Contingent LIAB Bonds P a y a ble PDF

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Chapter 6 CONTINGENT LIABILITYProblem 6-Zoe Company is preparing the annual financial statements at the current year-end. Because of a recently proven health hazard in one of the products, the Philippine government has clearly indicated its intention of requiring the entity to recall all cans of thi...

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Chapter 6 CONTINGENT LIABILITY Problem 6-6 Zoe Company is preparing the annual financial statements at the current year-end. Because of a recently proven health hazard in one of the products, the Philippine government has clearly indicated its intention of requiring the entity to recall all cans of this product sold in the last three months. The management of the entity estimated that this recall would cost P580,000. What accounting recognition should be accorded this situation? ANS.: C. Expense and liability of P580,000

Problem 6-7 Nia Company is involved in litigation regarding a faulty product sold in a prior year. The entity has consulted with an attorney and determined that it is possible that the entity may lose the case. The attorney estimated that there is a 40% chance of losing. If this is the case, the attorney estimated that the amount of any payment would be P5, 000,000. What is the required journal entry as a result of this litigation? ANS.: C. Debit litigation expense P2,000,000 and credit litigation liability P2,000,000

Problem 6-8 Winter Company is being sued for illness caused to local residents as a result of negligence on the entity’s part in permitting the local residents to be exposed to highly toxic chemicals from its plant. The entity’s lawyer stated that it is probable that the entity will lose the suit and be found liable for a judgment costing the entity anywhere from P1,200,000 to P6,000,000. However, the lawyer estimated that the most probable cost is P3,600,000. What amount should be accrued and disclosed? ANS.: B. A loss contingency of P3,600,000 and disclose an additional contingency of up to P2,400,000.

Problem 6-9 On December 31, 2019, Mith Company was a defendant in a pending lawsuit. In the opinion of the entity’s attorney, it is probable that Mith Company will have to pay P500,000 and it is reasonably possible that Mith Company will have to pay P600,000 as a result of this lawsuit. What should be reported in the 2019 financial statements? ANS.: A. An accrued liability of 500,000 only

Problem 6-10 During the current year, Haze Company won a litigation award for P1,500,000 which was tripled to P4,500,000 to include punitive damages. The defendant, who is financially stable, has appealed only the P3,000,000 punitive damages. The entity was awarded P5,000,000 in an unrelated suit it filed, which is being appealed by the defendant. Counsel is unable to estimate the outcome of these appeals What amount of pretax gain should be reported? ANS.: A. 1500,000

Problem 6-11 In May 2019, Caso Company filed suit against Wayne Company seeking P1,900,000 damages for patent infringement. A court verdict in November 2019 awarded Caso Company P1,500,000 in damages, but Wayne Company’s appeal is not expected to be decided before 2020. The legal counsel believed it is probable that Caso Company will be successful against Wayne Company for an estimated amount in the range between P800,000 and P1,100,000 with P1,000,000 considered the most likely amount. What amount should Caso Company record as income from the lawsuit for the year ended December 31, 2019? ANS.: D. 0

Problem 6-12 On November 1, 2019, Vienna Company was awarded a judgment of P1,500,000 in connection with a lawsuit. The decision is being appealed by the defendant and it is expected that the appeal process will be completed by the end of 2020. The attorney believed that it is highly probable that an award will be upheld on appeal but that the judgment may be reduced by an estimated 40%. What amount should be reported as a receivable on December 31, 2019? ANS.: D. 0

Problem 6-13 During 2019, Smith Company filed suit against. West Company seeking damages for patent infringement. On December 31, 2019, the legal counsel believed that it was probable that Smith Company would be successful against West Company for an estimated amount of P1,500,000. On March 31, 2020, Smith Company was awarded P1,000,000 and received full payment thereof. The financial statements were issued March 1, 2020. In Smith Company’s 2019 financial statements, how should this award be reported? ANS.: D. As a disclosure of a contingent asset of P1,500,000

Problem 6-14 Tone Company is the defendant in a lawsuit filed by Witt in 2018 disputing the validity of copyright held by Tone. On December 31, 2018, Tone determined that Witt would probably be successful for an estimated amount of P400,000. Appropriately, a P400,000 loss was accrued by a charge to income for the year ended December 31, 2018. On December 31, 2019, Tone and Witt agreed to a settlement providing for cash payment of P250,000 by Tone to Witt and transfer of Tone’s copyright to Witt. The carrying amount of the copyright on Tone’s accounting records was P60,000 on December 31, 2019. What would be the effect of the settlement on Tone’s income before tax in 2019? ANS.: C. 90,000 increase

Chapter 7 BONDS PAYABLE Problem 7-9 Glen Company had the following long-term debt: Sinking fund bonds, maturing in installments 1,100,000 Industrial revenue bonds, maturing in installments 900,000 Subordinated bonds, maturing on a single date 1,500,000 What is the total amount of serial bonds? ANS.: A. 2,000,000

Problem 7-10 Blue Company reported the following financial liabilities on December 31, 2019: 9% debentures, callable in 2020, due in 2021 11% collateral trust bonds, convertible into share capital beginning in 2020 due in 2021 10% debentures, P300,000 maturing annually

3,500,000 3,000,000 1,500,000

What is the total amount of term bonds? ANS.: D. 6,500,000

Problem 7-11 Zola Company had the following long-term debt: Bonds maturing in installments, secured by machinery Bonds maturing on a single date, secured by realty Collateral trust bonds What is the total amount of debenture bonds? ANS.: D. 0

1,000,000 1,800,000 2,000,000

Problem 7-12 Hancock Company reported the following noncurrent liabilities on December 31, 2019: Unsecured 9% registered bond, P250,000 maturing annually beginning in 2020 11% convertible bonds, callable beginning in 2020, due 2021

2,750,000 1,250,000

Secured 12% guaranty security bonds, due 2021 10% commodity backed bonds, P500,000 maturing annually beginning in 2020

2,500,000 2,000,000

What total amount of serial bonds should be reported? ANS.: A. 4750,000 What total amount of debenture bonds should be reported? ANS.: A. 4,000,000

Problem 7-13 On October 1, 2019, Shane Company issued 5,000 12% bonds with face amount of P1,000 per bond at 110. The bonds which mature on January 1, 2024, pay interest semiannually on January 1 and July 1. The entity paid bond issue cost of P200,000. How much cash was received from the issuance of the bonds? ANS.: A. 5,450,000

Problem 7-14 On April 1, 2019, Greg Company issued, at 99 plus accrued interest, 4,000 8% bonds with face amount of P1,000 per bond. The bonds are dated January 1, 2019, mature on January 1, 2029, and pay interest on January 1 and July 1. The entity paid bond issue cost of P140,000. How much cash was received from the bond issuance? ANS.: C. 3,900,000

Problem 7-15 On March 1, 2019, Cain Company issued at 103 plus accrued interest 4,000 9% bonds with face amount of P1,000 per bond. The bonds are dated January 1, 2019 and mature on January 1, 2029. Interest is payable semiannually on January 1 and July 1. The entity paid bond issue cost of P200,000. How much cash was received from the bond issuance? ANS.: D. 3,980,000

Problem 7-16 On July 1, 2019, Carol Company issued at 104, five thousand 10% bonds with face amount of P1,000 per bond. The bonds were issued through an underwriter to whom the entity paid bond issue cost of P125,000. On July 1, 2019, what is the carrying amount of the bonds payable? ANS.: B. 5,075,000

Problem 7-17 On June 30, 2019, Huff company issued at 99, four thousand 8% bonds with P1,000 face amount per bond. The bonds were issued through an underwriter to whom the entity paid bond issue cost of P340,000. On June 30, 2019, what is the carrying amount of the bond payable? ANS.: D. 3,620,000

Problem 7-18

During the current year, Cain Company incurred the following costs in connection with the issuance of bonds: Promotion cost Printing and engraving Legal fees Fees paid to independent accountants for registration information Commissions paid to underwriter

200,000 150,000 800,000 100,000 900,000

What total amount should be recorded as bond issue cost to be amortized over the term of the bonds? ANS.: B. 2,150,000 Problem 7-19 Aye Company is authorized to issue P5,000,000 of 6%, 10 year bonds dated July 1, 2019 with interest payments on June 30 and December 31. When the bonds are issued on November 1, 2019, the entity received cash of P5,150,000 including accrued interest. What is the discount or premium from the issuance of the bonds? ANS.: B. 50,000 bond premium

Problem 7-20 On November 1, 2019, Mason Company issued P4,000,000 of 10-year, 8% term bonds dated October 1, 2019. The bonds were sold to yield 10% with total proceeds of P3,500,000 plus accrued interest. Interest is paid every April 1 and October 1. What amount should be reported as accrued interest payable on December 31, 2019? ANS.: B. 80,000

Problem 7-21

On January 31, 2019, Beau Company issued P3,000,000 maturity value, 12% bonds for 3,000,000 cash. The bonds are dated December 31, 2018, and mature on December 31, 2028. Interest will be paid semiannually on June 30 and December 31. What amount of accrued interest payable should be reported on September 30, 2019? ANS.: D. 90,000

Problem7-22 On June 30, 2019, King Company had outstanding 9%, P5,000,000 face value bonds maturing on June 30, 2024. Interest is payable semiannually every June 30 and December 31. On June 30, 2019, after amortization was recorded for the period, the unamortized bond premium and unamortized bond discount were P30,000 and P50,000, respectively. On that date, the entity acquired all outstanding bonds on the open market at 98 and retired them. On June 30, 2019, what amount should be recognized as gain on redemption of bonds? ANS.: B. 80,000

Problem 7-23 On January 1, 2019, Nilo Company reported bonds payable of P8,000,000 and related unamortized discount of P430,000. The bonds had been issued at par. On January 1, 2019, the entity retired P4,000,000 of the outstanding bonds at par plus a call premium of P100,000. What amount should be reported in the 2019 income statement as loss on early extinguishment of debt? ANS.: D. 315,000

Problem 7-24 On January 1, 2020, Harlet Company redeemed the 15 year bonds of P5,000,000 par value for 102. The bonds were originally issued on January 1, 2008 at 98 with a maturity date of

January 1, 2023. The bond issue cost relating to this transaction was P200,000. The entity used the straight line method of amortization. What amount of loss should be recognized on the redemption of the bonds payable? ANS.: A. 160,000

Problem 7-25 On January 1, 2019, Davao Company issued 6% bonds with face amount of P4,000,000 for net proceeds of P3,677,600, a price that yields 8%. Interest is payable annually every December 31. The entity elected the fair value option. On December 31, 2019, the bonds are quoted at 95. 1. What amount should be reported as interest expense for 2019? ANS.: A. 240,000 2. What amount should be reported as gain or loss from change in fair value for 2019? ANS.: D. 122,400 loss 3. What is the carrying amount of the bonds payable on December 31, 2019? ANS.: A. 3,677,600

Problem 7-26 On January 1, 2019, Carmina Company received P5,385,000 for a P5,000,000 face amount of 12% bond a price that yields 10%. The bond pays interest semiannually on June 30 and December 31. The entity elected the fair value option. On December 31, 2019, the fair value of the bond is determined to be P5,125,000 based on market and interest factors. 1. What amount should be reported as interest expense for 2019? ANS.: A. 600,000 2. What is the gain or loss that should be recognized in 2019 to report the bond at fair value? ANS.: A. 260,000 gain 3. What is the carrying amount of the bonds payable on December 31, 2019? ANS.: B. 5,125,000 Problem 7-27

On January 1, 2019, Mariel Company issued bonds payable with face amount of P8,000,000 and 10% stated interest rate at 95. The entity paid bond issue cost of P150,000. The bonds have a 5 year term and interest is payable annually every December 31. The entity elected the fair value option. On December 31, 2019, the fair value of the bonds is 105. It is reliably determined that the fair value increase comprised P150,000 attributable to change in the market interest rate. 1. What is the interest expense for 2019? ANS.: D. 880,000 2. What amount of gain or loss should be recognized in profit or loss for 2019 to conform with the fair value option? ANS.: B. 650,000 loss 3. What is the carrying amount of the bonds payable on December 31, 2019? ANS.: B. 7,600,000

Problem 7-28 On January 1, 2019, Trisha Company received P1,077,200 for 12% bonds with face amount of P1,000,000. The bonds were sold to yield 10%. Interest is payable semiannually every January 1 and July 1. The entity elected the fair value option for measuring financial liabilities. On December 31, 2019, the fair value of the bonds is P1,064,600. The Change in fair value of the bonds is attributable to market factors. 1. What is the carrying amount of the bonds payable on January 1, 2019? ANS.: B. 1,077,200 2. What is the interest expense for 2019? ANS.: A. 120,000 3. What is the gain or loss from change in fair value of the bonds payable for 2019? ANS.: C. 12,600 gain 4. What is carrying amount of the bonds payable on December 31, 2019? ANS.: A. 1,064,600...