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A guide in applying auditing procedures tospecific accounts of the financial statements.TEACHERS MANUAL2015EditionByDARRELL JOE O. ASUNCION, MBA, CPARAYMUND FRANCIS A. ESCALA, MBA, CPAMARK ALYSON B. NGINA, CPADear fellow teacher,This “Teacher’s Manual” should be used solely by the teacherand for cla...

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A guide in applying auditing procedures to specific accounts of the financial statements.

TEACHERS MANUAL 2015 Edition By

DARRELL JOE O. ASUNCION, MBA, CPA RAYMUND FRANCIS A. ESCALA, MBA, CPA MARK ALYSON B. NGINA, CPA

Dear fellow teacher, This “Teacher’s Manual” should be used solely by the teacher and for classroom purposes only. This manual should NOT be reproduced either manually (e.g., printing or photocopy) or electronically (e.g., copying or uploading in the net) without our written consent (or the publisher’s written authorization). If you have comments, queries or suggestions, please do not hesitate to contact us at: Telephone: 074-2441894 Mobile No.: Darrell Joe O. Asuncion – 0923-424-8286 Raymund Francis A. Escala – 0917-715-1226 Mark Alyson B. Ngina – 0915-510-7281 Email ad: [email protected]. Thanks and God bless. Sincerely, Darrell Joe O. Asuncion, MBA, CPA Raymund Francis A. Escala, MBA, CPA Mark Alyson B. Ngina, CMA, CPA

Table of Contents Chapter 25 INTRODUCTION To LIABILITIES ............................................................. 4 Chapter 26 FINANCIAL LIABILITIES AND DEBT RESTRUCTURING .............. 17 Chapter 27 LEASE ................................................................................................................ 35 Chapter 29 SHAREHOLDERS' EQUITY ........................................................................ 61 Chapter 30 BOOK VALUE AND EARNINGS PER SHARE ....................................... 85 Chapter 32 STATEMENT OF FINANCIAL POSITION..............................................97 Chapter 33 STATEMENT OF CASH FLOWS.............................................................112

Chapter 25: Introduction to Liabilities

CHAPTER 25: INTRODUCTION TO LIABILITIES Note to the professor: Page 902

910 925

Existing data: Illustration: Long-term debt falling due within one year Additional information no. 3 As of December 31, 2015, Rondo’s current ratio is 1.5:1. B

=

Change Rondo’s to Rajon’s Change 5.5 to 5.5M

10% x [(5.5 x (1-30%] 1 - 10% + [10% x (1-30%)]

Change 800 to 900.

Requirement No. 1 Warranty Sales in 2014 earned in 2015 (41% x 800 x P1,000) Warranty Sales in 2015 earned in 2015 (22% x 800 x P1,000) Total warranty sales revenue earned in 2015

Change to:

328,000 198,000 526,000

PROBLEM 25-1 Total Liabilities Total liabilities Current Accounts payable Loan payable – current portion Unearned rent income Income tax payable Dividends payable Total current liabilities

P 1,000,000 1,000,000 300,000 250,000 100,000 P 2,650,000

Non-current Bonds payable Discount on bonds payable Loan payable – non-current portion Deferred tax liability Total non-current liabilities Total liabilities

P 5,000,000 500,000) ( 1,500,000 15,000 P 6,015,000 (B)

Below items shall be presented as part of entity’s assets: Current asset Advances to employees

P 8,665,000

P

Non-current asset Cash surrender value of officers’ life insurance Patent Below item shall be disclosed in the notes to financial statements: Contingent liability P

4

45,000 75,000 50,000 500,000

PROBLEM 25-2 Current Liabilities Current liabilities Accounts payable – unadjusted Add/(Deduct): Adjustments Debit balances in suppliers’ accounts Postdated checks of Accounts payable – adjusted Credit balances in customers’ accounts Premiums payable Accrued expenses Total current liabilities

P 4,000,000

(A)

100,000 50,000 P 4,150,000 500,000 600,000 150,000 P 5,400,000

Below items shall be presented as part of entity’s non-current liabilities: Bonds payable 1,000,000 Premium on bonds payable 100,000 Mortgage payable 850,000 Deferred tax liability 200,000 Deferred revenue 175,000 Below item shall be presented as part of shareholders’ equity: Stock dividends payable PROBLEM 25-3 Refinancing Current liabilities 10% note payable, maturing 03/3 1/2015 Annual sinking fund requirement Total current liabilities

(C)

750,000

P10,000,000 500,000 10,500,000

Below items shall be presented as part of entity’s non-current liabilities: 12% note payable, maturing 06/30/2015 6,000,000 7% guaranteed debentures, due 2018 2,000,000 PROBLEM 25-4 Refinancing (A) The amount to be reported as current liabilities in 2014 is P2,000,000 since the refinancing agreement was completed after the reporting date. PROBLEM 25-5 Refinancing (A) The amount to be reported as current liabilities in 2014 is P2,000,000 since the grace period was granted after the reporting date. PROBLEM 25-6 Accounts payable Accounts payable Accounts payable – unadjusted Cost of goods lost in transit Cost of returned goods Accounts payable – adjusted

(B)

P 8,000,000 500,000 ( 200,000) P 8,300,000

PROBLEM 25-7 Accounts payable Amount of cash to eliminate accounts payable Accounts payable from: *Purchases through March 15 (gross)(P4,900,000 / 98%) P 5,000,000 Merchandise inventory at cost(P1,500,000 / 150%) 1,000,000 Accounts payable (B) P 6,000,000 *The amount was grossed-up since the entity is no longer entitled to cash discount. The liability as of March 15, 2014 has been outstanding for more than 10 days. PROBLEM 25-8 Bonus payable Amount of bonus Net income before bonus and income tax Less: Required income to earn bonus Basis of bonus Multiply by: Bonus rate Total current liabilities

(C)

PROBLEM 25-9 Bonus payable Amount of bonus Net income before bonus and income tax Less: Required income to earn bonus Amount of income subject to bonus (125%) Less: Bonus (25%) (squeeze) Basis of bonus (100%) (P600,000/125%)

1,500,000

Balance, End (B)

4,000,000 300,000 4,300,000 2,200,000 6,500,000

P 1,600,000 1,000,000 P 600,000 120,000 P 480,000

(D)

PROBLEM 25-10 Unearned Revenue Unearned revenue – gift certificates Unearned revenue Gift certificate redeemed Expired gift certificate

P 2,200,000 880,000 P 1,320,000 10% P 132,000

5,000,000

Balance, Beg. Cash receipts from gift certificate sold

6,500,000 6,500,000

PROBLEM 25-11 Advances from Customers Unearned revenue – Advances from customers Unearned revenue 1,100,000 Advances applied to shipments Orders cancelled

1,600,000 100,000

1,800,000

Balance, Beg. Advances received

Balance, End (C)

1,700,000

2,900,000

1,200,000 2,900,000

2,900,000

PROBLEM 25-12 Escrow Liability Deposits received – Escrow account Escrow liability 600,000 Cash payments nine months

4,200,000 4,200,000 900,000 5,100,000

Balance, End (C)

4,500,000 5,100,000

Balance, Beg. Cash receipts for nine months

5,100,000

PROBLEM 25-13 Container’s Deposits Deposits received – Escrow account Liability for Deposits 100,000

Balance, Beg. Cash deposits from deliveries

Cash refunds for container returned in 2014 Balance, End (C)

92,000

100,000

92,000 108,000 200,000

200,000 200,000

PROBLEM 25-14 VAT payable Provision - VAT payable

Payment made

Balance, End (A)

VAT Payable 120,000 120,000 84,000 96,000 120,000 300,000 180,000 300,000 300,000

Balance, Beg. For October For November For December

PROBLEM 25-15 Contingencies (C) Since the outcome of the lawsuit remains uncertain, disclosure of the contingency in the notes to financial statements would be the necessary. PROBLEM 25-16 Contingencies

(B) Since it is probable that AAA will be liable to pay the P3,000,000 as supported by BBB’s filing of a petition for bankruptcy, AAA should accrue and disclose the provision for guarantee on a loan of P3,000,000.

PROBLEM 25-17 Premiums Payable Provision – Premiums liability Premiums liability 50,000 50,000 30,000 Balance, End (D) 80,000 *(20,000 x 80%)/5 x (P30 + P5 - P10) **(10,000/5) x (P30 + P5 - P10) **Coupons redeemed

PROBLEM 25-18 Premiums Premiums liability (2014) **Balance, End 200,000

-

80,000 80,000

Balance, Beg. *Premiums expense

80,000

-

Balance, Beg. Premiums expense (squeeze)

*Coupons redeemed

**Balance, End *Coupons redeemed

800,000 1,000,000 1,000,000 1,000,000 120,000 liability (2015) 200,000 Balance, Beg. Premiums Premiums expense (squeeze) (D) 2,000,000 1,920,000 2,120,000 2,120,000

*Number of towels distributed x net cost of P40 **Number of towels yet to be distributed x net cost of P40 The beginning balance of the 5,000 towels is included as part of the 50,000 towels distributed in 2015. If the actual towels distributed from 2015 is different from that was recorded as of the end of 2014, this is considered as a change in accounting estimate which should be taken into account during 2015 and for the succeeding accounting period.

PROBLEM 25-19 Warranty Liability Warranties liability (2014) Actual expenditures Balance, End

150,000 150,000 350,000 500,000

500,000 500,000 500,000

Balance, Beg. *Warranties expense

Warranties liability (2015) 350,000 600,000 550,000 Actual expenditures 950,000 550,000 400,000 Balance, End (A) 950,000 950,000 *Sales x Total estimated warranty cost of 10%

Balance, Beg. *Warranties expense

PROBLEM 25-20 Warranty Liability Warranties liability Actual expenditures Balance, End (C)

140,000 140,000 340,000 480,000

480,000 480,000 480,000

PROBLEM 25-21 Warranty - Sales are Made Evenly Pattern of Realized Revenues: 2014 SALES

Balance, Beg. Warranties expense

From sales in: 1st (40% x ½) 2nd (36% x ½) 3rd (24% x ½) Total 2015 SALES From sales in: 1st (40% x ½) 2nd (36% x ½ 3rd (24% x ½) Total

2014 0.20

2015 0.20 0.18

0.20

0.38

2015 0.20

2016 0.20 0.18

0.20

0.38

2016 0.18 0.12 0.30 2017 0.18 0.12 0.30

2017 0.12 0.12 2018 0.12 0.12

(A ) Warranty Sales in 2014 earned in 2015 (38% x 1,000 x P1,500) Warranty Sales in 2015 earned in 2015 (20% x 1,200 x P1,500) Total warranty sales revenue earned in 2015

Total 0.40 0.36 0.24 1 Total 0.40 0.36 0.24 1

Requirement No. 1

570,000 360,000 930,000

Notes:  The 38% represents the realized revenue in 2015 from 2014 Sales.  The 20% represents the realized revenue in 2015 from 2015 Sales. Requirement No. 2 (B) Total warranty sales revenue earned in 2015 (see No. 1) Expenses relating to computer warranties Profit from sales warranty

930,000 60,000 870,000

Requirement No. 3 (A) Unearned sales warranty from 2014 [(30% + 12% x 1,000 x P1,500)] Unearned sales warranty from 2015 [(100%-20%) x 1,200 x P1,500)] Total unearned sales warranty

630,000 1,440,000

2,070,000

Notes:  The 30% and 12% represent the unrealized revenues in 2015 from 2014 Sales.  The 20% represents the realized revenue in 2015 from 2015 Sales. So 100% minus 20% realized is equal to 80% unrealized revenue in 2015 from 2015 Sales. SUMMARY OF ANSWERS: 1. A 2. B 3. A

PROBLEM 25-22 Refinancing 1. P2,000,000 (Letter B). The entire amount is payable within one year from the reporting date thus presented as current liability. 2. Nil (Letter A). Since both parties are financially capable of honoring the agreement’s provisions and the debtor has the discretion to refinance or roll over the loan for at least twelve months from December 31, 2014 the entire amount is treated as Noncurrent liability. 3. Nil (Letter A). Since the company entered into a refinancing agreement with a bank to refinance the loan on a long-term basis before the reporting date, the entire amount of liability is treated as noncurrent. 4. P2,000,000 (Letter B). Since the company entered into a refinancing agreement with a bank to refinance the loan on a long-term basis after the reporting date, the entire amount of liability is treated as current.

PROBLEM 25-23 Obligations Payable on Demand, Breach of Loan Agreement 1. P2,000,000 (Letter C). Only if an enforceable promise is received by the end of the reporting period from the creditor not to demand payment for at least 12 months from the end of the reporting period that the note may be classified as noncurrent. 2. Nil (Letter A). The entire amount of loan is noncurrent liability since there was an agreement on the reporting date not to demand payment in order for the debtor to rectify the breach with 12 months from the reporting date. 3. P2,000,000 (Letter B). The entire amount of loan is current liability since the agreement not to demand payment happened after the reporting period.

PROBLEM 25-24 Contingencies 1. A 2. D 3. B 4. B 5. A (Amount of accrual is P2,040,000 using expected value method which is calculated as (P1.6M x 20 + (2M x 50%) + (2.4M x 30%) 6. A (Amount of accrual is P2,250,000 using midpoint of the range which is calculated as (P1.5M+3M)/2)

PROBLEM 25-25 Contingencies 1. A 2. B (Disclose an amount of P1,500,000) 3. B (Disclose an amount of P1,500,000) 4. B (Disclose an amount of P1,000,000) 5. D 6. A (It is virtually certain that the company will be receiving the P1,5000,000.)

PROBLEM 25-26 Bonus Computation 1.

Net income before bonus but before tax B= NY x BR 20% =3,090,000x =618,000

2.

Net income after bonus but before tax NY 100% + BR = BR x B 3,090,000 100%= + 20% 20% x =

3.

515,000

Net income after bonus and tax B=BRX(NY – B – T) B=20%x(3,090,000-B-(927,000-3.B) B=20%x(3,090,000-B-927,000+.3B) B = 618,000-.2B-185,400+.06B 1B+.2B-.06B = 618,000-185,400 1.14B = 432,600 1.14 1.14 B = 379,474

T

= =

30%

X (3,090,000 – B) 927,000-.3B

OR = BR x [NY x (1-TR)] B 1 + [BR x (1-TR)] = 20% x (3,090,000 x (1-30%) 1+[20% x (1-30%)] = 20% x (3,090,000 x 70%) 1+(20% x 70%) = 20% x (2,163,000) 1.14 =379,474 Where: NY = Net income before bonus and tax B = Bonus BR = Bonus Rate T = Tax TR = Tax Rate SUMMARY OF ANSWERS: 1. D 2. B 3. C PROBLEM 25-27 Question Nos. 1 and 2 Estimated liability from Warranties

Disbursement warranties Balance end

for

44,800 164,000 212,000 240,000

Total

Warranty expense.

376,000

Warranty expense Divide by % age of warranty Sales from musical instruments and sound reproduction equipment (Question No. 1) Question No. 3 Premium expense = P2,000,000

=

Beginning balance

200 coupons P63,000

X

1 coupon P2

240,000 4% 6,000,000

x

90%

P34-P20

Question No. 4 Inventory of Premium Beg. Balance Net Purchases P34)

39,950 221,000

(6,500 x

56,950 204,000

Total

Balance end Cost of issued premium (1.2M coupons.200 coupons x P34

260,950

Question No. 5 Estimated liability for Premiums Disbursement for premiums (1.2M coupons/200 coupons x P(34-P20) Balance end Total

44,800

Beginning balance

84,000 23,800 63,000

Premium expense.

107,800

SUMMARY OF ANSWERS: 1. A 2. A 3. C 4.

D

5.

D

PROBLEM 25-28 Refinancing of Loan, Notes Payable Interest and NonInterest Bearing Note to the Professor: This problem should be discussed after the discussion in Chapter 26. Question No. 1 Periodic payment-NP Delivery equipment (P2M/4) Multiply by PV of ordinary annuity Present value of NP-delivery equipment Amortization table: Payment Date 01/01/2015 12/31/2015 500,000 12/31/2016 500,000

500,000 3.0373 1,518,650

Interest Expense

Discount Amortization

182,238 144,107

317,762 355,893

Question Nos. 2 and 3 12% Note payable 10% note payable

Noncurrent 1,400,000 2,000,000

Current 700,000

Present value 1,518,650 1,200,888 844,995

Note payable-del. Equipment Total

844,995 4,244,995

355,893 1,055,893

Question No. 4 Accrued interest payable-12% Note payable =P2,100,000 x 12% x 8/12 =P168,000 Question No. 5 Interest expense: 12% Note payable 1/1-5/1 (2.8M x 12% x 4/12) 5/1-12/31 (2.1M x 12% x 8/12) 10% Note payable (2M x 10%) Note payable - Delivery. Equipment (see amortization table) Total SUMMARY OF ANSWERS: 1. A 2. B 3. B 4.

B

112,000 168,000 200,000 182,238 662,238 5.

C

PROBLEM 25-29 Warranty, Premiums and Bonus Note to the professor: The last sentence should be: Premium expense of P270,000 (not P120,000). Question No. 1 Warranty expense (P150 x 1,200) Less: Warranty paid Estimated Premiums payable Question No. 2 Premium expense (P1,200,000 x 1 coupon/P1)/400 x 60% x (P45-P20) Less: Net cost of redeemed coupons (500,000/400)x( P45-P20) Estimated Premiums payable Question No. 3 Unadjusted net income Warranty expense under, Net income over (P180,000-P85,000) Premium expense over, Net income under (P270,000-P45,000) Adjusted Net income 4.

Net income after bonus but before tax NY x B = BR 100% + BR x 2,065,000 = 20%

180,000 85,000 95,000

45,000 31,250 13,750 1,935,000 (95,000) 225,000 2,065,000

100% + 20% =344,167 5.

Net income after bonus and tax x B = BR (NY – B – T) T

= B

TR

(NY – B) x OR = BR x [NY x (1-TR)] 1 + [BR x (1-TR)]

Net income after bonus and tax B = BR X (NY – B – T) B = 20% x (2,065,000-B-(9619,500-3.B) B = 20% x (2,065,000-B-619,500+.3B) B = 413,000-.2B-123,900+.06B 1B+.2B-.06B = 413,000-123,900 1.14B = 289,100 1.14 1.14 B = 253,596 T

= =

30%

X (2,065,000 – B) 619,500-.3B

OR = BR x [NY x (1-TR)] B 1 + [BR x (1-TR)] = 20% x (2,065,000 x (1-30%) 1+[20% x (1-30%)] = 20% x (2,065,000 x 70%) 1+(20% x 70%) = 20% x (1,445,500) 1.14 =253,596 Where: NY = Net income before bonus and tax B = Bonus BR = Bonus Rate T = Tax TR = Tax Rate SUMMARY OF ANSWERS: 1. A 2. C 3. C 4.

B

5.

C

PROBLEM 25-30 Comprehensive Question No. 1 (B) SSS Payable Philhealth payable Estimated liabilities under guarantee agreement Estimated warranties on goods sold Utilities payable Trade payables (170,000+30,000+20,000+12,000-8,000) Notes payable arising from purchase of goods Convertible bonds payable due July 1, 2014 Serial bonds payable (40,000 x 2) Accrued interest expense Advances from customers Unearned rent income Unearned interest on receivables Income taxes payables Cash dividends payable Property dividends payable Credit balance of notes payable Overdraft with PNB Container's deposit Loans payable-12% Financial liability designated as FVTPL Current liabilities

Question No. 2 (A) Deferred tax liability Notes payable Arising from 4-year bank loan Arising from advances by officers, dune in 3 years Serial bonds payable (800,000 minus (40,000 x 2) Security deposit received from lessee Loans payable-10% Total noncurrent liabilities Question No. 3 (B) Total liabilities Current liabilities Total noncurrent liabilities Total liabilities SUMMARY OF ANSWERS: 1. B 2. A 3. B

10,000 9,000 110,000 120,000 6,000 224,000 200,000 1,000,000 80,000 4,000 25,000 36,000 3,500 45,000 100,000 120,000 40,000 80,000 45,00...