Chapter 11 to 15

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CHAPTER 11

Problem 11-1 Problem 11-2 Problem 11-3 Problem 11-4

1. A 6. A 1. B 1. D 1. B

2. C 7. C 2. D 2. D 2. C

3. C 8. A 3. B 3. C 3. D

4. A 9. D 4. A 4. A 4. A

5. D 10. B 5. C 5. C 5. A

Problem 11-5Equity method

1. Investment in associate 2,400,000

Cash 2,400,000

Acquisition cost 2,400,000

Net assets acquired (20% x 8,000,000) 1,600,000

Goodwill 800,000

2. Investment in associate 300,000

Investment income (20% x 1,500,000) 300,000

3. Memo – Received 2,000 shares as 10% stock dividend on

20,000 original shares. Shares now held, 22,000.

4. Investment loss 60,000

Investment in associate (20% x 300,000) 60,000

5. Cash (20% x 500,000) 100,000

Investment in associate 100,000

6. Cash (5,500 x 200) 1,100,000


Gain on sale of investment 465,000

Sales price 1,100,000

Less: Cost of investment sold (5,500/22,000 x 2,540,000) 635,000

Gain on sale 465,000

Cost method

1. Investment in equity securities 2,400,000

Cash 2,400,000

2. No entry

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3. Memo – Received 2,000 shares as 10% stock dividend.

Shares now held, 22,000.

4. No entry

5. Cash 100,000

Dividend income 100,000

6. Cash 1,100,000

Investment in equity securit ies (5,500/22,000 x 2,400,000) 600,000


Problem 11-6

1. Investment in equity securities 6,000,000

Cash 6,000,000

2. Cash (15% x 4,000,000) 600,000

Dividend income (15% x 3,000,000) 450,000

Investment in equity securities (15% x 1,000,000) 150,000

Problem 11-7

2008 Investment in associate 5,000,000

Cash 5,000,000

Investment in associate 300,000Investment income (30% x 4,000,000 x 3/12) 300,000

Cash (30% x 3,000,000) 900,000


Investment income 50,000

Investment in associate (200,000 x 3/12) 50,000


Investment income (30% x 6,000,000) 1,800,000

Cash (30% x 5,000,000) 1,500,000Investment in associate 1,500,000



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2006

Jan. 1 Investment in equity securities 1,000,000Cash 1,000,000

Dec. 31 Cash (15% x 300,000) 45,000


2007

Dec. 31 Cash (15% x 400,000) 60,000


2008

Jan. 1 Investment in associate 3,000,000

Cash 3,000,000

1 Investment in associate 75,000

Retained earnings 75,000

Investment income – Equity method (2006 and 2007) 180,000

(15% x 500,000 + 700,000)

Dividend income – Cost method (2006 and 2007) (45,000 + 60,000) 105,000

Cumulative effect of change to equity 75,000


Investment in equity securities 1,000,000

(Reclassification)

Dec. 31 Investment in associate 360,000

Investment income (40% x 900,000) 360,000

31 Cash (40% x 600,000) 240,000


Problem 11-9

2008

Jan. 1 Investment in associate 8,000,000

Cash 8,000,000

Dec. 31 Investment in associate 1,500,000


31 Cash (30% x 2,000,000) 600,000


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June 30 Investment in associate 1,800,000


July 1 Cash 6,000,000

Investment in associate (10,700,000 x 1/2) 5,350,000


Oct. 1 Cash (2,500,000 x 15%) 375,000


1 Available for sale securities 5,350,000

Investment in associate 5,350,000

(Reclassification)

Dec. 31 No entry is required for the share in net income

because the investor is now using the fair value

method by reason on the reduced 15% interest.

Problem 11-10

Requirement a


Cash 3,500,000



3. Cash (40% x 1,000,000) 400,000


4. Investment income 150,000

Investment in associate (600,000 / 4) 150,000

Cost 3,500,000

Book value of interest acquired (40% x 7,000,000) 2,800,000

Excess of cost over book value 700,000

Excess attributable to equipment (40% x 1,500,000) ( 600,000)

Excess attributable to inventory (40% x 500,000) ( 200,000)

Excess net fair value over cost ( 100,000)

5. Investment income 200,000




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Share in net income 1,600,000

Amortization of excess attributable to equipment ( 150,000)Amortization of excess attributable to inventory ( 200,000)

Excess net fair value over cost 100,000

Net investment income 1,350,000

Problem 11-11


Cash 1,700,000


Investment income (40% x 650,000) 260,000

3. Cash (40% x 150,000) 60,000



Revaluation surplus – investee (40% x 1,300,000) 520,000

Note:

1. Cost 1,700,000

Interest acquired (40% x 4,000,000) 1,600,000

Goodwill – not amortized 100,000

2. There is no need to adjust for the difference in depreciation method. If both entitiesa method that best reflects the flow of benefits as the assets are consumed, then

there is no policy difference.

Problem 11-12

1. Journal entries

a. Investment in associate 6,000,000

Cash 6,000,000

b. Investment in associate 750,000


c. Cash 450,000


d. Investment income 200,000


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2. Share in net income 750,000

Amortization of patent (2,000,000 / 10) (200,000)


3. Acquisition cost 6,000,000

Share in net income (5,000,000 x 15%) 750,000

Share in cash dividend (3,000,000 x 15%) ( 450,000)

Amortization of patent (2,000,000 / 10) ( 200,000)

Carrying value 6,100,000

Interest acquired (30,000 / 200,000) 15%


Book value of net assets acquired 4,000,000

Excess of cost applicable to patent 2,000,000

Problem 11-13

1. Journal entries


Cash 5,000,000

b. Investment in associate 1,200,000

Investment income 1,200,000

c. Cash 300,000




2. Share in net income 1,200,000

Amortization of depreciable asset (750,000 / 5) ( 150,000)

Investment income 1,050,000


Share in net income (30% x 4,000,000) 1,200,000

Share in cash dividend (30% x 1,000,000) ( 300,000)

Amortization of depreciable asset (750,000 / 5) ( 150,000)

Carrying value of investment 5,750,000



Excess of cost 1,400,000

Excess attributable to depreciable asset (30% x 2,500,000) 750,000

Excess attributable to goodwill 650,000

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Problem 11-14

1. Journal entries


Cash 1,000,000

b. Investment in associate 175,000


c. Cash 75,000




2. Share in net income 175,000

Amortization of excess (25,000 + 25,000) ( 50,000)



Net assets acquired (25% x 3,000,000) 750,000

Excess of cost 250,000

Excess attributable to inventory (25% x 100,000) 25,000

Excess attributable to equipment (25% x 500,000) 125,000

Excess attributable to goodwill (25% x 400,000) 100,000

250,000


Share in net income (25% x 700,000) 175,000

Amortization of excess:

Inventory ( 25,000)

Equipment (125,000 / 5) ( 25,000)

Cash dividend (25,000 x 3) ( 75,000)

Investment balance 1,050,000

Problem 11-15

1. Share in 2008 net income 900,000Amortization of excess (400,000 / 20) ( 20,000)

Investment income for 2008 880,000

Acquisition cost (20,000 x 120) 2,400,000



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2. Share in 2008 net income 975,000

Amortization of excess ( 20,000)

Investment income for 2009 955,000


Share in net income:

2008 (25% x 3,600,000) 900,000

2009 (25% x 3,900,000) 975,000

Share in cash dividend:

2008 (20,000 x 16) ( 320,000)

2009 (20,000 x 20) ( 400,000)


2008 (400,000 / 20) ( 20,000)

2009 ( 20,000)

Investment balance – 12/31/2009 3,515,000

Problem 11-16

Requirement a

1. Memo – Received 500 shares as 10% stock dividend on

5,000 original Dale ordinary shares. Shares now

held, 5,500.

2. Cash (5,500 x 20) 110,000


3. Stock rights (15/150 x 1,600,000) 160,000Investment in equity securities – Ever 160,000

Cash 200,000

Stock rights 160,000

Gain on sale of stock rights 40,000


Cash 5,000,000

1/1/2007 1/1/2008

Acquisition cost 2,000,000 5,000,000

Net assets acquired:10% x 16,000,000 1,600,000

20% x 20,000,000 ________ 4,000,000

Goodwill 400,000 1,000,000

Income from Fox investment in 2007 (10% x 4,000,000) 400,000

Less: Dividend income recorded in 2007 – cost method -___

Understatement of income 400,000

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Investment in equity securities 2,000,000

(Reclassification)





8. Cash (75,000 x 20) 1,500,000

Investment in associate 1,500,000

Requirement b

Noncurrent assets:

Investment in equity securities (Note) 2,690,000

Investment in associate – Fox Corporation 7,700,000

Note – Investment in equity securities

Dale Corporation, 5,500 shares 1,250,000

Ever Corporation, 10,000 shares 1,440,000

Total cost 2,690,000

Problem 11-17 Answer D


Problem 11-19 Answer B

Investment in Lax Corporation 3,000,000

Problem 11-20 Answer C

Total cash dividend 3,000,000

Cumulative net income 2,500,000

Liquidating dividend 500,000

Cash (10% x 3,000,000) 300,000Dividend income (10% x 2,500,000) 250,000

Investment in equity securities 50,000


Investment income (20% x 1,600,000) 320,000

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Problem 11-22 Answer A



Interest (30,000/100,000) 30%

Investment income (5,000,000 x 6/12 x 30%) 750,000


Cost 4,000,000

Less: Net assets acquired (40% x 8,000,000) 3,200,000

Excess of cost or goodwill 800,000

Share in net income from April 1 to December 31 (1,000,000 x 9/12 x 40%) 300,000



Share in net income (20% x 1,800,000) 360,000

Share in cash dividend (20% x 600,000) ( 120,000)

Amortization of excess (1,000,000/10) ( 100,000)





Share in cash dividend (10% x 1,500,000) ( 150,000)



Acquisition cost (squeeze) 1,720,000


Share in cash dividend (25% x 480,000) ( 120,000)

Carrying value – December 31 1,900,000



Less: Book value of net assets acquired (30% x 5,000,000) 1,500,000

Excess of cost over book value 1,000,000

Less: Amount attributable to undervaluation of land (30% x 2,000,000) 600,000

Goodwill 400,000

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Add: Share in net income (30% x 1,000,000) 300,000

Balance, December 31 2,800,000

The excess of cost attributable to the land is not amortized because the land is

nondepreciable. The goodwill is not amortized.


Acquisition cost – January 1 1,000,000

Acquisition cost – December 31 3,000,000





Investment income in 2008 (30% x 6,500,000) 1,950,000

Investment income in 2007 (10% x 6,000,000) 600,000

Less: Dividend income recorded in 2006 (10% x 2,000,000) 200,000

Understatement of income 400,000






Excess of cost 1,620,000

Attributable to depreciable assets (30% x 2,600,000) 780,000

Attributable to goodwill 840,000


Share in net income (30% x 3,600,000) 1,080,000

Share in dividends (30% x 400,000) ( 120,000)

Amortization (780,000/4) ( 195,000)

Investment balance – December 31 5,925,000





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Attributable to equipment (40% x 800,000) 320,000

Attributable to building (40% x 600,000) 240,000

560,000


Net income (40% x 1,600,000) 640,000

Cash dividend (40% x 1,000,000) ( 400,000)


Equipment (320,000 / 4) ( 80,000)

Building (240,000 / 12) ( 20,000)

Carrying value of investment – 12/31/2008 2,700,000


Net income 5,000,000

Less: Preference dividend (10% x 2,000,000) 200,000

Net income to ordinary shares 4,800,000


Problem 11-34

Question 1 – Answer B

Share in 2008 net income (30% x 800,000) 240,000



Share in net income – 2008 240,000

Cash dividends – 2008 (30% x 500,000) ( 150,000)

Book value – December 31, 2008 2,090,000



Share in net income up to June 30, 2009 (30% x 1,000,000) 300,000

Book value – June 30, 2009 2,390,000

Sales price 1,500,000

Book value sold (2,390,000 x ½) 1,195,000


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Acquisition cost (30,000 x 120) 3,600,000Deficit on January 1, 2008 (30% x 500,000) ( 150,000)


Net income for 2008 (30% x 700,000) 210,000

Net income for 2009 (30% x 800,000) 240,000

Cash dividend on 12/31/2009 (30% x 400,000) ( 120,000)


Another approach


Share in retained earnings – 12/31/2009 (30% x 600,000) 180,000


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Problem 12-1

1. B 6. C

2. B 7. C

3. A 8. B

4. A 9. B

5. D 10. C

Problem 12-2Bonds held as trading

2008

April 1 Trading securities 2,200,000

Cash 2,200,000

Oct. 1 Cash (2,000,000 x 12% x 6/12) 120,000

Interest income 120,000

Dec. 31 Accrued interest receivable 60,000

Interest income (2,000,000 x 12% x 3/12) 60,000

31 Trading securities 100,000

Unrealized gain – TS 100,000

2009

Jan. 1 Interest income 60,000Accrued interest receivable 60,000

April 1 Cash 120,000


Oct. 1 Cash 120,000




31 Unrealized loss – TS 340,000

Trading securities (2,300,000 – 1,960,000) 340,000

Bonds held to maturity

2008

April 1 Held to maturity securities 2,200,000

Cash 2,200,000

Oct. 1 Cash 120,000


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2008



31 Interest income (50,000 x 9/12) 37,500

Held to maturity securities 37,500

2009

Jan. 1 Interest income 60,000

Accrued interest receivable 60,000

April 1 Cash 120,000


Oct. 1 Cash 120,000Interest income 120,000



31 Interest income (200,000/4) 50,000


Problem 12-3

Bonds held as trading

Jan. 1 Trading securities 3,761,000

Cash 3,761,000

July 1 Cash 240,000

Interest income (4,000,000 x 12%) 240,000



31 Trading securities 439,000

Unrealized gain – TS (4,200,000 – 3,761,000) 439,000

Bonds held as available for sale

Jan. 1 Available for sale securities 3,761,000

Cash 3,761,000

July 1 Cash 240,000


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July 1 Available for sale securities 23,270



Interest received 240,000

Amortization of discount 23,270



31 Available for sale securities 24,899



Interest accrued 240,000



Unrealized gain – AFS 390,831

Market value (4,000,000 x 105) 4,200,000

Book value 3,809,169

Unrealized gain 390,831

Problem 12-4

Aug. 1 Trading securities (5,000,000 x 104) 5,200,000Interest income (5,000,000 x 12% x 3/12) 150,000

Cash 5,350,000

31 Trading securities (2,000,000 x 98) 1,960,000


Cash 2,000,000

Nov. 1 Cash (5,000,000 x 12% x 6/12) 300,000


Dec. 1 Cash (1,880,000 + 20,000) 1,900,000

Loss on sale of trading securities 200,000

Trading securities 2,080,000


Selling price (2,040,000 – 160,000) 1,880,000

Less: Cost of bonds sold (2,000/5,000 x 5,200,000) 2,080,000

Loss on sale ( 200,000)

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Dec. 31 Cash (2,000,000 x 12% x 6/12) 120,000


31 Accrued interest receivable (3,000,000 x 12% x 2/12) 60,000


31 Unrealized loss – TS 160,000

Trading securities 160,000

Carrying amount Market

Acme bonds (3,000,000 x 98%) 3,120,000 2,940,000

Avco bonds (2,000,000 x 99%) 1,960,000 1,980,000

5,080,000 4,920,000

Current assets:

Trading securities, at market value 4,920,000

Problem 12-5

Requirement a

March 1 Trading securities (2,000,000 x 93%) 1,860,000


Cash 1,880,000

April 1 Trading securities (4,000,000 x 95%) 3,800,000

Interest income (4,000,000 x 12% x 1/12) 40,000Cash 3,840,000

Aug. 1 Cash (2,000,000 x 12% x 6/12) 120,000


Sept. 1 Cash (4,000,000 x 12% x 6/12) 240,000


Oct. 1 Cash (1,010,000 + 10,000) 1,020,000



Gain on sale of trading securities 60,000

Sales price (1,000,000 x 105%) 1,050,000

Less: Brokerage 40,000

Net proceeds 1,010,000

Less: Cost of bonds sold (1,000/4,000 x 3,800,000) 950,000

Gain on sale 60,000

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Dec. 1 Cash (1,940,000 + 80,000) 2,020,000


Interest income (2,000,000 x 12% x 4/12) 80,000Gain on sale of trading securities 80,000

Sales price (2,000,000 x 100%) 2,000,000

Less: Brokerage 60,000

Net proceeds 1,940,000

Less: Cost of bonds sold 1,860,000

Gain on sale 80,000

31 Accrued interest receivable (3,000,000 x 12% x 4/12) 120,000


31 Unrealized loss – TS (2,850,000 – 2,700,000) 150,000


Requirement b

Current assets:

Trading securities, at market value (3,000,000 x 90) 2,700,000

Problem 12-6

2008

July 1 Trading securities 2,200,000

Commission expense 50,000Interest income (2,000,000 x 4%) 80,000

Cash 2,330,000

Dec. 31 Unrealized loss – TS 300,000


Market value (2,000,000 x 95) 1,900,000

Carrying amount 2,200,000

Unrealized loss 300,000

31 Cash (2,000,000) x 8%) 160,000


2009

March 31 Cash 2,140,000


Gain on sale of TS 200,000

Interest income (2,000,000 x 8%) x 3/12) 40,000

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Problem 12-7

Requirement 1Discount

Date Interest received Interest income amortization Book value

01/01/2008 1,900,500

12/31/2008 160,000 190,050 30,050 1,930,550

12/31/2009 160,000 193,055 33,055 1,963,605

12/31/2010 160,000 196,395 36,395 2,000,000

Requirement 2

2008


Cash 1,900,500

Dec. 31 Cash 160,000






Market value (2,000,000 x 110) 2,200,000

Carrying amount 1,930,550


2009

Dec. 31 Cash 160,000






Market value 12/31/2009 (2,000,000 x 120) 2,400,000Book value per table – 12/31/2009 1,963,605

Cumulative unrealized gain – 12/31/2009 436,395

Unrealized gain – 12/31/2008 269,450

Increase in 2009 166,945

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Requirement 1

DiscountDate Interest received Interest income amortization Book value

01/01/2008 4,742,000

12/31/2008 300,000 379,360 79,360 4,821,360

12/31/2009 300,000 385,709 85,709 4,907,069

12/31/2010 300,000 392,931 92,931 5,000,000

Requirement 2

2008


Cash 4,742,000

Dec. 31 Cash 300,000






Market value - 12/31/2008 (5,000,000 x 105) 5,250,000

Book value – 12/31/2008 4,821,360

Unrealized gain – 12/31/2008 428,640

2009

Dec. 31 Cash 300,000




31 Cash 5,500,000

Unrealized gain - AFS 428,640

Available for sale securities 5,335,709

Gain on sale of AFS 592,931

Sales price (5,000,000 x 110) 5,250,000


Total 5,928,640

Investment balance – 12/31/2009 5,335,709

Unrealized gain – 12/31/2009 592,931

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Another computation

Sales price 5,250,000Book value per table – 12/31/2009 4,907,069


Problem 12-9

Requirement a

2008

May 1 Held to maturity securit ies (6,000,000 x 94%) 5,640,000


Cash 5,820,000

Aug. 1 Cash 360,000




31 Held to maturity securities (8,000 x 8) 64,000


May 1, 2008 – February 1, 2012 = 45 months

360,000 / 45 = 8,000 monthly amortization

Requirement b

2010

May 1 Held to maturity securities (8,000 x 4) 32,000


1 Cash (6,300,000 + 180,000) 6,480,000

Held to maturity securities 5,832,000


Gain on sale of bonds 468,000

Original cost – May 1, 2008 5,640,000Add: Discount amortization from May 1, 2008 to

May 1, 2010 (8,000 x 24 months) 192,000

Book value, May 1, 2010 5,832,000

Selling price (6,000,000 x 105%) 6,300,000

Less: Book value 5,832,000


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Problem 12-10

1. Held to maturity securities 8,598,400Cash 8,598,400

2. Cash (12% x 8,000,000) 960,000


3. Interest income 100,160



Interest income (10% x 8,598,400) 859,840

Premium amortization 100,160

Problem 12-11

Year Bond outstanding Fraction Premium amortization

2008 1,000,000 10/30 50,000

2009 800,000 8/30 40,000

2010 600,000 6/30 30,000

2011 400,000 4/30 20,000

2012 200,000 2/30 10,000

3,000,000 150,000

2008

Jan. 1 Held to maturity securities 1,000,000

Cash 1,000,000

June 30 Cash (100,000 x 12% x 6/12) 60,000


Dec. 31 Cash 60,000


31 Interest income 50,000


31 Cash 200,000


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2009

June 30 Cash (800,000 x 12% x 6/12) 48,000Interest income 48,000

Dec. 31 Cash 48,000




31 Cash 200,000


Problem 12-12

Year Bond outstanding Fraction Discount amortization

2008 4,000,000 4/10 120,000

2009 3,000,000 3/10 90,000

2010 2,000,000 2/10 60,000

2011 1,000,000 1/10 30,000

10,000,000 300,000

2010

Dec. 31 Cash 240,000


31 Held to maturity securities 60,000


31 Cash 1,000,000


2011

Dec. 31 Cash 120,000


31 Held to maturity securities 30,000Interest income 30,000

31 Cash 1,000,000


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Problem 12-13

Bond Months Peso DiscountBond year outstanding outstanding months Fraction amortization

10/01/2008 – 02/01/2009 3,000,000 4 12,000,000 12/48 75,000

02/01/2009 - 02/01/2010 2,000,000 12 24,000,000 24/48 150,000

02/01/2010 – 02/01/2011 1,000,000 12 12,000,000 12/48 75,000

48,000,000 300,000

2008

Oct. 1 Held to maturity securities 2,700,000


Cash 2,760,000




Interest income (75,000 x 3/4) 56,250

2009

Jan. 1 Interest income 150,000


Feb. 1 Cash (3,000,000 x 12% x 6/12) 180,000


1 Cash 1,000,000


Aug. 1 Cash (2,000,000 x 12% x 6/12) 120,000






From January1 to February 1, 2009 (75,000 x 1/4) 18,750

From February 1 to December 31, 2009 (150,000 x 11/12) 137,500

Total amortization for year 2009 156,250

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Problem 12-14

Date Interest received Interest income Discount amortization Book value01/01/2008 3,757,015

12/31/2008 400,000 450,842 50,842 3,807,857

12/31/2009 400,000 456,943 56,943 3,864,800

12/31/2010 400,000 463,776 63,776 3,928,576

12/31/2011 400,000 471,424 71,424 4,000,000

2008


Cash 3,757,015

Dec. 31 Cash 400,000




Problem 12-15

Date Interest received Interest income Premium amortization Carrying value

Jan. 01, 2008 3,111,510

June 30, 2008 120,000 93,345 26,655 3,084,855

Dec. 31, 2008 120,000 92,546 27,454 3,057,401

June 30, 2009 120,000 91,722 28,278 3,029,123

Dec. 31, 2009 120,000 90,877 29,123 3,000,000

2008


Cash 3,111,510

June 30 Cash 120,000




Dec. 31 Cash 120,000Interest income 120,000



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Problem 12-16

1. Journal entries

a. Held to maturity securities 7,679,000

Cash 7,679,000

b. Cash (10% x 8,000,000) 800,000


c. Held to maturity securities 121,480



Interest received (8,000,000 x 10%) 800,000Discount amortization 121,480

d. Cash 2,000,000


2. Cost 7,769,000

Discount amortization 121,480

Annual installment (2,000,000)

Book value – 12/31/2008 5,800,480

Problem 12-17

Semiannual nominal interest (5,000,000 x 4%) 200,000Semiannual effective interest (5,000,000 x 5%) 250,000

Difference 50,000

Multiply by present value of annuity of 1 for 20 periods at 5% 12.462

Discount 623,100

Face value 5,000,000

Discount ( 623,100)

Purchase price 4,376,900

Problem 12-18

1. Annual nominal interest (4,000,000 x 16%) 640,000Annual effective interest (4,000,000 x 12%) 480,000

Difference 160,000

Multiply by present value factor 3.605

Premium 576,800



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2. Date Interest received Interest income Premium amortization Book value

Jan. 01, 2008 4,576,800

Dec. 31, 2008 640,000 549,216 90,784 4,486,016Dec. 31, 2009 640,000 538,322 101,678 4,384,338

Dec. 31, 2010 640,000 526,121 113,879 4,270,459

Dec. 31, 2011 640,000 512,455 127,545 4,142,914

Dec. 31. 2012 640,000 497,086 142,914 4,000,000

3. Held to maturity securities 4,576,800

Cash 4,576,800

Cash 640,000




Problem 12-19

Semiannual nominal interest (8,000,000 x 5%) 400,000

Semiannual effective interest (8,000,000 x 4%) 320,000

Difference 80,000

Multiply by PV of annuity of 1 for 10 periods at 4% 8.11

Premium 648,800



The amount of P648,800 is a premium because the effective rate is lower thannominal rate.

Another approach

PV of principal (8,000,000 x .6756) 5,404,800

PV of semiannual interest payments (400,000 x 8.11) 3,244,000

Purchase price or present value of bonds 8,648,800

Journal entries

2008


Cash 8,648,800

July 1 Cash 400,000




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Interest accrued 400,000



Problem 12-20

1. Principal payment 1,000,000

Interest payment (3,000,000 x 12%) 360,000

Total payment on December 31, 2008 1,360,000

Principal payment 1,000,000



Principal payment 1,000,000



December 31, 2008 payment (1,360,000 x .91) 1,237,600

December 31, 2009 payment (1,240,000 x .83) 1,029,200

December 31, 2010 payment (1,120,000 x .75) 840,000

Total present value on January 1, 2008 3,106,800

2. Journal entries

2008


Cash 3,106,800

Dec. 31 Cash 360,000




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Dec. 31 Cash 1,000,000


3. Acquisition cost – 1/1/2008 3,106,800

Premium amortization for 2008 ( 49,320)

Annual installment (1,000,000)


Problem 12-21

1. The present value of the bonds using the interest rate of 11% is as follows:

PV of principal (5,000,000 x .6587) 3,293,500

PV of interest (500,000 x 3.1024) 1,551,200

Total present value of cash flows 4,844,700

2. The present value of the bonds using the interest rate of 12% is as follows:

PV of principal (5,000,000 x .6355) 3,177,500

PV of interest (500,000 x 3.0373) 1,518,650

Total present value of cash flows 4,696,150

3. X – 11%____

12% - 11%

4,700,000 – 4,844,700_

4,696,150 – 4,844,700

_144,700_ = .97

148,550

Effective rate = 11% + .97

= 11.97%

4. Interest income for 2008 (4,700,000 x 11.97%) 562,590

5. Journal entries


Cash 4,700,000

Cash (10% x 5,000,000) 500,000


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Discounted amortization 62,590

Problem 12-22

Question 1 – Answer A

Acquisition cost (4,400,000 – 100,000) 4,300,000

Amortization of premium from Oct. 1, 2007 to Dec. 31, 2008 (4,000 x 15) ( 60,000)


Monthly amortization (300,000/75 months) 4,000


Interest for 2008 (4,000,000 x 10%) 400,000

Amortization of premium (4,000 x 12 months) ( 48,000)



Interest for 2008 (2,000,000 x 12%) 240,000

Amortization of discount (100,000/5) 20,000Interest income 260,000


Premium on sale of bonds 140,000

Unamortized discount (100,000 – 20,000) 80,000

Gain on sale of bonds 220,000


Acquisition cost – 1/1/2008 3,767,000

Discount amortization for 2008:Interest income (14% x 3,767,000) 527,380

Interest received (12% x 4,000,000) 480,000 47,380

Book value – 12/31/2008 3,814,380

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Bond year Bond outstanding Fraction Amortization

04/01/2007 – 03/31/2008 4,000,000 4/10 80,000

04/01/2008 – 03/31/2009 3,000,000 3/10 60,000

04/01/2009 – 03/31/2010 2,000,000 2/10 40,000

04/01/2010 – 03/31/2011 1,000,000 1/10 20,000

10,000,000 200,000

Interest for the year 2008:

From January 1 to March 31, 2008 (4,000,000 x 12% x 3/12) 120,000

From April 1 to December 31, 2008 (3,000,000 x 12% x 9/12) 270,000 390,000

Amortization of discount for year 2008:

From January 1 to March 31, 2008 (80,000 x 3/12) 20,000From April 1 to December 31, 2008 (60,000 x 9/12) 45,000 65,000

Interest income for year 2008 455,000


Interest income for 2008 (3,756,000 x 10%) 375,600


Interest accrued from July 1 to December 31, 2008 (5,000,000 x 8% x 6/12) 200,000


Interest received (1,000,000 x 10% x 6/12) 50,000



Acquisition cost – July 1, 2008 1,198,000

Premium amortization ( 2,080)


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Interest accrued (1,000,000 x 8% x 6/12) 40,000Interest income (906,000 x 10% x 6/12) 45,300


Acquisition cost – July 1, 2008 (946,000 - 40,000) 906,000


Book value – December 31, 2008 911,300


Acquisition cost – July 1, 2008 4,614,000

Discount amortization from July 1 to December 31, 2008:

Interest accrued (5,000,000 x 8% x 6/12) 200,000Interest income (4,614,000 x 10% x 6/12) 230,700 30,700




Discount amortization:


Interest received (5,000,000 x 10%) 500,000 71,920

Total 4,837,920

Annual installment on December 31, 2008 (1,000,000)

Book value –December 31, 2008 3,837,920


Annual effective (5,000,000 x 14%) 700,000

Annual nominal (5,000,000 x 12%) 600,000

Difference 100,000

Multiply by present value factor using effective rate of 14% 5.216

Discount 521,600




12/31/2008 (1,250,000 + 600,000 x .9091) 1,681,835

12/31/2009 (1,250,000 + 450,000 x .8264) 1,404,880

12/31/2010 (1,250,000 + 300,000 x .7513) 1,164,515

12/31/2011 (1,250,000 + 150,000 x .6830) 956,200

5,207,430

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171CHAPTER 13

Problem 13-1 Problem 13-2 Problem 13-3

1. C 1. A 1. A

2. B 2. C 2. A

3. D 3. D 3. B

4. D 4. D 4. A

5. D 5. A 5. B

6. A 6. A 6. A

7. D 7. D 7. D

8. B 8. A 8. A

9. A 9. D 9. A

10. B 10. A 10. D

Problem 13-4

2008

Jan. 1 Sinking fund cash 400,000

Cash 400,000

April 1 Sinking fund securities 384,000

Sinking fund cash 384,000

Oct. 1 Sinking fund cash 24,000

Sinking fund income (400,000 x 12% x 6/12) 24,000

Dec. 31 Sinking fund cash 400,000

Cash 400,000

31 Accrued interest receivable 12,000

Sinking fund income (400,000 x 12% x 3/12) 12,000

Sinking fund securities 3,000

Sinking fund income 3,000

Amortization of discount on sinking fund securities

for 9 months. (16,000/4 years = 4,000 x 9/12 = 3,000)

31 Retained earnings 439,000Retained earnings appropriated for sinking fund 439,000




Total 839,000

Less: Appropriated retained earnings balance 400,000

Additional appropriation 439,000

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Jan. 1 Sinking fund income 12,000


April 1 Sinking fund cash 24,000


1 Sinking fund expenses 12,000


Oct. 1 Sinking fund cash 24,000


1 Sinking fund securities (4,000 x 9/12) 3,000


1 Sinking fund cash (400,000 x 106%) 424,000


Gain on sale of securities 34,000


Cash 400,000

31 Retained earnings 461,000

Retained earnings appropriated for sinking fund 461,000

Sinking fund cash 1,300,000

Less: Appropriated retained earnings balance 839,000

Additional appropriation 461,000

2010

July 1 Bonds payable 1,000,000

Interest expense 100,000


1 Cash 200,000


1 Retained earnings appropriated for sinking fund 1,300,000

Retained earnings 1,300,000

Problem 13-5

2008

Jan. 1 Sinking fund cash 2,700,000

Cash 2,700,000

18 Sinking fund securities 2,500,000


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2008

July 5 Sinking fund expenses 100,000


Sept. 9 Sinking fund cash 530,000

Loss on sale of securities 70,000




2009

Feb. 12 No entry



31 Sinking fund cash 2,250,000

Sinking fund securities 1,900,000


31 Bonds payable 3,000,000


31 Cash 300,000


Problem 13-6

1. Sinking fund cash 2,000,000

Cash 2,000,000

2. Sinking fund securities 450,000




4. Sinking fund cash 60,000

Sinking fund income (500,000 x 12%) 60,000



Amortization of bond discount (50,000/5 years = 10,000 per year)

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5. Sinking fund expenses 20,000






Sinking fund income (500,000 x 10%) 50,000






10. Retained earnings 2,160,000

Retained earnings appropriated for sinking fund 2,160,000

Composition of fund:



2,160,000

Problem 13-7

1. Sinking fund – trustee 1,000,000Cash 1,000,000

2. No entry

3. No entry

4. No entry

5. No entry

6. Sinking fund – trustee 140,000

Sinking fund expense 30,000

Sinking fund income (60,000 + 10,000) 70,000


7. Bonds payable 1,000,000


Sinking fund – trustee 1,100,000

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8. Cash 40,000

Sinking fund – trustee 40,000

Problem 13-8

Annual contribution (5,000,000/6.051) 818,987

Date Interest income Annual contribution Fund balance

12/31/2008 818,987 818,987

12/31/2009 81,899 818,987 1,719,873

12/31/2010 171,987 818,987 2,710,847

12/31/2011 271,085 818,987 3,800,919

12/31/2012 380,094 818,987 5,000,000

Problem 13-9

Annual contribution (2,000,000/5.1051) 391,765

Date Interest income Annual contribution Fund balance

07/01/2008 391,765 391,765

07/01/2009 39,176 391,765 822,706

07/01/2010 82,271 391,765 1,296,742

07/01/2011 129,674 391,765 1,818,181

07/01/2012 181,819 - 2,000,000

Problem 13-10

2008

Jan. 1 Life insurance 60,000

Cash 60,000

2009


Cash 60,000

2010


Cash 60,000

Dec. 31 Cash surrender value 60,000Life insurance 20,000


2011


Cash 60,000

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177April 1 Life insurance 60,000

Cash 60,000

Dec. 31 Prepaid life insurance 15,000Life insurance 15,000

2010


Prepaid life insurance 15,000

April 1 Cash surrender value 60,000

Life insurance 5,000


April 1, 2007 – December 31, 2009 (33/36 x 60,000) prior years 55,000

January 1, 2010 – April 1, 2010 (3/36 x 60,000) current period 5,000

Total 60,000

1 Life insurance 60,000

Cash 60,000

Dec. 31 Prepaid life insurance 15,000


31 Cash surrender value 18,000


Balance – April 1, 2011 84,000

Balance – April 1, 2010 60,000Increase from April 1, 2010 to April 1, 2011 24,000

Increase from April 1, 2010 to December 31, 2010 (24,000 x 9/12) 18,000

2011


Prepaid life insurance 15,000

April 1 Cash surrender value (18,000 x 3/12) 6,000


1 Life insurance 60,000

Cash 60,000

July 1 Cash surrender value 8,000


Balance – April 1, 2012 116,000

Balance – April 1, 2011 84,000

Increase from April 1, 2011 to April 1, 2012 32,000

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Increase from April 1, 2010 to July 1, 2010 (32,000 x 3/12) 8,000

July 31 Cash 2,000,000Cash surrender value 92,000

Life insurance (60,000 x 9/12) 45,000

Gain on life insurance settlement 1,863,000

Problem 13-12

2008


Cash 80,000

2009

Jan. 1 Life insurance 80,000Cash 80,000

Dec. 31 Cash 5,000



Life insurance (42,000 x 1/3) 14,000


2010


Cash 80,000

Dec. 31 Cash 6,000




Balance – December 31, 2010 47,000

Balance – December 31, 2009 42,000

Increase in cash surrender value 5,000

Problem 13-13

a. Life insurance (10,000 x 6/12) 5,000

Cash surrender value 5,000

b. Prepaid life insurance (28,000 x 1/2) 14,000


c. Interest expense 4,500

Accrued interest payable (50,000 x 12% x 9/12) 4,500

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179d. Dividend income 2,000

Dividend receivable 2,000

Current assets:Prepaid life insurance 14,000

Investment:


Current liabilities:

Loan payable 50,000

Accrued interest payable 4,500

Problem 13-14

1. Land held by Eragon for undetermined use 5,000,000Vacant building 3,000,000

Building owned by a subsidiary Eragon occupied by lessees 1,500,000

Total investment property 9,500,000

2. a. The property held by a subsidiary Eragon in the ordinary course of business in included

in inventory.

b. The property held by Eragon for use in production is owner-occupied property and

therefore part of property, plant and equipment.

c. The land leased by Eragon to a subsidiary under an operating lease is owner-

occupied property for purposes of consolidated financial statements. However, from

the perspective of separate financial statements of Eragon, the land is an investmentproperty.

d. The property under construction for use as investment property is owner-occupied

property until the land is completed. Upon completion, the building becomes

investment property.

e. The land held for future factory site is owner-occupied property and therefore part of

property, plant and equipment.

f. The machinery leased out to an unrelated party is part of property, plant and

equipment because investment property includes only land and building, and not

movable property like machinery.

Problem 13-15

Cost model

2008 Depreciation 1,800,000

Accumulated depreciation 1,800,000

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1802009 Depreciation 1,800,000


2010 Depreciation 1,800,000Accumulated depreciation 1,800,000

Fair value model

2008 Investment property 5,000,000


2009 Loss from change in fair value 2,000,000


2010 Investment property 7,000,000

Gain from change in fair value 7,000,000


Annual deposit (8,000,000 / 4.78) 1,673,640


Annual deposit (9,000,000 / 6.34) 1,419,560


Principal amount 5,000,000

Multiply by future value of 1 for 6 periods at 10% 1.77Future amount at maturity 8,850,000


Future amount of maturity 7,160,000

Divide by future value of 1 for 10 periods at 6% 1.79

Initial investment 4,000,000

The annual interest of 12% is compounded semiannually for 5 years. Therefore, there are

10 interest periods at 6%.


Sinking fund balance – January 1 4,500,000

Add: 2007 investment 900,000

Dividends on investment 150,000

Interest revenue 300,000 1,350,000

Total 5,850,000

Less: Administration costs 100,000

Sinking fund balance – December 31 5,750,000

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Premium paid – January 1 100,000Less: Dividend received 15,000

Increase in cash surrender value (270,000 – 245,000) 25,000 40,000

Life insurance expense for 2008 60,000


Premium paid 200,000

Less: Increase in cash surrender value (540,000 – 435,000) 105,000

Life insurance expense 95,000

The dividend of P30,000 is not deducted anymore because it is already part of the increase

in cash surrender value.



Sinking fund securities 1,000,000


Plant expansion fund 600,000


Land held for capital appreciation 3,000,000

Advances to subsidiary 200,000

Investment in joint venture 2,000,000

7,500,000

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182CHAPTER 14


1. A 1. B 1. B

2. A 2. D 2. C

3. B 3. D 3. D

4. A 4. B 4. C

5. D 5. C 5. C

6. B 6. D

7. C 7. D

8. D 8. A

9. D 9. B

10. A 10. C

Problem 14-4

Requirement 1

2008

Jan. 1 Cash 4,000,000

Loan payable 4,000,000

Dec. 31 Interest expense 480,000

Cash (12% x 4,000,000) 480,000

31 Interest rate swap receivable 70,160

Unrealized gain – interest rate swap (80,000 x .877) 70,160

2009


Cash (14% x 4,000,000) 560,000

31 Cash 80,000

Interest rate swap receivable 70,160

Unrealized gain – interest rate swap 9,840

31 Loan payable 4,000,000

Cash 4,000,000

31 Unrealized gain – interest rate swap 80,000Interest expense 80,000

Requirement 2

2008

Jan. 1 Cash 4,000,000


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2008


Cash 480,000

31 Unrealized loss – interest rate swap 36,040

Interest rate swap payable (40,000 x .901) 36,040

2009


Cash (11% x 4,000,000) 440,000

31 Interest rate swap payable 36,040

Unrealized loss - Interest rate swap 3,960

Cash 40,000


Cash 4,000,000

31 Interest expense 40,000

Unrealized loss - interest rate swap 40,000

Problem 14-5

2008

Jan. 1 Cash 6,000,000


Dec. 31 Interest expense 600,000Cash (10% x 6,000,000) 600,000


Unrealized gain – interest rate swap (180,000 x .885) 159,300

2009


Cash (13% x 6,000,000) 780,000

31 Cash 180,000




Cash 6,000,000

31 Unrealized gain – interest rate swap 180,000


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184Problem 14-6

2008

Jan. 1 Cash 3,000,000Loan payable 3,000,000


Cash (8% x 3,000,000) 240,000


Unrealized gain – interest rate swap (30,000 x 3.24) 97,200

Batangas Company will receive P30,000 at the end of

2009 and can expect to receive P30,000 at the end of

2010, 2011 and 2012. Thus, the present value of the four

annual payments of P30,000 is recognized on December 31,

2008 as interest rate swap receivable.

2009


Cash (9% x 3,000,000) 270,000

31 Cash 30,000




31 Unrealized gain – interest rate swap 67,200Interest rate swap receivable (97,200 – 30,000) 67,200

31 Unrealized loss – interest rate swap 160,200

Interest rate swap payable (60,000 x 2.67) 160,200

Batangas Company will make a payment of P60,000 at

The end of 2010 by reason of the reduced interest rate

and can expect to make payment of P60,000 at the end

of 2011 and 2012. Thus, the present value of the three

annual payments of P60,000 is recognized on December 31,

2009 as the interest rate swap payable.

Problem 14-7

2008

Jan. 1 Cash 5,000,000


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Dec. 31 Interest expense (10% x 5,000,000) 500,000

Cash 500,000

31 Interest swap receivable 464,000

Unrealized gain – interest swap

(5,000,000 x 4% x 2.32) 464,000

2009


Cash 700,000

31 Cash 200,000




31 Unrealized gain – interest swap 95,000


Unrealized gain – 12/31/2009 (5,000,000 x 2% x 1.69) 169,000

Unrealized gain per book (464,000 – 200,000) 264,000

Decrease in unrealized gain ( 95,000)

2010


Cash 600,000

31 Cash 100,000






Unrealized gain – 12/31/2010 (5,000,000 x 1% x .90) 45,000


Decrease in unrealized gain (24,000)

2011


Cash 550,000

31 Cash 50,000



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186Dec. 31 Unrealized gain – interest rate swap 50,000


31 Loan payable 5,000,000Cash 5,000,000

Problem 14-8

2008

Jan. 1 Cash 5,000,000


Dec. 31 Interest expense (5,000,000 x 8%) 400,000

Cash 400,000

31 Interest swap receivable 249,000


(5,000,000 x 2% x 2.49)

2009


Cash 500,000

31 Cash 100,000






(5,000,000 x 2% x 2.49)

Unrealized gain – 12/31/2009 (5,000,000 x 3% x 1.71) 256,500


Increase in unrealized gain 107,500

2010


Cash 550,000

31 Cash 150,000

Interest swap receivable 150,000





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Unrealized gain – 12/31/2010 (5,000,000 x 4% x .89) 178,000Unrealized gain per book (256,500 – 150,000) 106,500

Increase in unrealized gain 71,500

2011


Cash 600,000

31 Cash 200,000


Unrealized gain – interest swap 22,000




Cash 5,000,000

Problem 14-9

2008

Jan. 31 Cash 1,000,000

Note payable 1,000,000


Cash 80,000

31 Note payable 34,760

Gain on note payable 34,760

On every year-end the note payable is measured at fair value. The fair value is

equal to the present value of the principal plus the present value of future interest

payments.

PV of principal (1,000,000 x .8264) 826,400

PV of interest (80,000 x 1.7355) 138,840

Fair value of note payable – 12/31/2008 965,240

Carrying value of note payable 1,000,000Decrease in carrying value – gain 34,760

31 Loss on interest rate swap 34,760

Interest rate swap payable 34,760

The derivative which is the interest rate swap is also measured at fair value. The

fair value is equal to the present value of the net cash settlement with the

speculator.

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Variable interest (1,000,000 x 10%) 100,000

Fixed interest (1,000,000 x 8%) 80,000Net cash payment to speculator 20,000

Multiply by PV of an ordinary annuity of 1 at 10% for two periods 1.7355

Fair value of interest swap payable – 12/31/2008 34,760*

*20,000 times 1.7355 equals P34,760. There is a difference of P50 due to rounding.

The gain on note payable and the loss on interest rate swap are recognized

immediately in profit or loss because the interest rate swap is designated as fair

value hedge.

2009Dec. 31 Interest expense 96,524

Cash 80,000

Note payable 16,624

Actually, on December 31, 2008, there is a discount on note payable because

the fair value is P965,240 and the face value is P1,000,000. This discount is

amortized using the effective interest method.

Interest expense (965,240 x 10%) 96,524

Interest paid (1,000,000 x 8%) 80,000

Amortization of discount – increase in note payable 16,524

31 Note payable 8,792

Gain on note payable 8,792

PV of principal (1,000,000 x .9009) 900,900

PV of interest payment (80,000 x .9009) 72,072

Fair value of note payable – 12/31/2009 972,972

Carrying value of note payable (965,240 – 16,524) 981,764

Decrease in carrying value – gain 8,792

31 Interest rate swap payable 20,000

Cash 20,000

This is the cash payment to the speculator as a result of the increase in marketrate of interest on January 1, 2009.



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Variable interest (1,000,000 x 11%) 110,000

Fixed interest (1,000,000 x 8%) 80,000

Net cash payment to speculator 30,000Multiply by PV of 1 at 11% for one period .9009

Fair value of interest rate swap payable – 12/31/2009 27,027

Carrying value of interest rate swap payable (34,760 – 20,000) 14,760

Increase in interest rate swap payable 12,267

2010


Cash 80,000

Note payable 27,028

Interest expense (972,972 x 11%) 107,028*

Interest paid 80,000


*972,972 x 11% equals P107,027 or a difference of P1 due to rounding to bring the

carrying value of the note payable to P1,000,000 on maturity date.



Final cash payment to speculator 30,000

Carrying value of interest rate swap payable 27,027

Loss on interest rate swap 2,973

31 Interest rate swap payable 30,000Cash 30,000

Final settlement with the speculator.

31 Note payable 1,000,000

Cash 1,000,000

Repayment of the loan to the bank.

Problem 14-10Requirement 1

2008

Dec. 31 Forward contract receivable 1,500,000

Unrealized gain – forward contract (5,000 x 300) 1,500,000

2009

Jan. 1 Tree inventory (5,000 x 1,800) 9,000,000

Cash 9,000,000

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1 Cash 1,500,000

Forward contract receivable 1,500,000

1 Unrealized gain – forward contract 1,500,000

Gain on forward contract 1,500,000

Requirement 2

2008

Dec. 31 Unrealized loss – forward contract 500,000

Forward contract payable (5,000 x 100) 500,000

2009

Jan. 1 Tree inventory (5,000 x 1,400) 7,000,000

Cash 7,000,000

1 Forward contract payable 500,000

Cash 500,000

1 Loss on forward contract 500,000

Unrealized loss – forward contract 500,000

Problem 14-11

2008

Dec. 31 Forward contract receivable 893,000

Unrealized gain – forward contract (1,000,000 x .893) 893,000

2009Dec. 31 Unrealized gain – forward contract 893,000

Forward contract receivable 893,000

Cancelation of the forward contract receivable because

of the reduction of market price on December 31, 2009

and January 1, 2010.

31 Unrealized loss – forward contract 500,000

Forward contract payable (100,000 x 5) 500,000

2010

Jan. 1 Fish inventory (100,000 x 75) 7,500,000

Cash 7,500,000

1 Forward contract payable 500,000

Cash 500,000

1 Loss on forward contract 500,000

Unrealized loss – forward contract 500,000

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191Problem 14-12

2008

Dec. 31 Forward contract receivable 500,000Unrealized gain – forward contract (50,000 x P10) 500,000

2009

March 1 Unrealized gain – forward contract 100,000


Forward contract receivable – 3/1/2009 (500,000 x P8) 400,000

Forward contract receivable – 12/31/2008 500,000

Decrease in derivative asset (100,000)

1 Cash 400,000


1 Purchases (500,000 x 58) 2,900,000

Cash 2,900,000

1 Unrealized gain – forward contract 400,000

Gain on forward contract 400,000

Problem 14-13Requirement 1

2008

Dec. 31 Futures contract receivable 500,000

Unrealized gain – futures contract (50,000 x 10) 500,000

2009

Jan. 1 Purchases 8,000,000

Cash (50,000 x 160) 8,000,000

1 Cash 500,000

Futures contract receivable 500,000

1 Unrealized gain – futures contract 500,000

Gain on futures contract 500,000

Requirement 2

2008

Dec. 31 Unrealized loss – futures contract 250,000

Futures contract payable (50,000 x 5) 250,000

2009


Cash (50,000 x 145) 7,250,000

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1 Futures contract payable 250,000

Cash 250,000

1 Loss on futures contract 250,000

Unrealized loss - futures contract 250,000

Problem 14-14

2008

Dec. 31 Futures contract receivable 1,500,000

Unrealized gain – futures contract (100,000 x 15) 1,500,000

2009


Cash (100,000 x 65) 6,500,000

1 Cash 1,500,000

Futures contract receivable 1,500,000

1 Unrealized gain – futures contract 1,500,000

Gain on futures contract 1,500,000

Problem 14-15

2008

Dec. 31 Unrealized loss – futures contract 125,000

Futures contract payable (25,000 x 5) 125,000

2009

June 1 Unrealized loss – futures contract 75,000

Futures contract payable 75,000

Futures contract payable – 6/1/2009 (25,000 x P8) 200,000

Futures contract payable – 12/31/2008 125,000

Increase in derivative liability 75,000

1 Futures contract payable 200,000

Cash 200,000

1 Purchases (25,000 x 42) 1,050,000Cash 1,050,000

1 Loss on futures contract 200,000

Unrealized loss – futures contract 200,000

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Problem 14-16

Requirement 1

2008

Dec. 31 Call option 50,000

Cash 50,000

2009

July 1 Call option 700,000

Gain on call option 700,000

Fair value of call option (150,000 x 5) 750,000

Payment for call option 50,000

Increase 700,000

2009

July 1 Cash 750,000

Call option 750,000

1 Purchases 5,250,000

Cash (150,000 x 35) 5,250,000

Requirement 2

2008


Cash 50,000

2009

July 1 Purchases 4,200,000

Cash (150,000 x 28) 4,200,000

1 Loss on call option 50,000

Call option 50,000

Problem 14-17

2008

Dec. 1 Call option 20,000Cash 20,000


Unrealized gain - call option 380,000

Fair value (200,000 x 2) 400,000

Payment for call option 20,000

Increase 380,000

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1942009

June 1 Call option 200,000

Unrealized gain – call option 200,000

Call option – 6/1/2009 (200,000 x P3) 600,000

Call option – 12/31/2008 400,000

Increase in derivative asset 200,000

1 Cash 600,000

Call option 600,000

1 Purchases (200,000 x P28) 5,600,000

Cash 5,600,000

1 Unrealized gain – call option 600,000

Gain on call option 600,000

Problem 14-18

2008

Dec. 1 Put option 100,000

Cash 100,000

2009

Feb. 1 Cash (50,000 x 180) 9,000,000

Sales 9,000,000

1 Loss on put option 100,000

Put option 100,000

With the price above the put option price, on the part of the

seller, there is no reason to exercise the option. It is better to

sell the product on the open market. Thus, the output option

is not exercised on February 1, 2009 and has no value.

Problem 14-19

2008

Sept. 1 Equipment 2,250,000

Accounts payable 2,250,000

Dec. 31 Loss on foreign exchange 50,000

Accounts payable 50,000

Peso equivalent – 12/31/2008 2,050,000

Peso equivalent – 09/01/2008 2,000,000

Loss on foreign exchange 50,000

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31 Forward contract receivable 50,000


2009

March 1 Loss on foreign exchange 100,000

Accounts payable 100,000

Peso equivalent – 3/1/2009 2,150,000

Peso equivalent – 12/31/2008 2,050,000

Loss on foreign exchange 100,000

1 Forward contract receivable 100,000


1 Cash 150,000


1 Accounts payable (50,000 x 43) 2,150,000

Cash 2,150,000

Problem 14-20

2008

Dec. 31 Forward contract receivable 50,000

Unrealized gain – forward contract ($50,000 x P1) 50,000

2009

March 31 Forward contract receivable 100,000Unrealized gain – forward contract ($50,000 x P2) 100,000

31 Cash 150,000


31 Purchases ($50,000 x P43) 2,150,000

Cash 2,150,000

31 Unrealized gain – forward contract 150,000

Purchases 150,000

Problem 14-21

Question 1 Answer B

The notional figure is 8,000 kilos and the notional value is 8,000 kilos times the underlying

Fixed price of P1,200 per kilo or P9,600,000.

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196Question 2 Answer C

Market price – 12/31/2008 1,500

Underlying fixed price 1,200Derivative asset 300

Forward contract receivable (8,000 x 300) 2,400,000

Present value of derivative asset (2,400,000 x .91) 2,184,000

The present value of P2,184,000 is recognized as forward contract receivable on December

31, 2008 because the amount is collectible on January 1, 2010, one year from December 31,

2008.

Question 3 Answer B

Market price – 12/31/2009 1,000

Underlying fixed price 1,200

Derivative liability 200

Forward contract payable – 12/31/2009 (8,000 x 200) 1,600,000


Fair value of call option (120 – 100 = 20 x 10,000) 200,000


Exchange rate on July 31 (80,000,000 / 92) 869,565Strike price (80,000,000 / 100) 800,000

Derivative asset 69,565

Call option payment 10,000

Saving 59,565

Problem 14-24

Question 1 Answer A

Camry’s payment to Corolla (5,000,000 x 2%) 100,000

Question 2 Answer C

Fair value of interest rate swap (100,000 x .926) 92,600


Notional amount 435,000

Exchange rate on December 31, 2008 (47,850,000 / 115) 416,087

Fair value of forward contract receivable 18,913

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197CHAPTER 15


1. D 1. D 1. A

2. C 2. C 2. C

3. A 3. D 3. A

4. D 4. C 4. A

5. D 5. C 5. D

6. C 6. C

7. A 7. B

8. B 8. C

9. A 9. D

10. C 10. C

Problem 15-4

1. Machinery 500,000

Cash 500,000

2. Land (2/5 x 5,500,000) 2,200,000

Building (3/5 x 5,500,000) 3,300,000

Cash 5,500,000

3. Investment in equity security 500,000

Cash

500,000

Delivery equipment (5,000 x 120) 600,000

Investment in equity security 500,000

Gain on exchange 100,000

Taxes and licenses 3,000

Cash 3,000

4. Equipment 1,000,000

Donated capital 1,000,000

Donated capital 25,000

Cash 25,000

5. Land 2,000,000Building 5,500,000

Share capital (60,000 x 100) 6,000,000

Share premium 1,500,000

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198Problem 15-5

Net method Gross method

a. Wi thin the discount period: a. Within the discount period:

1. Machinery 490,000 1. Machinery 500,000

Accounts payable 490,000 Accounts payable 500,000(500,000 x 98%)

2. Accounts payable 490,000 2. Accounts payable 500,000Cash 490,000 Cash 490,000

Machinery 10,000

b. Beyond the discount period: b. Beyond the discount period:

1. Machinery 490,000 1. Machinery 500,000

Accounts payable 490,000 Accounts payable 500,000

2. Accounts payable 490,000 2. Accounts payable 500,000Purchase discount lost 10,000 Purchase discount lost 10,000

Cash 500,000 Cash 500,000Machinery 10,000

Problem 15-6

2008

Jan. 1 Equipment 580,000

Discount on note payable 120,000

Cash 200,000

Note payable 500,000

Dec. 31 Note payable 100,000

Cash 100,000



Note payable Fraction Amortization

2008 500,000 5/15 40,000

2009 400,000 4/15 32,000

2010 300,000 3/15 24,000

2011 200,000 2/15 16,000

2012 100,000 1/15 8,000

1,500,000 120,000

2009


Cash 100,000



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Problem 15-7

Down payment 100,000

Present value of note (200,000 x 3.17) 634,000

Total cost 734,000

2008

Jan. 1 Machinery 734,000


Cash 100,000



Cash 200,000



Date Payment 10% interest Principal Present value

01/01/2008 634,000

12/31/2008 200,000 63,400 136,600 497,400

12/31/2009 200,000 49,740 150,260 347,140

12/31/2010 200,000 34,714 165,286 181,854

12/31/2011 200,000 18,146 181,854 -

2009

Dec. 31 Note payable 200,000Cash 200,000



Problem 15-8

1. Building 7,000,000

Cash 1,000,000

Share capital 5,000,000


2. Land 1,500,000

Income from donation 1,500,000

3. Machinery (800,000 x 95%) 760,000

Cash 760,000

4. Equipment 200,000


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200Problem 15-9

1. Land (1/4 x 6,000,000) 1,500,000

Building (3/4 x 6,000,000) 4,500,000Machinery (8/12 x 1,800,000) 1,200,000

Office equipment (4/12 x 1,800,000) 600,000

Delivery equipment 500,000

Cash 8,300,000

2. Land 1,000,000

Building 5,000,000

Machinery 2,000,000

Share capital 6,000,000


3. Land 500,000

Donated capital 500,000

4. Machinery (900,000 x 98%) 882,000

Cash 882,000

Machinery 35,000

Cash 35,000

5. Furniture and fixtures (400,000 x .797) 318,800



Problem 15-10

1. Land 1,500,000

Accumulated depreciation 700,000

Equipment – old 2,000,000


Fair value of equipment given 1,500,000



2. Equipment - new 1,300,000

Accumulated depreciation 700,000Equipment – old 2,000,000

3. Equipment - new 2,000,000



Cash 500,000


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Fair value 1,500,000

Cash payment 500,000

Cost of new asset 2,000,000

Fair value 1,500,000



Problem 15-11

1. Computer 430,000

Inventory (car) 300,000

Cash 50,000


2. Machinery – new (110,000 + 30,000) 140,000


Loss on exchange 10,000

Machinery – old 240,000

Cash 30,000

Fair value of asset given 110,000

Book value 120,000

Loss on exchange ( 10,000)

Problem 15-12

ABC XYZ

Equipment - new 500,000 Equipment – new 500,000

Accumulated depreciation 2,000,000 Accumulated depreciation 1,750,000Equipment – old 2,400,000 Equipment – old 2,200,000

Gain on exchange 100,000 Gain on exchange 50,000

Problem 15-13

Equipment – new 1,000,000




Problem 15-14

Company A

Machinery – new (600,000 + 200,000) 800,000


Machinery – old 2,000,000

Cash 200,000

Gain on exchange (600,000 – 500,000) 100,000

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Company B

Machinery – new (800,000 - 200,000) 600,000

Accumulated depreciation 1,800,000Cash 200,000

Machinery – old 2,500,000

Gain on exchange (800,000 – 700,000) 100,000

Problem 15-15

Equipment - new 1,400,000




Cash 1,300,000

Fair value 100,000

Cash payment (1,600,000 – 300,000) 1,300,000


Fair value 100,000

Less: Book value ( 150,000)

Loss on exchange ( 50,000)

Problem 15-16

Cash price without trade in 1,400,000


Trade in value 420,000Less: Book value 400,000


Equipment - new 1,400,000



Cash 980,000


Problem 15-17

Delivery equipment - new 2,300,000Accumulated depreciation 1,300,000


Input tax 300,000

Insurance 120,000

Taxes and licenses 10,000

Delivery equipment – old 1,500,000

Cash 2,680,000

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Cash paid 2,680,000

Total 2,730,000Less: VAT 300,000

Insurance 120,000

Registration fee 10,000 430,000


Fair value 50,000

Book value 200,000

Loss on exchange (150,000)

Problem 15-18Total Finished goods Building

1. Direct labor 6,000,000 4,200,000 1,800,000

Materials 7,000,000 3,000,000 4,000,000

Overhead 2,000,000 2,000,000 -___

15,000,000 9,200,000 5,800,000

2. Direct labor 6,000,000 4,200,000 1,800,000

Materials 7,000,000 3,000,000 4,000,000

Overhead 2,000,000

135 / 180 x 2,000,000 1,500,000

45 / 180 x 2,000,000 _________ _________ 500,000

15,000,000 8,700,000 6,300,000

3. Direct labor 6,000,000 4,200,000 1,800,000

Materials 7,000,000 3,000,000 4,000,000Overhead 2,000,000

42 / 60 x 2,000,000 1,400,000

18 / 60 x 2,000,000 _________ _________ 600,000

15,000,000 8,600,000 6,400,000

Problem 15-19

a. Materials 500,000

Direct labor 1,000,000

Overhead 600,000

Cost of machinery 2,100,000

Overhead 3,600,000

Charged to finished goods (75% x 4,000,000) 3,000,000

Charged to machinery 600,000

b. Materials 500,000

Direct labor 1,000,000

Overhead (1/5 x 3,600,000) 720,000

Cost of machinery 2,220,000

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Direct labor:

Finished goods 4,000,000 4/5

Machinery 1,000,000 1/55,000,000

Problem 15-20

Date Expenditure Months Amount

January 1 2,000,000 12 24,000,000

June 30 2,000,000 6 12,000,000

December 31 1,000,000 0 -____

5,000,000 36,000,000

Average expenditures (36,000,000 x 12) 3,000,000

Average capitalization rate (1,060,000 / 8,000,000) 13.25%

Expenditures on building 5,000,000

Interest (3,000,000 x 13.25%) 397,500

Total cost of building 5,397,500

Problem 15-21

Average capitalization rate (900,000 / 8,000,000) 11.25%


January 1 2,000,000 12 24,000,000

March 31 1,000,000 9 9,000,000

September 30 3,000,000 3 9,000,000

6,000,000 42,000,000

Average expenditures (42,000,000 / 12) 3,500,000

Expenditures on construction 6,000,000

Specific interest cost:

Actual interest 240,000

Interest income ( 10,000) 230,000

General interest cost:Average expenditures 3,500,000

Less: Specific borrowing 2,000,000

General borrowing 1,500,000

Capitalization rate 11.25% 168,750


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Problem 15-22

Date Expenditure Months AmountJanuary 1 1,500,000 12 18,000,000

March 31 1,000,000 9 9,000,000

June 30 1,000,000 6 6,000,000

September 30 1,000,000 3 3,000,000

December 31 1,000,000 0 -___

5,500,000 36,000,000

Average expenditures (36,000,000 x 12) 3,000,000

Expenditures on construction 5,500,000

Interest cost (3,000,000 x 11.5%) 345,000


Problem 15-23


January 1 1,000,000 12 12,000,000

July 1 2,000,000 6 12,000,000

November 1 3,000,000 2 6,000,000

6,000,000 30,000,000


Average expenditures 2,500,000

Applicable to specific loan (1,000,000)

Applicable t general loan 1,500,000

Actual expenditures 6,000,000

Capitalizable interest:

Specific (1,000,000 x 10%) 100,000

General (1,500,000 x 12%) 180,000


Problem 15-24


January 1, 2008 4,000,000 12 48,000,000April 1, 2008 5,000,000 9 45,000,000

December 1, 2008 3,000,000 1 3,000,000

12,000,000 96,000,000

Average expenditures in 2008 (96,000,000 / 12) 8,000,000

Applicable to specific loan (3,000,000)

Applicable t general loan 5,000,000

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Actual expenditures in 2008 12,000,000

Capitalizable interest in 2008

Specific (3,000,000 x 10%) 300,000General (5,000,000 x 12%) 600,000



January 1, 2009 12,900,000 6 77,400,000

March 1, 2009 6,000,000 4 _24,000,000

18,900,000 101,400,000

Average expenditures in 2009 (101,400,000 / 6) 16,900,000

Applicable to specific loan ( 3,000,000)

Applicable to general loan 13,900,000

Note that the construction period in 2009 is only 6 months because the building

was completed on June 30, 2009. Thus, the average expenditures should be for

6 months only.

Actual expenditures in 2009 18,900,000

Capitalizable interest in 2009

Specific (3,000,000 x 10% x 6/12) 150,000

General (13,900,000 x 12% x 6/12) 834,000

Total cost of new building – 6/30/2009 19,884,000

Problem 15-25

1. Cash 30,000,000

Deferred income-government grant 30,000,000

Environmental expenses 2,000,000

Cash 2,000,000


Income from government grant (2/20 x 30,000,000) 3,000,000

2. Cash 40,000,000


Building 50,000,000

Cash 50,000,000

Depreciation 2,500,000

Accumulated depreciation (50,000,000 / 20) 2,500,000


Income from government grant (40,000,000 / 20) 2,000,000

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3. Land 50,000,000


Building 80,000,000

Cash 80,000,000

Depreciation 3,200,000

Accumulated depreciation (80,000,000 / 25) 3,200,000


Income from government grant (50,000,000 / 25) 2,000,000

4. Cash 10,000,000

Income from government grant 10,000,000


Cost of land (5,400,000 x 2/5) 2,160,000


Cash price 950,000

Installation cost 30,000

Total cost 980,000


Cash price 2,000,000Installation cost 50,000



Present value of first note payable (500,000 x 5.65) 2,825,000

Present value of second note payable (3,000,000 x .80) 2,400,000

Total cost of machinery 5,225,000


First payment on December 30, 2008 200,000Present value of next 7 payments (200,000 x 4.712) 942,400

Total cost of machine 1,142,400

Another computation:

PV of annuity of 1 in advance for 8 periods (200,000 x 5.712) 1,142,400

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Invoice price 700,000Discount (2% x 700,000) ( 14,000)

Freight and insurance 3,000

Cost of assembling and installation 5,000

Total cost 694,000


Equipment:

Invoice price 600,000

Discount (5% x 600,000) ( 30,000) 570,000

Land (at its fair value) 1,100,000

Machinery:Acquisition cost 275,000

Installation cost 7,000

Trial run and testing cost 18,000

Construction of base 10,000 310,000

Total 1,980,000




Total cost 860,000


Fair value of asset given 2,100,000


Cost of new inventory 2,500,000


Fair value of asset given 1,500,000

Less: Cost of asset given 1,250,000



Since the old machine has no available fair value, the new machine received in exchange

is recorded at its cash price without trade in of P900,000. The average published retail value

of the old machine is not necessarily its fair value.

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Problem 15-37 Answer AAverage expenditures (20,000,000 / 2) 10,000,000

Multiply y capitalization rate 12%

Interest on average expenditures 1,200,000

The capitalizable borrowing cost is limited to the actual borrowing cost incurred. In this case,

the computed amount of P1,200,000 is more than the actual borrowing cost of P1,020,000.

Accordingly, the capitalizable interest is P1,020,000. Note that in computing the average

expenditures, the amount of P20,000,000 is simply divided by 2 because the said amount is

incurred evenly during the year ended 2008.


Since the actual interest incurred is not given, the interest on the average expenditures isdetermined.


Interest on average expenditures (4,800,000 x 10%) 480,000

Interest income on unexpended portion (320,000)

Capitalizable interest 160,000


Accumulated expenditures at the end of two years 3,000,000

Average expenditures in the third year (8,000,000 / 2) 4,000,000Total 7,000,000

Capitalizable interest (7,000,000 x 9%) 630,000


Average accumulated expenditures 2,500,000

Specific borrowing (1,500,000)

Applicable to general borrowing 1,000,000

Specific (6% x 1,500,000) 90,000

General (9% x 1,000,000) 90,000

Capitalizable interest 180,000

7/25/2019 Chapter 11 to 15


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