ARTS CPA Review (Academic Review and Training School, Inc.) 2F & 3F Crème Bldg., Abella St., Naga City Tel No.: (054) 472-9104; E-mail:
[email protected] [email protected].. CONSOLIDATED TOPICS PRACTICAL ACCOUNTING I A.
MICHAEL B. BONGALONTA,CPA,MICB,MBA
BORROWING COST (PAS 23)
Problem 1 (adapted): The following transaction pertain to the general borrowings made during 2014 by Victory Company in connection with the construction of the company’s new warehouse:
8% bank loan 6% short-term note 8% long-term note
Principal P2,400,000 1,600,000 2,000,000
Borrowing Costs P192,000 96,000 160,000
The construction started on January 1, 2014 and the warehouse was completed on December 31, 2014. Expenditures on the warehouse were as follows: January 1 March 31 June 30 A. B.
P
400,000 1,000,000 1,200,000
September 30 December 31
P1,000,000 400,000
How much is the capitalizable borrowing cost of Victory Company? Compute the cost of the new warehouse.
Answer: Total borrowing costs (192,000 + 96,000 + 160,000) ÷ Total borrowings (2,400,000 + 1,600,000 + 2,000,000) Average capitalization rate Principal Average Date Cost Incurred Rate 01/01 P400,000 x 7.47% 04/01 1,000,000 x 7.47% 07/01 1,200,000 x 7.47% 10/01 1,000,000 x 7.47% 12/31 400,000 x 7.47% Total borrowing cost to be capitalized
P 448,000 6,000,000 7.47%
Time x 12/12 x 09/12 x 06/12 x 03/12 X 00/12
Interest P29,880 56,025 44,820 18,675 0 P149,400
Moses Company borrowed P4, 000, 000 on a 10% note payable to finance a new warehouse which the entity is constructing for its own use. The only other debt of Moses’ books is a P6, 000, 000.00, 12% mortgage payable on an office buildi ng. At the end of the current year, average accumulated expenditures on the new warehouse totaled P4, 750, 000. What amount should Moses capitalize as interest for the current year? Problem 2 (adapted):
a. 400, 000 b. 475, 000 c. 490, 000 d. 522, 500 Answer: C
B.
Average expenditures Specific borrowing General borrowing
4, 750, 000 (4, 000, 000) 750, 000
Specific borrowing ( 4, 000, 000x10%) General borrowing (750, 000x12%)
400, 000 90, 000 490, 000
GOVERNMENT GRANT (PAS 20)
On January 2, 2007, Brand Company received a grant of P60,000,000 to compensate it for costs it incurred in plating trees over a period of five years. Brand Company will incur such cost in this manner: Year Costs 2007 P2,000,000 2008 P4,000,000 2009 P6,000,000 2010 P8,000,000 2011 P10,000,000 Problem 3 (adapted):
What amount of income should Brand Company recognize at the end of year 2010? Answer: Answer: Year Grant Ratio Income Recognized 2007 P60,000,000 x2/30 = P4,000,000 2008 P60,000,000 x4/30 = P8,000,000 2009 P60,000,000 x6/30 = P12,000,000 2010 P 60,000,000 60,000, 000 x8/ x 8/30 30 = P 16,000,000 16,000, 000 2011 P60,000,000 x10/30 = P20,000,000 On January 2, 2011, Dumont Company received a consolidated grant of P240,000,000. Three-fourths of the grant is to be utilized to purchase a college building for students from underdeveloped or developing countries. The balance of the grant is for subsidizing the tuition costs of those students for four years from the date of the grant. The expected college life of the building is 10 years and the company uses the straight line method of depreciation. Problem 4 (adapted):
What amount of the grant is recognized as income for the year ended December 31, 2011? Answer: Answer: Grant related to asset P240,000,000 x ¾ = P180,000,000 ÷ 10 years = P18,000,000 Grant related to income P240,000,000 x ¼ = P60,000,000 ÷ 4 years = 15,000,000 Total C.
P33,000,000 WASTING ASSETS(PFRS 6)
Problem 5 (adapted): In January 1, 2011, HUFF MINING COMPANY purchased a mineral mine for P36,000,000 with removal ore estimated by biological survey at P2,160,000 tons. The property has an estimated value of P3,600,000 after the ore has been extracted. Huff incurred P10,800,000 of development cost preparing the property for the extraction of ore. During 2011, P270,000 P270,000 tons were removed and P240,000 P240,000 tons were sold. For the year ended December December 31, 2011, what amount of depletion should be included in cost of goods sold? Solution:
Purchase price
P 36,000,000
Development cost
10,800,000
Total cost of ore property
P 46,800,000
Residual value
(3,600,000)
Depletable amount
P 43,200,000
Rate per ton (43,200,000/2,160,000)
20
Depletion for 2011 (270,000x20)
P 5,400,000
Depletion in cost of goods sold (240,000x20)
P 4,800,000
BATON CORPORATION acquires a coal mine at a cost of P5,000,000. Intangible development costs total P1,200,000. After extraction has occurred, Baton must restore the property (estimated fair value of the obligation is P600,000), after which it can be sold for P1,700,000. Baton estimates that P50,000 tons of coal can be extracted. If P9,000 tons were extracted during the first year, which of the following would be included in the journal entry to record depletion? Problem
6
(adapted):
A. B. C. D.
Debit to Accumulated Depletion for P918,000 Debit to Inventory for P918,000 Credit to Inventory for P900,000 Credit to Accumulated Depletion for P1,530,000
Solution 34-7 Answer: B Cost of coal mine Development cost Fair value of restoration cost Salvage value Depletable cost ÷ total estimate Depletion per ton X Tons extracted Debit to inventory D.
P5,000,000 1,200,000 600,000 (1,700,000) P5,100,000 50,000 P 102 9,000 P 918,000
REVALUATION AND IMPAIRMENT OF ASSETS (PAS 36)
Problem 7 (adapted): On June 30, 2011, the statement of financial position of Louisiana Company reported the following: Equipment at cost Accumulated depreciation
5,000,000 1,500,000
The equipment was measured using the cost model and depreciated on straight line basis over a 10-year period. On December 31, 2011, the management decided to change the basis of measuring the equipment from cost model to the revaluation model. The equipment was revalued to its fair value of P4,550,000 with remaining useful life of 5 years. Ignoring the income tax, what amount should Louisiana report as revaluation surplus on December 31, 2011?
Solution Answer b
Cost – June 30, 2011 Accumulated Depreciation Carrying amount – June 30, 2011 Depreciation from July 1 to December 31, 2011 (5,000,000/10 x 6/12) Carrying amount – December 31, 2011
5,000,000 (1,500,000) 3,500,000 ( 250,000) 3,250,000
Fair value – December 31, 2011 Carrying amount – December 31, 2011 Revaluation surplus – December 31, 2011
4,550,000 3,250,000 1,300,000
The fair value is already the sound value or revalued amount of the equipment. Subsequent annual depreciation for 2011 (4,550,000/5)
910,000
Problem 8 (adapted): A division of Vixen Company has following non-current assets, which are stated at their carrying amounts ate December 31, 2012:
Land and Buildings Plant and machinery Goodwill
P320,000,000 110,000,000 70,000,000
The management of Vixen believes that the value in use of these assets may have become impaired, because a major competitor has developed a superior version of the same product. As a result, sales are expected to fall. The following additional information is relevant: The land and buildings are carried at a valuation. The depreciated historical cost is P265,000,000 at December 31, 2012. All other non-current assets are carried at historical cost. The goodwill does not have a market value. It is estimated that the land and buildings could be sold for P270,000,000 and the plant and machinery could be sold for P50,000,000, net of direct selling costs. The value in use of the assets has been calculated at P385,000,000. What is the impairment loss to be recognized by Vixen Company?
Answer: Fair value less cost to sell (P270,000,000 and P50,000,000) Value in use Recoverable amount ( the higher between the fair value less cost to sell and value in use) Carrying amount Less: Recoverable amount
P500,000,000 385,000,000
P320,000,000 385,000,000 P385,000,000
Impairment loss
P115,000,000
Problem 9 (adapted): Foster Company acquires 80% of the shares of Roster Ltd. on January 2, 2010 for Pj1,600,000. At this date, the identifiable net asset of Roster Ltd. have a fair value of P1,500,000. Roster Ltd. is the smallest group of assets that generate cash inflows from continuing use that are largely independent of the cash flows from other assets. Roster Ltd. is a cash-generating-unit. During the year 2010, the amount of depreciation in relation to the identifiable assets of Roster Ltd. is P150,000. At December 31, 2010, Foster Company determines that the recoverable amount of roster Ltd. is P1,000,000. a. b. c.
What is the total amount of impairment loss on Roster Ltd? Answer:850,000 What amount of the impairment loss should be charged agjainst the goodwill of foster Company? Answer:100,000 What amount of the impairment loss should Foster Company recognize on the identifiable assets of Foster Ltd.? Answer:350,000
Solution: Acquisition cost Net asset acquired (P1,500,000 x 80%) Goodwill
P1,600,000 1,200,000 P 400,000
In order to test Roster Ltd for impairment, the goodwill has to be grossed up. If goodwill of P400,000 relates to 80%, then P500,000 (P400,000/80%) goodwill relates 100%. In other words, the P400,000 goodwill is grossed up to P500,000.
Test of impairment: Identifiable Particulars Goodwill assets Total Gross carrying amount P400,000 P1,500,000 P1,900,000 Accum. Dep. (150,000) (150,000) Carrying amount, 12/31/10 P400,000 P1,350,000 P1,750,000 Minority interest 100,000 100,000 Notionally adjusted carrying value P500,000 P1,350,000 P1,850,000 Less: recoverable amount P1,000,000 Total impairment loss P 850,000 Allocation of Impairment Loss: Particulars Goodwill Gross carrying amount P400,000 Accum. Dep. Carrying amount, 12/31/10 P400,000 Impairment loss 400,000 Carrying amount after impairment -0-
Identifiable assets Total P1,500,000 P1,900,000 (150,000) (150,000) P1,350,000 P1,750,000 750,000 350,00 P1,000,000 P1,000,000
Problem 10 (adapted): Marcus Company operates an oil platform in the sea. Marcus Company has provided the amount of P10,000,000 for the financial costs of the restoration of the seabed, which is the present value of such costs. Marcus Company has received an offer to buy the oil platform for P16,000,000 and the disposal costs would be P2,000,000. The value in use of the oil platform is approximately P24,000,000 before the restoration costs. The carrying value of the oil platform is P20,000,000. What amount of impairment loss should Marcus Company recognize related to the oil platform? a. None b. P4,000,000 c. P6,000,000 d. P8,000,000
Solution 36-5 Answer a Fair value less cost to sell (P16,000,0002,000,000)
14,000,000
Value in in use (P24,000,000-10,000,000)
14,000,000
Carrying value (P20,000,000-10,000,000)
10,000,000
Recoverable amount
14,000,000
Impairment loss
E.
R&D COST AND INTANGIBLE ASSET (PAS38)
None
Problem 11 (adapted): On December 31, 2011, Kate Conde Company exchanged 100,000 ordinary shares of P50 par value for the following assets: * A trademark valued at P1,500,000. * A building, including land, valued at P6,500,000 (20% of the value is for the land). * A franchise right. No estimate of the value is available at the date of exchange. The ordinary share of Kate Conde Company is selling at P90 at the date of exchange. What amount should be recognized as measurement of the franchise on the date of exchange? a. 1,500,000 b. 1,000,000 c. 2,000,000 d. 0
Solution 37-1 Answer b Fair value of shares issued (100,000 x 90) Fair value of trademark Fair value of land (20% x 6,500,000) Fair value of building (80% x 6,500,000) Measurement of franchise
9,000,000 (1,500,000) (1,300,000) (5,200,000) 1,000,000
Problem 12 (adapted): Rose Anne Company developed a new machine that reduces the time required to insert the fortune into its fortune cookies. Because the process is considered very valuable to the fortune cookie industry, Rose Anne Company patented the machine. The following expenses were incurred in developing and patenting the machine: Research and development laboratory expense Metal used in the construction of the machine Blueprint used to design the machine Legal expenses to obtain patent Wages paid for the employees’ work on the research and development, and building of the machine (60% of the time was spent on actually building the machine) Expense of the drawing required by the patent office to be submitted with the patent application Fee paid to government patent office to process application
500,000 160,000 60,000 240,000
600,000 30,000 50,000
At year end, Rose Anne Company paid P350,000 in legal fees to successfully defend the patent against the infringement suit by another entity. What total amount of the expenditures should be capitalized as cost of patent?
Answer Legal expenses to obtain patent Expense of drawing required by patent office Fee paid to patent office Total cost of patent Metal used Blueprint used to design machine Wages paid (60% x 600,000) Cost of machine Laboratory expense Wages paid (40% x 600,000) R and D expense
240,000 30,000 50,000 320,000 160,000 60,000 360,000 580,000 500,000 240,000 740,000
Problem 13 (adapted): On January 1, 2011, RAM Company purchased MAR Company at a cost that result in recognition of goodwill of P2,000,000. During the first quarter of 2011. RAM spent an additional P800,000 on expenditures designed to develop and maintain goodwill by training and hiring new employees. Due to these expenditures, on December 31, 2011, RAM estimated that the benefit period of goodwill was indefinite. In its December 31, 2011 statement of financial position, what amount should RAM report ass goodwill?
Solution 37-12 Answer c Cost of goodwill – January 1, 2011
2,000,000
Problem 14 (adapted): On January1, 2010, Better Company bought a trademark for P400,000, having a n estimated remaining useful life of 16 years . After16 years revenues expected from this intangible will be zero. In January 2014, Better paid P60,000 for legal fees in a successful defense of trademark. What amount of expenses should better company recognize and charge against income during 2014?
Solution of Problem 30-3: Amortization Expense-original cost (P400,000÷ 16) Cost of litigation Total expense
P25,000 60,000 P85,000
Problem 15 (adapted): An intangible asset costs P300,000 on January 1,2011. On January 1,2012 ,the asset was evaluated to determine if it was impaired. As on January 1,2012, the asst was expected to generate future cash flows of
P25,000 per year (at the end of year). The appropriate discount rate is 5%. What total amount should be charged against income in 2012, assuming that the asset had a total useful life at 10 years from date of acquisition?
Answer: C Solution of Problem 30-9: Amortization expense-2012(P177,696 ÷ 9) Impairment loss (Schedule) Total amount to be charged against income in 2012 Book Value: (P300,000 – P30,000) Estimated fair value: Value in use (P25,000 × 7.10782) Impairment loss
P19,744 92,304 P112,048 P270,000 177,696 P 92,304
Problem 16 (adapted): Sarrah Company is interested in computing the goodwill to be recognized in the purchase of A BC Company in January 2012. The following information was taken f rom the records of ABC. 2007 2008 2009 2010 2011
360,000 388,000 288,000 380,000 394,000 1,810,000
1,600,000 1,800,000 1,900,000 2,000,000 2,100,000 9,400,000
It is agreed that goodwill is measured by capitalizing excess earnings at 40% with normal return on average net assets at 10%. What is the “purchase price” of ABC Company?
SOLUTION : Average net assets ( 9,400,000 / 5 ) 1 ,8 ,880 ,0 ,000 Average earnings ( 1,810,000 / 5 ) 362,000 Less: Normal earnings (10% x 1,880,000) 188,000 Excess earnings 174,000 Divide by capitalization rate 40% Goodwill 435 ,0 ,000 Net assets – 2011 2,100,000 Total purchase price 2,535,000 The purchase price or acquisiti on cost includes the payment for the 2011 net assets and the goodwill. Problem 17 (adapted): Phar-Ti-Ra Company incurred research and development costs in the current year as follows: Equipment acquired for use in various R and D projects 975,000 Depreciation on the above equipment 135,000 Materials used 200,000 Compensation costs personnel 500,000 Outside consulting fees 150,000 Indirect costs appropriately 250,000 What total research and development costs should be r ecognized as expense for the current year?
Solution 31-1 Answer c Depreciation on the above equipment Materials used Compensation costs personnel Outside consulting fees Indirect costs appropriately Total F. A.
135,000 200,000 500,000 150,000 250,000 1,235,000
OTHER RELATES ASSET ACCOUNTS BIOLOGICAL ASSETS (PAS 40)
Fortitude Company purchased cattle at an auction for P 200,000 on July 1, 2014. Cost of transporting the cattle back to the company’s farm was P 2,000 and the company would have to incur cost similar transportation cost if it was to sell the cattle in the auction, in addition an auctioneer’s fee of 2% of sales price. What amount should the biological assets initially recognized? Answer: Fair value P 200,000 Transportation costs (2,000) (4,000) Auctioneer’s fee (200,000 x 2%) Adjusted fair value P 194,000 Problem 18 (adapted):
Creep Company purchased 100 beef cattle at an account for P 800,000 on July 1, 2014. Transportation costs if it had sold its cattle in the auction. In addition there would be a 2% auctioneer’s fee on the market price of the cattle payable by the seller. Creep Company also incurred P 4,000 veterinary expenses. On December 31, 2014, the fair value of the cattle in the most relevant market increases to P 880,000. On May 2, 2015, Creep Company sold 18 cattle at the auction for P 160,000 and incurred transportation charges of P 1,200. On June 15, 2015, the fair value of the remaining cattle was P 662,560 but on the same day, 42 cattle were slaughtered with total cost of P 33,600. The fair value of the carcasses on that day was P 386,400 and the estimated transportation cost to sell the carcasses is P 3,600. No other selling costs are expected. On June 30, 2015, the fair value of the remaining 40 cattle was P 358,400. The estimated transportation cost is P 3,200. Question 1: What amount should the biological asset should be initially recognized on July 1, 2014? Question 2: What amount should the biological asset be reported on December 31, 2014? Question 3: What amount of gain as a result in the change in value of the biological asset to be reported in the statement of comprehensive income for the year ended December 31, 2014? Question 4: What is the net proceeds from the sale of cattle on May 2, 2015? Question 5: What is the fair value of the inventory (carcasses) on June 15, 2015? Problem 19 (adapted):
Answers: Fair value in most relevant market Transportation costs Auctioneer’s fee (800,000 x 2%) Fair value at point of purchase Fair value in most relevant market Transportation costs Auctioneer’s fee (880,000 x 2%) Fair value at point of purchase Fair value at point of purchase Fair value at point of purchase Change in the fair value-to profit or loss
(
P 800,000 ( 8,000) 16,000)
P 776,000
(
P 800,000 ( 8,000) 17,600)
P 854,400
P 854,400 P 776,000 P 78, 400
Selling price P 160,000 Less: selling expense Transportation 1,200 4,400 Auctioneer’s fee (160,000 x 2%) 3,200 Net proceed from sale P 155,600 Fair value of remaining carcasses Less: Transportation costs Fair value of inventory
P 386,400 3,360 P 383,040
B. NON-CURRENT ASSET HELD FOR SALE (PFRS 5) Problem 20 (adapted): On June 1, 2012, Starlet Company approved a plan to dispose of a business segment. It is expected that the sale will occur on April 30, 2013. On December 31, 2012, the carrying value of net assets of the segment was P4,000,000 and the net recoverable amount was P3,600,000. During 2012, the company paid employees severance and relocation costs of P200,000 as a direct result of the discontinuing operation. The revenues and expenses of the discontinuing segment during 2012 were: Revenues Expenses January 1 to June 1 3,000,000 4,000,000 June 1 to December 31 1,400,000 1,800,000 Income tax rate is 35%. How much will be reported as loss from ordinary activities of the discontinued segment during 2012?
Answer : Revenue : January to June 1 June 1 to December 31 Expenses: January 1 to June 1 June 1 to December 31 Impairment loss: Carrying value of net assets Recoverable amount
3,000,000 1,400,000
Termination costs: Severance & relocation costs Loss from ordinary activities Tax savings (2,000,000 x 35% ) Net
4,400,000
4,000,000 1,800,000
( 5,800,000 )
4,000,000 3,600,000
( 400,000 )
( 200,000 ) ( 2,000,000) 700,000 1,300,000
PFRS 5, paragraph 33, provides that an entity shall disclose a single amount comprising the total of post-tax profit or loss of the discontinued operation and the post-tax gain or loss recognized on the measurement to fair value less cost to sell or on the disposal of the assets or disposal group constituting the discontinued operation. The ff. are disclosed in the notes to financial statements: a.) The amount of revenue , expenses and income or loss attributable to the discontinued operation during the current period and the related income tax. b.) Any impairment loss – the impairment loss is recognized when as of the end of reporting period and before the sale of the discontinued operation, the fair value less cost to sell of the discontinued operation is lower than the carrying amount of the net assets. If the fair value less cost to sell of the discontinued operation is higher than the carrying amount of the net assets, the expected gain is not recognized but only disclosed. c.) Any gain or loss from the actual disposal of the assets and settlement of the liabilities of a discontinued operation is recognized on the date of sale or date of settlement. Such gain or loss is reported as part of the discontinued operation. d.) The termination cost of employees and other costs which ar e directly incurred as a result of the discontinuance are shown as part of discontinued operation. Problem 21 (adapted): Camper Company acquires a subsidiary with a view to selling it. The subsidiary meets the criteria to be classified as held for sale. At the balance sheet date, the subsidiary has not been sold and six months have passed since its acquisition. At the balance sheet date, the carrying value of the subsidiary is P4,500,000; its estimated selling price is P6,000,000 and estimated cost to sell is P1,200,000. At how much should the subsidiary be valued at balance sheet date?
Answer: Estimated selling price Less: Cost to sell Fair value Carrying value Lower
P6,000,000 1,200,000 P4,800,000 4,500,000 P4,500,000
Problem 22 (adapted): On July 1, 2012, Blazer Company has a building with cost of P4,000,000 and accumulated depreciation of P1,600,000. On the same date, Blazer Company commits to a plan to sell the building
by February 1, 2013. The building has a fair value of P2,000,000 and it is estimated that the selling cost of the building will be P150,000. As of July 1, 2012, the building has a remaining life of 15 years. Question 1: What is the amount to be reported as the carrying value of the building-held for sale as of December 31, 2012? Question 2: What is the amount of loss to be recognized by Blazer Company in its income statement as a result if reclassification?
Answers : Fair value date if reclassification Less: Estimated selling cost Adjusted fair value of the asset
P2,000,000 150,000 1,850,000
Adjusted fair value date of transfer Less: Book value date of transfer: Cost Accumulated depreciation Loss on transfer
P1,850,000 P4,000,000 1,600,000
2,400,000 P 550,000
PFRS 5, paragraph 25, further provides that once a noncurrent asset was reclassified as held for sale the asset is no longer subject to depreciation. The rationale behind this concept is that because the asset is now designated for disposal, the key accounting point is no longer long-term cost allocati on using depreciation but instead proper current valuation of the asset. Accordingly, if current estimate reveals that the fair value of the asset differs from its original fair value at the time of reclassification, the difference should be recognized as a gain or loss that is to be reported in the current year income statement. C.
DERIVATIVES
Problem 23 (adapted): On January 1, 2011, Pasa Company entered to a two year P 3 M variable interest rate loans on the prevailing rate of 12%. In 2012, the interest rate is equal to the prevailing interest rate at the beginning of the year. The principal loan is payable on December 31, 2011 and the interest is payable on December 31 of each year. On January 1, 2011, Pasa Company entered into a “receive variable, pay fixed” interest swap agreement with a speculator bank designated as cash flow hedge. The prevailing interest rate on January 1, 2011 is 14% and the PV of 1 at 14% for 1 period is .877. What amount should be reported as “interest rate swap receivable” on December 31, 2011?
Answer: Since the interest on January 1, 2012 is 14% which is 2% higher than the fixed rate of 12%, it means that Pasa company shall receive P60,000 from the bank on December 31, 2012. This receivable is recognized as a derivative asset on December 31, 2011 at a PV of P52,620 as follows: Interest rate swap receivable Unrealized Gain – interest rate swap (60,000 x .877)
52,620 52,620
Problem 24 (adapted): On June 30 of the current year, Clary company entered into a firm commitment to purchase specialized equipment from Shigezaki Company for ¥80 Million on August 21. The exchange rate n June 30 is ¥100 = $1. To reduce the exchange rate risk that could increase the cost of the equipment in U.S. Dollars, Clary pays $12,000 for a call option contract. This contract gives the option to purchase ¥80M at an exchange rate of ¥100 = $1 on August 31. On August 31, the exchange rate is ¥93 = $1. What amount in U.S. Dollarsdid Clary company save by purchasing the call option?
Answer Dollar equivalent – Aug 31 (80,000,000/93) Dollar equivalent – June 30 (80,000,000/100) Total saving Payment for call option Net saving- gain on call option
860,215 800,000 60,215 12,000
48,215
Welch Co. purchased a put option on Reese common shares on January 7, 2014, for P2,150. The put option is for 3000 shares, and the strike price is P51. The option expires on July 31, 2014. The following data are available with respect to the put option: Problem 25 (adapted):
Date Market March 31, 2014 June 30, 2014 July 6, 2014
Price of Reese Shares P48 per share P50 per share P46 per share
Time Value of Put Option P1,200 540 160
If the change in fair value was recognized on March 31, 2014 and then again on June 30, 2014, what amount of loss the company recognize on the re-measurement of the option on June 30, 2014? a. P 660 c. P3,540 b. P2,150 d. P6,660 ANS:
D
Fair value – June 30: Time value P 540 Intrinsic value (P50 – P51) x 3,000 shares 3,000 Fair value – March 31: Time value P1,200 Intrinsic value (P48 – P51) x 3,000 shares 9,000 Loss
P 3,540
P10,200 P 6,660
G. CURRENT LIABILITIES Problem 26 (adapted): Sample Company has the following selected accounts after posting adjusting entries: Accounts Payable Notes Payable, 3-month Accumulated Depreciation — Equipment Payroll and Benefits Payable Notes Payable, 5-year, 8% Estimated Warranty Liability Payroll Tax Expense Interest Payable Mortgage Payable Sales Tax Payable
$ 50,000 80,000 14,000 22,000 30,000 34,000 6,000 3,000 200,000 16,000
Compute the amount of Current Liability. Sol. Current Liabilities Notes payable, 3-month Accounts payable Estimated warranty liability Payroll and benefits payable Long-term debt due within one year Sales tax payable Interest payable Total Current Liabilities
$
80,000 50,000 34,000 22,000 20,000 16,000 3,000 $225,000
Problem 27 (adapted): Toyo Company owns a car dealership that it uses for servicing cars under warranty. In preparing its financial statements, the entity needs to ascertain the provision for warranty that it would be required to recognized at the end of the year. The entity experience with warranty claims is as follows 60% of all car sold in a year have zero defect, 25% of all cars sold in a wear have normal defect, and 15% of all cars sold in a year have significant defect. The cost of rectifying a “normal defect” in a car is P10,000. The cost of rectifying a “significant defect” in a car is P30,000. The entity sold 500 cars during the year. What is the “expected value” of the provision for warranty for the current year?
Solution: Normal defect (25%x500xP10,000) Significant defect (15%x500xP30,000) Provision for warranty
1,250,000 2,250,000 3,500,000
Problem 28 (adapted): Cob Department store sells gift certificates redeemable only when merchandised is purchase. These gift certificates have an expiration date of two years after issuance dare. Upon redemption or expiration, Cobb recognizes the unearned revenue as realized. Information for the current year is as follow:
Unearned revenue, January 1, 2011 Gift certificates sold Gift certificates redeemed Expired gift certificates Cost of gods sold
650,000 2,250,000 1,950,000 100,000 60%
On December 31, 2011, what amount should Cobb report as unearned revenue?
Solution: Unearned revenue – January 1, 2011 Add: gift certificates sold Total Less: gift certificates redeemed 1,950,000 Expired gift certificates 100,000 Unearned revenue – December 31, 2011
650,000 2,250,000 2,900,000 2,050,000 850,000
Problem 29 (adapted): Black Company requires advance payments with special orders for machinery constructed to customer specifications. These advances are non refundable. Information for the current year is as follows: Advances from costumer – January 1 Advances received with orders Advances applied to orders shipped Advances applicable to orders canceled
1,180,000 1,840,000 1,640,000 500,000
In Black’s December 31 statement of financial posit, what amount should be reported as current liability for advances from costumers?
Solution: Advances from costumer – January 1 Add: Advances received with orders Total Less: Advances applied to orders shipped Advances applicable to orders canceled Advances from costumer – December 31
1,180,000 1,840,000 3,020,000 1,640,000 500,000 880,000
Problem 30 (adapted): Kent Company, a division of National Realty Corporation maintains escrow accounts and pays real states taxes for National’s mortgage costumers. Escrow funds are kept in interest -bearing accounts. Interest, less a 10% service fee, is credited to the mortgagee’s account and use to reduce future escrow payments. Additional information for 2011 follows: Escrow accounts liability, January 1 700,000 Escrow payments received 1,580,000 Real estate taxes paid 1,720,000 Interest on escrow funds 50,000 What amount should Kent report as escrow accounts liability in its December 31, 2011 statement financial position?
Solution: Escrow accounts liability – January 1 Add: escrow payments received Interest on escrow funds Total Less: real estate taxes paid Service fee (10% x 50,000) Escrow accounts liability – December 31 H.
700,000 1,580,000 50,000 1,720,000 5,000
1,630,000 2,330,000 1,725,000 605,000
LONG TERM LIABILITIES
Problem 31 (adapted): On June 30, 2002, Wayne, Inc., sold $600,000 (face value) of bonds. The bonds are dated June 30, 2002, pay interest semiannually on December 31 and June 30, and will mature on June 30, 2005. The following schedule was prepared by the accountant for 2002. Semi-Annual Interest Period 1
Interest to be Paid $24,000
Interest Expense $28,500
Amortization $4,500
Unamortized Amount $30,000 25,500
Bond Carrying Value $570,000 574,500
Instructions
On the basis of the above information, answer the following questions. (Round your answer to the nearest dollar or percent.) 1. What is the stated interest rate for this bond issue? 2. What is the market interest rate for this bond issue?
3. 4. 5.
What was the selling price of the bonds as a percentage of the face value? Prepare the journal entry to record the sale of the bond issue on June 30, 2002. Prepare the journal entry to record the payment of interest and amortization on December 31, 2002.
Solution 1. $24,000 ÷ $600,000 = .04 × 2 = 8% 2. $28,500 ÷ $570,000 = .05 × 2 = 10% 3. $570,000 ÷ $600,000 = .95 The bonds sold at 95. 4.
5.
June 30, 2002 Cash .................................................................................. Discount on Bonds Payable ................................................... Bonds Payable ............................................................. December 31, 2002 Interest Expense ................................................................. Discount on Bonds Payable ........................................... Cash ..........................................................................
570,000 30,000 600,000
28,500 4,500 24,000
Problem 32 (adapted): On July 1 2011 Tara Company issued 4000 of its 8%, 1,000 face value bonds payable for 3,504,000.The bond were issued to yield 10%.The bonds are dated July 1, 2011 and mature on July 1 2021.Interest is payable semiannually on January 1 and July 1. Using the effective interest method, what amount of the bond discount should be amortized for the six months ended December 31 2011?
Solution: Interest expense (3,504,000x10%x6/12) Interest paid (4,000,000x8%x5/12) Discount amortization for six months
175,200 (160,000) 15,200
Final Answer: 15,200 Problem 33 (adapted): On January 1 2011, West Company issued 9% bonds in the face amount of P5000000, which mature on January 1 2021. The bonds were issued for P4695000 to yield 10% Interest is payable annually on December 31. West uses the interest method of amortizing bond discount. In the December 31 2011 statement of financial position, what is the carrying amount of the bond payable?
Solution: Interest expense (4,695,000x10%) Interest paid (5,000,000x9%) Amortization of discount for 2011 Bond Payable Discount on bond Payable (305,000-,19,500) Carrying amount-December 31 2011
469,500 450,000 19,500 5,000,000 (285,500) 4,714,500
Problem 34 (adapted): On January 1, 2011,Colt Company issued ten-year bonds with a face amount of P5 000 000 and a stated interest rate of 8% payable annually on January 1.The bonds were price to yield 10% PV of 1 for 10 periods at 10% 0.3855 PV of an ordinary annuity of 1 for 10 periods10% 6.145 What is the issue price of the bonds?
Solution: PV of principal (5 000 000 x .3855 ) PV of annual interest payments (400 000 x 6.145) Total Present Value or issue price of bonds
1 927 500 2 458 000 4 385 500
Problem 35 (adapted): Susan company issued 5,000 convertible bonds on Jan.1,2011,the bond have a three years term and are issued at the 110 with a face value of P1,000 per bond. Interest is payable annually in arrears at a nominal 6% interest rate.Each bond is convertible at anytime up to maturity into 100 ordinary shares with par value of the P5.When the bonds are issued,the prevailing market interest rate for similar debt instrument without conversion option is 9%.The present value of 1 at 9% for 3 periods is .77 and the present value of an ordinary annuity of 1 at 9% for 3 periods is 2.53.What is the equity component of the issuance of the convertible bonds on Jan.1,2011?
Solution: PV of principle (5,000,000 x .77) PV of annual interest payments (300,000 x 2.53) Total present value of bonds
3,850,000 759,000 4,609,000
Issue price of convertible bonds (5,000,000 x 110) Present value of bonds Equity component – share premium
5,500,000 4,609,000 891,000
Problem 36 (adapted): On march .1,2011,case company issued P5,000,000 of 12% nonconvertible bonds at 103.Which are due on Feb.28,2016.In addition, each of which entitled the bondholder to purchase, for P50,on ordinary share of case company ,par valueP25.On March.1,2011,the quoted market value of each warrant was P4.The market value of the proceeds from the bond issue should be recognized as a increase in shareholders’ equity?
Solution: Issue price of bonds with warrants (5,000,000 x 103%) Market value of bonds without warrants (5,000,000 x 95%) Residual amount allocated to warrants-equity components I.
5,150,000 4,750,000 400,000
ACCOUNTING FOR INCOME TAX (PAS 12)
Problem 37 (adapted): The following differences between financial and taxable income were reported by Dider Corporation for the current year: (a) (b) (c) (d) (e) (f)
(g) (h)
Excess of tax depreciation over book depreciation .... Interest revenue on municipal bonds .................. Excess of estimated warranty expense over actual expenditures ......................................... Unearned rent received ............................... Fines paid ........................................... Excess of income reported under percentage-of-completion accounting for financial reporting over completed-contract accounting used for tax reporting . Interest on indebtedness incurred to purchase tax-exempt securities .................................... Unrealized losses on marketable securities recognized for financial reporting ..............................
$60,000 9,000 54,000 12,000 30,000
45,000 3,000 18,000
Compute the taxable income for the current year.
ANS: Pretax financial income ................................ Add (deduct) permanent differences: (b) Tax-exempt interest ........................... (e) Fines paid .................................... (g) Interest expense on funds used to purchase tax-exempt securities ......................... Subtotal ................................... Add (deduct) timing differences: (a) Excess of tax over book depreciation .......... (c) Excess of warranty expense over actual expenditures .................................. (d) Unearned rent received ........................ (f) Excess of percentage-of-completion income over completed contract income ..................... (h) Unrealized loss on marketable securities ...... Taxable income .............................
$900,000 (9,000) 30,000 3,000 $924,000
(60,000) 54,000 12,000 (45,000) 18,000 $903,000
Problem 38 (adapted): Bart, Inc., a newly organized corporation, uses the equity method of accounting for its 30% investment in Rex Co.’s common stock. During 2003, Rex paid dividends of $300,000 and reported earnings of $900,000. In addition, • The dividends received from Rex are eligible for the 80% dividends received ded uctions. • All the undistributed earnings of Rex will be distributed in future years. • There are no o ther temporary differences. • Bart’s 2003 income tax rate is 30%. • The enacted income tax rate after 2003 is 25%. In Bart’s December 31, 2003 balance sheet, the deferred income tax liability should be
Answer: ( b ) The deferred income tax liability is the result of the undistributed earnings of an equity investee, which are expected to be distributed as dividends in future periods. For accounting purposes, investment revenue is $270,000 ($900,000 x 30%). For tax purposes, dividend revenue is $90,000 ($300,000 x 30%), which will be partially offset by the 80% dividends received deduction. Because of this 80% deduction, the difference ($270,000 − $90,000 =
$180,000) is partially a permanent difference (80% x $180,000 = $144,000 which will never be subject to taxes) and partially a temporary difference (20% x $180,000 = $36,000 which will be taxable in future years). This future taxable amount of $36,000 will become taxable after 2003, when the expected tax rate is 25%. Therefore, the deferred tax liability is $9,000 (25% x $36,000). The entry to record the liability is as follows: Income tax expense—deferred 9,000 Deferred tax liability 9,000 J. ACCOUNTING FOR LEASES (PAS 17) Problem 39 (adapted): Presented below are three different aircraft lease transactions that occurred for Midwest Airways in 2002. All the leases start on January 1, 2002. In no case does Midwest receive title to the aircraft during or at the end of the lease period; nor is there a bargain purchase option. Lessor Unruh Insurance Type of property Yearly rental Lease term Estimated economic life Fair market value of leased asset Present value of lease rental payments
Maris Leasing
Gregg Leasing
747 Aircraft $5,908,781 15 years 25 years
727 Aircraft $4,954,021 15 years 25 years
L-1011 Aircraft $2,851,861 20 years 25 years
$55,000,000
$49,000,000
$32,000,000
$50,000,000
$42,000,000
$28,000,000
Instructions (a) Which of the above leases are operating leases and which are capital leases? Explain your answer. (b)
How should the lease transaction with Unruh Insurance be recorded in 2002?
(c)
How should the lease transaction with Maris Leasing be recorded in 2002?
Solution (a)
The Unruh Insurance lease is a capital lease since it meets one of the four criteria; i.e., the present value of the lease payments exceeds 90% of the fair market value of the leased asset. The Gregg Leasing lease is a capital lease since the lease term, 20 years, exceeds 75% of the estimated economic life of the leased asset. The Maris Leasing lease is an operating lease since it meets none of the criteria.
(b)
Leased Asset ...................................................................................... Lease Liability ...........................................................................
50,000,000
Lease Liability .................................................................................... Cash ........................................................................................
5,908,781
Rental Expense ................................................................................... Cash ........................................................................................
4,954,021
(c)
50,000,000
5,908,781
4,954,021
Problem 40 (adapted): On January 1, 2003, Day Corp. entered into a ten-year lease agreement with Ward, Inc. for industrial equipment. Annual lease payments of $10,000 are payable at the end of each year. Day knows that the lessor expects a 10% return on the lease. Day has a 12% incremental borrowing rate. The equipment is expected to have an estimated useful life of ten years. In addition, a third party has guaranteed to pay Ward a residual value of $5,000 at the end of the lease. The present value of an ordinary annuity of $1 at 12% for ten years is 5.6502 10% for ten years is 6.1446 The present value of $1 at 12% for ten years is .3220 10% for ten years is .3855 In Day’s October 31, 2003 balance sheet, the principal amount of the lease obligation was: Answer:
( b ) This is a capital lease since the lease term (ten years) is the same as the useful life of the leased asset. In a capital lease, the lessee records an asset and a liability based on the PV of the minimum lease payments. The minimum lease payments includes rentals and a guaranteed residual value, if guaranteed by the lessee. In this case the minimum lease payments include only the rentals, since the residual value is guaranteed by a third party. The minimum lease payments are discounted using the lower of the lessee’s incremental
borrowing rate or the implicit rate used by the lessor, if known. In this case, the lessee knows the implicit rate is 10%, which is lower than the incremental borrowing rate of 12%. Thus, the present value or principal amount of the lease obligation is $61,446 ($10,000 x 6.1446) through the first year. Although accrued interest would be recognized at 10/31/03, the principal amount does not change until 1/1/04. Problem 41 (adapted): On July 1, 2014, Radium Inc. leased a de livery truck from Titanium Corp. under a 3-year operating lease. Total rent for the term of the lease will be P360,000 payable as follows: 12 months at P5,000 per month P60,000 12 months at P7,500 per month 90,000 12 months at P17,500 per month 210,000 All payments were made when due. In Radium’s June 30, 2016 balance sheet, what amount should be reported as accrued rent payable?
Solution: Total rentals P360,000 Lease term (3 years) ÷36months Monthly rental P10,000 July 1, 2014 to June 30, 2016 24 months Monthly rentals ×P10,000 Rent expense for 2 years P240,000 st nd Less: Payment (1 and 2 years) 150,000 Accrued rent P90,000 If the operating lease agreement provides for varying periodic rentals, rent expense/income should be recognized on a straight-line basis unless a systematic and rational basis is more appropriate , meaning the total cash rental throughout the duration of the lease contract must be determined and amortized over the lease term. The difference between the rent expense (lessee) or rent income (lessor) over the cash paid (lessee) or cash received (lessor) is either a prepaid or accrued rent (lessee) or either an accrued unearned income (lessor). Problem 42 (adapted): As an inducement to enter a lease, Athena, a lessor, grants Zeus Corp. a lessee, months of free rent under a 5-year operating lease. The lease is effective July 1, 2014 and provides for a monthly rental of P20,000 to begin April 1, 2015.In Zeus income statement for the year ended June 30, 2015. How much should be reported as rent expense?
Solution: Lease term (5 years) 60 months Less: rent free months 9 months Number of lease payments 51 months Monthly rental ×P20,000 Total rentals P1,020,000 Lease term ÷ 5 Annual rent expense P204,000 If the lease agreement provides for a rent free months or holiday, the total cash rental must be determined and amortized on a straight-line basis (over the lease term) unless another systematic and rational basis is more appropriate. Problem 43 (adapted): On January 1, 2014, Peter Pan Company sold equipment with the carrying amount of P1,000,000 and a remaining economic life of 10 years to Koko Drilling for P1,500,000. Peter Pan immediately leased the equipment back under a 10-year finance lease payment of P244,120 in December 2014. In December 31, 2014 statement of financial position, how much should be the adjusted unearned gain on equipment sale?
Solution: Selling price P1,500,000 Carrying value 1,000,000 Deferred gain P 500,000 Less: Realized gain (P500,000÷10) 50,000 Deferred gain, Dec. 31, 2014 P450,000 The sale and leaseback is a finance lease, any gain is deferred and amortized over the lease term. Problem 44 (adapted): The following information pertains to a sale and operating leaseback of equipment by Germanium Co. on December 31, 2014: Sale price P640,000 Carrying amount P500,000 Monthly lease payment P 24,457 Estimated remaining life 25 years
Lease term 2 years Implicit rate 12% Fair value P540,800 What amount of deferred gain on the sale should Germanium report at December 31, 2014?
Solution: Sales price P640,000 Fair value 540,800 Deferred P99,200 Fair value P540,800 Carrying value 500,000 Realized gain P40,800 If a state and leaseback transaction results in an operating lease and sales price is above the fair value, the excess over fair value should be deferred and amortized over the period for which the asset is expected to be used, while the excess of the fair market value over its carrying value should be recognized immediately as a realized gain. Problem 45 (adapted): On June 30, 2014, Potassium Company sold an equipment with an estimated economic life of 10 years and immediately leased it back for 8 years. The equipment’s carrying amount was P450,000, the sales price was P430,000. What amount should Potassium report as deferred loss on its June 30, 2014 statement of financial position?
Solution: Selling price P430,000 Carrying value 450,000 Loss recognized outright P20,000 Any loss on a finance lease sale and leaseback is recognized immediately in the company’s income statement. Final Answer: NONE Problem 46 (adapted): Camia Company is in the business of leasing new sophisticated equipment. As a lessor, Camia expects a 12% return on its net investment. All leases are classified as a direct financing lease. At the end of the lease term, the equipment will revert to Camia Company. On January 1, 2011 an equipment is leased to another entity with the following information. Cost of equipment to Camia 5, 500, 000 Residual value-unguaranteed 400, 000 Annual rental payable in advance 959, 500 Useful life and lease term 8 years Implicit interest rate 12% First lease payment January 1, 2011 1. 2.
What is the unearned interest income on January 1, 2011? What is the interest income for 2011?
Solutions: Gross rentals (959, 500 x 8) Residual value Gross investment Net investment-equal to the cost of the equipment Unearned interest income-january 1, 2011
P7, 676, 000 400, 000 8, 076, 000 5, 500, 000 P2, 576, 000
The difference between gross investment and net investment in the lease is the unearned interest income. The gross investment is the sum in absolute amount of the gross rentals and residual value, whether guaranteed or unguaranteed. In indirect financing lease, the net investment is s imply the cost of the leased asset plus any initial direct cost. Whether guaranteed or unguaranteed, the residual value is included in computation of total financial income if the leased asset will revert to the lessor at the end of the lease term. Otherwise, the residual value is ignored if title passes to the lesse at the end of lease term. PV of rentals- equal to the cost of the equipment or net investment 5, 500, 000 First payment on January 1, 2011(all principal payment) 959, 500 Lease receivable- January 1, 2011 4, 540, 500 Interest income for 2011 (4, 540, 500 x 12%) Final answer: 1. P2, 576, 000 2. P594, 860 K. ACCOUNTING FOR EMPLYEE BENEFITS(IASR 19)
544, 860
Problem 47 (adapted): You gathered the following information r elated to Jomalig Company’s the defined benefit plan for the year e nded December 31, 2013: • Current service cost of providing benefits for the year to December 31, 2013: P54 million •
Average remaining working life of employees: 10 years
•
Benefits paid to retired employees in the year: P55.8 million
•
Contributions paid to the fund: P37.8 million
•
Present value of obligation to provide benefits: P3,960 million at January 1, 2013, and P4,500 million at December 31, 2013
• •
Fair value of plan assets: P3,780 million at January 1, 2013, and P4,320 million at December 31, 2013 Net cumulative unrecognized gains at January 1, 2013: P453.6 million
•
Past service cost: P207 million. All of these benefits have vested.
Discount rates and expected rates of r eturn on plan assets: 1/1/13 Discount rate 5% Expected rate of return on plan assets 7% 1. 2. 3.
1/1/14 6% 8%
COMPUTE THE ACTUAL RETURN COMPUTE THE NET INTEREST INCOME COMPUTE THE BENEFIT EXPENSE
Unrecognized Benefit expense
Prepaid/ (Accrued) Benefit 633.60
S I E R A P Actuarial loss Cash paid to employees
54.00 198.00 (264.60) (5.76) 207.00
Cash paid to plan assets 188.64 End
DBO
FVPA
3,960.00 54.00 198.00
3,780.00
453.60
558.00
293.40 (5.76)
207.00 136.80 (55.80) (37.80) 188.64 784.44
Actuarial Gains (Losses)
Past Service Cost
(136.80) (55.80) 37.80
4,500.00
4,320.00
604.44
784.44 UNDER IAS 19R
Benefit expense P/L
OCI
633.60 (453.60)
Adjustment to Retained earnings S IE II P Actuarial loss
Prepaid/ (Accrued) Benefit
54.00 198.00 (189.00) 207.00
DBO
FVPA
3,960.00
3,780.00
453.60 (453.60)
54.00 198.00 369.00
558.00 207.00 136.80
(136.80)
Cash paid to employees
(55.80)
Cash paid to plan assets
(37.80) 270.00
Unrecognized Actuarial Past Gains Service (Losses) Cost
232.20
(55.80) 37.80
270.00 (232.20)
End
180.00 180.00
L.
STOCKHOLDER’S EQUITY
4,500.00
4,320.00
-
-
Problem 48 (adapted): The following items were shown on the balance sheet of Herman Corporation on December 31, 2002: Stockholders’ Equity Paid-In Capital Capital Stock Common stock, $5 par v alue, 240,000 shares authorized; ______ shares issued and ______ outstanding ....................................
$1,000,000
Additional paid-in capital In excess of par value ........................................................................................ Total paid-in capital .....................................................................................
120,000 1,120,000
Retained Earnings ....................................................................................................... 500,000 Total paid-in capital and retaine d earnings ............................................................ 1,620,000 Less: Treasury stock (10,000 shares) .............................................................................. (120,000) Total stockholders' equity ................................................................................... $1,500,000 Instructions Complete the following statements and show your computations. (a) The number of shares of common stock issued was _______________. (b) The number of shares of common stock outstanding was ____________. (c) The sales price of the common stock when issued was $____________. (d) The cost per share of the treasury stock was $_______________. (e) The average issue price of the common stock was $______________. (f) Assuming that 25% of the treasury stock is sold at $20 per share, the balance in the Treasury Stock account would be $_______________.
Solution (a)
The number of shares of common stock issued was 200,000.
(b)
$1,000,000 ÷ $5 par value = 200,000 shares issued. The number of shares of common stock outstanding was 190,000.
(c)
200,000 issued less 10,000 in treasury = 190,000 shares outstanding The sales price of the common stock when issued was $1,120,000.
(d)
Common stock $1,000,000 Plus: In excess of par value 120,000 Total $1,120,000 The cost per share of the treasury stock was $ 12.
(e)
$120,000 ÷ 10,000 = $12 per share. The average issue price of the common stock was $5.60.
(f)
$1,120,000 ÷ 200,000 shares = $5.60 per share. Assuming 25% of the treasury stock is sold at $20 per share, the balance in the Treasury Stock account would be $90,000. 7,500 shares × $12 = $90,000.
Blue Company has 2,000,000 shares of ordinary shares outstanding on December 31, 2010. An additional 100,000 shares are issued on April 1, 2011, and 240,000 more on September1. On October 1, Blue i ssued P3, 000,000 of 9% convertible bonds. Each P1, 000 bond is convertible into 40 shares of ordinary shares. At the time of issue of the convertible bonds, the market rate of the bonds without the conversion option is equal to its nominal rate. No bonds have been converted. The number of shares to be used in computing basic earnings per share and diluted per share on December 31, 2011 would be: Solution: Average # of shares for basic EPS: 01/01/11 2,000,000x12/12 = 2,000,000 04/01/11 100,000x 9/12 = 75,000 09/01/11 240,000x 4/12 = 80,000 2,155,000 Diluted EPS = Average # of shares Basic EPS Diluted EPS Average 2,155,000 2,155,000 Average ordinary shares issued as if Converted (3,000,000/1,000x40x3/12) 30,000 Number of shares 2,155,000 2,185,000 Final Answer: 2,155,000&2,185,000 DILUTED EARNINGS PER SHARE Problem 49 (adapted):
Problem 50 (adapted): On January 1, 2002, Yount Corporation had Retained Earnings of $478,000. During the year, Yount had the following selected transactions: 1. Declared stock dividends of $30,000. 2. Declared cash dividends of $80,000. 3. A 2 for 1 stock split involving the issuance of 200,000 shares of $5 par value common stock for 100,000 shares of $10 par value common stock. 4. Suffered a net loss of $50,000. 5. Corrected understatement of 2001 net income because of an inventory error of $42,000. Instructions Compute the balance of retained earnings statement for the year.
Solution YOUNT CORPORATION Retained Earnings Statement For the Year Ended December 31, 2002 Balance, January 1, as reported ............................................... Correction for understatement of 2001 net income (inventory error) 42,000 Balance, January 1, as adjusted ............................................... Less: Net loss ...................................................................... Less:
Cash dividends ............................................................. Stock dividends ............................................................ Balance, December 31 ............................................................
$478,000
520,000 (50,000) 470,000 $80,000 30,000
(110,000) $360,000
Problem 51 (adapted): The accounts shown below appear in the December 31, 2014 trial balance of HALLOW CORPORATION: Preference share authorized, P50 par Unissued preference share Ordinary share authorized, P20 par Unissued ordinary share Subscription receivable, preference share Subscription receivable, ordinary share Subscribed preference share Subscribed ordinary share Treasury share, preference share, at cost Share premium Accumulated profits and losses
P10,000,000 3,600,000 4,000,000 2,000,000 380,000 360,000 600,000 440,000 1,360,000 1,700,000 2,000,000
All subscription receivables are due in ye ar 2015 How much is the total shareholders’ equity of Hallow Corporation?
Solution Preference share issued (P10,000,000-3,6000,000) Ordinary share issued (4,000,000-2,000,000) Subscribed preference share Subscribed ordinary share Share premium Accumulated profit Treasury shares
P6,400,000 2,000,000 600,000 440,000 1,700,000 2,000,000 (1,360,000)
Shareholders’ equity
P11,780,000
Problem 52 (adapted): Hallway Company issued 20,000 shares of its P10 par value ordinary shares and 40,000 share of its P10 par value convertible preference share for a total amount of P1,800,000. At this date, Hallway’s ordinary share was selling P20 per share and the convertible preference share was selling for P30 per share. What amount of proceeds should be allocated to the ordinary share?
Solution: When two classes of securities are issued at a single/basket price, then the proceeds are allocated using the market value ratio of the securities.
Preference share (40,000xP30) Ordinary share (20,000xP20) Journal entry to record the transaction:
Market value P1,200,000 400,000
Ratio 12/16 4/16
Allocation P1,350,000 450,000
Cash Ordinary share capital Share premium-ordinary Preference share capital Share premium-preference
P1,800,000 P200,000 250,000 400,000 950,000
Final answer: P450,000 Problem 53 (adapted): The following balances are shown in the shareholders equity of Kalinga Company on January 1,2011. Preference share capital, 100,000 share, P100 par Ordinary share capital, 500,000 share, P10 par Share premium – Preference Share premium – Ordinary Retained earnings
P1,000,000 5,000,000 50,000 200,000 1,000,000
During 2011, the following transactions were completed retirement of 5,000 preference shares at P11 per share. Purchase of 5,000 ordinary shares of treasury at P12 per share. Share split ordinary share 2-for-1 Reissue of 2,000 shares of treasury at P8 per share Net income for the year, P300,000 What is the total shareholders’ equity on December 31, 2011?
Solution Shareholders equity – January 1 Retirement of Preference share (5,000 x 11) Purchase of treasury share (5,000 x 12) Share split – no effect Reissue of treasury shares (2,000 x 8) Net income Shareholders equity – December 31
P6, 350,000 ( 55,000) ( 60,000) 16,000 300,000 P6,551,000
Problem 54 (adapted): The Accumulated Profits and Losses account of Gabby Company shows the following postings: Debit: Share dividends Uninsured fire loss Prior years error Reserve for bond redemption
P500,000 175,000 214,000 300,000
Credit: Beginning balance Net income for years Excess of par value Gain on sale of treasury shares Ending balance
1,120,000 760,000 250,000 150,000 P1,091,000
What is the correct balance of the Accumulated Profits account to be reported in the company’s year-end financial system?
Solution Balance per ledger Less: Items that were erroneously credited to Accumulated Profits and Losses: Excess of par Gain on sales of treasury Correct Accumulated Profits
P1,091,000
P250,000 150,000 P
400,000 691,000
The uninsured fire loss, which is a nominal account, was not included in the reported net income computation: as a result, income reported was over stated. Sa far as the effect on the accumulated profits is concerned, the net income and the correction were properly accounted for. Final Answer: a) P 621,000 Allocation and Cash Dividends
Problem 55 (adapted): Generic Corporation paid dividends of P200,000 and 300,000 at the end of 2010 and 2011, respectively. The corporation has not paid any other dividends since its organization on January 2, 2010. The outstanding shares are 20,000, 12% preference shares, par P100 and 30,000 ordinary shares, par P100. Question 1: If preference shares is non-cumulative and nonparticipating, how much would be received in 2010 by the preference and ordinary shareholders, respectively?
Solution: Dividends due to preference shares should be P240,000 (20,000 shares x P100 x 12%). However, since the dividends paid in 2010 was only P200,000, then the total amount will be given to the preference shareholders and none to the ordinary shareholders. Final Answer: d) P200,000 and
0
Question 2: If preference shares were cumulative and nonparticipating, how much would be the preference and ordinary shareholders, respectively, receive in 2011?
Solution: Total amount paid as dividends at the end of 2011 Less: Dividends payable to the preference shares: Unpaid dividends in 2010 (P240,000 – P200,000) Dividends for the current year (2011) Dividends due to ordinary shares
P300,000
P 40,000 240,000
280,000 P 20,000
Final Answer: c) P280,000 and P 20,000 Problem 56 (adapted): On January 2, 2013, Mining Corporation declared a cash dividend of P600,000 to shareholders to record on January 19, 2013 and payable on February 14, 2013. The following data pertain to 2012: Net income for the year ended December 31, 2012 Share premium, December 31, 2012 Accumulated profits, December 31, 2012
P190,000 675,000 425,000
The P600,000 dividend includes a liquidating dividend of:
Solution: Amount of dividends paid Accumulated profits, December 31, 2012 Dividends out of capital/liquidating dividends
P600,000 425,000 P175,000
The net income for 2012 of 190,000 should not be added to the accumulated profits and losses since the accumulated profits already include the net income. Problem 57 (adapted): The following information pertains to Martial Corporation: ● Dividends on its 1,000 shares of 6%, P10 par value cumulative preference shares have not been declared or paid for 3 years. ● Treasury shares that cost P15,000 were reissue d for P8,000. What amount of accumulated profits should be appropriated as a result of these items?
Solution: ● As a legal requirement, the company should appropriate accumulated profits equal to the remaining coast of treasury shares. Since the treasury shares had been reissued, hence, no appropriation is needed. ● Undeclared dividends do not require appropriation; only a disclosure is necessary in the notes to financial statements. ● Reasons for appropriation are the following: - As a legal requirement that the company should appropriate equal to the remaining cost of the treasury shares; - As a contractual restriction because there are bond indentures that require appropriation of accumulated profits at a specified amount over the term of the bonds;
- As a protection of working capital because it is necessary to maintain a strong current position, hence, the company should disclose that the working capital is not available for dividend distribution equal to the amount of appropriation. - For the existence of possible or expected losses – appropriations may be created for estimated losses arising from lawsuits, unfavorable contractual obligations and other contingencies. Final Answer: a) None Problem 58 (adapted): The shareholders’ equity of Diskette Corporation’s December 31, 2011 balance sheet consisted of the following account balances: Ordinary shares, P50 par, 100,000 Authorized and outstanding Share premium Accumulated profits and losses
P5,000,000 3,000,000 (2,000,000)
On January 2, 2012, the company put into the effect a shareholders-approved quasi-reorganization by reducing the par value of the stock to P25 and eliminating the deficit against share premium. Immediately, after the quasireorganization, what amount should the company report as share premium in its statement of f inancial position?
Solution: Share premium prior to quasi-organization P3,000,000 Add: Share premium on the reduction of par (P50 – P25 x 100,000) 2,500,000 Total share premium P5,500,000 Less: Amount of deficit charged to share premium 2,000,000 Share premium after the quasi-reorganization thru Recapitalization P3,500,000 Problem 59 (adapted): Tarr Company’s shareholders’ equity on December 31, 2011 consisted of the following: Preference share capital-12%, P50 par, 20,000 shares issued Ordinary share capital, P25 par, 100,000 share issued Share premium Retained earnings Retained earnings appropriated Revaluation surplus
1,000,000 2,500,000 200,000 400,000 100,000 300,000
Dividends on preference share have not been paid since 2009. The preference share has a liquidating value of P55 and a call price of P58. What is the book value per preference share?
Solution: Preference share capital Liquidation premium-excess of liquidating value Over par (20,000 x 5) Preference dividend for current year only (1,000,000 x 12%) Total preference shareholders’ equity Divide by preference shares outstanding Book value per preference share Final Answer: 61
1,000,000 100,000 120,000 1,220,000 20,000 60
In the absence of any contrary statement, the preference share is noncumulative and nonparticipating. Thus, it is entitled to current year dividend only. The liquidating value of the preference share is used instead of the call price because book value computation is on the premise that the entity will dissolve and liquidate. Problem 60 (adapted): Smart Company is an entity listed in a recognized stock exchange. Below is an extract from its financial statement of comprehensive income for the year ended December 31, 2010. Profit before tax 5,800,000 Income tax expense 1,500,000 Profit after tax 4,300,000 In addition, the entity paid during the year an ordinary dividend of P400,000 and a preference dividend of P500,000 on its redeemable preference share. An entity had P1,000,000 of P5 par value ordinary share in issue throughout the year and authorized share capital of 500,000 ordinary shares. What amount should be reported as retained earnings per share for the year ended?
Solution:
Ordinary share (1,000,000/5) Basic earnings per share (4,300,000/200,000)
200,000 21.50
Problem 61 (adapted): Night Company had 500,000 Ordinary shares issued and outstanding at December 31, 2013. During 2014, no additional ordinary shares were issued. On January 1, 2014, night issued 400,000 nonconvertible preference shares. During 2014, Night declared and paid 180,000 cash dividends on the ordinary shares and 150,000 on the nonconvertible preference shares. Net income for the year ended Dec. 31, 2014 was 960,000. What should be the 2014 earnings per ordinary share of Night Company?
Solution: Net income Less: Preference dividend Net Divide Ordinary share Outstanding Basic Earnings Per share
P 960,000 150,000 P 810,000 500,000 P 1.62
Problem 62 (adapted): Vios Company had 100,000 ordinary shares outstanding on January 1, 2011. In addition, on January 1, 2011, the entity had issued 10,000 convertible cumulative 5% preference shares with P100, par. The preference shares were converted on September 1, 2011. Each preference shares were converted into six ordinary shares. The preference dividends for the entire year were paid in full before the conversion. The entity has no other potentially dilutive securities. Net income for 20011 was P2,000,000.What is the amount of diluted earning per share?
Solution: January 1 outstanding 100,000 September 1 conversion (100,000x6) 60,000 Total ordinary shares 160,000 Diluted EPS (2,000,000/160,000) 12.50 The issuance of ordinary shares on September 1 is not “averaged” anymore because the convertible preference shares are outstanding on January 1. Under diluted EPS, the annual dividend on convertible preference share is no longer deducted from net income. Problem 63 (adapted): On January 1, 2011, G Company grants 5,000 shares to each member of its sales department, conditional upon the employee’s remaining in the company’s employ for three years, and the department selling more than 60,000 units of product Zip over the three-year period. The company estimates that the fair value of the option on January 1, 2011 is P30 per option. During 2012, G Company increases the sales target to 80,000 units. By the end of 2013, the company has sold 70,000 units, and share options are forfeited. And there were 10 members remaining in the sales department for the three-year period. What amount of remuneration expense should the company recognize in its December 31, 2013 profit or loss?
Solution: Option shares × Number of employees Total option share × Fair value of option, date of grant Total value of remuneration ÷ Vesting period Remuneration cost per year
5,000 10 50,000 P30 P1,500,000 3 years P 500,000
Irrespective of any modifications to the terms and conditions on which the equity instruments were granted, or a cancellation or settlement of that grant of equity instruments, the entity should recognize, as a minimum, the services received, measured at the fair value of the instrument (which is the fair market value on the date of grant date) unless those instruments do not vest because of failure to satisfy a vesting condition (other than market condition) that was specified at the grant date. Furthermore, if the company modifies the vesting conditions in a manner that is not beneficial to the employee/s does not take the modified vesting conditions into account. And since the modification to the performance condition is not beneficial to the employees, the company should not take into account the modified performance condition, but continue to measure the services received based on the original vesting conditions. Problem 64 (adapted): On January 2, 2014, X Company grants 50 shares to 400 employees, conditional upon the employees’ remaining in the company’s employ during the vesting period. The share will vest at the end of 2014 if the company’s earnings increased by more than 15%; or at the end of 2015 if the e arnings increased by an average of 12% over the two-year period; or at the end of 2015 if the earnings increased by an average of 10% over the three-year period. The shares have fair value of P25 on January 2, 2014, which is equal to the share price on the grant date. At the end of 2014, earnings had increased by 13% and the company expects that earnings will continue to increase at a similar rate in 2015 and expects to vest in 2015. At the end of 2015, earnings increased by only 9% and therefore shares do not vest at the end of 2015. The company expects that earnings will continue to increase at similar rate. At the end of 2016, earnings increased by 9%. What amount of remuneration expense should the company recognize in its December 31, 2016 profit or loss?
Solution: Year 2014 Year 2015 Year 2016
400 x 50 shares x P25 x 1/2 = P250,000 400 x 50 shares x P25 x 2/3 = P333,333 400 x 50 shares x P25 x 3/3 = P500,000
Required balance Beginning balance
2014 P250,000 0
2015 P333,333 250,000
2016 P500,000 333,333
Remuneration costs
P250,000
P 83,333
P166,667
Final answer: P166,667 Problem 65 (adapted): On January 1, 2011, Morey Company granted Dean, its president, 20,000 share appreciation rights for past services. These rights are exercisable immediately and expire on January 1, 2013. On exercise, Dean is entitled to receive cash for the excess of the share market price on the exercise date over the market price on the grant date. Dean did not exercise any of the rights during 2011. The market price of Morey’s share was ₱30 on January 1, 2011 and ₱45 on December 31, 2011. As a result of the share appreciation rights, what amount should be recognized as compensation expense for 2011?
Solution: Market price- December 31, 2011 45 Predetermined price on January 1, 2011 30 Fair value of share appreciation right 15 Compensation for 2011 (20,000 x 15) 300,000 The total compensation is recognized as expense entirely in 2011 because the share appreciation rights are exercisable immediately. Final Answer: 300,000 Problem 66 (adapted): On January 1, 2011 Module Company granted 100 share appreciation rights to each of its 500 employees on condition that the employees remain in its employ for the next three years. No employees left the entity during the three- year vesting period. The employees exercised their share appreciation rights as follows: December 31, 2013 100 employees December 31, 2014 250 employees December 31, 2015 150 employees The fair value and intrinsic value of the share appreciation right are as follows: Fair value Intrinsic value December 31, 2011 15 December 31, 2012 18 December 31, 2013 20 15 December 31, 2014 21 20 December 31, 2015 25 The intrinsic value of the share appreciation right on the date of exercise is the amount paid out to the employees. Determine the compensation expense for each year from 2011 to 2015 as a result of the share appreciation rights.
Solution: 2011 Dec. 31 Salaries 250,000 Accrued salaries payable Share appreciation rights (500 employees x 100) Multiply by fair value Total fair value Accrued liability- 12/31/2011 (750,000/3) 2012 Dec. 31 Salaries Accrued salaries payable Share appreciation rights Multiply by fair value Total fair value
50,000 15 750,000 250,000
350,000
Accrued liability- 12/31/2012 (900,000/3 x2) Accrued liability- 12/31/2011 Compensation expense for 2012 2013
250,000
350,000 50,000 18 900,000
600,000 (250,000) 350,000
Dec. 31 Salaries 200,000 Accrued salaries payable Share appreciation rights not yet exercised (500-100 x 100) Multiply by fair value Accrued liability- 12/31/2013 Accrued liability- 12/31/2012 Compensation expense for 2012 Salaries 150,000 Cash
200,000 40,000 20 800,000 (600,000) 200,000 150,000
Share appreciation rights exercised (100 x 100) Multiply by intrinsic value Total payment Compensation related to rights not yet exercised Compensation paid for rights already Exercised Total compensation expense for 2013 2014 Dec. 31
Accrued salaries payable 485,000 Salaries Share appreciation rights not yet exercised (400-250 x 100) Multiply by fair value Accrued liability- 12/31/2014 Accrued liability- 12/31/2013 Decrease in accrued liability Salaries 500,000 Cash
150,000 350,000
15,000 21 315,000 (800,000) (485,000) 500,000
25,000 20 500,000
Reversal of accrued liability related to rights not yet exercised Compensation paid for rights already Exercised Total compensation expense for 2013
Salaries 60,000 Accrued salaries payable 315,000 Cash Share appreciation rights exercised (150 employees x 100) Multiply by intrinsic value Total payment in 2015 Accrued liability- 12/31/2014 Net compensation expense for 2015
200,000
485,000
Share appreciation rights exercised (250 x 100) Multiply by intrinsic value Total payment
2015 Dec. 31
10,000 15 150,000
(485,000) 500,000 15,000
375,000 15,000 25 375,000 (315,000) 60,000
M. Supplementary topics Problem 67 (adapted): Malampaya Company showed income before income tax of P 6,500,000 on December 31, 2009. The year- end verification of the tr ansactions of the company revealed the following errors: P 1,000,000 worth of merchandise was purchased in 2009 and included in the ending inventory. However, the purchase was recorded only in 2010. A merchandise shipment valued at P 1,500,000 was properly recorded as purchase at year- end. Since the merchandise was still at the port area, it was inadvertently omitted from the inventory balance of December 31, 2009. Advertising for December 2009, amounting to P 500,000, was recorded when payment was made by the firm in January 2010.
Rental of P 300,000 on an equipment, applicable for six months, was received on November 1, 2009. The entire amount was reported as income in 2009. Insurance premium covering the period from July 1, 2009 to July 1, 2010, amounting to P 200,000 was paid and recorded as expense on July 31, 2009. The entity did not make any adjustment at the end of the year. The corrected income before tax for 2009 should be:
Solution: Net income per book Unrecorded purchase of 2009 Merchandise shipment not included in December 31, 2009 inventory Unrecorded advertising for December 2009 Unearned rent income (300,000 x 4/6) Prepaid insurance (200,000 x 6/12) Corrected net income
6,500,000 (1,000,000) 1,500,000 ( 500,000) ( 200,000) 100,000_ 6,400,000
Problem 68 (adapted): The electricity account of Velvet Company for the year ended June 30, 2015 was as the following: Opening balances for the electricity accrual of July 1, 2014 Payments made during the year: 08/01/14- for three months to July 31, 2014 11/01/14- for three months to October 31, 2014 02/01/15- for three months to January 31, 2015 06/30/15- for three months to April 30, 2015
P 30, 000 60, 000 72, 000 90, 000 84, 000
What amount of electricity expense should Velvet C ompany report in its June 30, 2015 Statement of Comprehensive Income?
Solution: Total payment made Accrued electricity, end balance (84,000x2/3) Total Accrued electricity, beginning balance Electricity Expense
P 306, 000 56, 000 P 362, 000 30, 000 P 332, 000
Problem 69 (adapted): For the year ended December 31, 2014 Light Incorporation reported the following: Net Income Preferrence Share Dividend declared Ordinary Share Dividend declared Unrealized holding loss, net of tax Retained Earnings Ordinary Share Capital Accumulated other Comprehensive Income beginning balance, net of tax
P 180, 000 30, 000 6, 000 3, 000 240, 000 120, 000 15, 000
Whatwould Light report as its ending balance of Accumulated other Comprehensive Income?
Solution: Beginning balance Unrealized holding loss Ending balance
P 15, 000 3, 000 P 12, 000
Problem 70 (adapted): On December 30, 2010, LUV U Company paid P1, 500,000 for land. On December 31, 2011, the current cost of the land was P3, 200,000. In January 2012, the land was sold for P2, 250,000. Under current cost accounting, what is the increase in shareholders’ equity in 2011?
SOLUTION: Current cost- December 31, 2011 Historical cost Unrealized holding gain in 2011
3,200,000 1,500,000 1,700,000
Problem 71 (adapted): Rice Company accounts for inventory on FIFO basis. There were 8,000 units in inventory on January 1, 2011. Historical cost
Units
Units sold
First quarter Second quarter Third quart Fourth quarter
410,000 350,000 425,000 630,000
Purchased 7,000 8,500 6,500 9,000
7,500 7,300 8,200 7,000
Rice estimates that the current cost per unit of inventory was P57 on January 1, 2011 and P71 on December 31, 2011. In the statement of financial position restated to current cost, what amount should be reported as December 31, 2011 inventory?
SOLUTION: Inventory-December 31 (9,000 x 71)
639,000
Problem 72 (adapted): Information with respect to cost of goods sold of Bar Company for 2011 is as follows:
Inventory, January 1 Purchases during the year Goods available for sale Inventory, December 31 Cost of goods sold
Historical cost
Units
1,060,000 5,580,000 6,640,000 (2,520,000) 4,120,000
20,000 90,000 110,000 40,000 70,000
Bar estimates that the current cost per unit of inventory was P58 on January 1, 2011 and P72 on December 31, 2011. In the income statement for 2011 restated to current cost, what amount should be reported as cost o f goods sold?
SOLUTION: Current cost per unit-January 1 58 Current cost per unit-December 31 72 TOTAL 130 Average current cost (130/2) Cost of goods sold at average current cost (70,000 x 65)
65 4,550,000
In the income statement for 2011 restated to current cost, what amount should be reported as realized holding gain from inventory sold?
ANSWER: Cost of goods sold at average current cost Cost of goods sold at historical cost Realized holding gain
4,550,000 4,120,000 430,000
Problem 73 (adapted): The following assets appear on the statement of financial position of Gardenia Company: Cash in bank 2,000,000 Accounts receivable 4,000,000 Inventory 1,500,000 Financial asset at fair value 500,000 Patent 1,000,000 Advances to employees 200,000 Advances to suppliers 400,000 Prepaid expense 100,000 In preparing financial statements in a hyperinflationary economy, what total amount should the entity classify as monetary asset?
Solution: Cash in bank Accounts receivable Advances to employees Total monetary asset
2,000,000 4,000,000 200,000 6,200,000
PAS 21 defines monetary asset as “money held and asset to be received in fixed or determinable amount of money”. The essential feature of a monetary asset is the right to receive a fixed or determinable amount of money. Monetary assets are those whose amounts are fixed in the sense that the amounts ultimately realizable are the same amounts that appear on the historical financial statements. Monetary asset are by their very nature already expressed in terms of current pesos and therefore realizable at no more or less than their face or stated amounts. Accordingly, the inventory, financial asset at fair value, patent, advances to suppliers and prepaid expenses are nonmonetary because they do not represent fixed amount to be received. Their ultimate realizable amounts definitely will differ from their carrying amounts.
Problem 74 (adapted): The following liabilities appear on the statement of financial position of Sunflower Company: Accounts payable 1,000,000 Accrued expenses 500,000 Bonds payable 3,000,000 Finance lease liability 4,000,000 Unearned revenue 300,000 Advances from customer 1,200,000 Estimated warranty liability 200,000 Deferred tax liability 400,000 In preparing financial statements in a hyperinflationary economy, what total amount should the entity classify as monetary liabilities?
Solution: Accounts payable Accrued expenses Bonds payable Finance lease liability Total monetary liabilities
1,000,000 500,000 3,000,000 4,000,000 8,500,000
PAS 21 defines monetary liabilities as “liabilities to paid in fixed or determinable amount of money”. The essential feature of a monetary liability is the obligation to deliver a fixed or determinable amount of money. Monetary liabilities are those whose amounts are fixed in the sense that the amounts ultimately payable are the same amounts that appear on the historical financial statements. Stated differently, liabilities are classified as monetary because by their very nature they are already expressed in current pesos and therefore payable at no more or no less than their face or stated amounts. Accordingly, the unearned revenue, advances from customers, estimated warranty liability and deferred tax liability are nonmonetary because they do not represent fixed amount of money to be paid. Their ultimate amounts payable will surely differ from their carrying amounts. Problem 75 (adapted): Dahlia Company was formed on January 1, 2005. Selected balances from historical cost statement of financial statement on December 31, 2011 were: Land (purchased on January 1, 2005) 2,400,000 Investment in long-term bonds (purchased on January 1, 2008) 1,200,000 Long term debt (issued on January 1,2005) 1,600,000 The general price index was 120 on January 1,2005, 150 on January 1,2008 and 300 on December 31,2011. What amount should be reported in a hyperinflationary statement of financial position?
Solution: Land (2,400,000 X 300/120) Investment in bond- monetary Long-term debt- monetary
6,000,000 1,200,000 1,600,000
Only nonmonetary items are restated when preparing hyperinflationary financial statements. Monetary items are not restated anymore because they are automatically stated in terms of current pesos at the end of the reporting period. The formula for restatement is to multiply the historical amount by a fraction whose numerator is the index number at the end of reporting period and whose denominator is the index number on acquisition date.
