PROBLEM NO.

1 - Heats Corporation
Requirement no. 1
Notes payable:
Arising from purchase of goods
Arising from bank loans, on which marketable securities valued
at P600,000 have pledged as security, due Dec. 31, 2005
Arising from advances by officers, due June 30, 2005
Employees income tax withheld
Advances received from customers on purchase orders
Containers deposit
Accounts payable arising from purchase of goods (P170,000 + P30,000)
Customers' account with credit balance
Cash dividends payable
Current portion of serial bonds (P50,000 x 2)
Overdraft with Allied Bank
Est. damages to be paid as a result of unsatisfactory performance on a contract
Est. expenses on meeting guarantee for service requirements on mechandise sold
Estimated premiums payable
Deferred revenue
Accrued interest on bonds payable
Provision - deficiency income tax assessment
TOTAL CURRENT LIABILITIES

500,000
50,000
20,000
64,000
50,000
200,000
40,000
80,000
100,000
90,000
160,000
120,000
75,000
87,000
360,000
200,000
2,500,000

Convertible bonds, due January 31, 2007

Noncurrent portion of serial bonds (P2,000,000 - P100,000)
TOTAL NONCURRENT LIABILITIES

1,000,000
1,900,000
2,900,000

5,400,000

TOTAL LIABILITIES (Requirement no. 2)

304,000

PROBLEM NO. 3 - Pistons Company

Item no. 2

Item no. 6

Item no. 8

Item no.10

Item no.11

Item no.12

Item no.19

Insurance expense (P24,000/12 x 1/2)

Prepaid insurance

1,000

Prepaid dues and subscription

Dues and subscription exp

5,000

Vouchers payable
Inventory

1,000

5,000
111,500
111,500

Legal and professional expense

Vouchers payable

46,000

Medical expense
Vouchers payable

25,000

Inventory
Vouchers payable

55,000

Machinery and equipment

Vouchers payable

46,000

25,000

55,000
254,000
254,000

PROBLEM NO. 2 - Sonic Corporation

1 Accounts payable per general ledger
Debit balances in suppliers' accounts
Goods in transit on 12/31/05, FOB shipping point
Unrecorded purchase return
Adjusted accounts payable
Accrued janitorial expenses (P144,000 x 2/3)
Accrued utilities (P67,200 x 15/30)
Total
2 Accrued salaries and wages
Income taxes withheld
SSS contributions payable
Philhealth contributions
Total
3 Since the outcome is only possible, the matter will only be disclosed.
4

5,440,000
240,000
192,000
(160,000)
5,712,000
96,000
33,600
5,841,600 D
776,000
56,000
64,000
16,000
912,000
-

D
A

B = 10% (P9,600,000 - B - T)
T = 30% (P9,600,000 - B)
T = P2,880,000 - .3B
B = 10% [P9,600,000 - B - (P2,880,000 - .3B)]
B = 10% (P9,600,000 - B - P2,880,000 + .3B)
B = 10% (P6,720,000 - .7B)
B = P672,000 - .07B
1.07B = P672,000
B = P628,000 (rounded off)

5 Principal amount due, 10/1/06

Accrued interest payable (P1,600,000 x 18% x 3/12)
Total

800,000
72,000
872,000

6 Estimated liability on purchase commitment [320,000 x (P5 - P4.40)]

192,000

7 Deferred tax assets and liabilities should not be presented as current

8 Warranty payable, 12/31/04
Add warranty expense accrued during 2005
Total
Less payments during 2005
Warranty payable, 12/31/05
9 Estimated coupons to be redeemed (160,000 x 60%)
Less coupons redeemed
Coupons outstanding
Divide by exchange rate
Premiums to be issued
Multiply by net premium cost (P100+P20-P30)
Estimated liability for coupons, 12/31/05
10 Advances against accounts receivable assigned are generally classified as
borrowing and treated as current liabilities.

416,000
1,504,000
1,920,000
1,408,000
512,000

96,000
64,000
32,000
5
6,400
90
576,000

1,280,000

PROBLEM NO. 4 - Rockets Company

Requirement no. 1
1) Discount on bonds payable (P10,000,000 - P9,500,000)
Bonds payable
To correct the original entry on issuance of 10,000 bonds
Retained earnings (P500,000 x 14/102)
Interest expense (P500,000 x 12/102)
Discount on bonds payable
To record discount amortization for the prior and current years
2) Bonds payable (P2,100,000 - P2,000,000)
Premium on bonds payable
To recognize premium on bonds payable
Premium on bonds payable (P100,000 x 6/82)
Interest expense
To record premium amortization for the year

500,000
500,000

68,627
58,824
127,451

100,000
100,000

7,317
7,317

3) Retained earnings (P10,000,000 x 12% x 2/12)

Interest expense
To correct interest exp pertaining to year 2004

200,000

4) Interest expense (P12,000,000 x 12% x 2/12)

Accrued interest payable
To record accrual of interest

240,000

200,000

240,000

Requirement no. 2
a) Bonds payable (P10,000,000 + P2,000,000)

12,000,000

b) Bond discount (P500,000 x 76/102)

372,549

c) Bond premium (P100,000 x 76/82)

92,683

d) Accrued interest (P12,000,000 x 12% x 2/12)

e) Interest expense
P10,000,000 x 12%
P2,000,000 x 12% x 6/12
Bond discount amortization (P500,000 x 12/102)
Bond premium amortization (P100,000 x 6/82)

240,000

1,200,000
120,000
58,824
(7,317)
1,371,506

PROBLEM NO. 5 - Wizards Company

Computation of amortization rate
Period covered
From
To

Bond year
1st
2nd
3rd
4th
5th
6th

10.02.03
10.01.04
10.01.05
10.01.06
10.01.07
10.01.08

09.30.04
09.30.05
09.30.06
09.30.07
09.30.08
09.30.09

Amount
Outstanding

Percent
to total

5,000,000
5,000,000
4,000,000
3,000,000
2,000,000
1,000,000
20,000,000

25%
25%
20%
15%
10%
5%
100%

Computation of amortization amount

2003
2004
2005
2006
2007
2008
2009

October to December (P100,000 x 25% x 3/12)

January to September (P100,000 x 25% X 9/12)
October to December (P100,000 x 25% x 3/12)
January to September (P100,000 x 25% X 9/12)
October to December (P100,000 x 20% x 3/12)
January to September (P100,000 x 20% X 9/12)
October to December (P100,000 x 15% x 3/12)
January to September (P100,000 x 15% X 9/12)
October to December (P100,000 x 10% x 3/12)
January to September (P100,000 x 10% X 9/12)
October to December (P100,000 x 5% x 3/12)
January to September (P100,000 x 5% X 9/12)

6,250
18,750
6,250
18,750
5,000
15,000
3,750
11,250
2,500
7,500
1,250

25,000
23,750
18,750
13,750
8,750
3,750
100,000

Requirement no. 1
a)

Bonds payable (P5,000,000 - P1,000,000)

b)

Bond discount
Original amount
Amortization : Prior years (2003 and 2004)
Current year (2005)

c)

Accrued interest (P4,000,000 x 5% x 3/12)

e)

Interest expense
P4,000,000 x 5%
P1,000,000 x 5% x 9/12
Bond discount amortization (see letter b above)

4,000,000
100,000
31,250
23,750

55,000
45,000
50,000
200,000
37,500
23,750
261,250

Requirement no. 2
1)

2)

3)

4)

Discount on bonds payable

Bond payable

100,000
100,000

Retained earnings
Bond interest expense
Discount on bonds payable

31,250
23,750

Accrued interest payable

Bond interest expense

62,500

Bond interest expense

Accrued interest payable

50,000

55,000

62,500

50,000

PROBLEM NO. 6 - Suns, Inc.

Question No. 1 - B
Total proceeds
Less liability component:
Present value of the principal (P2,000,000 x 0.6830)
Present value of the interest [(P2,000,000 x 8% x 3.1699)
Equity component
Int. exp.
Jan. 1, 2004
Dec. 31. 2004
Dec. 31. 2005
Dec. 31. 2006
Dec. 31. 2007

187,318
190,050
193,055
196,361

Int. exp.

Int. paid
160,000
160,000
160,000
160,000

Int. paid

2,000,000
1,366,000
507,184

Amort.
27,318
30,050
33,055
36,361
126,785
Amort.

Jan. 1, 2004
Dec. 31. 2004
Dec. 31. 2005

187,318
190,050

160,000
160,000

27,318
30,050

Dec. 31. 2006

Dec. 31. 2007

48,264
49,090

40,000
40,000

8,264
9,090
74,723

Question no. 2 - D
Carrying value, 1/1/04 (see no. 1)
Add discount amortization for 2004:
Effective interest (P1,873,184 x 10%)
Nominal interest (P2,000,000 x 8%)
Carrying value, 12/31/04

CV
1,873,184
1,900,502
1,930,553
1,963,608
1,999,969

CV
1,873,184
1,900,502
1,930,553
965,276
482,638
490,902
499,992

1,873,184
187,318
160,000

Question no. 3 - D
Effective interest (P1,900,502 x 10%)
Question no. 4 - A
Bonds Payable
Discount on bonds payable (P1,000,000 - P965,276)
Common stock
APIC

Question no. 5 - C
Reacquisiton price (P500,000 x 110%)
Carrying value of bonds reacquired (P1,930,553 x 1/4)
Loss on bond reacquisition

27,318
1,900,502

190,050

1,000,000
34,724
600,000
365,276

Carrying value of bonds converted (P1,930,553* x 1/2)

Par value of common stock received (P1,000,000/P1,000 x 10 x P100)
Amount to be credited to APIC
Carrying value, 12/31/04 (see no. 2)
Add discount amortization for 2005:
Effective interest (P1,900,502 x 10%)
Nominal interest (P2,000,000 x 8%)
Carrying value, 12/31/05

1,873,184
126,816

965,276
600,000
365,276
1,900,502
190,050
160,000

30,050
1,930,553

550,000
482,638
67,362

PROBLEM NO. 7 - Ginebra Corporation

Question No. 1 - B
Liability under capital lease
Balance, 1/1/05
Less principal payment on 12/31/05:
Total payment
Applicable to interest (P430,000 x 14%)
Balance, 12/31/05

430,000
100,000
60,200

Question No. 2 - D
15% Note payable, bank
Balance, 12/31/05 (P5,600,000 - P1,400,000)
Less installment due on April 1, 2006
Liability under capital lease
Balance, 1/1/05
Less principal payment on 12/31/05:
Total payment
100,000
Applicable to interest (P430,000 x 14%)
60,200
Balance, 12/31/05
Less principal payment due on 12/31/06:
Total payment
100,000
Applicable to interest (P390,200 x 14%)
54,628
10% bonds payable due 7/1/2014
Carrying value, 7/1/05
Add discount amortization:
Effective interest (1,774,000 x 12% x 6/12)
106,440
Nominal interest (2,000,000 x 10% x 6/12)
100,000
Deferred income tax liability
Balance, 1/1/05
Provision for deferred income tax (P312,500 x 32%)
Total noncurrent liabilities, 12/31/05

39,800
390,200

4,200,000
1,400,000
430,000

39,800
390,200

45,372

Question No. 5 - C
Note payable, bank
(P5,600,000 x 12% x 3/12)
(P4,200,000 x 12% x 9/12)
Liability under capital lease (see no. 1)
Bonds payable
Nominal (P2,000,000 x 10% x 6/12)
Discount amortization (see no. 2)
Total interest expense for 2005

6,440
700,000
100,000

PROBLEM NO. 8
CBBCD ACBBB AADCB ADCAA

378,000
100,000
478,000

168,000
378,000

100,000
6,440

344,828

1,774,000

Question No. 3 - A
Note payable, bank - due 4/1/06
Capital lease liability - principal payment due on 12/31/06 (see no. 1)
Current portion of long-term liabilities, 12/31/05
Question No. 4 - D
Note payable, bank (P4,200,000 x 12% x 9/12)
Bonds payable (P2,000,000 x 10% x 6/12)
Accrued interest payable, 12/31/05

2,800,000

546,000
60,200

106,440
712,640

1,780,440

800,000
5,725,268
1,400,000
45,372
1,445,372