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EASY

PROBLEM 1
Maria Rosa, president of the Villa Nova Company, has a bonus arrangement with the company
under which she receives 10% of the net income (after deducting taxes and bonuses) each
year. For the current year, the net income before deducting either the provision for income taxes
or the bonus is P4,650,000. The bonus is deductible for tax purposes, and the tax rate is 32%.
The appropriate provision for income tax for the year is.

SOLUTIONS:
T = 32% (P4,650,000 P296,067.42) = P1,393,258.43

PROBLEM 2
At December 31,2012, Bawi Corporation owed notes payable of P 2,000,000 with a maturity of
April 30,2013. These notes did not arise from transactions in the normal course of business. On
February 1,2013, Bawi issued P 4,000,000 of ten year bonds with the intention of using part of
the bond proceeds to liquidate the P 2,000,000 of notes payable. Bawis December 31,2012
financial statements were issued on March 29,2013.
How much of the P2,000,000 notes payable should be classified as current liabilities in Bawis
statement of financial position at December 31,2012?

SOLUTIONS:
The full amount of P2,000,000 is classified as current liability because on December 31,
2012 (the reporting date), the enterprise has no unconditional right to defer the
settlement of the obligation for a period of at least 12 months.

PROBLEM 3
The December 31 trial balance of the Ruel Corporation includes, among others, the following:

Long-term Notes which are payable in annual

installment of P10,000 on

February 1 of each year 60,000

Rental income received in advance 16,000

Notes payable, which are trade notes,

with the exception of P20,000

Notes payable to bank on June 30 of the following year 60,000

Accounts payable which include account with

debit balance of P2,000 80,000 Notes


Receivable which have been reduced by notes discounted of

P20,000 that are not yet due and on which the Corporation is

contingently liable 100,000


Accounts Receivable, which include accounts with credit balances

of P10,000 and past due accounts of P6,000 on which a loss

of 80% is anticipated 200,000

Merchandise Inventory, which includes goods held for consignment,

P8,000, and goods received on December 31 of P12,000; neither of these items having been
recorded as a purchase 180,000

The long-term debt at year-end is.

SOLUTIONS:

Long-term liability P50,000

PROBLEM 4

When the LUAYON MANUFACTURING COMPANY was expanding its metal window division, it
did not have enough capital to finance the expansion. So, management sought and received
approval from the board of directors to issue bonds. The company planned to issue P5,000,000
of 8 percent, five-year bonds in 2007. Interest would be paid on June 30 and December 31 of
each year. The bonds would be callable at 104, and each P1,000 bond would be convertible into
30 shares of P10 par value common stock.

On January 1, 2007, the bonds were sold at 96 because the market rate of interest for similar
investment was 9 percent. The company decided to amortize the bond discount by using the
effective interest method.

On July 1, 2009, management called and retired half the bonds, and investors converted the
other half into common stock. As inducement, the company agrees to pay additional P100,000
to the holders of the convertible bonds.

CarryingvalueofthebondsatDecember31,2007 is

SOLUTIONS:

5,000,000 * 4% = 200,000

4,800,000 * 4.5% = 216,000

216,000 200,000 = 16,000

4,800,000 + 16,000 = (4,816,000 * 4.5%) 200,000 =16,720 + 4,816,000 = 4,832,720

PROBLEM 5

On July 1, 2007 Salem Corporation issued P2,000,000 of 7% bonds payable in 10 years. The
bonds pay interest semiannually. Each P1,000 bond includes a detachable stock purchase right.
Each right gives the bondholder the option to purchase for P30, one share of P1 par value
common stock at any time during the next 10 years. The bonds were sold for P2,000,000. The
value of the stock purchase rights at the time of issuance was P100,000.

How many warrants were issued?

SOLUTIONS:

2,000,000 / 1,000 = 2,000 warrants

PROBLEM 6

Mckinley Company grants all employees two weeks paid vacation for each full year of
employment. Unused vacation time can be accumulated and carried forward to succeeding
years, and will be paid at the salaries in effect when vacations are taken or when employment is
terminated. There was no employee turnover in 2012. Additional information relating to the year
ended December 31,2012, is as follows:

Liability for accumulated vacations at 12/31/11 P 250,000

Pre- 2012 accrued vacations taken from 1/1/12 9/30/12 150,000

Vacations earned for work in 2012(adjusted to current rates) 200,000

Mckinley granted a 10% salary increase to all employees on October 1,2012, its annual salary
increase date.

How much is the vacation pay expense for the year ended December 31,2012?

SOLUTIONS:

Vacation earned by employees in 2012 P200,000

Adjustment in rate for unused vacation

pay in previous periods (250,000 150,000) x 10% 10,000

Vacation pay expense in 2012 210,000

MODERATE

PROBLEM 7

Included in Struggle Companys liability account balances at December 31,2012 were the
following:

14% note payable issued, October 1,2007, maturing September 30,2013, P2,500,000

16% note payable issued April 1,2012 payable in six equal annual installments of P800,000
beginning April 1,2013, P4,800,000
struggles December 31,2012 financial statements were issued on March 31,2013. On march
10,2013, Struggle consummated a non-cancelable agreement with the lender to refinance the
14% P2,500,000 note on a long-term basis, on readily determinable terms that not yet been
implemented.

What amount of the notes payable should classify as current liabilities on December 31,2012?

SOLUTIONS:

14% Notes Payable, refinanced on March 10, 2013 P2,500,000

Current portion of 16% notes payable 800,000

Total current liabilities P3,300,000

PROBLEM 8

The effective interest on a 12-month zero-interest bearing note payable of P 300,000,


discounted at the bank at 10%.

SOLUTIONS:

Proceeds = 100% - 10% = 90% ; Effective interest = 10%/90% = 11.11%

HARD

PROBLEM 9

During 2012, Iyakin Company sold 500,000 boxes of cake mix under a new sales promotional
program. Each box contains one coupon, which when submitted with P40.00 entitles the
customer to a baking pan. Iyakin pays P50.00 per pan and P5.00 for handling and shipping.
Iyakin estimates that 80% of the coupons will be redeemed, even though only 300,000 coupons
had been processed during the year.

What amount should Iyakin report as liability for unredeemed coupons at December 31,2012?

SOLUTIONS:

{(500,000 x 80%) 300,000} = 100,000; 100,000 x (50+5-40) = 1,500,000

PROBLEM 10

Kapit Corporation sells washing machines that carry a three-year warranty against
manufacturers defects. Based on company experience, warranty costs were estimated at P300
per machine. During 2012, Kapit sold 24,000 washing machines and paid warranty costs of
P1,700,000.

In its profut or loss for the year ended December 31,2012, Kapit should report warranty expense
of?

SOLUTIONS:
24,000 x 300 = 7,200,000

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