smfav1c11-15

139

CHAPTER 11

Problem 11-1 Problem 11-2 Problem 11-3Problem 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 Investment in associate 635,000 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

140

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 securities (5,500/22,000 x 2,400,000)

600,000 Gain on sale of investment 500,000

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

300,000

Cash (30% x 3,000,000) 900,000 Investment in associate

900,000

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

2009 Investment in associate 1,800,000 Investment income (30% x 6,000,000) 1,800,000

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

Investment income 200,000 Investment in associate 200,000

141Problem 11-8

2006Jan. 1 Investment in equity securities 1,000,000 Cash 1,000,000

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

2007Dec. 31 Cash (15% x 400,000) 60,000 Dividend income 60,000

2008Jan. 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

1 Investment in associate 1,000,000 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 Investment in associate

240,000 Problem 11-9

2008Jan. 1 Investment in associate 8,000,000 Cash 8,000,000

Dec. 31 Investment in associate 1,500,000

Investment income (30% x 5,000,000) 1,500,000

31 Cash (30% x 2,000,000) 600,000 Investment in associate

600,000

142 2009June 30 Investment in associate 1,800,000 Investment income (30% x 6,000,000) 1,800,000

July 1 Cash 6,000,000 Investment in associate (10,700,000 x 1/2) 5,350,000 Gain on sale of investment 650,000

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

1 Available for sale securities 5,350,000Investment 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


2. Investment in associate 1,600,000 Investment income (40% x 4,000,000) 1,600,000

3. Cash (40% x 1,000,000) 400,000 Investment in associate 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 Investment in associate 200,000

6. Investment in associate 100,000 Investment income 100,000

143Requirement b

Share in net income 1,600,000Amortization of excess attributable to equipment ( 150,000)Amortization of excess attributable to inventory ( 200,000)Excess net fair value over cost 100,000Net investment income 1,350,000

Problem 11-11


2. Investment in associate 260,000 Investment income (40% x 650,000) 260,000

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

60,000

4. Investment in associate 520,000 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 entities a 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 Investment income 750,000

c. Cash 450,000 Investment in associate 450,000

d. Investment income 200,000 Investment in associate 200,000

144

2. Share in net income 750,000 Amortization of patent (2,000,000 / 10) (200,000) Investment income 550,000

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%

Acquisition cost 6,000,000 Book value of net assets acquired 4,000,000 Excess of cost applicable to patent 2,000,000

Problem 11-13

1. Journal entries


b. Investment in associate 1,200,000 Investment income 1,200,000



2. Share in net income 1,200,000

Amortization of depreciable asset (750,000 / 5) ( 150,000) Investment income 1,050,000

3. Acquisition cost 5,000,000 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

Acquisition cost 5,000,000 Net assets acquired (30% x 12,000,000) 3,600,000 Excess of cost 1,400,000 Excess attributable to depreciable asset (30% x 2,500,000) 750,000 Excess attributable to goodwill 650,000

145

Problem 11-14

1. Journal entries


b. Investment in associate 175,000 Investment income 175,000



2. Share in net income 175,000 Amortization of excess (25,000 + 25,000) ( 50,000) Investment income 125,000

3. Acquisition cost 1,000,000 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 Acquisition cost 1,000,000 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 900,000 Amortization of excess (400,000 / 20) ( 20,000) Investment income for 2008 880,000

Acquisition cost (20,000 x 120) 2,400,000 Net assets acquired (25% x 8,000,000) 2,000,000 Excess of cost 400,000

146

2. Share in 2008 net income 975,000 Amortization of excess ( 20,000) Investment income for 2009 955,000

3. Acquisition cost 2,400,000 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)

Amortization of excess: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 Dividend income 110,000

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

Cash 200,000 Stock rights 160,000 Gain on sale of stock rights 40,000


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

147

5. Investment in associate 2,000,000 Investment in equity securities 2,000,000 (Reclassification)

6. Investment in associate 400,000 Retained earnings 400,000

7. Investment in associate 1,800,000 Investment income (30% x 6,000,000) 1,800,000

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 1,250,000Ever Corporation, 10,000 shares 1,440,000Total 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 3,000,000Cumulative net income 2,500,000Liquidating dividend 500,000

Cash (10% x 3,000,000) 300,000 Dividend income (10% x 2,500,000) 250,000 Investment in equity securities 50,000


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

148

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) 3,200,000Excess 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


Acquisition cost 7,000,000Share in net income (20% x 1,800,000) 360,000Share in cash dividend (20% x 600,000) ( 120,000)Amortization of excess (1,000,000/10) ( 100,000)Carrying value 7,140,000


Acquisition cost 4,000,000Share in net income (10% x 5,000,000) 500,000Share in cash dividend (10% x 1,500,000) ( 150,000)Carrying value 4,350,000


Acquisition cost (squeeze) 1,720,000Share in net income (25% x 1,200,000) 300,000Share in cash dividend (25% x 480,000) ( 120,000)Carrying value – December 31 1,900,000


Acquisition cost 2,500,000Less: Book value of net assets acquired (30% x 5,000,000) 1,500,000Excess of cost over book value 1,000,000 Less: Amount attributable to undervaluation of land (30% x 2,000,000) 600,000Goodwill 400,000

149

Acquisition cost 2,500,000Add: Share in net income (30% x 1,000,000) 300,000Balance, December 31 2,800,000

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

Problem 11-29 Answer B Acquisition cost – January 1 1,000,000Acquisition cost – December 31 3,000,000Total cost 4,000,000

Share in net income (10% x 8,000,000) 800,000Carrying value 4,800,000


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

Investment in associate 400,000 Retained earnings 400,000


Acquisition cost 5,160,000Net assets acquired (30% x 11,800,000) 3,540,000Excess of cost 1,620,000Attributable to depreciable assets (30% x 2,600,000) 780,000Attributable to goodwill 840,000

Acquisition cost 5,160,000Share in net income (30% x 3,600,000) 1,080,000Share in dividends (30% x 400,000) ( 120,000)Amortization (780,000/4) ( 195,000)Investment balance – December 31 5,925,000Problem 11-32 Answer B

Acquisition cost 2,560,000Net assets acquired (40% x 5,000,000) 2,000,000Excess of cost 560,000

150Attributable to equipment (40% x 800,000)

320,000Attributable to building (40% x 600,000) 240,000

560,000

Acquisition cost 2,560,000Net income (40% x 1,600,000)

640,000Cash dividend (40% x 1,000,000) ( 400,000)

Amortization of excess: Equipment (320,000 / 4) ( 80,000) Building (240,000 / 12) ( 20,000) Carrying value of investment – 12/31/2008 2,700,000


Net income 5,000,000Less: Preference dividend (10% x 2,000,000) 200,000Net 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


Acquisition cost 2,000,000Share in net income – 2008 240,000Cash dividends – 2008 (30% x 500,000) ( 150,000)Book value – December 31, 2008 2,090,000


Book value – December 31, 2008 2,090,000Share in net income up to June 30, 2009 (30% x 1,000,000)

300,000Book value – June 30, 2009 2,390,000

Sales price 1,500,000Book value sold (2,390,000 x ½) 1,195,000Gain on sale 305,000

151


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

Carrying value of investment – 1/1/2008 3,450,000Net income for 2008 (30% x 700,000)

210,000Net income for 2009 (30% x 800,000)

240,000Cash dividend on 12/31/2009 (30% x 400,000) ( 120,000)Carrying value of investment – 12/31/2009 3,780,000

Another approach

Acquisition cost 3,600,000Share in retained earnings – 12/31/2009 (30% x 600,000) 180,000Carrying value of investment – 12/31/2009 3,780,000

152CHAPTER 12

Problem 12-1

1. B 6. C

2. B 7. C3. A 8. B4. A 9. B5. D 10. C

Problem 12-2Bonds held as trading

2008April 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

2009Jan. 1 Interest income 60,000 Accrued interest receivable 60,000

April 1 Cash 120,000 Interest income

120,000

Oct. 1 Cash 120,000 Interest income

120,000

Dec. 31 Accrued interest receivable 60,000 Interest income 60,000

31 Unrealized loss – TS 340,000 Trading securities (2,300,000 – 1,960,000) 340,000

Bonds held to maturity2008April 1 Held to maturity securities 2,200,000 Cash 2,200,000


120,000

153

2008Dec. 31 Accrued interest receivable 60,000

Interest income 60,000 31 Interest income (50,000 x 9/12) 37,500

Held to maturity securities 37,500


April 1 Cash 120,000 Interest income

120,000


120,000

Dec. 31 Accrued interest receivable 60,000 Interest income 60,000

31 Interest income (200,000/4) 50,000 Held to maturity securities 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

Dec. 31 Accrued interest receivable 240,000 Interest income

240,000

31 Trading securities 439,000Unrealized 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 Interest income

240,000

154

July 1 Available for sale securities 23,270 Interest income 23,270

Interest income (3,761,000 x 7%) 263,270 Interest received 240,000 Amortization of discount 23,270

Dec. 31 Accrued interest receivable 240,000 Interest income

240,000

31 Available for sale securities 24,899 Interest income 24,899

Interest income (3,784,270 x 7%) 264,899 Interest accrued 240,000 Amortization of discount 24,899

31 Available for sale securities 390,831 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) 5,200,000 Interest 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 Interest income (2,000,000 x 12% x 2/12) 40,000 Cash 2,000,000

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

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 Interest income (2,000,000 x 12% x 1/12) 20,000

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)

155

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

120,000

31 Accrued interest receivable (3,000,000 x 12% x 2/12) 60,000 Interest income 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 2,940,000Avco 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 Interest income (2,000,000 x 12% x 1/12) 20,000 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) 40,000 Cash 3,840,000

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

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

Oct. 1 Cash (1,010,000 + 10,000) 1,020,000 Interest income (1,000,000 x 12% x 1/12)

10,000

Trading securities950,000

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

156

Dec. 1 Cash (1,940,000 + 80,000) 2,020,000 Trading securities 1,860,000 Interest income (2,000,000 x 12% x 4/12) 80,000 Gain 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 Interest income

120,000

31 Unrealized loss – TS (2,850,000 – 2,700,000) 150,000 Trading securities150,000

Requirement b

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

Problem 12-6

2008July 1 Trading securities 2,200,000

Commission expense 50,000 Interest income (2,000,000 x 4%) 80,000 Cash 2,330,000

Dec. 31 Unrealized loss – TS 300,000

Trading securities300,000 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

Interest income160,000

2009March 31 Cash 2,140,000

Trading securities 1,900,000Gain on sale of TS 200,000Interest income (2,000,000 x 8%) x 3/12) 40,000

157

Problem 12-7

Requirement 1 Discount

Date Interest received Interest income amortization Book value01/01/2008 1,900,50012/31/2008 160,000 190,050 30,050 1,930,55012/31/2009 160,000 193,055 33,055 1,963,60512/31/2010 160,000 196,395 36,395 2,000,000

Requirement 2

2008Jan. 1 Available for sale securities 1,900,500

Cash 1,900,500

Dec. 31 Cash 160,000 Interest income160,000

31 Available for sale securities 30,050 Interest income

30,050


Market value (2,000,000 x 110) 2,200,000 Carrying amount 1,930,550 Unrealized gain 269,450

2009



33,050

31 Available for sale securities 166,945 Unrealized gain166,945

Market value 12/31/2009 (2,000,000 x 120) 2,400,000 Book 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

158Problem 12-8

Requirement 1 Discount

Date Interest received Interest income amortization Book value01/01/2008 4,742,00012/31/2008 300,000 379,360 79,360 4,821,36012/31/2009 300,000 385,709 85,709 4,907,06912/31/2010 300,000 392,931 92,931 5,000,000

Requirement 2

2008Jan. 1 Available for sale securities 4,742,000

Cash 4,742,000



79,360


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

2009Dec. 31 Cash 300,000

Interest income300,000


85,709

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

Unrealized gain 428,640 Total 5,928,640 Investment balance – 12/31/2009 5,335,709 Unrealized gain – 12/31/2009 592,931

159

Another computation

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

4,907,069 Gain on sale 592,931

Problem 12-9

Requirement a2008May 1 Held to maturity securities (6,000,000 x 94%) 5,640,000 Interest income (6,000,000 x 12% x 3/12) 180,000 Cash 5,820,000

Aug. 1 Cash 360,000 Interest income (6,000,000 x 12% x 6/12) 360,000

Dec. 31 Accrued interest receivable 300,000 Interest income (6,000,000 x 12% x 5/12) 300,000 31 Held to maturity securities (8,000 x 8) 64,000 Interest income 64,000

May 1, 2008 – February 1, 2012 = 45 months 360,000 / 45 = 8,000 monthly amortization

Requirement b

2010May 1 Held to maturity securities (8,000 x 4) 32,000 Interest income 32,000

1 Cash (6,300,000 + 180,000) 6,480,000 Held to maturity securities 5,832,000 Interest income (6,000,000 x 12% x 3/12)

180,000 Gain on sale of bonds 468,000

Original cost – May 1, 2008 5,640,000 Add: 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 Gain on sale 468,000

160

Problem 12-10

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

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

3. Interest income 100,160Held to maturity securities 100,160

Interest received 960,000 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 50,0002009 800,000 8/30 40,0002010 600,000 6/30 30,0002011 400,000 4/30 20,0002012 200,000 2/30 10,000

3,000,000 150,000

2008Jan. 1 Held to maturity securities 1,000,000

Cash 1,000,000

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

Dec. 31 Cash 60,000Interest income 60,000

31 Interest income 50,000Held to maturity securities 50,000

31 Cash 200,000 Held to maturity securities 200,000

161

2009June 30 Cash (800,000 x 12% x 6/12) 48,000 Interest income 48,000

Dec. 31 Cash 48,000 Interest income 48,000

31 Interest income 40,000 Held to maturity securities 40,000

31 Cash 200,000 Held to maturity securities 200,000

Problem 12-12

Year Bond outstanding Fraction Discount amortization2008 4,000,000 4/10 120,000

2009 3,000,000 3/10 90,0002010 2,000,000 2/10 60,0002011 1,000,000 1/10 30,000

10,000,000 300,000

2010Dec. 31 Cash 240,000 Interest income

240,000

31 Held to maturity securities 60,000 Interest income 60,000

31 Cash 1,000,000 Held to maturity securities 1,000,000

2011Dec. 31 Cash 120,000 Interest income

120,000

31 Held to maturity securities 30,000 Interest income 30,000 31 Cash 1,000,000 Held to maturity securities 1,000,000

162

Problem 12-13

Bond Months Peso Discount Bond year outstanding outstanding months Fraction

amortization10/01/2008 – 02/01/2009 3,000,000 4 12,000,000 12/48 75,00002/01/2009 - 02/01/2010 2,000,000 12 24,000,000 24/48 150,00002/01/2010 – 02/01/2011 1,000,000 12 12,000,000 12/48 75,000

48,000,000 300,000

2008Oct. 1 Held to maturity securities 2,700,000 Interest income (3,000,000 x 12% x 2/12) 60,000 Cash 2,760,000


31 Held to maturity securities 56,250 Interest income (75,000 x 3/4) 56,250


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

180,000

1 Cash 1,000,000 Held to maturity securities 1,000,000

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

120,000


31 Held to maturity securities 156,250 Interest income

156,250

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

163

Problem 12-14

Date Interest received Interest income Discount amortization Book value01/01/2008 3,757,01512/31/2008 400,000 450,842 50,842 3,807,857

12/31/2009 400,000 456,943 56,943 3,864,80012/31/2010 400,000 463,776 63,776 3,928,57612/31/2011 400,000 471,424 71,424 4,000,000


Cash 3,757,015 Dec. 31 Cash 400,000

Interest income 400,000

31 Held to maturity securities 50,842 Interest income 50,842

Problem 12-15

Date Interest received Interest income Premium amortization Carrying valueJan. 01, 2008 3,111,510 June 30, 2008 120,000 93,345 26,655 3,084,855Dec. 31, 2008 120,000 92,546 27,454 3,057,401June 30, 2009 120,000 91,722 28,278 3,029,123Dec. 31, 2009 120,000 90,877 29,123 3,000,000

2008Jan. 1 Held to maturity securities 3,111,510 Cash 3,111,510

June 30 Cash 120,000 Interest income 120,000




164

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 Interest income 800,000

c. Held to maturity securities 121,480 Interest income 121,480

Interest income (7,679,000 x 12%) 921,480 Interest received (8,000,000 x 10%)

800,000 Discount amortization

121,480

d. Cash 2,000,000 Held to maturity securities

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%)200,000

Semiannual effective interest (5,000,000 x 5%) 250,000Difference 50,000Multiply by present value of annuity of 1 for 20 periods at 5% 12.462Discount 623,100

Face value 5,000,000Discount ( 623,100)Purchase price 4,376,900

Problem 12-18

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

Annual effective interest (4,000,000 x 12%) 480,000 Difference 160,000 Multiply by present value factor 3.605 Premium 576,800 Face value 4,000,000 Purchase price 4,576,800

165

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 4,486,016 Dec. 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 4,576,800Cash 4,576,800

Cash 640,000Interest income 640,000

Interest income 90,784Held to maturity securities 90,784

Problem 12-19

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

Semiannual effective interest (8,000,000 x 4%) 320,000Difference 80,000Multiply by PV of annuity of 1 for 10 periods at 4% 8.11Premium 648,800Face value 8,000,000Purchase price 8,648,800

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) 5,404,800PV of semiannual interest payments (400,000 x 8.11) 3,244,000Purchase price or present value of bonds 8,648,800

Journal entries


Cash 8,648,800

July 1 Cash 400,000 Interest income 400,000

1 Interest income 54,048


166

Interest received 400,000 Interest income (8,648,800 x 8% x 6/12) 345,952 Premium amortization 54,048

Dec. 31 Accrued interest receivable 400,000 Interest income400,000


Interest accrued 400,000 Interest income (8,594,752 x 8% x 6/12) 343,790 Premium amortization 56,210

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 Interest payment (2,000,000 x 12%) 240,000 Total payment on December 31, 2009 1,240,000

Principal payment 1,000,000 Interest payment (1,000,000 x 12%) 120,000 Total payment on December 31, 2010 1,120,000

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 Jan. 1 Held to maturity securities 3,106,800

Cash 3,106,800


31 Interest income 49,320


167

Interest received360,000 Interest income (3,106,800 x 10%) 310,680 Premium amortization 49,320

Dec. 31 Cash 1,000,000 Held to maturity securities

1,000,000

3. Acquisition cost – 1/1/2008 3,106,800 Premium amortization for 2008 ( 49,320) Annual installment (1,000,000) Carrying value of investment – 12/31/2008 2,057,480 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

Held to maturity securities 4,700,000Cash 4,700,000

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

168

Held to maturity securities 62,590Interest income 62,590

Interest income 562,590 Interest received 500,000 Discounted amortization 62,590

Problem 12-22

Question 1 – Answer A

Acquisition cost (4,400,000 – 100,000) 4,300,000Amortization of premium from Oct. 1, 2007 to Dec. 31, 2008 (4,000 x 15) ( 60,000) Book value – December 31, 2008 4,240,000

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 income 352,000


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 140,000Unamortized discount (100,000 – 20,000) 80,000Gain on sale of bonds

220,000


Acquisition cost – 1/1/2008 3,767,000Discount amortization for 2008: Interest income (14% x 3,767,000) 527,380 Interest received (12% x 4,000,000) 480,000 47,380Book value – 12/31/2008 3,814,380

169


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 60,00004/01/2009 – 03/31/2010 2,000,000 2/10 40,00004/01/2010 – 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

390,000Amortization of discount for year 2008: From January 1 to March 31, 2008 (80,000 x 3/12) 20,000 From April 1 to December 31, 2008 (60,000 x 9/12) 45,000 65,000Interest 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) 50,000Interest income (1,198,000 x 8% x 6/12) 47,920Premium amortization 2,080

Acquisition cost – July 1, 2008 1,198,000Premium amortization ( 2,080)Book value – December 31, 2008 1,195,920

170


Interest accrued (1,000,000 x 8% x 6/12) 40,000Interest income (906,000 x 10% x 6/12) 45,300Discount amortization 5,300

Acquisition cost – July 1, 2008 (946,000 - 40,000) 906,000Discount amortization 5,300Book value – December 31, 2008 911,300


Acquisition cost – July 1, 2008 4,614,000Discount amortization from July 1 to December 31, 2008: Interest accrued (5,000,000 x 8% x 6/12) 200,000 Interest income (4,614,000 x 10% x 6/12) 230,700 30,700 Book value – December 31, 2008 4,644,700


Acquisition cost 4,766,000Discount amortization: Interest income (4,766,000 x 12%) 571,920 Interest received (5,000,000 x 10%) 500,000 71,920Total 4,837,920Annual installment on December 31, 2008 (1,000,000)Book value –December 31, 2008 3,837,920


Annual effective (5,000,000 x 14%) 700,000Annual nominal (5,000,000 x 12%) 600,000 Difference 100,000 Multiply by present value factor using effective rate of 14% 5.216Discount 521,600Face value 5,000,000Purchase price 4,478,400


12/31/2008 (1,250,000 + 600,000 x .9091) 1,681,83512/31/2009 (1,250,000 + 450,000 x .8264) 1,404,88012/31/2010 (1,250,000 + 300,000 x .7513) 1,164,51512/31/2011 (1,250,000 + 150,000 x .6830) 956,200

5,207,430

171CHAPTER 13

Problem 13-1 Problem 13-2Problem 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. A10. B 10. A 10. D

Problem 13-4

2008Jan. 1 Sinking fund cash 400,000

Cash 400,000 April 1 Sinking fund securities 384,000

Sinking fund cash384,000

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

Sinking fund cash 440,000 Sinking fund securities 387,000 Accrued interest receivable 12,000 Total

839,000 Less: Appropriated retained earnings balance 400,000 Additional appropriation 439,000

172 2009Jan. 1 Sinking fund income 12,000

Accrued interest receivable 12,000

April 1 Sinking fund cash 24,000 Sinking fund income 24,000

1 Sinking fund expenses 12,000 Sinking fund cash

12,000

Oct. 1 Sinking fund cash 24,000 Sinking fund income 24,000

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

1 Sinking fund cash (400,000 x 106%) 424,000 Sinking fund securities 390,000 Gain on sale of securities

34,000

Dec. 31 Sinking fund cash 400,000 Cash 400,000

31 Retained earnings 461,000 Retained earnings appropriated for sinking fund461,000

Sinking fund cash 1,300,000 Less: Appropriated retained earnings balance 839,000 Additional appropriation 461,000

2010July 1 Bonds payable 1,000,000 Interest expense 100,000

Sinking fund cash 1,100,000

1 Cash 200,000 Sinking fund cash200,000

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

Problem 13-5

2008Jan. 1 Sinking fund cash 2,700,000 Cash 2,700,000

18 Sinking fund securities 2,500,000 Sinking fund cash 2,500,000

173

2008July 5 Sinking fund expenses 100,000 Sinking fund cash 100,000

Sept. 9 Sinking fund cash 530,000 Loss on sale of securities 70,000 Sinking fund securities

600,000

Dec. 20 Sinking fund cash 150,000

Sinking fund income 150,000

2009Feb. 12 No entry

Dec. 31 Sinking fund cash 270,000 Sinking fund income 270,000

31 Sinking fund cash 2,250,000 Sinking fund securities 1,900,000 Gain on sale of securities 350,000

31 Bonds payable 3,000,000 Sinking fund cash 3,000,000

31 Cash 300,000 Sinking fund cash 300,000

Problem 13-6

1. Sinking fund cash 2,000,000 Cash 2,000,000

2. Sinking fund securities 450,000 Sinking fund cash 450,000

3. Sinking fund securities 400,000 Sinking fund cash 400,000

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

Sinking fund securities 10,000 Sinking fund income 10,000

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

174

5. Sinking fund expenses 20,000 Sinking fund cash 20,000

6. Sinking fund securities 400,000 Sinking fund income 10,000 Sinking fund cash 410,000

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

8. Sinking fund cash 20,000 Sinking fund income 20,000

9. Sinking fund cash 450,000 Sinking fund securities

400,000 Gain on sale of securities 50,000

10. Retained earnings 2,160,000 Retained earnings appropriated for sinking fund 2,160,000

Composition of fund: Sinking fund cash 1,300,000 Sinking fund securities 860,000 2,160,000

Problem 13-7

1. Sinking fund – trustee 1,000,000 Cash 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 Gain on sale of securities 100,000

7. Bonds payable 1,000,000 Interest expense 100,000 Sinking fund – trustee 1,100,000

1758. 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 818,987 818,98712/31/2009 81,899 818,987 1,719,87312/31/2010 171,987 818,987 2,710,84712/31/2011 271,085 818,987 3,800,91912/31/2012 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 391,765 391,76507/01/2009 39,176 391,765 822,70607/01/2010 82,271 391,765 1,296,74207/01/2011 129,674 391,765 1,818,18107/01/2012 181,819 - 2,000,000

Problem 13-10

2008Jan. 1 Life insurance 60,000 Cash 60,000



Dec. 31 Cash surrender value 60,000 Life insurance 20,000 Retained earnings 40,000


176

Dec. 31 Cash surrender value 24,000 Life insurance 24,000

Balance – December 31, 2011 84,000 Balance – December 31, 2010 60,000

Increase in cash surrender value 24,000


June 30 Cash surrender value 16,000 Life insurance 16,000 Balance – December 31, 2012 116,000 Balance – December 31, 2011 84,000 Increase in cash surrender value for 2012 32,000

Increase from January 1 to June 30, 2012 (1/2 x 32,000) 16,000

July 31 Cash 2,000,000 Cash surrender value

100,000 Life insurance (60,000 x 6/12) 30,000 Gain on sale of life insurance settlement 1,870,000

Problem 13-11

2007April 1 Life insurance 60,000 Cash 60,000

Dec. 31 Prepaid life insurance (60,000 x 3/12) 15,000 Life insurance 15,000

2008Jan. 1 Life insurance 15,000 Prepaid life insurance 15,000

April 1 Life insurance 60,000 Cash 60,000

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


177

April 1 Life insurance 60,000 Cash 60,000

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


April 1 Cash surrender value 60,000 Life insurance 5,000 Retained earnings 55,000

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 Life insurance 15,000 31 Cash surrender value 18,000 Life insurance 18,000

Balance – April 1, 2011 84,000 Balance – April 1, 2010 60,000 Increase 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


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

1 Life insurance 60,000

Cash 60,000

July 1 Cash surrender value 8,000 Life insurance 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

178

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

July 31 Cash 2,000,000 Cash surrender value 92,000 Life insurance (60,000 x 9/12) 45,000 Gain on life insurance settlement 1,863,000

Problem 13-12



Dec. 31 Cash 5,000 Life insurance 5,000

31 Cash surrender value 42,000 Life insurance (42,000 x 1/3) 14,000 Retained earnings 28,000


Dec. 31 Cash 6,000Life insurance 6,000

31 Cash surrender value 5,000Life insurance 5,000

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 Life insurance 14,000

c. Interest expense 4,500 Accrued interest payable (50,000 x 12% x 9/12) 4,500

179d. Dividend income 2,000 Dividend receivable 2,000

Current assets: Prepaid life insurance 14,000

Investment: Cash surrender value 85,000

Current liabilities: Loan payable 50,000 Accrued interest payable 4,500

Problem 13-14

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

property.

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

1802009 Depreciation 1,800,000

Accumulated depreciation 1,800,000

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

Fair value model

2008 Investment property 5,000,000 Accumulated depreciation 5,000,000

2009 Loss from change in fair value 2,000,000 Accumulated depreciation 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 5,000,000Multiply by future value of 1 for 6 periods at 10% 1.77Future amount at maturity 8,850,000


Future amount of maturity 7,160,000Divide 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 4,500,000Add: 2007 investment 900,000 Dividends on investment 150,000 Interest revenue 300,000 1,350,000Total 5,850,000Less: Administration costs 100,000Sinking fund balance – December 31 5,750,000

181


Premium paid – January 1 100,000Less: Dividend received 15,000 Increase in cash surrender value (270,000 – 245,000) 25,000

40,000Life insurance expense for 2008 60,000


Premium paid 200,000Less: Increase in cash surrender value (540,000 – 435,000)

105,000Life insurance expense 95,000The dividend of P30,000 is not deducted anymore because it is already part of the increase in cash surrender value.


Sinking fund cash 500,000Sinking fund securities 1,000,000Accrued interest receivable 50,000Plant expansion fund 600,000Cash surrender value 150,000Land held for capital appreciation 3,000,000Advances to subsidiary 200,000Investment in joint venture 2,000,000

7,500,000

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. B10. A 10. C

Problem 14-4

Requirement 1

2008Jan. 1 Cash 4,000,000

Loan payable 4,000,000

Dec. 31 Interest expense 480,000Cash (12% x 4,000,000) 480,000

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

70,160

2009Dec. 31 Interest expense 560,000

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

31 Cash 80,000Interest rate swap receivable

70,160Unrealized gain – interest rate swap

9,840

31 Loan payable 4,000,000Cash 4,000,000

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

Requirement 2

2008Jan. 1 Cash 4,000,000


183


Cash 480,000

31 Unrealized loss – interest rate swap 36,040Interest rate swap payable (40,000 x .901) 36,040


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


31 Interest expense 40,000Unrealized loss - interest rate swap 40,000

Problem 14-5

2008Jan. 1 Cash 6,000,000


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

31 Interest rate swap receivable 159,300

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


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


159,300Unrealized gain – interest rate swap

20,700



184Problem 14-6

2008Jan. 1 Cash 3,000,000


Dec. 31 Interest expense 240,000Cash (8% x 3,000,000)

240,000

31 Interest rate swap receivable 97,200Unrealized 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.


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


30,000


31 Unrealized gain – interest rate swap 67,200

Interest 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

2008Jan. 1 Cash 5,000,000


185

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

2009Dec. 31 Interest expense (14% x 5,000,000) 700,000

Cash 700,000

31 Cash 200,000 Interest rate swap receivable 200,000

31 Unrealized gain – interest rate swap 200,000 Interest expense200,000

31 Unrealized gain – interest swap 95,000 Interest rate swap receivable 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)


Cash 600,000



31 Unrealized gain – interest swap 24,000 Interest rate swap receivable 24,000

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

Unrealized gain per book (169,000 – 100,000) 69,000 Decrease in unrealized gain

(24,000)


Cash 550,000

31 Cash 50,000 Interest rate swap receivable 45,000 Unrealized gain – interest rate swap 5,000

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

Interest expense 50,000 31 Loan payable 5,000,000 Cash 5,000,000

Problem 14-8

2008Jan. 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 Unrealized gain – interest rate swap 249,000

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

2009Dec. 31 Interest expense (5,000,000 x 10%) 500,000

Cash 500,000



31 Interest rate swap receivable 107,500

Unrealized gain – interest rate swap 107,500 (5,000,000 x 2% x 2.49)

Unrealized gain – 12/31/2009 (5,000,000 x 3% x 1.71) 256,500 Unrealized gain per book (249,000 – 100,000) 149,000 Increase in unrealized gain107,500


Cash 550,000

31 Cash 150,000 Interest swap receivable 150,000


31 Interest rate swap receivable 71,500 Unrealized gain – interest rate swap 71,500

187

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

71,500


Cash 600,000

31 Cash 200,000 Interest rate swap receivable 178,000 Unrealized gain – interest swap

22,000

31 Unrealized gain – interest swap 200,000 Interest expense200,000

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

Problem 14-9

2008Jan. 31 Cash 1,000,000

Note payable 1,000,000

Dec. 31 Interest expense (1,000,000 x 8%) 80,000 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 – 12/31/2008965,240 Carrying value of note payable 1,000,000

Decrease 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.

188

Variable interest (1,000,000 x 10%)100,000 Fixed interest (1,000,000 x 8%) 80,000 Net 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.


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 market rate of interest on January 1, 2009.


189

Variable interest (1,000,000 x 11%)110,000 Fixed interest (1,000,000 x 8%) 80,000 Net cash payment to speculator 30,000 Multiply 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


Cash 80,000 Note payable 27,028 Interest expense (972,972 x 11%)107,028* Interest paid

80,000 Amortization of discount 27,028

*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 30,000 Cash 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

2008Dec. 31 Forward contract receivable 1,500,000

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

2009Jan. 1 Tree inventory (5,000 x 1,800) 9,000,000

Cash 9,000,000

190

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 2008Dec. 31 Unrealized loss – forward contract 500,000

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

2009Jan. 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

2008Dec. 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

2010Jan. 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

191Problem 14-12


Unrealized gain – forward contract (50,000 x P10) 500,000

2009March 1 Unrealized gain – forward contract 100,000

Forward contract receivable 100,000

Forward contract receivable – 3/1/2009 (500,000 x P8) 400,000 Forward contract receivable – 12/31/2008500,000 Decrease in derivative asset (100,000)

1 Cash 400,000Forward contract receivable 400,000

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

1 Unrealized gain – forward contract 400,000Gain on forward contract 400,000

Problem 14-13Requirement 1

2008Dec. 31 Futures contract receivable 500,000

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

2009Jan. 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 contract500,000

Requirement 2

2008Dec. 31 Unrealized loss – futures contract 250,000

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


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

192

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

2008Dec. 31 Futures contract receivable 1,500,000

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


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

2008Dec. 31 Unrealized loss – futures contract 125,000

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

2009June 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 200,000Cash 200,000

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

1 Loss on futures contract 200,000Unrealized loss – futures contract 200,000

193

Problem 14-16

Requirement 1

2008Dec. 31 Call option 50,000

Cash 50,000

2009July 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

2009July 1 Cash 750,000

Call option 750,000

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

Requirement 2


Cash 50,000

2009July 1 Purchases 4,200,000

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

1 Loss on call option 50,000Call option 50,000

Problem 14-17


Cash 20,000

Dec. 31 Call option 380,000Unrealized gain - call option 380,000

Fair value (200,000 x 2) 400,000 Payment for call option 20,000 Increase 380,000

194 2009June 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 600,000Call option 600,000

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

1 Unrealized gain – call option 600,000Gain on call option 600,000

Problem 14-18

2008Dec. 1 Put option 100,000

Cash 100,000

2009Feb. 1 Cash (50,000 x 180) 9,000,000

Sales 9,000,000

1 Loss on put option 100,000Put 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 2,250,000Accounts payable 2,250,000

Dec. 31 Loss on foreign exchange 50,000Accounts 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

195

31 Forward contract receivable 50,000Gain on forward contract 50,000

2009March 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 100,000Gain on forward contract 100,000


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

Problem 14-20


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

2009March 31 Forward contract receivable 100,000

Unrealized gain – forward contract ($50,000 x P2) 100,000


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

31 Unrealized gain – forward contract 150,000Purchases 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 underlyingFixed price of P1,200 per kilo or P9,600,000.

196

Question 2 Answer C

Market price – 12/31/2008 1,500Underlying 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 1,000Underlying fixed price 1,200Derivative 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)

800,000Derivative asset 69,565Call option payment 10,000Saving 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 435,000Exchange rate on December 31, 2008 (47,850,000 / 115) 416,087Fair value of forward contract receivable 18,913

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. D10. C 10. C

Problem 15-4

1. Machinery 500,000Cash 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) 600,000Investment in equity security500,000Gain on exchange 100,000

Taxes and licenses 3,000

Cash 3,000

4. Equipment 1,000,000Donated capital 1,000,000

Donated capital 25,000Cash 25,000

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

Share capital (60,000 x 100) 6,000,000 Share premium 1,500,000

198Problem 15-5

Net method Gross method

a. Within 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 500,000 Purchase discount lost 10,000 Purchase discount lost 10,000 Cash 500,000 Cash 500,000

Machinery 10,000 Problem 15-6

2008Jan. 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

31 Interest expense 40,000 Discount on note payable 40,000

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

2009Dec. 31 Note payable 100,000

Cash 100,000


199

Problem 15-7

Down payment 100,000Present value of note (200,000 x 3.17)

634,000Total cost 734,000

2008Jan. 1 Machinery 734,000

Discount on note payable 166,000 Cash 100,000 Note payable 800,000

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


Date Payment 10% interest Principal Present

value01/01/2008 634,00012/31/2008 200,000 63,400 136,600 497,40012/31/2009 200,000 49,740 150,260 347,14012/31/2010 200,000 34,714 165,286 181,85412/31/2011 200,000 18,146 181,854 -

2009Dec. 31 Note payable 200,000

Cash 200,000


Problem 15-8

1. Building 7,000,000 Cash 1,000,000 Share capital 5,000,000 Share premium 1,000,000

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 Note payable 200,000

200Problem 15-9

1. Land (1/4 x 6,000,000) 1,500,000 Building (3/4 x 6,000,000) 4,500,000 Machinery (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 Share premium 2,000,000

3. Land 500,000 Donated capital 500,000

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

Machinery 35,000Cash 35,000

5. Furniture and fixtures (400,000 x .797) 318,800 Discount on note payable 81,200

Note payable 400,000

Problem 15-10

1. Land 1,500,000 Accumulated depreciation 700,000

Equipment – old 2,000,000Gain on exchange 200,000

Fair value of equipment given 1,500,000 Less: Book value 1,300,000 Gain on exchange 200,000

2. Equipment - new 1,300,000 Accumulated depreciation 700,000

Equipment – old 2,000,000

3. Equipment - new 2,000,000 Accumulated depreciation 700,000

Equipment – old 2,000,000Cash 500,000Gain on exchange 200,000

201

Fair value 1,500,000 Cash payment 500,000 Cost of new asset 2,000,000

Fair value 1,500,000 Less: Book value 1,300,000 Gain on exchange 200,000

Problem 15-11

1. Computer 430,000 Inventory (car)

300,000Cash 50,000Gain on exchange 80,000

2. Machinery – new (110,000 + 30,000) 140,000 Accumulated depreciation 120,000 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 500,000Accumulated depreciation 2,000,000 Accumulated depreciation 1,750,000 Equipment – old 2,400,000 Equipment – old 2,200,000 Gain on exchange 100,000 Gain on exchange 50,000Problem 15-13

Equipment – new 1,000,000Loss on exchange 200,000Accumulated depreciation 1,800,000 Equipment – old 3,000,000

Problem 15-14

Company AMachinery – new (600,000 + 200,000) 800,000Accumulated depreciation 1,500,000 Machinery – old 2,000,000 Cash 200,000 Gain on exchange (600,000 – 500,000)

100,000

202

Company BMachinery – new (800,000 - 200,000) 600,000Accumulated 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 1,400,000Accumulated depreciation 1,050,000Loss on exchange 50,000 Equipment – old 1,200,000 Cash 1,300,000

Fair value 100,000Cash payment (1,600,000 – 300,000) 1,300,000Cost of new asset 1,400,000

Fair value 100,000Less: Book value ( 150,000)Loss on exchange ( 50,000)

Problem 15-16

Cash price without trade in 1,400,000Cash payment 980,000Trade in value 420,000Less: Book value 400,000Gain on exchange 20,000

Equipment - new 1,400,000Accumulated depreciation 600,000 Equipment – old 1,000,000 Cash 980,000 Gain on exchange 20,000

Problem 15-17

Delivery equipment - new 2,300,000Accumulated depreciation 1,300,000Loss on exchange 150,000Input tax 300,000Insurance 120,000Taxes and licenses 10,000 Delivery equipment – old 1,500,000 Cash 2,680,000

203

Fair value of asset given 50,000Cash paid 2,680,000Total 2,730,000Less: VAT 300,000 Insurance 120,000 Registration fee 10,000 430,000Cost of new asset 2,300,000

Fair value 50,000Book value 200,000Loss on exchange (150,000)

Problem 15-18 Total Finished goods

Building1. 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 4,000,000 Overhead 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

204

Direct labor:Finished goods 4,000,000

4/5 Machinery 1,000,000 1/5

5,000,000

Problem 15-20

Date Expenditure Months Amount

January 1 2,000,000 12 24,000,000June 30 2,000,000 6 12,000,000December 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 5,000,000Interest (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 24,000,000March 31 1,000,000 9 9,000,000September 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 6,000,000Specific interest cost: Actual interest 240,000 Interest income ( 10,000) 230,000General interest cost: Average expenditures 3,500,000 Less: Specific borrowing 2,000,000 General borrowing 1,500,000 Capitalization rate 11.25% 168,750Total cost of building 6,398,750

205

Problem 15-22

Date Expenditure Months AmountJanuary 1 1,500,000 12 18,000,000March 31 1,000,000 9 9,000,000June 30 1,000,000 6 6,000,000September 30 1,000,000 3 3,000,000December 31 1,000,000 0 -___

5,500,000 36,000,000

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

Expenditures on construction 5,500,000Interest cost (3,000,000 x 11.5%) 345,000Total cost 5,845,000

Problem 15-23

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

July 1 2,000,000 6 12,000,000November 1 3,000,000 2 6,000,000

6,000,000 30,000,000


Average expenditures 2,500,000Applicable to specific loan (1,000,000)Applicable t general loan 1,500,000

Actual expenditures 6,000,000Capitalizable interest: Specific (1,000,000 x 10%) 100,000 General (1,500,000 x 12%) 180,000Total cost of building 6,280,000

Problem 15-24

Date Expenditure Months AmountJanuary 1, 2008 4,000,000 12 48,000,000April 1, 2008 5,000,000 9 45,000,000December 1, 2008 3,000,000 1 3,000,000

12,000,000 96,000,000

Average expenditures in 2008 (96,000,000 / 12) 8,000,000Applicable to specific loan (3,000,000)Applicable t general loan 5,000,000

206

Actual expenditures in 2008 12,000,000Capitalizable interest in 2008 Specific (3,000,000 x 10%) 300,000 General (5,000,000 x 12%) 600,000Total cost of building 12,900,000


January 1, 2009 12,900,000 6 77,400,000March 1, 2009 6,000,000 4 _24,000,000

18,900,000 101,400,000

Average expenditures in 2009 (101,400,000 / 6) 16,900,000Applicable 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 buildingwas completed on June 30, 2009. Thus, the average expenditures should be for

6 months only.

Actual expenditures in 2009 18,900,000Capitalizable interest in 2009 Specific (3,000,000 x 10% x 6/12) 150,000 General (13,900,000 x 12% x 6/12) 834,000Total cost of new building – 6/30/2009 19,884,000

Problem 15-25

1. Cash 30,000,000Deferred income-government grant 30,000,000

Environmental expenses 2,000,000Cash 2,000,000

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

3,000,000

2. Cash 40,000,000Deferred income-government grant 40,000,000

Building 50,000,000Cash 50,000,000

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

2,500,000

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

207

3. Land 50,000,000Deferred income-government grant 50,000,000

Building 80,000,000Cash 80,000,000

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

3,200,000

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

4. Cash 10,000,000Income from government grant 10,000,000


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


Cash price 950,000Installation cost 30,000Total cost 980,000 Problem 15-28 Answer C

Cash price 2,000,000Installation cost 50,000Total cost 2,050,000Problem 15-29 Answer B

Present value of first note payable (500,000 x 5.65) 2,825,000Present value of second note payable (3,000,000 x .80) 2,400,000Total cost of machinery 5,225,000


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

208


Invoice price 700,000

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

Freight and insurance 3,000 Cost of assembling and installation 5,000Total cost 694,000


Equipment: Invoice price 600,000 Discount (5% x 600,000) ( 30,000) 570,000Land (at its fair value) 1,100,000Machinery: Acquisition cost 275,000 Installation cost 7,000 Trial run and testing cost 18,000 Construction of base 10,000 310,000Total 1,980,000


Fair value of asset given 700,000Cash payment 160,000Total cost 860,000


Fair value of asset given 2,100,000Cash payment 400,000Cost of new inventory 2,500,000Problem 15-35 Answer A

Fair value of asset given 1,500,000Less: Cost of asset given 1,250,000Gain on exchange 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.

209Problem 15-37 Answer AAverage expenditures (20,000,000 / 2) 10,000,000Multiply 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 is determined.


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 3,000,000Average expenditures in the third year (8,000,000 / 2) 4,000,000Total 7,000,000

Capitalizable interest (7,000,000 x 9%) 630,000Problem 15-40 Answer B

Average accumulated expenditures 2,500,000Specific borrowing (1,500,000)Applicable to general borrowing 1,000,000

Specific (6% x 1,500,000) 90,000General (9% x 1,000,000) 90,000Capitalizable interest 180,000

smfav1c11-15

Documents

sale of investment

cost of investment

investment loss

equity securities

dividend income cost

sale securities

stock dividend

original shares