capital (680K x 10) 6,800,000
Share premium (12 – 10) x 680K 1,360,000

6. CASSOWARY Company

Periodic Present
PV Factor of PV Factor Payments Value
Single payment for 6 periods at 10% 0.564474 6,000,000 3,386,844
Ordinary annuity for 6 periods at 10% 4.355261 540,000 2,351,841
5,738,685
Less: Carrying amount 6,000,000
Difference 261,315
Divide by: Carrying amount 6,000,000
Difference in % (<10%, i.e., not substantial modification) 4.36%

Discount on loan payable 388,969

Gain on modification 388,969

Discount on loan payable 261,315

Gain on modification 261,315

Interest expense 573,869

Discount on loan payable 33,869
Cash 540,000

58
Answer Key (v1.6)

7. NIGHTINGALE Company (Change modification costs to P906,603)

Year Periodic Present

(12/31) PV Factor of PV Factor Payments Value
2024 Single payment for 1 period at 5% 0.952381 0 0
2025 Single payment for 2 periods at 5% 0.907029 500,000 453,515
2026 Single payment for 3 periods at 5% 0.863838 500,000 431,919
2027 Single payment for 4 periods at 5% 0.822702 500,000 411,351
2028 Single payment for 5 periods at 5% 0.783526 500,000 391,763
2029 Single payment for 6 periods at 5% 0.746215 500,000 373,108
2030 Single payment for 7 periods at 5% 0.710681 500,000 355,341
2031 Single payment for 8 periods at 5% 0.676839 10,500,000 7,106,810
9,523,807
Less: Carrying amount 10,500,000
Difference 976,193
Divide by: Carrying amount 10,500,000
Difference in % (<10%, i.e., not substantial modification) 9.30%

December 31, 2023:

Discount on loan payable 476,193
Interest payable 500,000
Gain on modification 976,193

December 31, 2023:

Discount on loan payable 906,603
Cash 906,603

December 31, 2024:

Interest expense (8,617,204 x 6.50%) 560,118
Discount on loan payable 560,118

8. SWIFT Company

Periodic Present
PV Factor of PV Factor Payments Value
Single payment for 6 periods at 7% 0.666342 6,000,000 3,998,052
Ordinary annuity for 6 periods at 7% 4.766540 300,000 1,429,962
5,428,014

|P8,560,000 – (P5,428,014 + P200,000)|

Difference (in %) = = 34.25%
P8,560,000

59
Answer Key (v1.6)

Scenario 1 – Traditional Approach

Loan payable – old 8,000,000

Interest payable 560,000
Discount on loan payable – new 571,986
Gain on extinguishment 3,131,986
Loan payable – new 6,000,000

Gain on extinguishment 200,000

Cash 200,000

Scenario 2 – Contemporary Approach

Periodic Present
PV Factor of PV Factor Payments Value
Single payment for 6 periods at 6% 0.704961 6,000,000 4,229,766
Ordinary annuity for 6 periods at 6% 4.917324 300,000 1,475,197
5,704,963

Loan payable – old 8,000,000

Interest payable 560,000
Discount on loan payable – new 295,037
Gain on extinguishment 2,855,037
Loan payable – new 6,000,000

Gain on extinguishment 200,000

Cash 200,000

9. PELICAN Company

Year Periodic Present

(12/31) PV Factor of PV Factor Payments Value
2024 Single payment for 1 period at 9% 0.917431
2025 Single payment for 2 periods at 9% 0.841680
2026 Single payment for 3 periods at 9% 0.772183 420,000 324,317
2027 Single payment for 4 periods at 9% 0.708425 420,000 297,539
2028 Single payment for 5 periods at 9% 0.649931 420,000 272,971
2029 Single payment for 6 periods at 9% 0.596267 420,000 250,432
2030 Single payment for 7 periods at 9% 0.547034 7,420,000 4,058,992
5,204,251

|P9,000,000 – (P5,204,251)|
Difference (in %) = = 42.17%
P9,000,000

60
Answer Key (v1.6)

Scenario 1 – Traditional Approach

Loan payable – old 9,000,000

Discount on loan payable – new 1,795,749
Gain on extinguishment 3,795,749
Loan payable – new 7,000,000

Gain on extinguishment 320,000

Cash 320,000

Scenario 2 – Contemporary Approach

Year Periodic Present

(12/31) PV Factor of PV Factor Payments Value
2024 Single payment for 1 period at 8% 0.925926
2025 Single payment for 2 periods at 8% 0.857339
2026 Single payment for 3 periods at 8% 0.793832 420,000 333,409
2027 Single payment for 4 periods at 8% 0.735030 420,000 308,713
2028 Single payment for 5 periods at 8% 0.680583 420,000 285,845
2029 Single payment for 6 periods at 8% 0.630170 420,000 264,671
2030 Single payment for 7 periods at 8% 0.583490 7,420,000 4,329,496
5,522,134
Loan payable – old 9,000,000
Discount on loan payable – new 1,477,866
Gain on extinguishment 3,477,866
Loan payable – new 7,000,000

Gain on extinguishment 320,000

Cash 320,000
10. MAGPIE Company
Loan payable 3,000,000
Cash 3,000,000
Loan payable 5,000,000
Land 4,500,000
Gain on extinguishment 500,000

Loans payable 4,000,000

Loss on extinguishment 200,000
Share capital (100K x 20) 2,000,000
Share premium (42 – 20) x 100K 2,200,000

61
Answer Key (v1.6)

Periodic Present
PV Factor of PV Factor Payments Value
Single payment for 5 periods at 8% 0.680583 6,000,000 4,083,498
Ordinary annuity for 5 periods at 8% 3.992710 300,000 1,197,813
5,281,311

Loan payable – old 8,000,000

Discount on loan payable – new 718,689
Gain on extinguishment 2,718,689
Loan payable – new 6,000,000

Gain on extinguishment 300,000

Cash 300,000

Multiple Choice – Problems

1. B; D; C; A 6. C
2. A; B; A
3. C; A; D; D
4. B; A; C
5. B; A; A; D; C; B

CHAPTER 9 – LESSEE ACCOUNTING – FUNDAMENTAL CONSIDERATIONS

True or False
1. False 6. True 11. False
2. True 7. False 12. True
3. True 8. False 13. True
4. False 9. True 14. False
5. False 10. True 15. True

Multiple Choice – Theories

1. A 6. C 11. C
2. B 7. B 12. D
3. A 8. A 13. A
4. E 9. D 14. D
5. C 10. B 15. B

Straight Problems
1. PIGEON Company

Lease Liab./
PV Factor of PV Factor Cash Flows ROU Asset
Ordinary annuity for 7 periods at 8% 5.206370 P900,000 4,685,733

62
Answer Key (v1.6)

Lease Liability:
Lease Interest Amorti- Carrying
Date Payments Expense zation Amount
Jan. 1, 2023 4,685,733
Dec. 31, 2023 900,000 374,859 (525,141) 4,160,592
Dec. 31, 2024 900,000 332,847 (567,153) 3,593,439

ROU Asset:
Initial measurement, 1/1/23 4,685,733
Less: Depreciation, 2023 (4,685,733/7) 669,390
Carrying amount, 12/31/23 4,106,343
Less: Depreciation, 2024 669,390
Carrying amount, 12/31/24 3,346,953

January 1, Right-of-use asset 4,685,733

2023 Lease liability 4,685,733

December Interest expense 374,859

31, 2023 Lease liability 374,859

December Lease liability 900,000

31, 2023 Cash 900,000

December Depreciation expense 669,390

31, 2023 Right-of-use asset 669,390

December Interest expense 332,847

31, 2024 Lease liability 332,847

December Lease liability 900,000

31, 2024 Cash 900,000

December Depreciation expense 669,390

31, 2024 Right-of-use asset 669,390

2. PIGEON Company

Lease Liab./
PV Factor of PV Factor Cash Flows ROU Asset
Ordinary annuity for 7 periods at 11% 4.712196 P900,000 4,240,976

63
Answer Key (v1.6)

Lease Liability:
Lease Interest Amorti- Carrying
Date Payments Expense zation Amount
Jan. 1, 2023 4,240,976
Dec. 31, 2023 900,000 466,507 (433,493) 3,807,483
Dec. 31, 2024 900,000 418,823 (481,177) 3,326,306

ROU Asset:
Initial measurement, 1/1/23 4,240,976
Less: Depreciation, 2023 (4,240,976/7) 605,854
Carrying amount, 12/31/23 3,635,122
Less: Depreciation, 2024 605,854
Carrying amount, 12/31/24 3,029,268

3. BISHOP Company
Lease Liab./
PV Factor of PV Factor Cash Flows ROU Asset
Annuity due for 5 periods at 7% 4.387211 P1,500,000 6,580,817

Lease Interest Amorti- Carrying

Date Payments Expense zation Amount
Jan. 1, 2023 6,580,817
Jan. 1, 2023 1,500,000 - (1,500,000) 5,080,817
Jan. 1, 2024 1,500,000 355,657 (1,144,343) 3,936,474
Jan. 1, 2025 1,500,000 275,553 (1,224,447) 2,712,027

Lease Liability: 2023 2024

Carrying amount, 1/1 5,080,817 3,936,474
Accretion of interest 355,657 275,553
Carrying amount, 12/31 5,436,474 4,212,027

ROU Asset:
Lease liability 6,580,817
Add: Initial direct costs 100,000
Initial measurement, 1/1/23 6,680,817
Less: Depreciation, 2023 (6,680,817/5) 1,336,163
Carrying amount, 12/31/23 5,344,654
Less: Depreciation, 2024 1,336,163
Carrying amount, 12/31/24 4,008,491

Right-of-use asset 6,680,817

January 1,
Cash 100,000
2023
Lease liability 6,580,817

64
Answer Key (v1.6)

January 1, Security deposit 700,000

2023 Cash 700,000

Lease liability 1,500,000

January 1,
Other expenses 300,000
2023
Cash 1,800,000

December Interest expense 355,657

31, 2023 Lease liability 355,657

December Depreciation expense 1,336,163

31, 2023 Right-of-use asset 1,336,163

Lease liability 1,500,000

January 1,
Other expenses 300,000
2024
Cash 1,800,000

December Interest expense 275,553

31, 2024 Lease liability 275,553

December Depreciation expense 1,336,163

31, 2024 Right-of-use asset 1,336,163

4. DOVE Company

Lease Liab./
PV Factor of PV Factor Cash Flows ROU Asset
Annuity due for 4 periods at 8% 3.577097 P1,200,000 4,292,516

Lease Interest Amorti- Carrying

Date Payments Expense zation Amount
Jan. 1, 2023 4,292,516
Jan. 1, 2023 1,200,000 - (1,200,000) 3,092,516
Jan. 1, 2024 1,200,000 247,401 (952,599) 2,139,917
Jan. 1, 2025 1,200,000 171,193 (1,028,807) 1,111,110

Lease Liability: 2023 2024

Carrying amount, 1/1 3,092,516 2,139,917
Accretion of interest 247,401 171,193
Carrying amount, 12/31 3,339,917 2,311,110

65
Answer Key (v1.6)

ROU Asset:
Initial measurement, 1/1/23 4,292,516
Less: Depreciation, 2023 (4,292,516/4) 1,073,129
Carrying amount, 12/31/23 3,219,387
Less: Depreciation, 2024 1,073,129
Carrying amount, 12/31/24 2,416,258

January 1, Right-of-use asset 4,292,516

2023 Lease liability 4,292,516

January 1, Lease liability 1,200,000

2023 Cash 1,200,000

December Interest expense 247,401

31, 2023 Lease liability 247,401

December Depreciation expense 1,073,129

31, 2023 Right-of-use asset 1,073,129

December Rent expense 600,000

31, 2023 Rent payable 600,000

January 1, Lease liability 1,200,000

2024 Cash 1,200,000

February 1, Rent payable 600,000

2024 Cash 600,000

December Interest expense 171,193

31, 2024 Lease liability 171,193

December Depreciation expense 1,073,129

31, 2024 Right-of-use asset 1,073,129

December Rent expense 750,000

31, 2024 Rent payable 750,000

5. FLATBILL Company
Lease Liab./
PV Factor of PV Factor Cash Flows ROU Asset
Ordinary annuity for 5 periods at 9% 3.889651 600,000 2,333,791

66
Answer Key (v1.6)

Lease liability:
Lease Interest Amorti- Carrying
Date Payments Expense zation Amount
Jan. 1, 2023 2,333,791
Dec. 31, 2023 600,000 210,014 (389,959) 1,943,832
Dec. 31, 2024 600,000 174,945 (425,055) 1,518,777

ROU Asset:
Initial measurement, 1/1/23 2,333,791
Less: Depreciation, 2023 (2,333,791/5) 466,758
Carrying amount, 12/31/23 1,867,033
Less: Depreciation, 2024 466,758
Carrying amount, 12/31/24 1,400,275

January 1, Right-of-use asset 2,333,791

2023 Lease liability 2,333,791

December Interest expense 210,014

31, 2023 Lease liability 210,014

December Depreciation expense 466,758

31, 2023 Right-of-use asset 466,758

Rent expense 200,000

December
Lease liability 600,000
31, 2023
Cash (10M x 8%) 800,000

December Interest expense 174,945

31, 2024 Lease liability 174,945

December Depreciation expense 466,758

31, 2024 Right-of-use asset 466,758

Rent expense 360,000

December
Lease liability 600,000
31, 2024
Cash (12M x 8%) 960,000

6. BABBLER Company
Lease Liab./
PV Factor of PV Factor Cash Flows ROU Asset
Single payment for 5 periods at 10% 0.620921 800,000 496,737
Annuity due for 5 periods at 10% 4.169865 1,200,000 5,003,838
5,500,575
67
Answer Key (v1.6)

Lease Interest Amorti- Carrying

Date Payments Expense zation Amount
Jan. 1, 2023 5,500,575
Jan. 1, 2023 1,200,000 - (1,200,000) 4,300,575
Jan. 1, 2024 1,200,000 430,058 (769,942) 3,530,633
Jan. 1, 2025 1,200,000 353,063 (846,937) 2,683,696

Lease Liability: 2023 2024

Carrying amount, 1/1 4,300,575 3,530,633
Accretion of interest 430,058 353,063
Carrying amount, 12/31 4,730,633 3,883,696

ROU Asset:
Initial measurement, 1/1/23 5,500,575
Less: Depreciation, 2023 (5,500,575/5) 1,100,115
Carrying amount, 12/31/23 4,400,460
Less: Depreciation, 2024 1,100,115
Carrying amount, 12/31/24 3,300,345

January 1, Right-of-use asset 5,500,575

2023 Lease liability 5,500,575

January 1, Security deposit 300,000

2023 Cash 300,000

January 1, Lease liability 1,200,000

2023 Cash 1,200,000

December Interest expense 430,058

31, 2023 Lease liability 430,058

December Depreciation expense 1,100,115

31, 2023 Right-of-use asset 1,100,115

January 1, Lease liability 1,200,000

2024 Cash 1,200,000

December Interest expense 353,063

31, 2024 Lease liability 353,063

December Depreciation expense 1,100,115

31, 2024 Right-of-use asset 1,100,115

68
Answer Key (v1.6)

7. CRIMSON Company
Lease Liab./
PV Factor of PV Factor Cash Flows ROU Asset
Single payment for 6 periods at 6% 0.704961 400,000 281,984
Annuity due for 6 periods at 6% 5.212364 1,000,000 5,212,364
5,494,348

Lease Interest Amorti- Carrying

Date Payments Expense zation Amount
Jan. 1, 2023 5,494,348
Jan. 1, 2023 1,000,000 - (1,000,000) 4,494,348
Jan. 1, 2024 1,000,000 269,661 (730,339) 3,764,009
Jan. 1, 2025 1,000,000 225,841 (774,159) 2,989,850

Lease Liability: 2023 2024

Carrying amount, 1/1 4,494,348 3,764,009
Accretion of interest 269,661 225,841
Carrying amount, 12/31 4,764,009 3,989,850

ROU Asset:
Initial measurement, 1/1/23 5,494,348
Less: Depreciation, 2023 (5,494,348/6) 915,725
Carrying amount, 12/31/23 4,578,623
Less: Depreciation, 2024 915,725
Carrying amount, 12/31/24 3,662,898

January 1, Right-of-use asset 5,494,348

2023 Lease liability 5,494,348

January 1, Lease liability 1,000,000

2023 Cash 1,000,000

December Interest expense 269,661

31, 2023 Lease liability 269,661

December Depreciation expense 915,725

31, 2023 Right-of-use asset 915,725

January 1, Lease liability 1,000,000

2024 Cash 1,000,000

69
Answer Key (v1.6)

December Interest expense 225,841

31, 2024 Lease liability 225,841

December Depreciation expense 915,725

31, 2024 Right-of-use asset 915,725

8. MADDER Company

Lease Liab./
PV Factor of PV Factor Cash Flows ROU Asset
Single payment for 7 periods at 7% 0.622750 500,000 311,375
Annuity due for 7 periods at 7% 5.766540 1,400,000 8,073,156
8,384,531

Lease Interest Amorti- Carrying

Date Payments Expense zation Amount
Jan. 1, 2023 8,384,531
Jan. 1, 2023 1,400,000 - (1,400,000) 6,984,531
Jan. 1, 2024 1,400,000 488,917 (911,083) 6,073,448
Jan. 1, 2025 1,400,000 425,141 (974,859) 5,098,590

Lease Liability: 2023 2024

Carrying amount, 1/1 6,984,531 6,073,448
Accretion of interest 488,917 425,141
Carrying amount, 12/31 7,473,448 6,498,589

ROU Asset:
Initial measurement, 1/1/23 8,384,531
Less: Depreciation, 2023 [(8,384,531 – 200,000)/10] 818,453
Carrying amount, 12/31/23 7,566,077
Less: Depreciation, 2024 818,453
Carrying amount, 12/31/24 6,747,624

January 1, Right-of-use asset 8,384,531

2023 Lease liability 8,384,531

January 1, Lease liability 1,400,000

2023 Cash 1,400,000

December Interest expense 488,917

31, 2023 Lease liability 488,917

December Depreciation expense 818,453

31, 2023 Right-of-use asset 818,453
70
Answer Key (v1.6)

January 1, Lease liability 1,400,000

2024 Cash 1,400,000

December Interest expense 425,141

31, 2024 Lease liability 425,141

December Depreciation expense 818,453

31, 2024 Right-of-use asset 818,453

9. MADDER Company (Part 2)

Lease Liab./
PV Factor of PV Factor Cash Flows ROU Asset
Annuity due for 7 periods at 7% 5.766540 1,400,000 8,073,156

Lease Interest Amorti- Carrying

Date Payments Expense zation Amount
Jan. 1, 2023 8,073,156
Jan. 1, 2023 1,400,000 - (1,400,000) 6,673,156
Jan. 1, 2024 1,400,000 467,121 (932,879) 5,740,277
Jan. 1, 2025 1,400,000 401,819 (998,181) 4,742,096

Lease Liability: 2023 2024

Carrying amount, 1/1 6,673,156 5,740,277
Accretion of interest 467,121 401,819
Carrying amount, 12/31 7,140,277 6,142,096

ROU Asset:
Initial measurement, 1/1/23 8,073,156
Less: Depreciation, 2023 [(8,073,156)/7] 1,153,308
Carrying amount, 12/31/23 6,919,848
Less: Depreciation, 2024 1,153,308
Carrying amount, 12/31/24 5,766,540

January 1, Right-of-use asset 8,073,156

2023 Lease liability 8,073,156

January 1, Lease liability 1,400,000

2023 Cash 1,400,000

December Interest expense 467,121

31, 2023 Lease liability 467,121

71
Answer Key (v1.6)

December Depreciation expense 1,153,308

31, 2023 Right-of-use asset 1,153,308

January 1, Lease liability 1,400,000

2024 Cash 1,400,000

December Interest expense 401,819

31, 2024 Lease liability 401,819

December Depreciation expense 1,153,308

31, 2024 Right-of-use asset 1,153,308

10. SALMON Company

Lease Liab./
PV Factor of PV Factor Cash Flows ROU Asset
Annuity due for 5 periods at 6% 4.465106 1,500,000 6,697,659

Lease Interest Amorti- Carrying

Date Payments Expense zation Amount
Jan. 1, 2023 6,697,659
Jan. 1, 2023 1,500,000 - (1,500,000) 5,197,659
Jan. 1, 2024 1,500,000 311,860 (1,188,140) 4,009,519
Jan. 1, 2025 1,500,000 240,571 (1,259,429) 2,750,090
Lease Liability: 2023 2024
Carrying amount, 1/1 5,197,659 4,009,519
Accretion of interest 311,860 240,571
Carrying amount, 12/31 5,509,519 4,250,090
ROU Asset:
Initial measurement, 1/1/23 6,697,659
Less: Depreciation, 2023 [(6,697,659)/5] 1,339,532
Carrying amount, 12/31/23 5,358,127
Less: Depreciation, 2024 1,339,532
Carrying amount, 12/31/24 4,018,595
January 1, Right-of-use asset 6,697,659
2023 Lease liability 6,697,659

January 1, Lease liability 1,500,000

2023 Cash 1,500,000

December Interest expense 311,860

31, 2023 Lease liability 311,860
72
Answer Key (v1.6)

December Depreciation expense 1,339,532

31, 2023 Right-of-use asset 1,339,532

January 1, Lease liability 1,500,000

2024 Cash 1,500,000

December Interest expense 240,571

31, 2024 Lease liability 240,571

December Depreciation expense 1,339,532

31, 2024 Right-of-use asset 1,339,532

11. EXTROVERT Company

Scenario a: Extension option is reasonably certain to be exercised

Lease Liab./
PV Factor of PV Factor Cash Flows ROU Asset
Ordinary annuity for 10 periods at 8% 6.710081 900,000 6,039,073

Scenario b: Extension option is NOT reasonably certain to be exercised

Lease Liab./
PV Factor of PV Factor Cash Flows ROU Asset
Ordinary annuity for 6 periods at 8% 4.622880 900,000 4,160,592

12. INTROVERT Company

Scenario a: Termination option is NOT reasonably certain to be exercised

Lease Liab./
PV Factor of PV Factor Cash Flows ROU Asset
Annuity due for 10 periods at 6% 7.801692 400,000 3,120,677

Scenario b: Termination option is reasonably certain to be exercised

Lease Liab./
PV Factor of PV Factor Cash Flows ROU Asset
Single payment for 5 periods at 6% 0.747258 1,000,000 747,258
Annuity due for 5 periods at 6% 4.212364 400,000 1,684,946
2,432,204

73
Answer Key (v1.6)

13. CARDINAL Company (lease of low-value assets)

2023 (200 x 16K) 3,200,000

2024 (200 x 11K) 2,200,000
2025 (200 x 9K) 1,800,000
7,200,000
Divide: Lease term 3 years
Annual rental expense 2,400,000

Rent expense 2,400,000

2023 Prepaid rent 800,000
Cash 3,200,000

Rent expense 2,400,000

2024 Prepaid rent 200,000
Cash 2,200,000

Rent expense 2,400,000

2025 Prepaid rent 600,000
Cash 1,800,000

14. CARMINE Company

2023 (30 x 9K) 270,000

2024 (270K x 1.09) 294,300
2025 (294,300 x 1.09) 320,787
885,087
Divide: Lease term 3 years
Annual rental expense 295,029

Rent expense 295,029

2023 Accrued rent payable 25,029
Cash 270,000

Rent expense 295,029

2024 Accrued rent payable 729
Cash 294,300

Rent expense 295,029

2025 Accrued rent payable 25,758
Cash 320,787

74
Answer Key (v1.6)

15. ACUPUNCTURE Company

PV Factor of PV Factor Cash Flows Lease Liab.

Single payment for 1 period at 8% 0.925926 800,000 740,741
Single payment for 2 periods at 8% 0.857339 840,000 720,165
Single payment for 3 periods at 8% 0.793832 882,000 700,160
Single payment for 4 periods at 8% 0.735030 926,100 680,711
Initial lease liability 2,841,777
Add: Initial direct costs 250,000
Initial ROU asset 3,091,777

16. DRAGON Company

Scenario 1: Semi-annual lease payments

PV Factor of PV Factor Cash Flows Lease Liab.

Annuity due for 6 periods at 5% 5.329477 500,000 2,664,739
Initial direct costs 150,000
Initial ROU asset 2,814,739

Scenario 2: Quarterly lease payments

PV Factor of PV Factor Cash Flows Lease Liab.

Annuity due for 12 periods at 2.50% 10.257765 250,000 2,564,441
Initial direct costs 150,000
Initial ROU asset 2,714,441

Multiple Choice – Problems

1. A; B; C; D; D 6. B; D
2. C; A; A; B; D; A; C; A 7. C
3. B; D; C; A; C; B; D; C 8. B
4. A; D; C; D
5. A; B

CHAPTER 9A – LESSEE ACCOUNTING – OTHER MATTERS

True or False
1. True 6. False
2. True 7. True
3. False 8. False
4. False 9. True
5. True 10. False

Multiple Choice – Theories

1. B 6. C 11. D
75
Answer Key (v1.6)

2. A 7. B 12. A
3. D 8. D
4. B 9. D
5. C 10. A

Straight Problems
1. LION Company

January 1, 2023 Lease Liab./

PV Factor of PV Factor Cash Flows ROU Asset
Annuity due for 5 periods at 9% 4.239720 1,400,000 5,935,608

Lease Interest Amorti- Carrying

Date Payments Expense zation Amount
Jan. 1, 2023 5,935,608
Jan. 1, 2023 1,400,000 - (1,400,000) 4,535,608
Jan. 1, 2024 1,400,000 408,205 (991,795) 3,543,813
Jan. 1, 2025 1,400,000 318,943 (1,081,057) 2,462,756

January 1, 2025 Lease Liab./

PV Factor of PV Factor Cash Flows ROU Asset
Ordinary annuity for 7 periods at 10% 4.868419 1,400,000 6,815,787
Carrying amount before reassessment 2,462,756
Increase in lease liability and ROU asset 4,353,031

January 1, ROU asset 4,353,031

2025 Lease liability 4,353,031

ROU Asset:
Initial measurement, 1/1/23 5,935,608
Less: Depreciation, 2023 [(5,935,608)/5] 1,187,122
Carrying amount, 12/31/23 4,748,486
Less: Depreciation, 2024 1,187,122
Carrying amount, 12/31/24 3,561,364
Add: Increase in lease liability and ROU asset 4,353,031
Carrying amount, 1/1/25 7,914,395
Less: Deprecation, 2025 (7,914,395/8) 989,299
Carrying amount, 12/31/25 6,925,096

76
Answer Key (v1.6)

Lease liability Carrying Amount

Jan. 1, 2025 6,815,787
Add: Interest expense (6,815,787 x 10%) 681,579
December 31, 2025 7,497,366

2. CHEETAH Company

January 1, 2023 Lease Liab./

PV Factor of PV Factor Cash Flows ROU Asset
Annuity due for 10 periods at 8% 7.246888 1,200,000 8,696,266

Lease Interest Amorti- Carrying

Date Payments Expense zation Amount
Jan. 1, 2023 8,696,266
Jan. 1, 2023 1,200,000 - (1,200,000) 7,496,266
Jan. 1, 2024 1,200,000 599,701 (600,299) 6,895,967
Jan. 1, 2025 1,200,000 551,677 (648,323) 6,247,644
Jan. 1, 2026 1,200,000 499,812 (700,188) 5,547,456

January 1, 2026 Lease Liab./

PV Factor of PV Factor Cash Flows ROU Asset
Ordinary annuity for 2 periods at 9% 1.759111 1,200,000 2,110,933
Carrying amount before reassessment 5,547,456
Decrease in lease liability and ROU asset 3,436,523

January 1, Lease liability 3,436,523

2026 ROU asset 3,436,523

ROU Asset:
Initial measurement, 1/1/23 8,696,266
Less: Depreciation, 2023 – 2025 [(8,696,266) x 3/10] 2,608,880
Carrying amount, 12/31/25 6,087,386
Less: Decrease in lease liability and ROU asset 3,436,523
Carrying amount, 1/1/26 2,650,863
Less: Deprecation, 2026 (2,650,863/3) 883,621
Carrying amount, 12/31/26 1,767,242

Lease liability Carrying Amount

Jan. 1, 2026 2,110,933
Add: Interest expense (2,110,933 x 9%) 189,984
December 31, 2026 2,300,917

77
Answer Key (v1.6)

3. ELEPHANT Company

January 1, 2023 Lease Liab./

PV Factor of PV Factor Cash Flows ROU Asset
Annuity due for 7 periods at 6% 5.917324 1,000,000 5,917,324

Lease Interest Amorti- Carrying

Date Payments Expense zation Amount
Jan. 1, 2023 5,917,324
Jan. 1, 2023 1,000,000 - (1,000,000) 4,917,324
Jan. 1, 2024 1,000,000 295,039 (704,961) 4,212,363
Jan. 1, 2025 1,000,000 252,742 (747,258) 3,465,105
Jan. 1, 2026 1,000,000 207,906 (792,094) 2,673,012

January 1, 2026
PV Factor of PV Factor Cash Flows Lease Liab.
Single payment for 4 periods at 7% 0.762895 2,000,000 1,525,790
Ordinary annuity for 3 periods at 7% 2.624316 1,000,000 2,624,316
Lease liability after reassessment 4,150,106
Carrying amount before reassessment 2,673,012
Increase in lease liability and ROU asset 1,477,094

January 1, ROU asset 1,477,094

2026 Lease liability 1,477,094

ROU Asset:
Initial measurement, 1/1/23 5,917,324
Less: Depreciation, 2023 – 2025 [(5,917,324) x 3/7] 2,535,996
Carrying amount, 12/31/25 3,381,328
Add: Increase in lease liability and ROU asset 1,477,094
Carrying amount, 1/1/26 4,858,422
Less: Deprecation, 2026 (2,650,863 – 1,200,000/9) 161,207
Carrying amount, 12/31/26 4,697,215

Lease liability Carrying Amount

Jan. 1, 2026 4,150,106
Add: Interest expense (4,150,106 x 7%) 290,507
December 31, 2026 4,440,613

4. GIRAFFE Company

78
Answer Key (v1.6)

January 1, 2023 Lease Liab./

PV Factor of PV Factor Cash Flows ROU Asset
Single payment for 6 periods at 8% 0.630170 1,000,000 630,170
Annuity due for 6 periods at 8% 4.992710 1,500,000 7,489,065
8,119,235

Lease Interest Amorti- Carrying

Date Payments Expense zation Amount
Jan. 1, 2023 8,119,235
Jan. 1, 2023 1,500,000 - (1,500,000) 6,619,235
Jan. 1, 2024 1,500,000 529,539 (970,461) 5,648,774
Jan. 1, 2025 1,500,000 451,902 (1,048,098) 4,600,676

January 1, 2025
PV Factor of PV Factor Cash Flows Lease Liab.
Ordinary annuity for 3 periods at 7% 2.624316 1,500,000 3,936,474
Carrying amount before reassessment 4,600,676
Decrease in lease liability and ROU asset 664,202

January 1, Lease liability 664,202

2025 ROU asset 664,202

ROU Asset:
Initial measurement, 1/1/23 8,119,235
Less: Depreciation, 2023 – 2024 [(8,119,235 – 600,000) x 2/10] 1,503,847
Carrying amount, 12/31/24 6,615,388
Less: Decrease in lease liability and ROU asset 664,202
Carrying amount, 1/1/25 5,951,186
Less: Depreciation, 2025 (5,951,186/4) 1,487,797
Carrying amount, 12/31/25 4,463,389

Lease liability Carrying Amount

Jan. 1, 2025 3,936,474
Add: Interest expense (3,936,474 x 7%) 275,553
December 31, 2025 4,212,027

5. BUFFALO Company

January 1, 2023 Lease Liab./

PV Factor of PV Factor Cash Flows ROU Asset
Single payment for 8 periods at 7% 0.582009 600,000 349,205
Annuity due for 8 periods at 7% 6.389289 1,400,000 8,945,005
9,294,210

79
Answer Key (v1.6)

Lease Interest Amorti- Carrying

Date Payments Expense zation Amount
Jan. 1, 2023 9,294,210
Jan. 1, 2023 1,400,000 - (1,400,000) 7,894,210
Jan. 1, 2024 1,400,000 552,595 (847,405) 7,046,805
Jan. 1, 2025 1,400,000 493,276 (906,724) 6,140,081
Jan. 1, 2026 1,400,000 429,806 (970,194) 5,169,887

January 1, 2026
PV Factor of PV Factor Cash Flows Lease Liab.
Single payment for 5 periods at 7% 0.712986 200,000 142,597
Ordinary annuity for 4 periods at 7% 3.387211 1,400,000 4,742,095
Lease liability after reassessment 4,884,692
Lease liability before reassessment 5,169,887
Decrease in lease liability and ROU asset 285,195

January 1, Lease liability 285,195

2026 ROU asset 285,195

ROU Asset:
Initial measurement, 1/1/23 9,294,210
Less: Depreciation, 2023 – 2025 [(9,294,210) x 3/8] 3,485,329
Carrying amount, 12/31/25 5,808,881
Less: Decrease in lease liability and ROU asset 285,195
Carrying amount, 1/1/26 5,523,686
Less: Depreciation, 2026 (5,523,686/5) 1,104,737
Carrying amount, 12/31/26 4,418,949

Lease liability Carrying Amount

Jan. 1, 2026 4,884,692
Add: Interest expense (4,884,692 x 7%) 341,928
December 31, 2026 5,226,620

6. BUFFALO Company (Part 2)

January 1, 2026
PV Factor of PV Factor Cash Flows Lease Liab.
Single payment for 5 periods at 7% 0.712986 900,000 641,687
Ordinary annuity for 4 periods at 7% 3.387211 1,400,000 4,742,095
Lease liability after reassessment 5,383,782
Lease liability before reassessment 5,169,887
Increase in lease liability and ROU asset 213,895

80
Answer Key (v1.6)

January 1, ROU asset 213,895

2026 Lease liability 213,895

ROU Asset:
Initial measurement, 1/1/23 9,294,210
Less: Depreciation, 2023 – 2025 [(9,294,210) x 3/8] 3,485,329
Carrying amount, 12/31/25 5,808,881
Add: Increase in lease liability and ROU asset 213,895
Carrying amount, 1/1/26 6,022,776
Less: Depreciation, 2026 (6,022,776/5) 1,204,555
Carrying amount, 12/31/26 4,818,221

Lease liability Carrying Amount

Jan. 1, 2026 5,383,782
Add: Interest expense (5,383,782 x 7%) 376,865
December 31, 2026 5,760,647

7. HIPPO Company

January 1, 2023 Lease Liab./

PV Factor of PV Factor Cash Flows ROU Asset
Annuity due for 6 periods at 9% 4.889651 1,800,000 8,801,372

Lease Interest Amorti- Carrying

Date Payments Expense zation Amount
Jan. 1, 2023 8,801,372
Jan. 1, 2023 1,800,000 - (1,800,000) 7,001,372
Jan. 1, 2024 1,800,000 630,123 (1,169,877) 5,831,495
Jan. 1, 2025 1,800,000 524,835 (1,275,165) 4,556,330

January 1, 2025
PV Factor of PV Factor Cash Flows Lease Liab.
Ordinary annuity for 3 periods at 9% 2.531295 2,700,000 6,834,497
Lease liability before reassessment 4,556,330
Increase in lease liability and ROU asset 2,278,167

January 1, ROU asset 2,278,167

2025 Lease liability 2,278,167

81
Answer Key (v1.6)

ROU Asset:
Initial measurement, 1/1/23 8,801,372
Less: Depreciation, 2023 – 2024 [(8,801,372) x 2/6] 2,933,791
Carrying amount, 12/31/24 5,867,581
Add: Increase in lease liability and ROU asset 2,278,167
Carrying amount, 1/1/25 8,145,748
Less: Depreciation, 2025 (8,145,748/4) 2,036,437
Carrying amount, 12/31/25 6,109,311

Lease liability Carrying Amount

Jan. 1, 2025 6,834,497
Add: Interest expense (6,834,497 x 9%) 615,105
December 31, 2025 7,449,602

8. LEOPARD Company

Original lease agreement:

January 1, 2023 Lease Liab./

PV Factor of PV Factor Cash Flows ROU Asset
Annuity due for 6 periods at 8% 4.992710 2,400,000 11,982,504

Lease liability (original)

Lease Interest Amorti- Carrying
Date Payments Expense zation Amount
Jan. 1, 2023 11,982,504
Jan. 1, 2023 2,400,000 - (2,400,000) 9,582,504
Jan. 1, 2024 2,400,000 766,600 (1,633,400) 7,949,104
Jan. 1, 2025 2,400,000 635,928 (1,764,072) 6,185,032
Jan. 1, 2026 2,400,000 494,803 (1,905,197) 4,279,835

ROU Asset (original):

Initial measurement, 1/1/23 11,982,504
Less: Depreciation, 2023 – 2024 [(11,982,504) x 2/6] 3,994,168
Carrying amount, 12/31/24 7,988,336

Scenario 1: (Considered as a separate lease (i.e., original lease is not affected))

January 1, 2025 Lease Liab./

PV Factor of PV Factor Cash Flows ROU Asset
Annuity due for 4 periods at 7% 3.624316 1,600,000 5,798,906

January 1, ROU asset 5,798,906

2025 Lease liability 5,798,906
82
Answer Key (v1.6)

Lease liability (additional space)

Lease Interest Amorti- Carrying
Date Payments Expense zation Amount
Jan. 1, 2025 5,798,906
Jan. 1, 2025 1,600,000 - (1,600,000) 4,198,906
Jan. 1, 2026 1,600,000 293,923 (1,306,077) 2,892,829

Original Additional
Lease liability Lease Lease
Jan. 1, 2025 6,185,032 4,198,906
Add: Interest expense 494,803 293,923
December 31, 2025 6,679,835 4,492,829

Original Additional
ROU Asset Lease Lease
Jan. 1, 2025 7,988,336 5,798,906
Less: Depreciation expense 1,997,084 1,449,727
December 31, 2025 5,991,252 4,349,179

Scenario 2: (NOT considered as a separate lease (i.e., original lease is

affected))

January 1, 2025
PV Factor of PV Factor Cash Flows Lease Liab.
Ordinary annuity for 3 periods at 7% 2.624316 2,400,000 6,298,358
Annuity due for 4 periods at 7% 3.624316 1,000,000 3,624,316
Total lease liability after modification 9,922,674
Lease liability from the original lease, 1/1/25 6,185,032
Increase in lease liability 3,737,642

January 1, ROU asset 3,737,642

2025 Lease liability 3,737,642

Lease liability (original and additional space)

Lease Interest Amorti- Carrying
Date Payments Expense zation Amount
Jan. 1, 2025 9,922,674
Jan. 1, 2025 1,000,000 - (1,000,000) 8,922,674
Jan. 1, 2026 3,400,000 624,587 (2,775,413) 6,147,261

Lease liability (original and additional space) Carrying Amount

Jan. 1, 2025 8,922,674
Add: Interest expense (8,922,674 x 7%) 624,587
December 31, 2025 9,547,261
83
Answer Key (v1.6)

ROU Asset (original and additional space):

Carrying amount, 12/31/24 7,988,336
Add: Increase in lease liability and ROU asset 3,737,642
Carrying amount, 1/1/25 11,725,978
Less: Depreciation, 2025 (11,725,978/4) 2,931,495
Carrying amount, 12/31/25 8,794,483

Scenario 3: (Considered as a separate lease (i.e., original lease is not affected))

January 1, 2025 Lease Liab./

PV Factor of PV Factor Cash Flows ROU Asset
Annuity due for 4 periods at 7% 3.624316 1,300,000 4,711,611

January 1, ROU asset 4,711,611

2025 Lease liability 4,711,611

Lease liability (additional space)

Lease Interest Amorti- Carrying
Date Payments Expense zation Amount
Jan. 1, 2025 4,711,611
Jan. 1, 2025 1,300,000 - (1,300,000) 3,411,611
Jan. 1, 2026 1,300,000 238,813 (1,061,187) 2,350,424

Original Additional
Lease liability Lease Lease
Jan. 1, 2025 6,185,032 3,411,611
Add: Interest expense 494,803 238,813
December 31, 2025 6,679,835 3,650,424

Original Additional
ROU Asset Lease Lease
Jan. 1, 2025 7,988,336 4,711,611
Less: Depreciation expense 1,997,084 1,177,903
December 31, 2025 5,991,252 3,533,708

9. BABOON Company

January 1, 2023 Lease Liab./

PV Factor of PV Factor Cash Flows ROU Asset
Ordinary annuity for 6 periods at 6% 4.917324 1,800,000 8,851,183

84
Answer Key (v1.6)

Lease liability (before decrease in scope)

Lease Interest Amorti- Carrying
Date Payments Expense zation Amount
Jan. 1, 2023 8,851,183
Dec. 31, 2023 1,800,000 531,071 (1,268,929) 7,582,254
Dec. 31, 2024 1,800,000 454,935 (1,345,065) 6,237,189

ROU Asset (original):

Initial measurement, 1/1/23 8,851,183
Less: Depreciation, 2023 – 2024 [(8,851,183) x 2/6] 2,950,394
Carrying amount, 12/31/24 5,900,789

Lease liability (6,237,189 x 2K/5K) 2,494,876

January 1,
ROU asset (5,900,789 x 2K/5K) 2,360,316
2025
Gain on lease modification – P/L 134,560

January 1, 2025 Revised

PV Factor of PV Factor Cash Flows Lease Liab.
Ordinary annuity for 4 periods at 7% 3.387211 1,100,000 3,725,932
Carrying after proportional reduction (6,237,189 – 2,494,876) 3,742,313
Further decrease in lease liability and ROU asset 16,381

January 1, Lease liability 16,381

2025 ROU asset 16,381

Lease Liability ROU Asset

Balances before modification, 1/1/25 P6,237,189 P5,900,789
Less: Proportional reduction (2,494,876) (2,360,316)
Balances after proportional reduction P3,742,313 P3,540,473
Less: Further decrease in lease liability (16,381) (16,381)
Balances after modification, 1/1/25 P3,725,932 P3,524,092

10. HYENA Company

January 1, 2023 Lease Liab./
PV Factor of PV Factor Cash Flows ROU Asset
Annuity due for 5 periods at 6% 4.465106 800,000 3,572,085

Lease liability (original)

Lease Interest Amorti- Carrying
Date Payments Expense zation Amount
Jan. 1, 2023 3,572,085
Jan. 1, 2023 800,000 - (800,000) 2,772,085
Jan. 1, 2024 800,000 166,325 (633,675) 2,138,410
Jan. 1, 2025 800,000 128,305 (671,695) 1,466,715
85
Answer Key (v1.6)

January 1, 2025
PV Factor of PV Factor Cash Flows Lease Liab.
Ordinary annuity for 6 periods at 7% 4.766540 800,000 3,813,232
Carrying amount before modification 1,466,715
Increase in lease liability and ROU asset 2,346,517

January 1, ROU asset 2,346,517

2025 Lease liability 2,346,517

Lease liability (original)

Lease Interest Amorti- Carrying
Date Payments Expense zation Amount
Jan. 1, 2025 3,813,232
Jan. 1, 2026 800,000 266,926 (533,074) 3,280,158

Lease liability (modified) Carrying Amount

Jan. 1, 2025 3,813,232
Add: Interest expense (3,813,232 x 7%) 266,926
December 31, 2025 4,080,158

ROU Asset (modified):

Initial measurement, 1/1/23 3,572,085
Less: Depreciation, 2023 – 2024 [(3,572,085) x 2/5] 1,428,834
Carrying amount, 12/31/24 2,143,251
Add: Increase in ROU asset 2,346,517
Carrying amount, 1/1/25 4,489,768
Less: Depreciation, 2025 (4,489,768/7) 641,395
Carrying amount, 12/31/25 3,848,373

Multiple Choice – Problems

1. B; C
2. A; B; D
3. A; C; B; D
4. A; B
5. D; C; A; C

CHAPTER 10 – LESSOR ACCOUNTING – FINANCE LEASE

True or False
1. True 6. True 11. False
2. False 7. False 12. True
3. True 8. True
4. False 9. True
5. False 10. False
86
Answer Key (v1.6)

Multiple Choice – Theories

1. C 6. C 11. B
2. D 7. D 12. D
3. C 8. B 13. C
4. A 9. A 14. A
5. B 10. A 15. D

Straight Problems
1. Finance lease or operating lease
a. Finance lease – there is transfer of ownership at the end of the lease term.
b. Finance lease – lease term is at least 75% of the economic life (6yrs/8yrs = 75%)
c. Operating lease – no transfer of ownership; lease term is below 75% of the
economic life (6yrs/12yrs = 50%)
d. Finance lease – Bargain purchase option of the lessee.
e. Finance lease – lease term is at least 75% of the economic life (7yrs/9yrs = 78%)
f. Finance lease – because of the following:

PV Factor of PV Factor Cash Flows PV

Annuity due for 4 periods at 7% 3.624316 1,000,000 3,624,316
Divide: FV of underlying asset 1,466,715
% of PV of cash flows over FV of underlying asset 90.61%

g. Finance lease – lease term is at least 75% of the economic life (6yrs/8yrs =
75%), even though the PV of lease payments is below 90% of the FV of the
underlying asset.
h. Operating lease

2. INDIGO Company

PV Factor of PV Factor Cash Flows PV

Annuity due for 6 periods at 8% 4.992710 1,400,000 6,989,794
Lease receivable (1.4M x 6) 8,400,000
Unearned finance income 1,410,206

Gross Unearned
Lease Interest Net Investment/ Finance
Date Pmts. Income Amort. Investment Lease Rec. Inc.
Jan. 1, 2023 6,989,794 8,400,000 1,410,206
Jan. 1, 2023 1.4M - (1,400,000) 5,589,794 7,000,000 1,410,206
Jan. 1, 2024 1.4M 447,184 (952,816) 4,636,978 5,600,000 963,022
Jan. 1, 2025 1.4M 370,958 (1,029,042) 3,607,936 4,200,000 592,064

87
Answer Key (v1.6)

Lease receivable 8,400,000

January 1,
Machinery for lease 6,989,794
2023
Unearned finance income 1,410,206

January 1, Cash 1,400,000

2023 Lease receivable 1,400,000

December Unearned finance income 447,184

31, 2023 Interest income 447,184

January 1, Cash 1,400,000

2024 Lease receivable 1,400,000

December Unearned finance income 370,958

31, 2024 Interest income 370,958

Net investment: 2023 2024

Gross investment, 12/31 7,000,000 5,600,000
Less: Unearned finance income 963,022 592,064
Net investment, 12/31 6,036,978 5,007,936

3. SPRUCE Financing Company

PV Factor of PV Factor Cash Flows PV

Single payment for 5 periods at 6% 0.747258 1,500,000 1,120,887
Ordinary annuity for 5 periods at 6% 4.212364 1,800,000 7,582,255
Net investment in the lease 8,703,142
Lease receivable (1.8M x 5) + 1.5M 10,500,000
Unearned finance income 1,796,858

Gross Unearned
Lease Interest Net Investment/ Finance
Date Pmts. Income Amort. Investment Lease Rec. Inc.
Jan. 1, 2023 8,703,142 10.5M 1,796,858
Dec. 31, 2023 1.8M 522,189 (1,277,811) 7,425,331 8.7M 1,274,669
Dec. 31, 2024 1.8M 445,520 (1,354,480) 6,070,851 6.9M 829,149

Lease receivable 10,500,000

January 1,
Vehicle for lease 8,703,142
2023
Unearned finance income 1,796,858

December Cash 1,800,000

31, 2023 Lease receivable 1,800,000

88
Answer Key (v1.6)

December Unearned finance income 522,189

31, 2023 Interest income 522,189

December Cash 1,800,000

31, 2024 Lease receivable 1,800,000

December Unearned finance income 445,520

31, 2024 Interest income 445,520

4. LARA Company

PV Factor of PV Factor Cash Flows PV

Single payment for 5 periods at 7% 0.712986 1,000,000 712,986
Annuity due for 5 periods at 7% 4.387211 2,200,000 9,651,864
Net investment in the lease (Lower than 11.2M FV) 10,364,850
Lease receivable (2.2M x 5) + 1M 12,000,000
Unearned finance income 1,635,150

Gross Unearned
Lease Interest Net Investment/ Finance
Date Pmts. Income Amort. Investment Lease Rec. Inc.
Jan. 1, 2023 10,364,850 12,000,000 1,635,150
Jan. 1, 2023 2.2M - (2,200,000) 8,164,850 9,800,000 1,635,150
Jan. 1, 2024 2.2M 571,540 (1,628,460) 6,536,390 7,600,000 1,063,610
Jan. 1, 2025 2.2M 457,547 (1,742,453) 4,793,937 5,400,000 606,063

Lease receivable 12,000,000

January 1,
Sales revenue 10,364,850
2023
Unearned finance income 1,635,150

January 1, Cost of goods sold 7,000,000

2023 Inventory 7,000,000

January 1, Cash 2,200,000

2023 Lease receivable 2,200,000

December Unearned finance income 571,540

31, 2023 Interest income 571,540

January 1, Cash 2,200,000

2024 Lease receivable 2,200,000

December Unearned finance income 457,547

31, 2024 Interest income 457,547
89
Answer Key (v1.6)

Net investment: 2023 2024

Gross investment, 12/31 9,800,000 7,600,000
Less: Unearned finance income 1,063,610 606,063
Net investment, 12/31 8,736,390 6,993,937

5. DENIM Company

Assumption 1: Residual value is guaranteed

PV Factor of PV Factor Cash Flows PV

Single payment for 6 periods at 9% 0.596267 800,000 477,014
Ordinary annuity for 6 periods at 9% 4.485919 1,200,000 5,383,103
Net investment in the lease 5,860,117
Lease receivable (1.2M x 6) + 800K 8,000,000
Unearned finance income 2,139,883

Gross Unearned
Lease Interest Net Investment/ Finance
Date Pmts. Income Amort. Investment Lease Rec. Inc.
Jan. 1, 2023 5,860,117 8M 2,139,883
Dec. 31, 2023 1.2M 527,411 (672,589) 5,187,528 6.8M 1,612,472
Dec. 31, 2024 1.2M 466,877 (733,123) 4,454,405 5.6M 1,145,595

Lease receivable 8,000,000

Cost of goods sold 4,200,000
January 1,
Sales revenue 5,860,117
2023
Unearned finance income 2,139,883
Inventory 4,200,000

December Cash 1,200,000

31, 2023 Lease receivable 1,200,000

December Unearned finance income 527,411

31, 2023 Interest income 527,411

January 1, Cash 1,200,000

2024 Lease receivable 1,200,000

December Unearned finance income 466,877

31, 2024 Interest income 466,877

90
Answer Key (v1.6)

Assumption 2: Residual value is NOT guaranteed

PV Factor of PV Factor Cash Flows PV

Single payment for 6 periods at 9% 0.596267 800,000 477,014
Ordinary annuity for 6 periods at 9% 4.485919 1,200,000 5,383,103
Net investment in the lease 5,860,117
Lease receivable (1.2M x 6) + 800K 8,000,000
Unearned finance income 2,139,883

Gross Unearned
Lease Interest Net Investment/ Finance
Date Pmts. Income Amort. Investment Lease Rec. Inc.
Jan. 1, 2023 5,860,117 8M 2,139,883
Dec. 31, 2023 1.2M 527,411 (672,589) 5,187,528 6.8M 1,612,472
Dec. 31, 2024 1.2M 466,877 (733,123) 4,454,405 5.6M 1,145,595

Lease receivable 8,000,000

Cost of goods sold (4.2M – 477,014) 3,722,986
January 1,
Sales revenue (5,860,117 – 477,014) 5,383,103
2023
Unearned finance income 2,139,883
Inventory 4,200,000

December Cash 1,200,000

31, 2023 Lease receivable 1,200,000

December Unearned finance income 527,411

31, 2023 Interest income 527,411

January 1, Cash 1,200,000

2024 Lease receivable 1,200,000

December Unearned finance income 466,877

31, 2024 Interest income 466,877

6. SLATE Company

Scenario 1
PV Factor of PV Factor Cash Flows Total PV
Ordinary annuity for 5 periods at 6% 4.212364 1,400,000 5,897,310
PV of lease payments discounted using market rate 5,897,310
Fair value of the underlying asset 5,740,276
Amount to be recognized as revenue (lower) 5,740,276

91
Answer Key (v1.6)

Scenario 2
PV Factor of PV Factor Cash Flows Total PV
Ordinary annuity for 5 periods at 8% 3.992710 1,400,000 5,589,794
PV of lease payments discounted using market rate 5,589,794
Fair value of the underlying asset 5,740,276
Amount to be recognized as revenue (lower) 5,589,794

7. COBALT Company

Asset for lease 1,800,000

Scenario
Cash 200,000
1
Lease receivable 2,000,000

Asset for lease 950,000

Scenario
Cash 1,050,000
2
Lease receivable 2,000,000

Asset for lease 1,700,000

Scenario
Loss on residual value 300,000
3
Lease receivable 2,000,000

Asset for lease 850,000

Scenario
Loss on residual value 1,150,000
4
Lease receivable 2,000,000

Multiple Choice – Problems

1. A; D; B
2. B; C; C
3. B; D; C
4. B; D; A

CHAPTER 10A – LESSOR ACCOUNTING – OPERATING LEASE AND OTHER MATTERS

True or False
1. False 6. False 11. True
2. False 7. True 12. True
3. True 8. True
4. True 9. False
5. False 10. False

Multiple Choice – Theories

1. B 6. A 11. C
2. D 7. B 12. A
3. A 8. A
4. C 9. C
92
Answer Key (v1.6)

5. D 10. D

Straight Problems
1. EMERALD Company

Cash 600,000
December
Rent income 550,000
31, 2023
Other income 50,000

December Depreciation expense (8M/15) 533,333

31, 2023 Accumulated depreciation – building 533,333

2. SHAMROCK Company

2023 2,000,000
2024 2,200,000
2025 2,420,000
2026 2,662,000
Total lease payments 9,282,000
Divide: Lease term 4 years
Annual rental income 2,320,500

January 1, Cash 2,000,000

2023 Unearned rent income 2,000,000

Unearned rent income 2,000,000

December
Accrued rent receivable 320,500
31, 2023
Rent income 2,320,500

January 1, Cash 2,200,000

2024 Unearned rent income 2,200,000

Unearned rent income 2,200,000

December
Accrued rent receivable 120,500
31, 2024
Rent income 2,320,500

January 1, Cash 2,420,000

2025 Unearned rent income 2,420,000

Unearned rent income 2,420,000

December
Accrued rent receivable 99,500
31, 2025
Rent income 2,320,500

93
Answer Key (v1.6)

January 1, Cash 2,662,000

2026 Unearned rent income 2,662,000

Unearned rent income 2,662,000

December
Accrued rent receivable 341,500
31, 2026
Rent income 2,320,500

3. PARAKEET Company

2023 2,000,000
2024 1,800,000
2025 1,600,000
2026 1,400,000
2027 1,200,000
Total lease payments 8,000,000
Divide: Lease term 5 years
Annual rental income 1,600,000

Cash 2,000,000
December
Unearned rent income 400,000
31, 2023
Rent income 1,600,000

Cash 1,800,000
December
Unearned rent income 200,000
31, 2024
Rent income 1,600,000

December Cash 1,600,000

31, 2025 Rent income 1,600,000

4. OLIVE Company

2023 450,000
2024 450,000
2025 450,000
2026 900,000
2027 900,000
2028 900,000
2029 900,000
2030 900,000
Total lease payments 5,850,000
Divide: Lease term 8 years
Annual rental income 731,250

94
Answer Key (v1.6)

Cash 450,000
December
Accrued rent receivable 281,250
31, 2023
Rent income 731,250

Cash 450,000
December
Accrued rent receivable 281,250
31, 2024
Rent income 731,250

Cash 450,000
December
Accrued rent receivable 281,250
31, 2025
Rent income 731,250

Cash 900,000
December
Accrued rent receivable 168,750
31, 2026
Rent income 731,250

5. MOSS Company (Correction: Ignore the information about MOSS Company’s

payment of P180,000 initial direct costs)

2023 1,000,000
2024 1,000,000
2025 1,080,000
2026 1,166,400
Total lease payments 4,246,400
Divide: Lease term 4 years
Annual rental income 1,061,600

Cash 1,075,000
January 1,
Unearned other income 75,000
2023
Unearned rent income 1,000,000

January 1, Capitalized initial direct costs 240,000

2023 Cash 240,000

January 1, Security deposit 600,000

2023 Cash 600,000

Unearned rent income 1,000,000

December
Accrued rent receivable 61,600
31, 2023
Rent income 1,061,600

December Unearned other income 75,000

31, 2023 Other income 75,000

95
Answer Key (v1.6)

December Amortization expense – initial direct cost 60,000

31, 2023 Capitalized initial direct costs 60,000

December Depreciation expense 800,000

31, 2023 Accumulated depreciation – machinery 800,000

December Cash (20M x 3%) 600,000

31, 2023 Rent income 600,000

Cash 1,075,000
January 1,
Unearned other income 75,000
2024
Unearned rent income 1,000,000

Unearned rent income 1,000,000

December
Accrued rent receivable 61,600
31, 2024
Rent income 1,061,600

December Unearned other income 75,000

31, 2024 Other income 75,000

December Amortization expense – initial direct cost 60,000

31, 2024 Capitalized initial direct costs 60,000

December Depreciation expense 800,000

31, 2024 Accumulated depreciation – machinery 800,000

December Cash (18M x 3%) 540,000

31, 2024 Rent income 540,000

2022 2023 2024

Beg. Carrying Amt. P7,200,000 P6,800,000 P6,180,000
Add: Initial direct
costs (IDC) – 240,000 –
Less: Depreciation (400,000) (800,000) (800,000)
Amortization
of IDC – (60,000) (60,000)
End. Carrying Amt. P6,800,000 P6,180,000 P5,320,000

6. VILLA Company

Allocation to P7,800,000
= P1,565,120 x = P939,072
Lease of Building P5.2M + P7.8M

96
Answer Key (v1.6)

Allocation to P5,200,000
= P1,565,120 x = P626,048
Lease of Land P5.2M + P7.8M

PV Factor of PV Factor Cash Flows Total PV

Annuity due for 8 periods at 7% 6.389289 939,072 6,000,000

Gross Unearned
Lease Interest Net Investment/ Finance
Date Pmts. Income Amort. Investment Lease Rec. Inc.
Jan. 1, 2023 6,000,000 7,512,576 1,512,576
Jan. 1, 2023 939,072 - (939,072) 5,060,928 6,573,504 1,512,576
Jan. 1, 2024 939,072 354,265 (584,807) 4,476,121 5,634,432 1,158,311
Jan. 1, 2025 939,072 313,328 (625,744) 3,850,377 4,695,360 844,983

Land 4,000,000
January 1,
Building 6,000,000
2023
Cash 10,000,000

Lease receivable 7,512,576

January 1,
Building 6,000,000
2023
Unearned finance income 1,512,576

Cash 1,565,120
January 1,
Rent income 626,048
2023
Lease receivable 939,072

December Unearned finance income 354,265

31, 2023 Interest income 354,265

Cash 1,565,120
January 1,
Rent income 626,048
2023
Lease receivable 939,072

December Unearned finance income 313,328

31, 2023 Interest income 313,328

7. PICKLE Company

PV Factor of PV Factor Cash Flows Total PV

Single payment for 7 periods at 6% 0.665057 800,000 532,046
Ordinary annuity for 7 periods at 6% 5.582381 600,000 3,349,429
Net investment in the lease 3,881,475
Lease receivable (600K x 7) + 800K 5,000,000
Unearned finance income 1,118,525

97
Answer Key (v1.6)

Gross Unearned
Lease Interest Net Investment/ Finance
Date Pmts. Income Amort. Investment Lease Rec. Inc.
Jan. 1, 2023 3,881,475 5,000,000 1,118,525
Dec. 31, 2023 600,000 232,888 (367,112) 3,514,363 4,400,000 885,637
Dec. 31, 2024 600,000 210,862 (389,138) 3,125,225 3,800,000 674,775

Unearned finance income 674,775

December
Vehicle 3,125,225
31, 2024
Lease receivable 3,800,000

8. FOREST Company

2023 1,200,000
2024 1,400,000
2025 1,600,000
2026 1,800,000
2027 2,000,000
Total lease payments 8,000,000
Divide: Lease term 5 years
Annual rental income 1,600,000

Total rent income, 2023 – 2025 (1.6M x 3) 4,800,000

Total rent received (1.2M + 1.4M + 1.6M) 4,200,000
Accrued rent receivable, 12/31/25 600,000

Total revised lease payments (P1,600,000 x 3) P4,800,000

Less: Balance of accrued rental income 600,000
Net revised lease payments P4,200,000
Divided by: Remaining lease term 3 years
Revised periodic rental income P1,400,000
12/31/2026 12/31/2027 12/31/2028
Accrued rent receivable 400,000 200,000 -

9. SACRAMENTO and UNIFORM

SACRAMENTO Financing Company books (the lessor):
PV Factor of PV Factor Cash Flows Total PV
Single payment for 5 periods at 6% 0.747258 500,000 373,629
Annuity due for 5 periods at 6% 4.465106 1,000,000 4,465,106
Net investment in the lease 4,838,735
Lease receivable (1M x 5) + 500K 5,500,000
Unearned finance income 661,265
98
Answer Key (v1.6)

Lease receivable 5,500,000

January 1,
Vehicle 4,838,735
2023
Unearned finance income 661,265

January 1, Cash 1,000,000

2023 Lease receivable 1,000,000

December Unearned finance income 230,324

31, 2023 Interest income 230,324

UNIFORM Company (lessee)

Lease Liab./
PV Factor of PV Factor Cash Flows ROU Asset
Annuity due for 5 periods at 6.5% 4.425799 1,000,000 4,425,799

January 1, ROU asset 4,425,799

2023 Lease liability 4,425,799

January 1, Lease liability 1,000,000

2023 Cash 1,000,000

December Interest expense 222,677

31, 2023 Lease liability 222,677

December Depreciation expense 885,160

31, 2023 ROU asset 885,160

10. CANARY and DAFFODIL

CANARY Company (lessor)

2023 1,000,000
2024 900,000
2025 800,000
2026 700,000
2027 600,000
Total lease payments 4,000,000
Divide: Lease term 5 years
Annual rental income 800,000

99
Answer Key (v1.6)

Cash 1,000,000
December
Unearned rent income 200,000
31, 2023
Rent income 800,000

DAFFODIL Company (lessee)

Lease Liab./
PV Factor of PV Factor Cash Flows ROU Asset
Single payment for 1 period at 9% 0.917431 1,000,000 917,431
Single payment for 2 periods at 9% 0.841680 900,000 757,512
Single payment for 3 periods at 9% 0.772183 800,000 617,746
Single payment for 4 periods at 9% 0.708425 700,000 495,898
Single payment for 5 periods at 9% 0.649931 600,000 389,959
3,178,546

January 1, ROU asset 3,178,546

2023 Lease liability 3,178,546

December Lease liability 1,000,000

31, 2023 Cash 1,000,000

December Interest expense 286,069

31, 2023 Lease liability 286,069

December Depreciation expense 635,709

31, 2023 ROU asset 635,709

Multiple Choice – Problems

1. B; C; D; A 6. A; D; B; C
2. C; A; D
3. C; C
4. B; A; D
5. B; D

CHAPTER 11 – SUBLEASE, AND SALE AND LEASEBACK

True or False
1. False 6. True
2. False 7. False
3. True 8. False
4. True 9. True
5. False 10. True

100
Answer Key (v1.6)

Multiple Choice – Theories

1. D 6. A
2. C 7. C
3. A 8. B
4. D 9. B
5. A 10. D

Straight Problems
1. GRANOLA Company

Head Lease (1/1/23) Lease Liab./

PV Factor of PV Factor Cash Flows ROU Asset
Annuity due for 10 periods at 8% 7.246888 P1,400,000 10,145,643

Sublease (net invest.) (1/1/23) Net

PV Factor of PV Factor Cash Flows investment
Annuity due for 10 periods at 8% 7.246888 P1,600,000 11,595,021
Net investment in the lease (1.6M x 10) 16,000,000
Unearned finance income 4,404,979

Note: Sublease is considered as a finance lease.

January 1, ROU asset 10,145,643

2023 Lease liability 10,145,643

Lease receivable (1.6M x 10) 16,000,000

January 1, ROU asset 10,145,643
2023 Unearned finance income 4,404,979
Gain on sublease – P/L 1,449,378

January 1, Lease liability 1,400,000

2023 Cash 1,400,000

January 1, Cash 1,600,000

2023 Lease receivable 1,600,000

December Interest expense 699,651

31, 2023 Lease liability (10,145,643 – 1.4M) x 8% 699,651

December Unearned finance income 799,602

31, 2023 Interest income (11,595,021 – 1.6M) x 8% 799,602

Net amount in profit or loss = 1,449,378 +799,602 – 699,651 = 1,549,329 net income

101
Answer Key (v1.6)

2. BUMBLEBEE Company

Head Lease (1/1/23) Lease Liab./

PV Factor of PV Factor Cash Flows ROU Asset
Annuity due for 5 periods at 7% 4.387211 P700,000 3,071,048

Sublease (net invest.) (1/1/24) Net

PV Factor of PV Factor Cash Flows investment
Annuity due for 4 periods at 7% 3.624316 P900,000 P3,261,884
Net investment in the lease (900K x 4) 3,600,000
Unearned finance income 338,116

Note: Sublease is considered as a finance lease.

January 1, Lease liability 700,000

2024 Cash 700,000

Lease receivable (900K x 4) 3,600,000

January 1, ROU asset (3,071,048 x 4/5) 2,456,838
2024 Unearned finance income 338,116
Gain on sublease – P/L 805,046

January 1, Cash 900,000

2024 Lease receivable 900,000

December Interest expense 128,591

31, 2023 Lease liability 128,591

December Unearned finance income 165,332

31, 2023 Interest income 165,332

Net amount in profit or loss = 805,046 + 165,332 – 128,591 = 841,787 net income

3. ORANGE and AMBER

Scenario 1
ORANGE Company

PV Factor of PV Factor Cash Flows Lease Liab

Annuity due for 4 periods at 5% 3.723248 P1,000,000 P3,723,248

P3,723,248
ROU Asset = P4,800,000 x = P3,249,380
P5,500,000

102
Answer Key (v1.6)

Recognized P5,500,000 – P3,723,248

= P700,000 x = P226,132
Gain on Sale P5,500,000

Cash 5,500,000
Right-of-use asset 3,249,380
Lease liability 3,723,248
Land 4,800,000
Gain on sale and leaseback (squeeze) 226,132

AMBER Company

Land 5,500,000
Cash 5,500,000

Scenario 2
ORANGE Company

PV Factor of PV Factor Cash Flows PV

Annuity due for 4 periods at 5% 3.723248 P1,000,000 P3,723,248
Excess of selling price over fair value 500,000
Initial lease liability P3,223,248

P3,223,248
ROU Asset = P4,800,000 x = P2,813,016
P5,500,000

Recognized P5,500,000 – P3,223,248

= P700,000 x = P289,768
Gain on Sale P5,500,000

Cash 6,000,000
Right-of-use asset 2,813,016
Lease liability 3,223,248
Loan payable 500,000
Land 4,800,000
Gain on sale and leaseback (squeeze) 289,768

AMBER Company

Land 5,500,000
Loan receivable 500,000
Cash 6,000,000

Scenario 3
ORANGE Company

103
Answer Key (v1.6)

PV Factor of PV Factor Cash Flows PV

Annuity due for 4 periods at 5% 3.723248 P1,000,000 P3,723,248
Excess of fair value over selling price 300,000
Lease liability to be used in ROU asset and gain on sale P4,023,248

P4,023,248
ROU Asset = P4,800,000 x = P3,511,198
P5,500,000

Recognized P5,500,000 – P4,023,248

= P700,000 x = P187,950
Gain on Sale P5,500,000

Cash 5,200,000
Right-of-use asset 3,511,198
Lease liability 3,723,248
Land 4,800,000
Gain on sale and leaseback (squeeze) 187,950

AMBER Company

Land 5,500,000
Cash 5,200,000
Unearned income 300,000

4. BRONZE and APRICOT

Scenario 1
BRONZE Company

PV Factor of PV Factor Cash Flows Lease Liab

Annuity due for 5 periods at 7% 4.387211 P900,000 P3,948,490

P3,948,490
ROU Asset = 10,000,000 x = P4,935,612
P8,000,000

Recognized P8,000,000 – P3,948,490

= 2,000,000 x = P1,012,878
Loss on Sale P8,000,000

Cash 8,000,000
Right-of-use asset 4,935,612
Loss on sale and leaseback (squeeze) 1,012,878
Lease liability 3,948,490
Building, net 10,000,000

104
Answer Key (v1.6)

APRICOT Company

Building 8,000,000
Cash 8,000,000

Scenario 2
BRONZE Company

PV Factor of PV Factor Cash Flows Lease Liab

Annuity due for 5 periods at 7% 4.387211 P900,000 P3,948,490
Excess of selling price over fair value 1,000,000
Initial lease liability P2,948,490

P2,948,490
ROU Asset = 10,000,000 x = P3,685,613
P8,000,000

Recognized P8,000,000 – P2,948,490

= 2,000,000 x = P1,262,878
Loss on Sale P8,000,000

Cash 9,000,000
Right-of-use asset 3,685,613
Loss on sale and leaseback (squeeze) 1,262,877
Lease liability 2,948,490
Loan payable 1,000,000
Building, net 10,000,000

APRICOT Company

Building 8,000,000
Loan receivable 1,000,000
Cash 9,000,000
Scenario 3
BRONZE Company

PV Factor of PV Factor Cash Flows Lease Liab

Annuity due for 5 periods at 7% 4.387211 P900,000 P3,948,490
Excess of fair value over selling price 500,000
Lease liability to be used in ROU asset and gain on sale P4,448,490

P4,448,490
ROU Asset = 10,000,000 x = P5,560,613
P8,000,000
Recognized P8,000,000 – P4,448,490
= 2,000,000 x = P887,878
Loss on Sale P8,000,000
105
Answer Key (v1.6)

Cash 7,500,000
Right-of-use asset 5,560,613
Loss on sale and leaseback (squeeze) 887,877
Lease liability 3,948,490
Building, net 10,000,000

APRICOT Company

Building 8,000,000
Cash 7,500,000
Unearned rent income 500,000

Multiple Choice – Problems

1. A; B 6. C; B
2. C; A 7. D
3. B; D; C 8. C; A; B; D; B; D
4. D; B; A
5. C; A; B; D; C; A; B; C; A

CHAPTER 12 – EMPLOYEE BENEFITS PART 1

True or False
1. True 6. True 11. False
2. False 7. True 12. True
3. True 8. True 13. False
4. False 9. False 14. False
5. False 10. True 15. True

Multiple Choice – Theories

1. A 6. A 11. A
2. D 7. C 12. B
3. C 8. D
4. B 9. C
5. B 10. D

Straight Problems
1. CUYO Company

Salaries expense 4,500,000

Scenario
Accrued salaries payable 200,000
1
Cash 4,300,000

Salaries expense 4,500,000

Scenario
Prepaid expense 250,000
2
Cash 4,750,000
106
Answer Key (v1.6)

Salaries expense 4,500,000

Scenario
Accrued salaries payable 350,000
3
Cash 4,150,000

2. AGUTAYA
Total Basic 13th Month Total
Employee Pay Pay Benefits
Employee A P1,200,000 P100,000 P1,300,000
Employee B 420,000 35,000 455,000
Employee C 840,000 70,000 910,000
Employee D 240,000 20,000 260,000
P2,925,000

3. MAGSAYSAY Company

Total 13th Month Total

Employee Basic Pay Pay Benefits
Employee A P270,000 P22,500 P292,500
Employee B 720,000 60,000 780,000
Employee C 250,000 20,833 270,833
Employee D 360,000 30,000 390,000
1,733,333

4. BATANES Company

Scenario 1: P4,770,000 x 6% = P286,200

Scenario 2: (P4,770,000/1.06) x 6% = P270,000

Scenario 3:

B = B% x {NI – [T% x (NI – B)]}

B = 6% x {4,770,000 – [25% x (4,770,000 – B)]}
B = 6% x {4,770,000 – [1,192,500 – 0.25B]}
B = 6% x {4,770,000 – 1,192,500 + 0.25B}
B = 6% x {3,577,500 + 0.25B}
B = 214,650 + 0.015B
B – 0.015B = 214,650
0.985B = 214,650
0.985 0.985
B = P217,919

107
Answer Key (v1.6)

Scenario 4:

B = B% x {[NI – B] – [T% x (NI – B)]}

B = 6% x {[4,770,000 – B] – [25% x (4,770,000 – B)]}
B = 6% x {[4,770,000 – B] – [1,192,500 – 0.25B]}
B = 6% x {4,770,000 – B – 1,192,500 + 0.25B}
B = 6% x {3,577,500 – 0.75B}
B = 214,650 – 0.045B
B + 0.045B = 214,650
1.045B = 214,650
1.045 1.045
B = P205,407

5. CAGAYAN Company

Scenario 1:

Salary base [A] Utilized VLs [B] [A] x [B]

Employee A P2,000/day 14 P28,000
Employee B 1,800/day 16 28,800
Employee C 2,500/day 12 30,000
Employee D 1,500/day 8 12,000
Expense from used vacation leaves P98,800
Salary base [A] Unutilized VLs [B]
Employee A P2,200/day 6 P13,200
Employee B 1,980/day 4 7,920
Employee C 2,750/day 8 22,000
Employee D 1,650/day 12 19,800
Expense from unused vacation leaves P62,920
Total Expense (P98,800 + P62,920) P161,720

Accrued liability = P62,920

Scenario 2:

Salary base [A] Utilized VLs [B] [A] x [B]

Employee A P2,000/day 14 P28,000
Employee B 1,800/day 16 28,800
Employee C 2,500/day 12 30,000
Employee D 1,500/day 8 12,000
Expense from used vacation leaves (Total Expense) P98,800

Accrued liability = P0

108
Answer Key (v1.6)

6. ISABELA Company

Scenario 1 (Accumulating and vesting):

Employee No. of Available Paid Used Paid Unused Paid

Category Employees Absences Absences Absences
Managers 100 1,500 1,200 300
Supervisors 250 3,750 2,900 850
Staffs 500 7,500 6,200 1,300

[A] [B]
Employee Average Daily Used Paid
Category Salary Absences [A] x [B]
Managers P3,000 1,200 P3,600,000
Supervisors 2,000 2,900 5,800,000
Staffs 1,200 6,200 7,440,000
Total expense from used paid absences P16,840,000

[A] [B]
Employee Average Daily Unused Paid
Category Salary Absences [A] x [B]
Managers P3,150 300 P945,000
Supervisors 2,100 850 1,785,000
Staffs 1,260 1,300 1,638,000
Total expense from unused paid absences P4,368,000

Total expense from paid absences P21,208,000

Accrued liability = P4,368,000

Scenario 2 (Accumulating and non-vesting):

[A] [B]
Employee Average Daily Used Paid
Category Salary Absences [A] x [B]
Managers P3,000 1,200 P3,600,000
Supervisors 2,000 2,900 5,800,000
Staffs 1,200 6,200 7,440,000
Total expense from used paid absences P16,840,000

109
Answer Key (v1.6)

[A] [B]
Employee Average Daily Unused Paid
Category Salary Absences [A] x [B]
Managers P3,150 260 P819,000
Supervisors 2,100 760 1,596,000
Staffs 1,260 1,160 1,461,600
Total expense from unused paid absences P3,876,600

Total expense from paid absences P20,716,600

Accrued liability = P3,876,600

Scenario 3 (Non-accumulating):

[A] [B]
Employee Average Daily Used Paid
Category Salary Absences [A] x [B]
Managers P3,000 1,200 P3,600,000
Supervisors 2,000 2,900 5,800,000
Staffs 1,200 6,200 7,440,000
Total expense from paid absences P16,840,000

Accrued liability = P0

7. QUIRINO Company
Compensation expense 4,000,000
Cash (equal to net pay) 2,410,000
Withholding tax payable 700,000
Philhealth contributions payable 320,000
SSS contributions payable 450,000
HDMF contributions payable 120,000
Philhealth contributions expense 260,000
SSS contributions expense 300,000
HDMF contributions expense 90,000
Philhealth contributions payable 260,000
SSS contributions payable 300,000
HDMF contributions payable 90,000
Compensation expense (inclusive of employee share and tax) P4,000,000
Philhealth contributions expense (employer share only) 260,000
SSS contributions expense (employer share only) 300,000
HDMF contributions expense (employer share only) 90,000
Total short-term employee benefit expense P4,650,000

110
Answer Key (v1.6)

Withholding tax payable 700,000

Philhealth contributions payable 580,000
SSS contributions payable 750,000
HDMF contributions payable 210,000
Cash 2,240,000

8. VIZCAYA Company

Termination benefits for 50 employees in Area A (50 x 40K) P2,000,000

Termination benefits for redundant functions 1,200,000
Total termination benefits P3,200,000

Multiple Choice – Problems

1. B; C 6. B
2. A; C; B; D
3. C; B; D; A
4. C; A
5. B

CHAPTER 12A – POST-EMPLOYMENT BENEFITS

True or False
1. True 6. False 11. False
2. False 7. False 12. False
3. False 8. True 13. False
4. True 9. True 14. True
5. True 10. True 15. False

Multiple Choice – Theories

1. A 6. D 11. B 16. A
2. B 7. B 12. C 17. B
3. D 8. D 13. C
4. A 9. A 14. B
5. C 10. D 15. D

Straight Problems
1. SONIA

Current
Year PV Attributed Service
(12/31) PV Factor of Factor Benefit Cost
2023 Single payment for 19 periods at 7% 0.276506 P180,000 P49,771
2024 Single payment for 18 periods at 7% 0.295864 180,000 53,256
2025 Single payment for 17 periods at 7% 0.316574 180,000 56,983

111
Answer Key (v1.6)

2023 2024 2025

Beg. defined benefit obligation P– P49,771 P106,511
Add: Interest expense – 3,484 7,456
Current service cost 49,771 53,256 56,983
End. defined benefit obligation P49,771 P106,511 P170,950

2. BERNANDO

FV Current Future
FV Factor of Factor Salary Salary
Single payment for 14 periods at 2% 1.319479 P200,000 P263,896

Current
Year PV Attributed Service
(12/31) PV Factor of Factor Benefit Cost
2023 Single payment for 14 periods at 8% 0.340461 P263,896 P89,846
2024 Single payment for 13 periods at 8% 0.367698 263,896 97,034
2025 Single payment for 12 periods at 8% 0.397114 263,896 104,797

2023 2024 2025

Beg. defined benefit obligation P– P89,846 P194,068
Add: Interest expense – 7,188 15,525
Current service cost 89,846 97,034 104,797
End. defined benefit obligation P89,846 P194,068 P314,390

3. PANGASINAN Company

Beginning defined benefit obligation (DBO) P6,000,000

Add: Interest expense (P6M x 9%) 540,000
Current service cost 800,000
Past service cost 200,000
Actuarial losses 200,000
Less: Benefits paid to retirees (700,000)
Settled benefits at present value (345,000)
Actuarial gains (120K + 270K) (390,000)
Ending defined benefit obligation P6,305,000

As net expense in profit or loss:

Current service cost 800,000
Past service cost 200,000
Interest expense 540,000
Loss on settlement (360K – 345K) 15,000
Net expense recognized in profit or loss P1,555,000

112
Answer Key (v1.6)

As part of other comprehensive income:

Actuarial losses 200,000
Less: Actuarial gains (390,000)
Net retirement cost (gain) recognized in OCI (P190,000)
4. ZAMBALES Company
[B] [A] x [B]
[A] Time to Weighting Weighted
Date Amounts 12/31 Factor Amounts
1/1 P5,400,000 12 months 12/12 P5,400,000
4/1 (1,200,000) 9 months 9/12 (900,000)
7/1 (900,000) 6 months 6/12 (450,000)
Weighted average DBO P4,050,000
Multiply: Beginning discount rate 7%
Interest expense, 2023 P283,500
Beginning defined benefit obligation (DBO) P5,400,000
Add: Interest expense 283,500
Current service cost 500,000
Past service cost 330,000
Actuarial losses (P1M + P250K) 1,250,000
Less: Benefits paid to retirees (1,200,000)
Settled benefits at present value (900,000)
Actuarial gains (800,000)
Ending defined benefit obligation P4,863,500
As net expense in profit or loss:
Current service cost P500,000
Past service cost 330,000
Interest expense 283,500
Less: Gain on settlement (900K – 840K) (60,000)
Net expense recognized in profit or loss P1,053,500
As deduction from other comprehensive income:
Actuarial losses P1,250,000
Less: Actuarial gains (800,000)
Net retirement cost recognized in OCI P450,000
5. TARLAC Company
Beginning plan assets P4,500,000
Add: Actual return (P1M – P400K) 600,000
Contributions to the plan assets 1,400,000
Less: Amount of benefits paid to retirees (800,000)
Settlement price of settled benefits (420,000)
Ending plan assets P5,280,000

113
Answer Key (v1.6)

Actual return P600,000

Less: Interest income (P4.5M x 6%) 270,000
Remeasurement gain P330,000

6. PAMPANGA Company

[B] [A] x [B]

[A] Time to Weighting Weighted
Date Amounts 12/31 Factor Amounts
1/1 P7,500,000 12 months 12/12 P7,500,000
3/31 (900,000) 9 months 9/12 (675,000)
7/1 1,000,000 6 months 6/12 500,000
10/1 (400,000) 3 months 3/12 (100,000)
Weighted average plan assets P7,225,000
Multiply: Beginning discount rate 6%
Interest income, 2023 P433,500

Beginning plan assets P7,500,000

Add: Actual return 210,000
Contributions to the plan assets 1,000,000
Less: Amount of benefits paid to retirees (400,000)
Settlement price of settled benefits (900,000)
Ending plan assets P7,410,000
Actual return P210,000
Less: Interest income 433,500
Remeasurement loss P223,500

7. ECIJA Company
Beginning defined benefit obligation (DBO) P7,000,000
Add: Interest expense (P7M x 5%) 350,000
Current service cost 1,000,000
Past service cost 350,000
Net actuarial losses 600,000
Less: Benefits paid to retirees (900,000)
Settled benefits at present value (500,000)
Ending defined benefit obligation P7,900,000

Beginning plan assets 6,000,000

Add: Actual return 420,000
Contributions to the plan assets 800,000
Less: Amount of benefits paid to retirees (900,000)
Settlement price of settled benefits (450,000)
Ending plan assets P5,870,000
114
Answer Key (v1.6)

As expense in profit or loss:

Current service costs P1,000,000
Past service costs 350,000
Interest expense on defined benefit obligation 350,000
Less: Gain on settlement (500K – 450K) (50,000)
Interest income on plan assets (P6M x 5%) (300,000)
Net retirement cost recognized in profit or loss P1,350,000
As reduction from other comprehensive income:
Actuarial losses on defined benefit obligation P600,000
Less: Remeasurement gains on plan assets (420K – 300K) (120,000)
Net retirement cost recognized in OCI P480,000
Total retirement costs in comprehensive income (net expense
recognized in profit or loss and OCI) P1,830,000

Retirement cost – OCI 480,000

Retirement cost – profit or loss 1,350,000
Cash (equal to contributions) 800,000
Net retirement liability 1,030,000

8. BULACAN Company (Please ignore the P800,000 contribution to plan asset)

Beginning defined benefit obligation (DBO) P9,400,000

Add: Interest expense (P9.4M x 6%) 564,000
Current service cost 1,500,000
Past service cost 400,000
Net actuarial losses (300K + 500K – 250K) 550,000
Less: Benefits paid to retirees (1,200,000)
Ending defined benefit obligation P11,214,000

Beginning plan assets P7,900,000

Add: Actual return 700,000
Contributions to the plan assets 1,000,000
Less: Amount of benefits paid to retirees (1,200,000)
Ending plan assets P8,400,000

As expense in profit or loss:

Current service costs 1,500,000
Past service costs 400,000
Interest expense on defined benefit obligation 564,000
Less: Interest income on plan assets (P7.9M x 6%) (474,000)
Net retirement cost recognized in profit or loss P1,990,000

115
Answer Key (v1.6)

As reduction from other comprehensive income:

Actuarial losses on defined benefit obligation P550,000
Less: Remeasurement gains on plan assets (700K – 474K) (226,000)
Net retirement cost recognized in OCI P324,000
Total retirement costs in comprehensive income (net expense
recognized in profit or loss and OCI) P2,314,000

Retirement cost – OCI 324,000

Retirement cost – profit or loss 1,990,000
Cash (equal to contributions) 1,000,000
Net retirement liability 1,314,000

9. AURORA Company

Year 2023:

Beginning DBO, 1/1/23 P10,000,000

Add: Interest expense (P10M x 7%) 700,000
Current service cost 1,300,000
Past service cost 700,000
Net actuarial losses 500,000
Less: Benefits paid to retirees (900,000)
Carrying amount of settled benefits (400,000)
Ending DBO, 12/31/23 P11,900,000

Beginning plan assets, 1/1/23 P8,000,000

Add: Actual return 750,000
Contributions to the plan assets 1,600,000
Less: Amount of benefits paid to retirees (900,000)
Payments to settled benefits (430,000)
Ending plan assets, 12/31/23 P9,020,000

As expense in profit or loss:

Current service costs P1,300,000
Past service costs 700,000
Interest expense on defined benefit obligation 700,000
Loss on settlement (430K – 400K) 30,000
Less: Interest income on plan assets (P8M x 7%) (560,000)
Net retirement cost recognized in profit or loss P2,170,000

As reduction from other comprehensive income:

Actuarial losses on defined benefit obligation P500,000
Less: Remeasurement gains on plan assets (750K – 560K) (190,000)
Net retirement cost recognized in OCI P310,000
116
Answer Key (v1.6)

Total retirement costs in comprehensive income (net expense

recognized in profit or loss and OCI) P2,480,000

December 31, 2023:

Retirement cost – OCI 310,000
Retirement cost – profit or loss 2,170,000
Cash (equal to contributions) 1,600,000
Net retirement liability 880,000

Year 2024:

Beginning DBO, 1/1/24 P11,900,000

Add: Interest expense (P11.9M x 8%) 952,000
Current service cost 1,500,000
Past service cost 400,000
Less: Benefits paid to retirees (1,000,000)
Carrying amount of settled benefits (360,000)
Net actuarial gains (700,000)
Ending DBO, 12/31/24 P12,692,000

Beginning plan assets, 1/1/24 P9,020,000

Add: Actual return 300,000
Contributions to the plan assets 2,000,000
Less: Amount of benefits paid to retirees (1,000,000)
Payments to settled benefits (300,000)
Ending plan assets, 12/31/24 P10,020,000

As expense in profit or loss:

Current service costs P1,500,000
Past service costs 400,000
Interest expense on defined benefit obligation 952,000
Less: Interest income on plan assets (P9.02M x 8%) (721,600)
Gain on settlement (360K – 300K) (60,000)
Net retirement cost recognized in profit or loss P2,070,400

As reduction from other comprehensive income:

Rem. loss on plan assets (300K – 721.6K) P421,600
Less: Actuarial gains on defined benefit obligation (700,000)
Net retirement cost (gain) recognized in OCI (278,400)
Total retirement costs in comprehensive income (net expense
recognized in profit or loss and OCI) P1,792,000

117
Answer Key (v1.6)

December 31, 2024:

Net retirement liability 208,000
Retirement cost – profit or loss 2,070,400
Cash (equal to contributions) 2,000,000
Retirement cost – OCI 278,400

10. BENGUET Company

Beginning DBO, 1/1/23 6,000,000

Add: Interest expense (P6M x 10%) 600,000
Current service cost 800,000
Past service cost 250,000
Net actuarial losses 100,000
Less: Benefits paid to retirees (600,000)
Carrying amount of settled benefits (150,000)
Ending DBO, 12/31/23 P7,000,000

Beginning plan assets, 1/1/23 8,000,000

Add: Actual return 1,000,000
Contributions to the plan assets 1,800,000
Less: Amount of benefits paid to retirees (600,000)
Payments to settled benefits (200,000)
Ending plan assets, 12/31/23 P10,000,000

Date Net Surplus Asset Ceiling Effect of A.C.

01/01/23 P2,000,000 P1,200,000 P800,000
12/31/23 3,000,000 1,200,000 1,800,000
Increase in the effect of asset ceiling P1,000,000
Less: Interest expense (P800K x 10%) 80,000
Remeasurement loss on effect of asset ceiling P920,000

Interest expense on defined benefit obligation 600,000

Interest expense on the beg. effect of the asset ceiling 80,000
Less: Interest income on plan assets (P8M x 10%) (800,000)
Net interest income P120,000

As expense in profit or loss:

Current service costs 800,000
Past service costs 250,000
Interest expense on defined benefit obligation 600,000
Interest expense on beg. effect of asset ceiling 80,000
Loss on settlement (200K – 150K) 50,000
Less: Interest income on plan assets (P8M x 10%) (800,000)
Net retirement cost recognized in profit or loss P980,000

118
Answer Key (v1.6)

As reduction from other comprehensive income:

Net actuarial loss P100,000
Remeasurement loss on effect of asset ceiling 920,000
Less: Rem. gain on plan asset (P1M – P800K) (200,000)
Net retirement cost (gain) recognized in OCI P820,000
Total retirement costs in comprehensive income (net expense
recognized in profit or loss and OCI) P1,800,000

December 31, 2023:

Retirement cost – OCI 820,000
Retirement cost – profit or loss 980,000
Cash (equal to contributions) 1,800,000

Multiple Choice – Problems

1. B; C; D; B 6. A; D
2. B; C; C; A; B
3. A; D; D; A; C; B; B; A
4. A; D; D; A
5. D

CHAPTER 13 – ACCOUNTING FOR INCOME TAX

True or False
1. True 6. True 11. False
2. False 7. True 12. True
3. True 8. False 13. False
4. False 9. True 14. True
5. False 10. False 15. False

Multiple Choice – Theories

1. D 6. B 11. C 16. D
2. D 7. C 12. B 17. A
3. A 8. C 13. A 18. D
4. B 9. A 14. D
5. A 10. D 15. C

119
Answer Key (v1.6)

Straight Problems
1. PORAC Company
Accounting income before tax P5,000,000
Add: Non-tax-deductible expenses 900,000
Less: Non-taxable interest income (700,000)
Income subject to income tax P5,200,000
Multiply: Current tax rate 25%
Current income tax expense P1,300,000
Less: Quarterly income tax paid (750,000)
Current income tax payable P550,000
2. APALIT Company
Sales revenue P8,000,000
Cost of goods sold (3,500,000)
Operating expenses (2,000,000)
Interest income from deposits (gross of tax) (400K/80%) 500,000
Proceeds from life insurance policy on the Company’s president 5,000,000
Gain on sale of investment in equity securities at FVTPL 800,000
Accounting income before any income tax P8,800,000
Add: Non-deductible expenses 400,000
Less: Interest income from deposits (500,000)
Less: Proceeds from life insurance (5,000,000)
Less: Gain on sale of equity securities at FVTPL (800,000)
Add: Excess accounting depreciation over tax depreciation 200,000
Taxable income P3,100,000
Current tax expense – regular tax (P3.1M x 25%) P775,000
Current tax expense – final tax (P500K x 20%) 100,000
Current tax expense – CG tax (P800K x 15%) 120,000
Total current tax expense P995,000
3. SASMUAN Company
Accounting income before tax P7,000,000
Add: Non-tax-deductible expenses 800,000
Less: Non-taxable interest income (1,000,000)
Accounting income subject to income tax P6,800,000
Add: Excess warranty expense (900K – 600K) 300,000
Less: Excess tax depre (1.8M – 1.2M) (600,000)
Taxable income P6,500,000
Multiply: Tax rate 25%
Current tax expense, 2023 P1,625,000
Less: Current tax payments (800,000)
Current tax payable, 12/31/23 P825,000

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Answer Key (v1.6)

Add: Excess warranty expense (900K – 600K) 300,000

Multiply: Tax rate 25%
Deferred tax asset/Deferred tax benefit P75,000

Excess tax depre (1.8M – 1.2M) 600,000

Multiply: Tax rate 25%
Deferred tax liab/Deferred tax income P150,000

4. TOMAS Company (Note: Please change effective interest rate to effective TAX rate)

Accounting income (audited) P12,000,000

Less: Interest income from tax-exempt securities (1,000,000)
Add: Rep. exp. in excess of tax-deductible amount 300,000
Accounting income subject to tax P11,300,000
Add: Unearned advances received from customers 700,000
Add: Impairment loss on the Company’s land 1,500,000
Less: Excess of tax depreciation (1.9M – 1.1M) (800,000)
Less: Excess accounts written-off (800K – 500K) (300,000)
Taxable income P12,400,000
Multiply by: Tax rate 25%
Current tax expense P3,100,000

Add: Unearned advances received from customers 700,000

Add: Impairment loss on the Company’s land 1,500,000
Less: Excess of tax depreciation (1.9M – 1.1M) (800,000)
Less: Excess accounts written-off (800K – 500K) (300,000)
Net deductible temporary difference P1,100,000
Multiply by: Tax rate 25%
Net deferred tax benefit P275,000

Net deferred tax liab., 12/31/23 = P540,000 – P275,000 = P265,000

Current tax expense 3,100,000

Less: Net deferred tax benefit (275,000)
Total tax expense P2,825,000
Divide by: Accounting income (audited) 12,000,000
Effective tax rate 23.54%

5. BACOLOR Company (Clarification: Insurance payments and expense are related to

property insurance and not on life insurance. Please ignore the P6,000,000
accounting income given in the first paragraph)

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Answer Key (v1.6)

Accounting income (audited) P10,000,000

Less: Gain from the settlement of life insurance (2,000,000)
Add: Expense items with no proper documents 400,000
Less: Gain on sale of tax-exempt debt security (950,000)
Accounting income subject to tax P7,450,000
Add: Excess accounting depreciation (1.9M – 1.3M) 600,000
Add: Loss on inventory write-down 200,000
Less: Unrealized gain from FVTPL debt investments (1,200,000)
Add: Impairment of the Company’s office building 1,000,000
Add: Research costs in 2023 (1.5M x 4/5) 1,200,000
Less: Excess amounts paid for prepaid insurance (1.1M – 450K) (650,000)
Add: Excess warranty expense (900K – 650K) 250,000
Taxable income P8,850,000
Multiply: Tax rate 25%
Current tax expense P2,212,500

Add: Excess accounting depreciation (1.9M – 1.3M) 600,000

Add: Loss on inventory write-down 200,000
Add: Impairment of the Company’s office building 1,000,000
Add: Research costs in 2023 (1.5M x 4/5) 1,200,000
Add: Excess warranty expense (900K – 650K) 250,000
Total deductible temporary difference P3,250,000
Multiply: Tax rate 25%
Deferred tax benefit P812,500
Add: Beg. DTA 900,000
End. DTA P1,712,500

Less: Unrealized gain from FVTPL debt investments 1,200,000

Less: Excess amounts paid for prepaid insurance (1.1M – 450K) 650,000
Total taxable temporary difference P1,850,000
Multiply: Tax rate 25%
Deferred tax expense P462,500
Add: Beg. DTL 500,000
End. DTL P962,500

Net DTA = P1,712,500 – P962,500 = P750,000

Total tax expense (2,212,500 – 812,500 + 462,500) P1,862,500

Divide: Accounting income 10,000,000
Effective tax rate 18.63%

122
Answer Key (v1.6)

6. RITA Company

Carrying amount Tax Base Tax. Temp. Diff

Equipment 4,500,000 3,500,000 P1,000,000
FVTPL debt inv. 1,800,000 1,250,000 550,000
Prepaid insurance 500,000 0 500,000
Total taxable temporary differences P2,050,000
Multiply: Tax rate 25%
Deferred tax liability, 12/31/23 P512,500
Less: Deferred tax liability, 01/01/23 0
Deferred tax expense, 2023 P512,500

Carrying amount Tax Base Tax. Ded. Diff

Research costs 0 800,000 800,000
Est. warranty liab. 600,000 0 600,000
Total deductible temporary differences 1,400,000
Multiply: Tax rate 25%
Deferred tax asset, 12/31/23 350,000
Less: Deferred tax asset, 01/01/23
Deferred tax benefit, 2023 350,000

Accounting income (audited) 6,000,000

Less: Tax-exempt income items (900,000)
Add: Non-tax-deductible expense items 400,000
Accounting income subject to tax 5,500,000
Less: Excess tax depreciation (4,5M – 3.5M) (1,000,000)
Add: Unamortized research costs 800,000
Add: Excess of warranty expense 600,000
Less: Unrealized gain from FVTPL debt inv. (1.8M – P1.25M) (550,000)
Less: Excess payment for prepaid insurance (500,000)
Taxable income 4,850,000
Multiply: Tax rate 25%
Current tax expense P1,212,500

Total tax exp (1,212,500 + 512,500 – 350,000) 1,375,000

Divide by: Accounting income before tax 6,000,000
Effective tax rate 22.92%

7. MINALIN Company

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Answer Key (v1.6)

Carrying amount Tax Base Tax. Temp. Diff

PPE 9,000,000 7,800,000 1,200,000
FVTPL debt inv. 6,000,000 5,400,000 600,000
Total taxable temporary differences 1,800,000
Multiply: Tax rate 25%
Deferred tax liability, 12/31/23 450,000
Less: Deferred tax liability, 01/01/23 180,000
Deferred tax expense, 2023 270,000

Carrying amount Tax Base Tax. Ded. Diff

Accounts receivable P4,500,000 P4,800,000 300,000
Unamortized research costs – 2,000,000 2,000,000
Inventory 5,000,000 5,500,000 500,000
Estimated warranty liability 1,200,000 – 1,200,000
Unearned income 800,000 – 800,000
Total deductible temporary differences 4,800,000
Multiply: Tax rate 25%
Deferred tax asset, 12/31/23 1,200,000
Less: Deferred tax asset, 01/01/23 1,000,000
Deferred tax benefit, 2023 200,000

Accounting income 8,000,000

Less: Tax-exempt income items (1,400,000)
Add: Non-tax-deductible expense items 800,000
Accounting income subject to tax 7,400,000
Multiply: Income tax rate 25%
Total tax expense 1,850,000
Add: Deferred tax benefit 200,000
Less: Deferred tax expense (270,000)
Current tax expense 1,780,000

8. MASANTOL Company

Beginning deferred tax asset and liability:

Carrying amount Tax Base Tax. Temp. Diff

PPE 6,900,000 5,300,000 1,600,000
FVTPL debt inv. 3,500,000 3,100,000 400,000
Total taxable temporary differences 2,000,000
Multiply: Tax rate 25%
Deferred tax liability, 1/1/23 500,000

124
Answer Key (v1.6)

Carrying amount Tax Base Tax. Ded. Diff

Allowance for bad debts P500,000 – P500,000
Inventory 2,800,000 3,000,000 200,000
Estimated warranty liability 700,000 – 700,000
Unearned income 300,000 – 300,000
Total deductible temporary differences 1,700,000
Multiply: Tax rate 25%
Deferred tax asset, 1/1/23 425,000

Income statement approach:

Accounting income (audited) 7,000,000

Less: Tax-exempt income items (700,000)
Add: Non-tax-deductible expense items 950,000
Accounting income subject to tax 7,250,000
Less: Excess tax depreciation (1.8M – 1.2M) (600,000)
Add: Excess bad debts expense (900K – 750K) 150,000
Add: Unrealized loss on FVTPL debt inv. 200,000
Add: Loss on invty. write-down 180,000
Less: Excess actual warranty cost (1M – 800K) (200,000)
Add: Excess advances from customers (400K – 250K) 150,000
Taxable income 7,130,000
Multiply: Tax rate 25%
Current tax expense P1,782,500

Total tax exp (P7,250,000 x 25%) 1,812,500

Less: Current tax expense 1,782,500
Net deferred tax expense 30,000

Beg. net deferred tax liability (500K – 425K) 75,000

Add: Net deferred tax expense 30,000
End. net deferred tax liability 105,000

Total tax exp (P7,250,000 x 25%) 1,812,500

Divide by: Accounting income before tax 7,000,000
Effective tax rate 25.89%

125
Answer Key (v1.6)

Balance sheet approach:

Allowance for bad debts

Carrying amount (500K + 900K – 750K) 650,000
Tax base 0
Property, plant and equipment
Carrying amount (6.9M – 1.2M) 5,700,000
Tax base (5.3M – 1.8M) 3,500,000
FVTPL debt investments
Carrying amount (3.5M – 200K) 3,300,000
Tax base 3,100,000
Inventory
Carrying amount (2.8M – 180K) 2,620,000
Tax base 3,000,000
Estimated warranty liability
Carrying amount (700K + 800K – 1M) 500,000
Tax base 0
Unearned income
Carrying amount (300K + 400K – 250K) 450,000
Tax base 0

Carrying amount Tax Base Tax. Temp. Diff

PPE 5,700,000 3,500,000 P2,200,000
FVTPL debt inv. 3,300,000 3,100,000 200,000
Total taxable temporary differences P2,400,000
Multiply: Tax rate 25%
Deferred tax liability, 12/31/23 P600,000
Less: Deferred tax liability, 1/1/23 500,000
Deferred tax expense, 2023 P100,000

Carrying amount Tax Base Tax. Ded. Diff

Allowance for bad debts 650,000 0 650,000
Inventory 2,620,000 3,000,000 380,000
Estimated warranty liability 500,000 0 500,000
Unearned income 450,000 0 450,000
Total deductible temporary differences P1,980,000
Multiply: Tax rate 25%
Deferred tax asset, 12/31/23 495,000
Less: Deferred tax asset, 1/1/23 425,000
Deferred tax benefit, 2023 70,000

126
Answer Key (v1.6)

Accounting income (audited) 7,000,000

Less: Tax-exempt income items (700,000)
Add: Non-tax-deductible expense items 950,000
Taxable income 7,250,000
Multiply: Tax rate 25%
Total tax expense P1,812,500
Less: Net deferred tax expense (100K – 70K) 30,000
Current tax expense P1,782,500

9. SIMON Company

Accounting income (audited) 4,000,000

Less: Tax-exempt income items (700,000)
Add: Non-tax-deductible expense items 600,000
Accounting income subject to tax 3,900,000
Add: Excess accounting depreciation (1.8M – 1.6M) 200,000
Add: Loss on invty. write-down 150,000
Less: Excess prepaid insurance (200K – 800K) (600,000)
Taxable income 3,650,000
Multiply: Tax rate 30%
Current tax expense P1,095,000

Add: Excess accounting depreciation (1.8M – 1.6M) 200,000

Add: Loss on invty. write-down 150,000
Total deductible temporary differences 350,000
Multiply: Tax rate 25%
Deferred tax benefit P87,500

Less: Excess prepaid insurance (200K – 800K) 600,000

Total taxable temporary differences 600,000
Multiply: Tax rate 25%
Deferred tax expense P150,000

Multiple Choice – Problems

1. B; A; C 6. B; D; C; C
2. D; C; B; C 7. B; A; D; D
3. A 8. C; D
4. B
5. A; C

127