CHAPTER 4

Problem 4-3
Requirement 1
April

2011
1

Oct.

Dec.

31
31

Jan.

2012
1

April

Oct.

Dec.

31
31

Cash (7,000,000 x 106%)

Bonds payable
Premium on bonds payable
Interest expense (7,000,000 x 12% x 6/12)
Cash
Interest expense (7,000,000 x 12% x 3/12)
Accrued interest payable
Premium bonds payable
Interest expense (420,000 / 10 x 9/12)
Accrued interest payable
Interest expense
Interest expense
Cash
Interest expense
Cash
Interest expense
Accrued interest payable
Premium on bonds payable
Interest expense (420,000 / 10)

7,420,000
7,000,000
420,000
420,000
420,000
210,000
210,000
31,500
31,500
210,000
210,000
420,000
420,000
420,000
420,000
210,000
210,000
42,000
42,000

Requirement 2
Noncurrent liabilities:
Bonds payable
Premium on bonds payable
Book value

7,000,000
346,500
7,346,500

Problem 4-4
Requirement 1
Jan.

2011
1
1

June

30

Dec.

31
31

June
Sept.

Dec.

2012
30
1

31
31
31

Unissued bonds payable

Authorized bonds payable
Cash (5,000,000 x 95%)
Discount on bonds payable
Unissued bonds payable
Interest expense (5,000,000 x 12% x 6/12)
Cash
Interest expense
Cash
Interest expense (250,000 / 10)
Discount on bonds payable
Interest expense
Cash
Cash
Unissued bonds payable
Premium on bonds payable
Interest expense (2,000,000 x 12% x 2/12)
Interest expense
Cash (7,000,000 x 12% x 6/12)
Interest expense
Discount on bonds payable
Premium on bonds payable
Interest expense

8,000,000
8,000,000
4,750,000
250,000
5,000,000
300,000
300,000
300,000
300,000
25,000
25,000
300,000
300,000
2,100,000
2,000,000
60,000
40,000
420,000
420,000
25,000
25,000
2,400
2,400

120 months 20 = 100 months remaining

60,000 / 100 = 600 monthly
600 x 4 = 2,400
Requirement 2
Noncurrent liabilities:
Authorized bonds payable
Less: Unissued bonds payable
Issued bonds payable
Premium on bonds payable
Total
Discount on bonds payable
Book value

8,000,000
1,000,000
7,000,000
57,600
7,057,600
( 200,000)
6,857,600

Problem 4-5
Requirement 1
April

2011
1

Oct.

Dec.

31

Jan.

2012
1

April

July

Cash
4,850,000
Discount on bonds payable
100,000
Bond issue cost
Bonds payable
Interest expense
300,000
Cash (5,000,000 x 12% x 6/12)
Interest expense
150,000
Accrued interest payable (5,000,000 x 12% x 3/12)
Interest expense
22,500
Discount on bonds payable (100,000 / 5 x 9/12)
Bond issue cost (50,000 / 5 x 9/12)
Accrued interest payable
Interest expense
Interest expense
Cash
Interest expense
Discount on bonds payable (20,000 x 6/12)
Bond issue cost (10,000 x 6/12)
Retirement price (2,000,000 x 99%)
Add: Accrued interest from April 1 to July 1, 2011
(2,000,000 x 12% x 3/12)
Total payment
Bonds payable retired
Less: Applicable discount (2/5 x 75,000)
Applicable issue cost (2/5 x 37,500)
Book value of bonds retired
Less: Retirement price
Loss on early retirement

July

Oct.

Dec.

31

Bonds payable
Interest expense
Loss on early retirement of bonds
Cash
Discount on bonds payable
Bond issue cost
Interest expense
Cash (3,000,000 x 12% x 6/12)
Interest expense
Accrued interest payable
(3,000,000 x 12% x 3/12)

50,000
5,000,000
300,000
150,000
15,000
7,500

150,000
150,000
300,000
300,000
15,000
10,000
5,000
1,980,000
60,000
2,040,000
2,000,000
30,000
15,000

45,000
1,955,000
1,980,000
( 25,000)

2,000,000
60,000
25,000
2,040,000
30,000
15,000
180,000
180,000
90,000
90,000

31

Interest expense
Discount on bonds payable (12,000 x 6/12)
Bond issued cost (6,000 x 6/12)
Revised annual amortization:
Discount (3/5 x 20,000)
Issue cost (3/5 x 10,000)

9,000
6,000
3,000
12,000
6,000

Requirement 2
Noncurrent liabilities:
Bonds payable
Discount on bonds payable
Bond issue cost
Book value

3,000,000
( 39,000)
( 19,500)
2,941,500

Problem 4-6
Requirement 1
Jan.
Dec.

2011
1
31
31
31

Dec.

2012
31
31

Cash

4,200,000

Bonds payable
Premium on bonds payable
Interest expense
Cash (4,000,000 x 12%)

4,000,000
200,000
480,000
480,000

Premium on bonds payable

Interest expense (200,000 / 5)
Bonds payable
Premium on bonds payable
Cash
Gain on early retirement of bonds

1,000,000
40,000

Face of bonds payable retired

Add: Applicable premium (1/4 x 160,000)
Book value
Less: Retirement price (1,000,000 x 95%)
Gain on retirement

1,000,000
40,000
1,040,000
950,000
90,000

Interest expense
Cash (3,000,000 x 12%)
Premium on bonds payable
Interest expense (40,000 x 3/4)

40,000
40,000
950,000
90,000

360,000
360,000
30,000
30,000

Requirement 2
Noncurrent liabilities
Bonds payable
Premium on bonds payable
Book value

3,000,000
90,000
3,090,000

Problem 4-7
1. Total bonds payable issued
Less: Face value bonds payable retired
Bonds payable December 31, 2011

6,000,000
3,000,000
3,000,000

Discount on bonds payable

Less: Amortization from 2004 to 2010 (300,000 / 10 x 7)
Balance January 1, 2011
Less: Discount applicable to bonds retired (3/6 x 90,000)
Adjusted balance
Less: Amortization for 2011 (3/6 x 30,000)
Discount on bonds payable December 31, 20011

300,000
210,000
90,000
45,000
45,000
15,000
30,000

2. Interest (3,000,000 x 12%)

Amortization of discount for 2011
Interest expense for 2011

360,000
15,000
375,000

3. Adjusting entries on December 31, 2011:

a. Retained earnings
Discount on bonds payable

210,000
210,000

b. Bonds payable
Discount on bonds payable
Gain on early retirement of bonds

300,000
45,000
255,000

Bonds payable retired

Less: Applicable discount
Book value
Less: Retirement price
Gain on early retirement

3,000,000
45,000
2,955,000
2,700,000
255,000

c. Interest expense
Discount on bonds payable
Amortization for 2011.

15,000
15,000

d. Interest expense
Accrued interest payable (3,000,000 x 12% x 1/2)
Problem 4-8
1. Cash
Discount on bonds payable
Bonds payable new

180,000
180,000
3,900,000
100,000
4,000,000

2. Bonds payable old

Premium on bonds payable
Accrued interest payable
Loss on early retirement of bonds
Cash

3,000,000
50,000
180,000
10,000
3,240,000

Bonds payable old

Premium on bonds payable
Carrying amount
Less: Retirement price (3,000,000 x 102)
Loss on early retirement

3,000,000
50,000
3,050,000
3,060,000
10,000

Retirement price
Add: Accrued interest payable
Total payment

3,060,000
180,000
3,240,000

Problem 4-9
a. Amortization table
Year
2009
2010
2011
2012
2013
2014
2015

Bond
outstanding
8,000,000
8,000,000
7,000,000
6,000,000
5,000,000
4,000,000
2,000,000
40,000,000

Fraction
8/40
8/40
7/40
6/40
5/40
4/40
2/40

Discount
amortization
64,000
64,000
56,000
48,000
40,000
32,000
16,000
320,000

Interest
paid
960,000
960,000
840,000
720,000
600,000
480,000
240,000
4,800,000

Interest
expense
1,024,000
1,024,000
896,000
768,000
640,000
512,000
256,000
5,120,000

b. Journal entries
2008
Dec. 31
Cash
Discount on bonds payable
Bonds payable
2009
Dec. 31
Interest expense
Cash
31
Interest expense
Discount on bonds payable
2010
Dec. 31
Interest expense
Cash
31
Interest expense
Discount on bonds payable
31
Bonds payable
Cash
2011
Dec. 31
Interest expense
Cash
31
Interest expense
Discount on bonds payable
31
Bonds payable
Cash

7,680,000
320,000
8,000,000
960,000
960,000
64,000
64,000
960,000
960,000
64,000
64,000
1,000,000
1,000,000
840,000
840,000
56,000
56,000
1,000,000
1,000,000

Problem 4-10
Amortization table
Year
2009
2010
2011
2012
2013
2014
2015
Dec.

2011
31

Bond
outstanding
7,000,000
6,000,000
5,000,000
4,000,000
3,000,000
2,000,000
1,000,000
28,000,000

Fraction
7/28
6/28
5/28
4/28
3/28
2/28
1/28

Cash

Premium
amortization
105,000
90,000
75,000
60,000
45,000
30,000
15,000
420,000

Interest
paid
840,000
720,000
600,000
480,000
360,000
240,000
120,000
3,360,000
7,420,000

Bonds payable
Premium on bonds payable
Dec.

2012
31
31
31

Dec.

2013
31

Dec.

31
31
31

Interest
expense
735,000
630,000
525,000
420,000
315,000
210,000
105,000
2,940,000

Interest expense
Cash
Premium on bonds payable
Interest expense
Bonds payable
Cash
Interest expense
Cash
Premium on bonds payable
Interest expense
Bonds payable
Cash
Bonds payable
Premium on bonds payable
Loss on early retirement of bonds
Cash (1,000,000 x 105)
420,000 / 28,000,000 = .015 per year
1,000,000 x .015 x 2 = 30,000

7,000,000
420,000
840,000
840,000
105,000
105,000
1,000,000
1,000,000
720,000
720,000
90,000
90,000
1,000,000
1,000,000
1,000,000
30,000
20,000
1,050,000

CHAPTER 5
Problem 5-3
Requirement 1
Jan.
Dec.

1
31
31

Cash

6,737,000

Bonds payable
Premium on bonds payable
Interest expense (6,000,000 x 12%)
Accrued interest payable
Premium on bonds payable
Interest expense (90,000 / 9)

6,000,000
737,000
720,000
720,000
46,300
46,300

Interest paid
Interest expense (10% x 6,737,000)
Premium amortization

720,000
673,700
46,300

Requirement 2
Noncurrent liabilities:
Bonds payable
Premium on bonds payable (737,000 46,300)
Book value

6,000,000
690,700
6,690,700

Problem 5-4
Requirement 1
Date
01/01/2011
06/30/2011
12/30/2011
06/30/2012
12/31/2012

Interest
paid

Interest
expense

Discount
amortization

150,000
150,000
150,000
150,000

192,740
194,450
196,228
198,082

42,740
44,450
46,228
48,082

Requirement 2:
2011
Jan.
1
Cash
Discount on bonds payable
Bonds payable
June 30
Interest expense
Cash
Discount on bonds payable
Dec. 31
Interest expense
Cash
Discount on bonds payable
2012
June

30
31

Carrying
amount
4,818,500
4,861,240
4,905,690
4,951,918
5,000,000

4,818,500
181,500
5,000,000
192,740
150,000
42,740
194,450
150,000
44,450

Interest expense
Cash
Discount on bonds payable
Bonds payable
Cash

196,228
150,000
48,082
5,000,000
5,000,000

Problem 5-5
a. Amortization table
Date
01/01/2011
06/30/2011
12/31/2011
06/30/2012
12/31/2012
06/30/2013
12/31/2013

Interest
paid

Interest
expense

Discount
amortization

240,000
240,000
240,000
240,000
240,000
240,000

273,868
277,255
280,980
285,078
289,586
294,551

33,868
37,255
40,980
45,078
49,586
54,551

Book
value
2,738,682
2,772,550
2,809,805
2,850,785
2,895,863
2,945,449
3,000,000

b. Journal entries
2011
Jan.
1
Cash
Discount on bonds payable
Bonds payable
June 30
Interest expense
Cash
Discount on bonds payable
2013
Dec. 31
Interest expense
Cash
Discount on bonds payable
Jan.
1
Bonds payable
Cash

2,738,682
261,318
3,000,000
273,868
240,000
33,868
294,551
240,000
54,551
3,000,000
3,000,000

Problem 5-6
1. Amortization table
Date
04/01/2011
10/01/2011
04/01/2012
10/01/2012
04/01/2013
10/01/2013
04/01/2014

Interest
paid

Interest
expense

Discount
amortization

120,000
120,000
120,000
120,000
120,000
120,000

105,076
104,330
103,546
102,724
101,860
100,944

14,924
15,670
16,454
17,276
18,140
19,056

2. Journal entries:
2011
Apr.
1
Cash
Oct.

Dec.

31

Jan.

2012
1

Apr.

1
1

Oct.

Dec.

31
31

2,101,520

Bonds payable
Premium on bonds payable
Interest expense
Premium on bonds payable
Cash
Interest expense
Accrued interest payable
Premium on bonds payable
Interest expense (15,670 x 1/2)

2,000,000
101,520
105,076
14,924
120,000
60,000
60,000
7,835
7,835

Accrued interest payable

Interest expense
Interest expense
Cash
Premium on bonds payable
Interest expense
Interest expense
Premium on bonds payable
Cash
Interest expense
Accrued interest payable
Premium on bonds payable
Interest expense (17,276 x 3/6)

Problem 5-7
Requirement 1
Interest expense for 2008 (3,805,600 x 10%)
Interest paid for 2008
Discount amortization

Book
value
2,101,520
2,086,596
2,070,926
2,054,472
2,037,196
2,019,056
2,000,000

60,000
60,000
120,000
120,000
7,835
7,835
103,546
16,454
120,000
60,000
60,000
8,638
8,638

380,560
320,000
60,560

Bonds payable
Issue price proceeds from issuance
Discount on bonds payable 12/31/2007
Amortization for 2008
Balance 12/31/2008

4,000,000
3,805,600
194,400
60,560
133,840

Bonds payable
Payment on 12/31/2008
Balance 12/31/2008
Discount on bonds payable
Carrying value 12/31/2008

4,000,000
( 800,000)
3,200,000
( 133,840)
3,066,160

Requirement 2
1. Cash
Discount on bonds payable
Bonds payable
2. Interest expense
Cash
3. Interest expense
Discount on bonds payable
4. Bonds payable
Cash

3,805,600
194,400
4,000,000
320,000
320,000
60,560
60,560
800,000
800,000

Problem 5-8
1.
December 31, 2008
Principal payment
Interest payment (6,000,000 x 6%)
Total payment 12/31/2008

2,000,000
360,000
2,360,000

December 31, 2009

Principal payment
Interest payment (4,000,000 x 6%)
Total payment 12/31/2009

2,000,000
240,000
2,240,000

December 31, 2010

Principal payment
Interest payment (2,000,000 x 6%)
Total payment 12/31/2010

2,000,000
120,000
2,120,000

2.

Present value
December 31, 2008 (2,360,000 x .9259)
December 31, 2009 (2,240,000 x .8573)
December 31, 2010 (2,120,000 x .7938)
Total present value
Cash
Discount on bonds payable
Bonds payable
Interest expense
Cash (6% x 6,000,000)
Interest expense
Discount on bonds payable
Interest expense (8% x 5,788,332)
Interest paid
Discount amortization
Bonds payable
Cash

3.

Bonds payable 1/1/2008

Discount on bonds payable

2,185,124
1,920,352
1,682,856
5,788,332
5,788,332
211,668
6,000,000
360,000
360,000
103,067
103,067
463,067
360,000
103,067
2,000,000
2,000,000
6,000,000
( 108,601)

Principal payment on 12/31/2008

Book value 12/31/2008

(2,000,000)
3,891,399

Problem 5-9
Requirement 1
PV of interest payment on 6/30/2008 (240,000 x .9615)
PV of principal and interest payment on 12/31/2008
(2,000,000 + 240,000 x .9246)
PV of interest payment on 6/30/2009 (120,000 x .8890)
PV of principal and interest payment on 12/31/2009
(2,000,000 + 120,000 x .8548)
Total present value

230,760
2,071,104
106,680
1,812,176
4,220,720

Requirement 2
Date
01/01/2008
06/30/2008
12/31/2008
06/30/2009
12/31/2009

Interest
paid

Interest
expense

Premium
amortization

240,000
240,000
120,000
120,000

168,829
165,982
83,021
81,448

71,171
74,018
36,979
38,552

Requirement 3
01/01/2008
Cash
06/30/2008
06/30/2008
12/31/2008

06/30/2009

12/31/2009

2,000,000
2,000,000

Book
value
4,220,720
4,149,549
2,075,531
2,038,552
-

4,220,720

Bonds payable
Premium on bonds payable
Interest expense
Cash
Premium on bonds payable
Interest
Interest expense
Cash

4,000,000
220,720
240,000
240,000
71,171
71,171
240,000
240,000

Premium on bonds payable

Interest

74,018

Bonds payable
Cash
Interest expense
Cash
Premium on bonds payable
Interest expense
Interest expense
Cash
Premium on bonds payable
Interest expense
Bonds payable
Cash

2,000,000

Problem 5-10
PV of principal (7,000,000 x 456)
PV of interest (350,000 x 13.59)
Total issue price
Date
03/01/2008
09/01/2008
03/01/2009

Principal
payment

74,018
2,000,000
120,000
120,000
36,979
36,979
120,000
120,000
38,552
38,552
2,000,000
2,000,000
3,192,000
4,756,500
7,948,500

Interest
paid

Interest
expense

Premium
amortization

750,000
350,000

317,940
316,658

32,060
33,342

Book
value
7,948,500
7,916,440
7,883,098

March

2011
1

Sept. 1
Dec. 31

Cash

7,948,500

Bonds payable
Premium on bonds payable
Interest expense
Premium on bonds payable
Cash
Interest expense
Accrued interest payable
(7,000,000 x 10% x 4/12)
Premium on bonds payable
Interest expense
(33,342 x 4/6)

Problem 5-11
PV of principal (6,000,000 x .57)
PV of interest (600,000 x 3.60)
Total issue price
Date
06/01/2008
06/01/2009
06/01/2010
2011
June 1
Dec. 31

Jan.

2012
1

June 1

Dec. 31

7,000,000
948,500
317,900
32,060
350,000
233,333
233,333
22,228
22,228

3,420,000
2,260,000
5,580,000

Interest
paid

Interest
expense

Premium
amortization

600,000
600,000

669,600
667,952

69,600
77,952

Book
value
5,580,000
5,649,600
5,727,552

Cash
Discount on bonds payable
Bonds payable
Interest expense
Accrued interest payable
(600,000 x 7/12)
Interest expense
Discount on bonds payable
(69,600 x 7/12)

5,580,000

Accrued interest payable

Interest expense
Interest expense
Cash
Interest expense
Discount on bonds payable
(69,600 x 5/12)
Interest expense
Accrued interest payable
Interest expense
Discount on bonds payable
(77,952 x 7/12)

350,000

420,000
6,000,000
350,000
350,000
40,600
40,600

350,000
600,000
600,000
29,000
29,000
350,000
350,000
45,472
45,472

CHAPTER 6
Problem 6-3
1. Cash (5,000,000 x 120)
Bonds payable
Premium on bonds payable
Share warrants outstanding

6,000,000
5,000,000
735,000
265,000

Issue price with warrants (5,000,000 x 120)

Market price of bonds without warrants (5,000,000 x 1.147)
Equity component

6,000,000
5,735,000
265,000

2. Interest expense (5,000,000 x 8%)

Cash
3. Premium on bonds payable (400,000 344,100)
Interest expense (6% x 5,735,000 = 344,100)
4. Cash (20,000 shares x 30)
Share warrants outstanding
Share capital (20,000 x 25)
Share premium

400,000
400,000
55,900
55,900
600,000
265,000
500,000
365,000

Problem 6-4
Jan. 1 Cash
Discount on bonds payable
Bonds payable
Share warrants outstanding
Dec.31 Interest expense (5,000,000 x 12%)
Cash
Interest expense
Discount on bonds payable

5,100,000
343,000
5,000,000
443,000
600,000
600,000
51,980
51,980

Interest paid
Interest expense (14% x 4,657,000)
Discount amortization

600,000
651,980
51,980

Cash (25,000 x 1000

Share warrants outstanding
Share capital (25,000 x 50)
Share premium

2,500,000
443,000
1,250,000
1,693,000

Problem 6-5
Jan. 1 Cash

9,600,000
Bonds payable
Premium on bonds payable
Share warrants outstanding

Date
01/01/2008
06/30/2008
12/31/2008

8,000,000
585,600
1,014,400

(6% x FV)
Interest
paid

(5% x BV)
Interest
expense

Premium
amortization

480,000
480,000

429,280
426,744

50,720
53,256

PV of principal (8,000,000 x .61)

PV of interest (480,000 x 7.72)
Total PV of bonds payable
June 30 Interest expense
Premium on bonds payable
Cash
Dec. 31 Interest expense
Premium on bonds payable
Cash

Book
value
8,585,600
8,534,880
8,481,624
4,880,000
3,705,600
8,585,600

429,280
50,720
480,000
426,744
53,256
480,000

Dec.31 Cash (16,000 x 150)

Share warrants outstanding
Share capital (16,000 x 100)
Share premium

2,400,000
1,014,400
1,600,000
1,814,400

Problem 6-6
Present value of principal (2,000,000 x 0.77)
Present value of interest payments (120,000 x 2.53)
Total present value
Face value
Discount on bonds payable
1. Cash
Discount on bonds payable
Bonds payable
Share premium
2. Interest expense
Cash (6% x 2,000,000)
3. Interest expense
Discount on bonds payable

1,540,000
303,600
1,843,600
2,000,000
156,400
2,200,000
156,400
2,000,000
356,400
120,000
120,000
45,924
45,924

Interest paid
Interest expense (9% x 1,843,600)
Discount amortization
4. Bonds payable
Share premium conversion privilege
Discount on bonds payable
Share capital (50,000 x 20)
Share premium issuance
Problem 6-7
1. Cash (5,000,000 x 105%)
Discount on bonds payable
Bonds payable
Share premium conversion privilege
2. Interest expense (14% x 4,700,000)
Discount on bonds payable
Cash (12% x 5,000,000)
3. Bonds payable
Share premium conversion privilege
Discount on bonds payable
Share capital
Share premium - issuance

120,000
165,924
45,924
2,000,000
356,400
110,476
1,000,000
1,245,924
5,250,000
300,000
5,000,000
550,000
658,000
58,000
600,000
5,000,000
550,000
242,000
4,000,000
1,308,000

Bonds payable
Discount on bonds payable
Share premium conversion privilege
Total consideration
Share capital issued (40,000 shares x 100)
Share premium - issuance
Problem 6-8
Bonds payable
Share premium conversion privilege
Premium on bonds payable
Share capital (50,000 x 50)
Share premium issuance
Share premium issuance
Cash

5,000,000
( 242,000)
550,000
5,308,000
4,000,000
1,308,000
5,000,000
500,000
250,000
2,500,000
3,250,000
200,000
200,000

CHAPTER 7
Problem 7-3
Book of Marian Company (Lessor)
Jan. 1 Machinery
Cash
Mar. 1 Cash
Rent income
Dec.31 Repair and maintenance
Cash
Rent income
Unearned rent income (600,000 x 2/12)
Depreciation (2,400,000 / 6)
Accumulated depreciation
Book of Delia Company (Lessee)
Mar. 1 Rent expense
Cash
Dec.31 Prepaid rent
Rent expense
Problem 7-4
Requirement 1
Books of Lessor
1. Equipment
Cash
2. Cash (40,000 x 9)
Rent income
3. Cash
Unearned rent income
4. Repairs
Cash
5. Unearned rent income
Rent income (120,000 / 3 = 40,000 x 9/12)
6. Depreciation
Accumulated depreciation (3,000,000 / 10)
Books of Lessee
1. Rent expense
Cash
2. Prepaid rent
Cash
3. Rent expense
Prepaid rent
Requirement 2
Rent income (360,000 + 30,000)
Less: Repairs
Depreciation
Net income of lessor
Problem 7-5
Books of Lessor
1. Tractor
Cash
2. Cash
Rent income
3. Repairs
Transportation
Cash
4. Rent income
Unearned rent income (50,000 x 3)
5. Depreciation

2,400,000
2,400,000
600,000
600,000
30,000
30,000
100,000
100,000
400,000
400,000
600,000
600,000
100,000
100,000

3,000,000
3,000,000
360,000
360,000
120,000
120,000
20,000
20,000
30,000
30,000
300,000
300,000
360,000
360,000
120,000
120,000
30,000
30,000
390,000
20,000
300,000

320,000
70,000

1,600,000
1,600,000
600,000
600,000
15,000
5,000
20,000
150,000
150,000
300,000

Accumulated depreciation (1,500,000 / 5)

Books of Lessee
1. Rent expense
Cash
2. Prepaid rent
Rent expense
Problem 7-6
Requirement 1
Books of Lessor
1. Machinery
Cash
2. Cash (36,000 x 9)
Rent income
3. Machinery
Cash
4. Amortization of initial direct costs
Machinery (120,000 / 4 = 30,000 x 9/12)
5. Depreciation
Accumulated depreciation (2,400,000 / 10 x 9/12)
Books of Lessee
1. Rent expense
Cash

300,000
600,000
600,000
150,000
150,000

2,400,000
2,400,000
324,000
324,000
120,000
120,000
22,500
22,500
180,000
180,000
324,000
324,000

Requirement 2
Machinery
Accumulated depreciation
Carrying amount
Deferred initial direct costs
Adjusted carrying amount
Problem 7-7
Books of Dorey Company
Jan.1 Machinery
Cash
Mar.1 Cash
Rent income
Lease expense
Cash
Dec.31 Depreciation
Accumulated depreciation (5,000,000 /10)
Rent income
Unearned rent income (1,200,000 x 2/12)
Books of Anne company
Mar.1 Rent expense
Cash
Dec.31 Prepaid rent expense
Rent expense

2,400,000
(180,000)
2,220,000
97,500
2,317,500

5,000,000
5,000,000
1,200,000
1,200,000
60,000
60,000
500,000
500,000
200,000
200,000
1,200,000
1,200,000
200,000
200,000

Requirement 2
Rent received
Unearned rent income
Lease expense
Depreciation
Net rent income
Problem 7-8
1. Rent expense
Prepaid rent

1,200,000
(200,000)
(60,000)
(500,000)
440,000
60,000
60,000

Rent deposit
Leasehold improvement
Cash
2. Depreciation
Accumulated depreciation (360,000 / 5 x 1/12)
Problem 7-9
1. Rent expense
Cash
2. Cash
Sales
3. Prepaid rent
Cash
4. Rent expense (5% X 1,000,000)
Accrued rent payable
5. Rent expense
Prepaid rent (250,000 / 10)
Problem 7-10
1. Machinery
Cash
2. Cash
Rent income
3. Cash
Unearned rent income
4. Insurance
Cash
5. Depreciation
Accumulated depreciation (4,800,000 / 12)
6. Unearned rent income
Rent income (300,000 / 3)
Problem 7-11
2011
1. Equipment
Cash
2. Equipment
Cash
2012
1. Cash
Rent income
2. Repairs
Transportation
Cash
3. Depreciation
Accumulated depreciation (450,000 / 5)
4. Rent income
Unearned rent income (15,000 x 3)
Problem 7-12
2011 Rent receivable
Rent income

80,000
360,000
560,000
6,000
6,000
900,000
900,000
6,000,000
6,000,000
250,000
250,000
50,000
50,000
25,000
25,000
4,800,000
4,800,000
850,000
850,000
300,000
300,000
80,000
80,000
400,000
400,000
100,000
100,000

375,000
375,000
75,000
75,000
180,000
180,000
7,000
3,000
10,000
90,000
90,000
45,000
45,000

765,000
765,000

Total rent (100,000 x 51 months)

Average annual rent (5,100,000/5)
Rent from April 1 to Dec. 31, 2011 (1,020,000 x 9/12)
2012
2013

Cash (100,000 x 12)

Rent income
Rent receivable
Cash

5,100,000
1,020,000
765,000
1,200,000
1,020,000
180,000
1,200,000

Rent income
Rent receivable
2014

Cash

1,020,000
180,000
1,200,000

Rent income
Rent receivable
2015

Cash

2016

Rent income
Rent receivable
Cash (100,000 x 3)
Rent income (1,020,000 x 3/12)
Rent receivable

1,020,000
180,000
1,200,000
1,020,000
180,000
300,000
255,000
45,000

The rental for 2016 is for three months only, from Jan. 1 to April 1, 2016.
Books of Ronald Company (Lessee)
2011 Rent expense
Rent payable
2012 Rent expense
Rent payable
Cash
2013 Rent expense
Rent payable
Cash
2014 Rent expense
Rent payable
Cash
2015 Rent expense
Rent payable
Cash
2016 Rent expense
Rent payable
Cash
Problem 7-13
Books of Lessor
2011 Rent receivable
Rent income

765,000
765,000
1,020,000
180,000
1,200,000
1,020,000
180,000
1,200,000
1,020,000
180,000
1,200,000
1,020,000
180,000
1,200,000
255,000
45,000
300,000

877,500
877,500

Total rent (300,000 x 117 remaining months)

Average annual rent (35,100,000 /10)
Rent from Oct. 1 to Dec. 31, 2011 (3,510,000 x 3/12)
2012
2021

Cash (300,000 x 12)

Rent income
Rent receivable
Cash (300,000 x 9)
Rent income (3,510,000 x 9/12)
Rent receivable

35,100,000
3,510,000
877,500
3,600,000
3,510,000
90,000
2,700,000
2,632,500
67,500

The rent for the last year 2021 is for 9 months from Jan. 1 to Sept. 310, 2021.
Books of Lessee
2011 Rent expense
877,500
Rent payable
877,500
2012 Rent expense
3,510,000
Rent payable
90,000
Cash
3,600,000
2021 Rent expense
2,632,000
Rent payable
67,500
Cash
2,700,000
Problem 7-14
Books of Lessor

2011

Cash
Rent receivable
Rent income

600,000
600,000
1,200,000

Average annual rent (3,600,000 / 3)

2012
2013

Cash
Rent receivable
Rent income
Cash
Rent income
Rent receivable

Books of Lessee
2011 Rent expense
Cash
Rent payable
2012 Rent expense
Cash
Rent payable
2013 Rent expense
Rent payable
Cash
Problem 7-15
2011 Rent expense
Cash
Rent payable

1,200,000
900,000
300,000
1,200,000
2,100,000
1,200,000
900,000
1,200,000
600,000
600,000
1,200,000
900,000
300,000
1,200,000
900,000
2,100,000
460,000
300,000
160,000

Average annual rent (2,300,000 /5)

2012
2013
2014
2015

Rent expense
Cash
Rent payable
Rent expense
Cash
Rent payable
Rent expense
Rent payable
Cash
Rent expense
Rent payable
Cash

Problem 7-33
Books of German Company
1. Cash
Accumulated depreciation
Equipment
Gain on sale and leaseback
2. Rent expense
Cash
Books of Sterling Company
1. Equipment
Cash
2. Cash
Rent income
3. Depreciation (1,100,000 / 10)
Accumulated depreciation

460,000
460,000
300,000
160,000
460,000
450,000
10,000
460,000
90,000
550,000
460,000
240,000
700,000

1,100,000
1,500,000
2,500,000
100,000
40,000
40,000
1,100,000
1,100,000
40,000
40,000
110,000
110,000

Problem 7-34
Books of Canada Company
1. Cash
Accumulated depreciation
Loss on sale and leaseback
Machinery
2. Rent expense
Cash
Books of Saigon Company
1. Machinery
Cash
2. Cash
Rent income
3. Depreciation (500,000 / 10)
Accumulated depreciation
Problem 7-39
Books of Cuba Company
1. Cash
Accumulated depreciation
Building
Deferred gain on sale and leaseback
2. Building
Lease liability
3. Depreciation (2,415,000 / 15)
Accumulated depreciation
4. Deferred gain on sale and leaseback
Gain on sale and leaseback (815,000 / 10)
5. Interest expense (16% x 2,415,000)
Lease liability
Cash
Books of Mexico Company
1. Building
Cash
2. Lease receivable (500,000 x 10)
Building
Unearned interest income
3. Cash
Lease receivable
4. Unearned interest income
Interest income
Problem 7-40
Books of Hook Company (Seller Lessee)
1. To record the sale on Jan.1, 2011:
Cash
Equipment
Deferred gain on sale and leaseback
2. To record the leaseback as a finance lease:
Equipment
Lease liability
3. To record the first rental payment on Dec. 31, 2011:
Interest expense
Lease liability
Cash
Rental payment
Applicable to interest (10% x 1,500,000)
Applicable to principal
4. To amortize the deferred gain over the lease term:

500,000
450,000
50,000
1,000,000
90,000
90,000
500,000
500,000
90,000
90,000
50,000
50,000

2,415,000
3,400,000
5,000,000
815,000
2,415,000
2,415,000
161,000
161,000
81,500
81,500
386,400
113,600
500,000
2,415,000
2,415,000
5,000,000
2,415,000
2,585,000
500,000
500,000
386,400
386,400

1500,000
1,000,000
500,000
1,500,000
1,500,000
150,000
94,120
244,120
244,120
150,000
94,120

Deferred gain on sale and leaseback (500,000 /10 years)

Gain on sale and leaseback (500,000/10 years)
5. To record the depreciation for 2011:
Depreciation
Accumulated depreciation (1,500,000 /10)
Books of Maco Drilling (Purchaser Lessor)
1. Equipment
Cash
2. Lease receivable (244,120 x 10)
Equipment
Unearned interest income
3. Cash
Lease receivable
4. Unearned interest income
Interest income

50,000
50,000
150,000
150,000
1,500,000
1,500,000
2,441,200
1,500,000
941,200
244,120
244,120
150,000
150,000

CHAPTER 8
Problem 8-6
2011
Jan. 1 Building (800,000 x 4.17)
Lease liability

3,336,000
3,336,000

1 Building
Cash
1 Lease liability
Cash
Dec.31 Depreciation (3,436,000 / 10)
Accumulated depreciation
31 Interest expense
Accrued interest payable
Year
01/01/2008
01/01/2008
01/01/2009
01/01/2010

100,000
100,000
800,000
800,000
343,600
343,600
253,600
253,600

Payment

10% interest

Principal

800,000
800,000
800,000

253,600
198,960

800,000
546,400
601,040

31 Taxes

Present value
3,336,000
2,536,000
1,989,600
1,388,560

40,000
Cash

40,000

2012
Jan. 2 Accrued interest payable
Lease liability
Cash
Dec.31 Depreciation
Accumulated depreciation
31 Interest expense
Accrued interest payable

253,600
546,400
800,000
343,600
343,600
198,960
198,960

31 Taxes

40,000
Cash

40,000

Problem 8-7
2011
1. Building (1,000,000 x 3.79)
Lease liability
2. Interest expense
Lease liability
Cash
Year
01/01/2008
12/31/2008
12/31/2009

3,790,000
379,000
621,000
1,000,000

Payment

10% interest

Principal

1,000,000
1,000,000

379,000
316,900

621,000
683,100

3. Taxes
Insurance
Cash
4. Depreciation (3,790,000 / 10)
Accumulated depreciation
2012
1. Interest expense
Lease liability
Cash
2. Taxes
Insurance
Cash

3,790,000

Present value
3,790,000
3,169,000
2,485,900

75,000
125,000
200,000
379,000
379,000
316,900
683,100
1,000,000
75,000
125,000
200,000

3. Depreciation
Accumulated depreciation

379,000
379,000

Problem 8-8
2011
Jan.1 Machinery
Lease liability

6,392,400
6,392,400

Present value of rentals (1,000,000 x 6.328)

Present value of bargain option (200,000 x .322)
Total cost
1

Lease liability
Cash
Dec.31 Depreciation (6,392,400 / 15)
Accumulated depreciation
31 Interest expense
Accrued interest payable
Year
01/01/2008
01/01/2008
01/01/2009
01/01/2010

6,328,000
64,400
6,392,400
1,000,000
1,000,000
426,160
426,160
647,088
647,088

Payment

12% interest

Principal

1,000,000
1,000,000
1,000,000

647,088
604,739

1,000,000
352,912
395,261

2012
Jan. 1 Accrued interest payable
Lease liability
Cash
Dec.31 Depreciation
Accumulated depreciation

Present value
6,392,400
5,392,400
5,039,488
4,644,277

647,088
352,912
1,000,000
426,160
426,160

31 Interest expense
Accrued interest payable

604,739
604,739

Problem 8-9
1. Building (1,000,000 x 7.606)
Lease liability
2. Depreciation
Accumulated depreciation

7,606,000
7,606,000
507,067
507,067

The term of the lease is at least 75% of the life of the asset (15/20). Since this is the basis of the finance
lease, the depreciation is computed using the term of the lease, which is shorter than the life of the asset.
3. Interest expense (10% x 7,606,000)
Lease liability
Cash

760,600
239,400
1,000,000

Problem 8-10
Requirement 1
Present value of rentals (1,000,000 x 3.2743)
Present value of guaranteed residual value (474,060 x .4761)
Total present value

3,274,300
225,700
3,500,000

The lease is accounted for as finance lease because the present value of rentals is 100% of the fair value of
the leased asset.
Year
01/01/2008
12/31/2008
12/31/2009

Payment

16% interest

Principal

1,000,000
1,000,000

560,000
489,600

440,000
510,400

Present value
3,500,000
3,060,000
2,549,600

12/31/2010
12/31/2011
12/31/2012

1,000,000
1,000,000
1,000,000

407,936
313,206
203,318

592,064
686,794
796,682

Requirement 2
2011
Jan.1 Equipment
Lease liability

1,957,536
1,270,742
474,060

3,500,000
3,500,000

Dec.31 Interest expense

Lease liability
Cash
31 Depreciation
Accumulated depreciation
(3,500,000 474,060 / 5)

560,000
440,000
1,000,000
605,188
605,188

2012
Dec.31 Interest expense
Lease liability
Cash
31 Depreciation
Accumulated depreciation

489,600
510,400
1,000,000
605,188
605,188

Requirement 3
Accumulated depreciation (605,188 x 5)
Lease liability
Equipment

3,025,940
474,060

Requirement 4
Accumulated depreciation
Lease liability
Equipment

3,025,940
474,060

3,500,000

3,500,000

Loss on finance lease

Cash (474,060 300,000)

174,060
174,060

Requirement 5
Accumulated depreciation
Lease liability
Equipment

3,025,940
474,060
3,500,000

Problem 8-11
Requirement 1
Percentage of lease term (6 years/8)

75%

PV of rentals (500,000 x 4.7908)

PV of guaranteed residual value (400,000 x .5645)
Total present value

2,395,400
225,800
2,621,200

Percentage of present value to fair value (2,621,200 / 2,800,000)

93.61%

In conclusion, the lease is a finance lease. The asset and liability should be recorded at the lower between
the present value of rentals and the fair value of the asset.
Requirement 2
Date
Payment
1/1/2011
1/1/2011
500,000
1/1/2012
500,000
1/1/2013
500,000
1/1/2014
500,000
1/1/2015
500,000

Interest

Principal

212,120
183,332
151,665
116,832

500,000
287,880
316,668
348,335
383,168

Present value
2,621,200
2,121,200
1,833,320
1,516,652
1,168,317
785,149

1/1/2016
1/1/2017

500,000
500,000

78,515
36,336

421,485
363,664

363,664
-

Requirement 3
2011
Jan.1 Machinery
2,621,200
Lease liability
1 Lease liability
500,000
Cash
Dec.31 Interest expense
212,120
Accrued interest payable
31 Depreciation
370,200
Accumulated depreciation (2,621,200 400,000/6)
2012
Jan.1 Accrued interest payable
212,120
Lease liability
287,880
Cash
Dec.31 Interest expense
183,332
Accrued interest payable
31 Depreciation
370,200
Accumulated depreciation
Requirement 4
2017
Jan.1 Accumulated depreciation (370,000 x 6)
Lease liability
Accrued interest payable
Machinery

2,621,200
500,000
212,120
370,200

500,000
183,332
370,200

2,221,200
363,664
36,336
2,621,200

Requirement 5
2017
Jan.1 Accumulated depreciation (370,200 x 6)
Lease liability
Accrued interest payable
Machinery

2,221,200
363,664
36,336
2,621,200

Loss on finance lease

Cash

100,000
100,000

Problem 8-12
Requirement 1
PV of rentals (420,000 20,000 x 3.6243)
PV of guaranteed residual value (200,000 x .7629)
Total present value

1,449,720
152,580
1,602,300

Percentage of present value to fair value (1,602,300 / 1,700,000)

94.25%

Since the present value is at least 90% of the fair value and the lease carries a huge penalty, the
cancellable lease is a finance lease.
Requirement 2
Date
Payment
12/31/2011
12/31/2011
400,000
12/31/2012
400,000
12/31/2013
400,000
12/31/2014
400,000
12/31/2015
200,000
Requirement 3
2011
Dec.31 Equipment

Interest

Principal

84,161
62,052
38,396
13,091

400,000
315,839
337,948
361,604
186,909

Present value
1,602,300
1,202,300
886,461
548,513
186,909
-

1,602,300

Lease liability
31 Prepaid insurance
Lease liability
Cash
2012
Jan.1

Insurance expense
Prepaid insurance
Dec.31 Prepaid insurance
Interest expense
Lease liability
Cash
31 Depreciation
Accumulated depreciation (1,602,300 200,000 /4)

1,602,300
20,000
400,000
420,000
20,000
20,000
20,000
84,161
315,839
420,000
350,575
350,575

The guaranteed residual value of 200,000 is deducted from the cost to get the depreciable amount.
Requirement 4
2015
Dec.31 Accumulated depreciation (350,575 x 4)
Interest expense
Lease liability
Equipment
Loss on finance lease
Cash

1,402,300
13,091
186,909
1,602,300
150,000
150,000

Problem 8-13
1. Annual rental
Multiply by PV of an ordinary annuity of 1 at 12% for 5 periods
PV of rentals

600,000
3.60
2,160,000

The residual value is not included in present value of rentals because it is unguaranteed by the lessee.
The lease is a finance lease because the present value is at least 90% of the fair value of asset.
The asset and liability should be recognized at 2,160,000 because this amount is lower than the fair value.
2. Equipment
Lease liability

2,160,000
2,160,000

Interest expense (12% x 2,160,000)

Lease liability
Cash

259,200
340,800

Depreciation
Accumulated depreciation (2,160,000/5)

432,000

3. Accumulated depreciation (432,000 x 5)

Equipment

600,000
432,000
2,160,000
2,160,000

The lessee has no obligation for the lower fair value because the residual value is unguaranteed by the
lessee. The lessor will suffer the loss from a lower fair value.
Problem 8-14
1. 2012
2013
2014
Remaining future lease payments
Executory costs (30,000 x 3 years)
Guaranteed residual value
2. Machinery

300,000
300,000
300,000
900,000
90,000
50,000
1,040,000
985,150

Lease liability
3. Interest expense
Lease liability
Cash
Executory cost
Cash
4. Depreciation
Accumulated depreciation

985,150
98,515
201,485
300,000
30,000
30,000
233,788
233,788

Cost of asset
Guaranteed residual value
Depreciable amount

985,150
(50,000)
935,150

Annual depreciation (935,150/ 4 years)

233,788

5. Interest expense
Lease liability
Cash
Executory cost
Cash
6. Lease liability
Accumulated depreciation (233,788 x 4)
Machinery
Problem 8-15
Equipment
Accumulated depreciation
Lease liability
Equipment under finance lease
Cash
Equipment under finance lease
Accumulated depreciation
Carrying amount
Cash payment
Total consideration
Lease liability
Cost of equipment purchased

31,766
268,234
300,000
30,000
30,000
50,000
935,150
985,150
1,835,000
2,465,000
1,300,000
4,000,000
1,600,000
4,000,000
(2,465,000)
1,535,000
1,600,000
3,135,000
(1,300,000)
1,835,000

CHAPTER 9
Problem 9-2
2011
Jan.1 Lease receivable
Machinery
Unearned interest income
Cash
Lease receivable
Dec.31 Unearned interest income
Interest income
Year
01/01/2011
01/01/2011
01/01/2012
01/01/2013
2012
Jan.1

500,000
403,700
96,300
100,000
100,000
36,444
36,444

Payment

12% interest

Principal

100,000
100,000
100,000

36,444
28,817

100,000
65,556
71,183

Cash

Present value
403,700
303,700
240,144
168,961

100,000

Lease receivable
Dec.31 Unearned interest income
Interest income

100,000
28,817
28,817

Problem 9-3
1. Gross rentals (600,000 x 10)
Net investment in the lease:
Cost of equipment
Initial direct costs
Total financial revenue
2. Equipment
Cash
Lease receivable
Equipment
Unearned interest income
Cash
Lease receivable
Unearned interest income
Interest income (11% x 3,533,400)

6,000,000
(3,390,000)
(143,400)
2,466,600
143,400
143,400
6,000,000
3,533,400
2,466,600
600,000
600,000
388,674
388,674

PV factor (3,533,400/600,000)

5.889

This factor is applicable to 11%. Thus, this is the new implicit rate in computing interest income.
Problem 9-4
Requirement 1
Gross rentals (900,000 x 8)
Residual value
Gross investment debit to lease receivable
Net investment cost of equipment
Total financial revenue

Requirement 2
Date
Payment
1/1/2011
1/1/2011
900,000
1/1/2012
900,000
1/1/2013
900,000
1/1/2014
900,000
1/1/2015
900,000
1/1/2016
900,000

7,200,000
600,000
7,800,000
5,250,000
2,550,000

Interest

Principal

522,000
476,640
425,837
368,937
305,210

900,000
378,000
423,360
474,163
531,063
594,790

Present value
5,250,000
4,350,000
3,972,000
3,548,640
3,074,477
2,543,414
1,948,624

1/1/2017
1/1/2018
1/1/2019

900,000
900,000
600,000
7,800,000

233,835
153,895
63,646
2,550,000

666,165
746,105
536,354

1,282,459
536,354
-

Requirement 3
2011
Jan.1 Lease receivable
Equipment
Unearned interest income
Cash
Lease receivable
Dec.31 Unearned interest income
Interest income
2012
Jan.1

7,800,000
5,250,000
2,550,000
900,000
900,000
522,000
522,000

Cash

900,000

Lease receivable
Dec.31 Unearned interest income
Interest income

900,000
476,640
476,640

Requirement 4
2018
Jan.1 Cash

900,000

Lease receivable
Dec.31 Unearned interest income
Interest income

900,000
63,646
63,646

Requirement 5
2019
Jan.1 Equipment
Loss on finance lease
Lease receivable

500,000
100,000
600,000

Problem 9-5
Requirement 1
Cost
PV of residual value (200,000 x .5066)
Net investment to be recovered from rental
Divide by PV factor
Annual rental
Requirement 2
Date
Payment
Interest
01/01/2011
01/01/2011
629,490
12/31/2011
629,490
284,461
12/31/2012
629,490
243,058
12/31/2013
629,490
196,686
12/31/2014
629,490
144,749
12/31/2015
629,490
86,580
12/31/2016
200,000
21,406
3,976,940
976,940
Requirement 3
2011
Jan.1 Machinery
Cash
Lease receivable
Machinery
Unearned interest income
Gross rentals (629,940 x 6)

3,000,000
(101,320)
2,898,680
4.6048
629,490
Principal
629,490
345,029
386,432
432,804
484,741
542,910
178,594

Present value
3,000,000
2,370,510
2,025,481
1,639,049
1,206,245
721,504
178,594
-

3,000,000
3,000,000
3,796,940
3,000,000
976,940
3,776,940

Residual value
Gross investment debit to lease receivable
Net investment cost of machinery
Unearned interest income
1

200,000
3,796,940
3,000,000
976,940

Cash

629,490
Lease receivable
(First payment)

629,490

Dec.31 Cash

629,490

Lease receivable
31 Unearned interest income
Interest income
(2011 interest income)

629,490
284,461
284,461

Requirement 4
2016
Dec.31 Unearned interest income
Interest income
(2016 interest income)

21,406
21,406

Requirement 5
2016
Dec.31 Machinery
Lease receivable

200,000
200,000

If the entries from 2011 to 2016 are properly recorded and posted, the lease receivable has debit
balance of 200,000 equal to the unguaranteed residual value, and the unearned interest income has a zero
balance.
Requirement 6
2016
Dec.31 Cash

300,000
Lease receivable
Gain on sale of leased asset

200,000
100,000

The difference between the selling price and the carrying amount of the lease receivable is
recognized as gain or loss. The carrying amount of the lease receivable is equal to the balance of the lease
receivable minus the unearned interest income, if any.
Problem 9-6
Requirement 1
Gross rentals (400,000 x 4)
Net investment in the lease
Total financial revenue
Requirement 2
Date
Payment
1/1/2011
1/1/2011
400,000
1/1/2012
400,000
1/1/2013
400,000
1/1/2014
400,000

1,600,000
1,377,480
222,520
Interest

Principal

107,523
75,350
39,647

400,000
292,477
324,650
364,353

Requirement 3
2011
Jan.1 Lease receivable
Machinery
Unearned interest income
2011
Jan.1

Cash

Present value
1,377,480
977,480
685,003
360,353
-

1,600,000
1,377,480
222,520
440,000

Lease receivable

400,000

Lease income
Dec.31 Unearned interest income
Interest income
2012
Jan.1

Cash

Cash

400,000
40,000
75,350
75,350
440,000

Lease receivable
Lease income
Dec.31 Unearned interest income
Interest income
2014
Jan.1

107,523
440,000

Lease receivable
Lease income
Dec.31 Unearned interest income
Interest income
2013
Jan.1

40,000
107,523

Cash

400,000
40,000
39,647
39,647
440,000

Lease receivable
Lease income

400,000
40,000

CHAPTER 10
Problem 10-2
1. Lease receivable
Sales
Unearned interest income
2. Cost of sales
Inventory
3. Cash
Lease receivable
4. Unearned interest income
Interest income (10% x 3,072,500)

5,000,000
3,072,500
1,927,500
2,000,000
2,000,000
500,000
500,000
307,250
307,250

Problem 10-3
2011
Jan.1 Lease receivable (600,000 x 8)
Sales
Unearned interest income
Initial direct costs
Cash
Cash
Lease receivable
Dec.31 Unearned interest income
Interest income
Date
1/1/2011
1/1/2011
1/1/2012
1/1/2013
2012
Jan.1

4,800,000
3,520,000
1,280,000
50,000
50,000
600,000
600,000
292,000
292,000

Payment

10% interest

Principal

600,000
600,000
600,000

292,000
261,200

600,000
308,000
338,800

Cash

600,000

Lease receivable
Dec.31 Unearned interest income
Interest income

600,000
261,200
261,200

Problem 10-4
Books of Fox Company (Lessor)
2011
Jan.1 Lease receivable (500,000 x 10)
Sales
Unearned interest income
Cost of sales
Inventory
Cash
Lease receivable
Dec.31 Unearned interest income
Interest income
Year
01/01/2008
01/01/2008
01/01/2009
01/01/2010
2012
Jan.1

Present value
3,520,000
2,920,000
2,612,000
2,273,200

5,000,000
3,165,000
1,835,000
2,675,000
2,675,000
500,000
500,000
319,800
319,800

Payment

12% interest

Principal

500,000
500,000
500,000

319,800
298,176

500,000
180,200
201,824

Cash

Lease receivable
Dec.31 Unearned interest income
Interest income

Present value
3,165,000
2,665,000
2,484,800
2,282,976

500,000
500,000
298,176
298,176

Books of Tiger Company (Lessee)

2011
Jan.1 Equipment
Lease liability
Lease liability
Cash
Dec.31 Depreciation (3,165,000 / 10)
Accumulated depreciation
Interest expense
Accrued interest payable
2012
Jan.1

Accrued interest payable

Lease liability
Cash
Dec.31 Depreciation
Accumulated depreciation
Interest expense
Accrued interest payable
Problem 10-5
Books of Universal Company (Lessor)
Gross rentals (700,000 x 8)
Unguaranteed residual value
Lease receivable
Present value:
Gross rentals (700,000 x 4.968)
Unguaranteed RV (400,000 x .404)
Unearned interest income

3,165,000
3,165,000
500,000
500,000
316,500
316,500
319,800
319,800
319,800
180,200
500,000
316,500
316,500
298,176
298,176

5,600,000
400,000
6,000,000
3,477,600
161,600

Cost of equipment sold

Less: PV of unguaranteed RV
Cost of sales
1. Lease receivable
Cost of sales
Sales (equal to PV of rentals only)
Unearned interest income
Inventory
2. Cash
Lease receivable
3. Unearned interest income
Interest income (12% x 3,639,200)
Books of National Company (Lessee)
1. Equipment
Lease liability

2,000,000
161,600
1,838,400
6,000,000
1,838,400
3,477,600
2,360,800
2,000,000
700,000
700,000
436,704
436,704
3,477,600
3,477,600

The residual value is unguaranteed, so it is not included in the computation of

2. Interest expense (12% x 3,477,600)
Lease liability
Cash
3. Depreciation
Accumulated depreciation (3,477,600 / 8)
Problem 10-6
Gross rentals (3,000,000 x 5)
Residual value guaranteed
Gross investment
Present value:
Rentals (3,000,000 x 3.60)

3,639,200
2,360,800

the lessees lease liability.

417,312
282,688
700,000
434,700
434,700
15,000,000
1,000,000
16,000,000
10,800,000

Residual value (1,000,000 x .57)

Total unearned financial revenue

570,000

Sales
Cost of sales:
Cost of machinery
Initial direct costs
Gross income
Books of Vanderbilt Company
1. Lease receivable
Cost of sales
Sales
Unearned interest income
Inventory
2. Cost of sales (Initial direct costs)
Cash
3. Cash
Lease receivable
4. Unearned interest income
Interest income (12% x 11,370,000)
Books of Thunder Company
1. Machinery
Lease liability
2. Interest expense
Lease liability
Cash
3. Depreciation
Accumulated depreciation
(11,370,000 1,000,000 / 5)

11,370,000
4,630,000
11,370,000
( 8,000,000)
( 300,000)
3,070,000

16,000,000
8,000,000
11,370,000
4,630,000
8,000,000
300,000
300,000
3,000,000
3,000,000
1,364,400
1,364,400
11,370,000
11,370,000
1,364,400
1,635,600
3,000,000
2,074,000
2,074,000

Problem 10-7
1. Lease receivable (3,328,710 x 5)
PV of gross rentals (3,328,710 x 3.605)
Total unearned financial revenue

16,643,550
12,000,000
4,643,550

The residual value of P500,000 is ignored by the lessor because ownership of the
lessee at the end of the lease term.

asset is transferred to the

2. Sales price (equal to present value of rentals)

Cost of sales:
Cost of equipment
Initial direct costs
Manufacturers profit
3. Interest income for first year (12% x 12,000,000)

12,000,000

Requirement 4 Journal entries

1. Lease receivable
Sales
2. Cost of sales
Inventory
3. Cost of sales (initial direct costs)
Cash
4. Cash
Lease receivable
5. Unearned interest income
Interest income
Problem 8-8
Requirement 1
Gross rentals (700,000 x 8)

( 8,000,000)
( 200,000)
3,800,000
1,440,000
16,643,550
12,000,000
8,000,000
8,000,000
200,000
200,000
3,328,710
3,328,710
1,440,000
1,440,000

5,600,000

Present value of rentals (700,000 x 5.868)

Total financial revenue

4,107,600
1,492,400

Requirement 2
Sales present value of rentals
Cost of sales cost of equipment
Gross profit on sale

4,107,600
3,760,000
247,600

Requirement 3
Date
Payment
4/1/2011
4/1/2011
700,000
4/1/2012
700,000
4/1/2013
700,000

Interest

Principal

340,760
304,836

700,000
359,240
395,164

2011
April 1 Lease receivable
Sales
Unearned interest income
Cost of sales
Inventory
Cash
Lease receivable
Dec.31 Unearned interest income
Interest income
(340,760 x 9/12)

Present value
4,107,600
3,407,600
3,048,360
2,653,196
5,600,000
4,107,600
1,492,400
3,760,000
3,760,000
700,000
700,000
255,570
255,570

2012
April 1 Cash

700,000

Lease receivable
Dec.31 Unearned interest income
Interest income

700,000
313,817
313,817

1/1/2012 to 3/31/2012 (340,760 x 3/12)

4/1/2012 to 12/31/2012 (304,836 x 9/12)
Total interest income for 2012

85,190
228,627
313,817

Problem 10-9
Requirement 1
Gross rentals (900,000 x 20)
Present value of rentals (900,000 x 9.36)
Total financial revenue

18,000,000
8,424,000
9,576,000

The residual value is ignored because ownership is transferred to the lessee at the lease expiration.
Requirement 2
Sales equal to present value of rentals
Cost of sales
Gross profit on sale
Requirement 3
Date
Payment
4/1/2011
4/1/2011
900,000
4/1/2012
900,000
4/1/2013
900,000

8,424,000
6,000,000
2,424,000

Interest

Principal

752,400
737,640

900,000
147,600
162,360

2011
April 1 Lease receivable
Sales
Unearned interest income
Cost of sales

Present value
8,424,000
7,524,000
7,376,400
7,214,040

18,000,000
8,424,000
9,576,000
6,000,000

Inventory

6,000,000

Cash

900,000

Lease receivable
Dec.31 Unearned interest income
Interest income (752,400 x 9/12)

900,000
564,300
564,300

2012
April 1 Cash

900,000

Lease receivable
Dec.31 Unearned interest income
Interest income

900,000
741,330
741,330

1/1/2012 to 3/31/2012 (752,400 x 3/12)

4/1/2012 to 12/31/2012 (737,640 x 9/12)
Total interest income for 2012

188,100
553,230
741,330

Problem 10-10
Requirement 1
Gross rentals (875,000 x 8)
Bargain purchase option
Gross investment

7,000,000
300,000
7,300,000

Present value of gross rentals (875,000 x 5.8684)

Present value of bargain purchase option (300,000 x .4665)
Total present value

5,134,850
139,950
5,274,800

Gross investment
Total present value
Unearned interest income

7,300,000
5,274,800
2,025,200

Requirement 2
Sales equal to total present value
Cost of sales
Gross profit

5,274,800
3,100,000
2,174,800

Requirement 3
Date
Payment
Jan. 1, 2011
Jan. 1, 2011
875,000
Jan. 1, 2012
875,000
Jan. 1, 2013
875,000
2011
Jan.1

Interest

Principal

439,980
396,478

875,000
435,020
478,522

Lease receivable
Cost of sales
Sales
Unearned interest income
Inventory
Cash
Lease receivable
Dec.31 Unearned interest income
Interest income
2012
Jan.1

Cash

Lease receivable
Dec.31 Unearned interest income
Interest income
Requirement 4
2018
Dec.31 Cash

Present value
5,274,800
4,399,800
3,964,780
3,486,258

7,300,000
3,100,000
5,274,800
2,025,200
3,100,000
875,000
875,000
439,980
439,980
875,000
875,000
396,478
396,478

300,000

Lease receivable

300,000

Requirement 5
2018
Dec.31 Inventory
Loss on finance lease
Lease receivable

200,000
100,000
300,000

Problem 10-11
Requirement 1
Gross rentals (500,000 x 5)
Present value (500,000 x 3.60)

2,500,000
1,800,000
700,000

Requirement 2
Sales
Cost of sales
Gross profit
Date
Jan. 1, 2011
Dec.31, 2011
Dec.31, 2012
Dec.31, 2013

1,800,000
1,000,000
800,000
Payment

Interest

Principal

500,000
500,000
500,000

216,000
181,900
143,750

284,000
318,090
356,250

Requirement 3
2011
Jan.1 Lease receivable
Sales
Unearned interest income
Dec.31 Cash
Lease receivable
Unearned interest income
Interest income
2012
Dec.31 Cash

Present value
1,800,000
1,516,000
1,197,920
841,670

2,500,000
1,800,000
700,000
500,000
500,000
216,000
216,000
500,000

Lease receivable
Unearned interest income
Interest income
2013
July 1 Unearned interest income
Interest income (143,750 x )
Cash
Unearned interest income
Loss on sale of leased asset
Lease receivable

500,000
181,920
181,920
71,875
71,875
1,200,000
230,205
69,795
1,500,000

Lease receivable 7/1/2013

Unearned interest income 7/1/2013
Carrying amount
Actual sales price
Loss on sale of leased asset

1,500,000
(230,205)
1,269,795
1,200,000
69,795

Unearned interest income -1/1/2011

Interest income recognized:
2011
2012
2013
Unearned interest income 7/1/2013

700,000
216,000
181,920
71,875

469,795
230,205

CHAPTER 11
Problem 11-5
1. Income tax expense
Income tax payable (30% x 1,500,000)
2. Income tax expense
Deferred tax liability (30% x 500,000)
3. Income tax payable
Cash

450,000
450,000
150,000
150,000
200,000
200,000

Current tax expense

Deferred tax expense
Total income tax expense
Problem 11-6
1. Income tax expense
Income tax payable (30% x 4,000,000)
2. Deferred tax asset
Income tax benefit (30% x 1,000,000)
3. Income tax payable
Cash

450,000
150,000
600,000
1,200,000
1,200,000
300,000
300,000
500,000
500,000

Current tax expense

Income tax benefit
Total income tax expense
Problem 11-7
2011
1. Income tax expense
Income tax payable (30% x 7,000,000)
2. Deferred tax asset
Income tax benefit (30% x 1,000,000)
Income statement presentation
Income before income tax
Income tax expense:
Current tax expense
Income tax benefit
Net income
2012
1. Income tax expense
Income tax payable (30% x 8,000,000)
2. Income tax expense
Deferred tax asset
Income statement presentation
Income before income tax
Income tax expense:
Current tax expense
Decrease in deferred tax asset
Net income
Problem 11-8
2011
1. Income tax expense
Income tax payable (30% x 5,000,000)
2. Income tax expense
Deferred tax liability (30% x 500,000)
Income statement presentation
Income before income tax
Income tax expense:

1,200,000
( 300,000)
900,000

2,100,000
2,100,000
300,000
300,000
6,000,000
2,100,000
( 300,000)

1,800,000
4,200,000

2,400,000
2,400,000
300,000
300,000
9,000,000
2,400,000
300,000

2,700,000
5,850,000

1,500,000
1,500,000
150,000
150,000
5,500,000

Current tax expense

Deferred tax expense
Net income
2012
1. Income tax expense
Income tax payable (30% x 7,500,000)
2. Deferred tax liability
Income tax expense
Income statement presentation
Income before income tax
Income tax expense:
Current tax expense
Decrease in deferred tax liability
Net income

1,500,000
150,000

2,250,000
2,250,000
150,000
150,000
7,000,000
2,250,000
( 150,000)

Problem 11-9
Accounting income
Permanent differences:
Nondeductible expenses
Nontaxable revenue
Accounting income subject to tax
Taxable temporary differences:
Deferred income
Excess tax depreciation
Deductible temporary differences:
Doubtful accounts
Estimated warranty cost
Taxable income
1. Income tax expense
Income tax payable (30% x 3,600,000)
2. Income tax expense
Deferred tax liability (30% x 500,000)
3. Deferred tax asset
Income tax benefit (30% x 200,000)
4. Income before income tax
Income tax expense
Current tax expense
Deferred tax expense
Income tax benefit
Net income
5. Tax expense from increase in deferred tax liability
Tax benefit from increase in deferred tax asset
Net deferred tax expense
Problem 11-10
2011
1. Income tax expense
Income tax payable (30% x 2,400,000)
2. Income tax expense
Deferred tax liability (30% x 600,000)
2012
1. Income tax expense
Income tax payable (30% x 3,600,000)
2. Income tax expense
Deferred tax liability (30% x 1,500,000)
2013
1. Income tax expense

1,650,000
3,850,000

2,100,000
4,900,000
4,000,000
200,000
(300,000)
3,900,000
( 450,000)
( 50,000)
100,000
100,000
3,600,000

1,080,000
1,080,000
150,000
150,000
60,000
60,000
4,000,000
1,080,000
150,000
( 60,000)

1,170,000
2,830,000
150,000
(60,000)
90,000

720,000
720,000
180,000
180,000
1,080,000
1,080,000
450,000
450,000
1,860,000

Income tax payable (30% x 6,200,000)

1,860,000

Income before construction income

Construction income
Taxable income

3,200,000
3,000,000
6,200,000

2. Deferred tax liability

Income tax expense (30% x 2,100,000)

630,000
630,000

Problem 11-11
Requirement 1
The current expense is computed as follows:
2011
Income before depreciation
4,000,000
Depreciation SYD
400,000
Taxable income
3,600,000

2012
4,000,000
300,000
3,700,000

2013
4,000,000
200,000
3,800,000

2014
4,000,000
100,000
3,900,000

Current tax expense (30%)

1,110,000

1,140,000

1,170,000

1,080,000

The deferred tax liability arising from the taxable temporary difference is computed as follows:
Temporary difference
Rate
Deferred tax liability
2011
150,000
30%
45,000
2012
50,000
30%
15,000
2013
(50,000)
30%
(15,000)
2014
(150,000)
(45,000)
Balance
2011
1. Income tax expense
Income tax payable
2. Income tax expense
Deferred tax liability

1,080,000
1,080,000
45,000
45,000

2012
1. Income tax expense
Income tax payable
2. Income tax expense
Deferred tax liability

1,110,000
1,110,000
15,000
15,000

2013
1. Income tax expense
Income tax payable
2. Deferred tax liability
Income tax expense

1,140,000
1,140,000
15,000
15,000

2014
1. Income tax expense
Income tax payable
2. Deferred tax liability
Income tax expense

1,170,000
1,170,000
45,000
45,000

Requirement 2 Balance sheet on December 31, 2009

Noncurrent liabilities:
Deferred tax liability

60,000

Problem 11-12
Requirement 1
Accounting income
Doubtful accounts
Rent income
Warranty cost

2011
2,000,000
100,000
120,000
300,000

2012
3,000,000
( 100,000)
( 40,000)
( 20,000)

2013
4,000,000

2014
5,000,000

( 40,000)
( 80,000)

( 40,000)
(200,000)

Taxable income
Tax rate
Current tax expense
2011
2012
2013
2014
Balance

2,520,000
30%
756,000
Temporary difference
520,000
(160,000)
(120,000)
(240,000)
-

2011
1. Income tax expense
Income tax payable
2. Deferred tax asset
Income tax benefit
2012
1. Income tax expense
Income tax payable
2. Income tax expense
Deferred tax asset
2013
1. Income tax expense
Income tax payable
2. Income tax expense
Deferred tax asset
2014
1. Income tax expense
Income tax payable
2. Income tax expense
Deferred tax asset

2,840,000
30%
852,000

3,880,000
30%
1,164,000

Rate
30%
30%
30%
30%

4,760,000
30%
1,428,000

Deferred tax asset

156,000
( 48,000)
( 36,000)
( 72,000)
-

756,000
756,000
156,000
156,000
852,000
852,000
48,000
48,000
1,164,000
1,164,000
36,000
36,000
1,428,000
1,428,000
72,000
72,000

Requirement 2 Balance sheet on December 31, 2008

Noncurrent assets:
Deferred tax asset

108,000

Problem 11-13
Operating loss
Interest income on note receivable
Taxable income

(1,000,000)
1,100,000
100,000

The interest income is part of taxable income because it arises from note receivable and not from bank
deposit.
1. Income tax expense (30% x 100,000)
Income tax payable
2. Deferred tax asset (30% x 300,000)
Income tax benefit
Income statement presentation
Loss before income tax
Income tax expense:
Current tax expense
Income tax benefit
Net loss

30,000
35,000
90,000
90,000
(200,000)
( 30,000)
90,000

60,000
(140,000)

Problem 11-14
Requirement 1
Accounting income
Taxable temporary difference:
Tax depreciation
Deductible temporary differences:
Litigation loss
Warranty cost
Taxable income
1. Income tax expense
Income tax payable (30% x 7,600,000)
2. Income tax expense
Deferred tax liability (30% x 1,000,000)
3. Deferred asset
Income tax benefit (30% x 700,000)
Requirement 2
Income statement presentation
Income before income tax
Income tax expense:
Current tax expense
Deferred tax expense
Income tax benefit
Net income

7,900,000
(1,000,000)
400,000
300,000
7,600,000
2,280,000
2,280,000
300,000
300,000
210,000
210,000

7,900,000
2,280,000
300,000
( 210,000)

Statement presentation
Noncurrent assets:
Deferred tax asset
Current liabilities:
Income tax payable
Noncurrent liabilities:
Deferred tax liability

210,000
2,280,000
300,000

Requirement 3
Tax expense from increase in deferred tax liability
Tax benefit from increase in deferred tax asset
Net deferred tax expense
Problem 11-15
1. Income tax expense
Deferred tax liability (30% x 7,000,000)
2. Deferred tax asset
Income tax benefit (30% x 2,000,000)
3. Income tax expense
Income tax payable

2,370,000
5,530,000

300,000
(210,000)
90,000
2,100,000
2,100,000
600,000
600,000
2,400,000
2,400,000

Pretax accounting income

Future taxable amount
Future deductible amount
Taxable income

13,000,000
(7,000,000)
2,000,000
8,000,000

Current tax expense (30% x 8,000,000)

2,400,000

4. Income before income tax

Income tax expense:
Current tax expense
Deferred tax expense
Income tax benefit
Net income

13,000,000
2,400,000
2,100,000
( 600,000)

3,900,000
9,100,000

Problem 11-16
1. Equipment
Accumulated depreciation
Revaluation surplus
Equipment
Accumulated depreciation
( 8,000,000 x 3/8)
(12,000,000 x 3/8)
BV / SV / RS

4,000,000
1,500,000
2,500,000
Cost
8,000,000

Replacement cost
12,000,000

Appreciation
4,000,000

4,500,000
7,500,000

1,500,000
2,500,000

3,000,000
5,000,000

2. Revaluation surplus
Deferred tax liability (30% x 2,500,000)
3. Income tax expense
Income tax payable

750,000
750,000
2,700,000
2,700,000

Pretax income before depreciation

Depreciation on cost (5,000,000 / 5)
Taxable income

10,000,000
( 1,000,000)
9,000,000

Current tax expense (30% x 9,000,000)

2,700,000

4. Deferred tax liability

Income tax expense
Equipment at replacement cost
Accumulated depreciation:
January 1, 2011
Depreciation on revalued amount
for 2011 (7,500,000 / 5)
Carrying amount 12/31/2011
Equipment at cost
Accumulated depreciation:
January 1, 2011
Depreciation on cost for 2011
Tax base 12/31/2011
Carrying amount 12/31/2011
Tax base 12/31/2011
Taxable temporary difference

150,000
150,000
12,000,000
4,500,000
1,500,000

8,000,000
3,000,000
1,000,000

6. Income before depreciation

Depreciation on revalued amount
Income before income tax
Income tax expense:
Current tax expense
Decrease in deferred tax liability
Net income
Problem 11-17
1. Motor vehicle:
Carrying amount
Tax base

4,000,000
4,000,000

6,000,000
4,000,000
2,000,000

Deferred tax liability 12/31/2008 (30% x 2,000,000)

Deferred tax liability 01/01/2008
Decrease in deferred tax liability
5. Revaluation surplus (2,500,000 750,000 / 5)
Retained earnings

6,000,000
6,000,000

600,000
750,000
(150,000)
350,000
350,000
10,000,000
(1,500,000)
8,500,000
2,700,000
( 150,000)

2,550,000
5,950,000

1,650,000
1,250,000

Taxable temporary difference

400,000

Deferred tax liability (30% x 400,000)

120,000

There is a deferred tax liability when the carrying amount of an asset is higher the tax base.
2.
AR
Warranty
Deposits
Total deductible temporary differences

Carrying amount
1,500,000
120,000
150,000

Tax base
1,750,000
0
0

Deferred tax asset (30% x 520,000)

Deductible temporary
250,000
120,000
150,000
520,000
156,000

There is a deferred tax asset when the tax base of an asset is higher than the carrying amount or when the
tax base of liability is lower than the carrying amount.
3. Tax expense from increase in deferred tax liability
Tax benefit from increase in deferred tax asset
Net deferred tax benefit

120,000
(156,000)
(36,000)

4. Financial income
Taxable temporary difference
Deductible temporary differences
Taxable income

8,000,000
(400,000)
520,000
8,120,000

Current tax expense (30% x 8,120,000)

2,436,000

5. Current tax expense

Net deferred tax benefit
Total income tax expense (30% x 8,000,000)

2,436,000
(36,000)
2,400,000

Problem 11-18
Property
Plant and equipment
Inventory
Trade receivables
Trade payable
Cash

Carrying amount
10,000,000
5,000,000
4,000,000
3,000,000
6,000,000
2,000,000

Tax base
7,000,000
4,000,000
6,000,000
4,000,000
6,000,000
2,000,000

Difference
3,000,000
1,000,000
2,000,000
1,000,000
-

Property
Plant and equipment
Future taxable amount

3,000,000
1,000,000
4,000,000

Deferred tax liability (30% x 4,000,000)

1,200,000

Inventory
Trade receivables
Future deductible amount

2,000,000
1,000,000
3,000,000

Deferred tax liability (30% x 3,000,000)

900,000

Accounting income
Future taxable amount
Future deductible amount
Taxable income
1. Income tax expense
Income tax payable
2. Income tax expense
Deferred tax liability

9,000,000
(4,000,000)
3,000,000
8,000,000
2,400,000
2,400,000
1,200,000
1,200,000

3. Deferred tax asset

900,000
Deferred tax benefit
4. Net deferred tax expense (1,200,000 900,000)
5. Total income tax expense (2,400,000 + 300,000 or 30% x 9,000,000)
Problem 11-19
1. Income tax expense
Income tax payable (30% x 7,000,000)
2. Income tax expense
Deferred tax liability (30% x 1,000,000)
3. Deferred tax asset
Income tax benefit (30% x 200,000)
4. Tax expense from deferred tax liability
Tax benefit from deferred tax asset
Net deferred tax expense
5. Current tax expense
Net deferred tax expense
Total income tax expense

900,000
300,000
2,700,000

2,100,000
2,100,000
300,000
300,000
60,000
60,000
300,000
(60,000)
240,000
2,100,000
240,000
2,340,000

Problem 11-20
1. No entry. There is no current tax expense because there is an operating loss carryover.
Pretax accounting income
Permanent differences:
Interest income
Insurance premium
Accounting income subject to tax
Temporary differences:
Gross profit on installment sale
Warranty liability
Operating loss carryover
2. Income tax expense
Deferred tax liability (30% x 4,500,000)
3. Deferred tax asset
Income tax benefit

2,000,000
(500,000)
100,000
1,600,000
(4,500,000)
2,000,000
(900,000)
1,350,000
1,350,000
870,000
870,000

Warranty liability (2,000,000 x 30%)

Operating loss carryover (900,000 x 30%)
Deferred tax asset

600,000
270,000
870,000

4. Tax expense from deferred tax liability

Tax benefit from deferred tax asset
Net deferred tax expense

1,350,000
(870,000)
480,000

5. Current tax expense

Net deferred tax expense
Total income tax expense

0
480,000
480,000

Another computation (30% x 1,600,000)

480,000

Problem 11-21
1. Financial assets
Retained earnings
Retained earnings
Intangible assets
Retained earnings
Employee benefits payable

500,000
500,000
400,000
400,000
50,000
50,000

2.
Property, plant and equipment
Goodwill
Intangible assets
Financial assets
Trade receivables
Other receivables
Cash and cash equivalents
Loans payable
Trade payables
Employee benefits payable
Current tax liability
Deferred tax liability

Carrying amount
7,000,000
3,000,000
1,600,000
6,500,000
7,000,000
1,600,000
700,000
8,000,000
4,000,000
1,050,000
70,000
600,000

Tax base
1,400,000
NA
0
7,000,000
7,500,000
1,600,000
700,000
8,500,000
3,800,000
1,000,000
70,000
600,000

PPE
Intangible assets
Loans payable
Total taxable temporary differences

Difference
5,600,000
1,600,000
500,000
500,000
500,000
200,000
50,000
-

5,600,000
1,600,000
500,000
7,700,000

Taxable temporary differences arise when the carrying amount of an asset is higher than the tax base or
when the carrying amount of a liability is lower than the tax base.
Deferred tax liability as corrected (30% x 7,700,000)
Deferred tax liability per book
Increase in deferred tax liability
Retained earnings (tax expense)
Deferred tax liability

2,310,000
600,000
1,710,000
1,710,000
1,710,000

The standard does not allow recognition of deferred tax liability on goodwill.
3. Financial assets
Trade receivables
Trade payables
Employee benefits payable
Total deductible temporary differences

500,000
500,000
200,000
50,000
1,250,000

Deferred tax asset as corrected (30% x 1,250,000)

375,000

Deductible temporary differences arise when the tax base of an asset is higher than the carrying amount or
when the tax base of a liability is lower than the carrying amount.
Deferred asset
Retained earnings

375,000
375,000

CHAPTER 12
Problem 12-4
2011
Jan.1 Equipment
Note payable
Dec.31 Note payable
Interest expense (12% x 600,000)
Cash
2012
Dec.31 Note payable
Interest expense (12% x 300,000)
Cash
Problem 12-5
1. Land
Cash
Note payable
2. Interest expense (10% x 900,000)
Accrued interest payable
3. Interest expense
Accrued interest payable (900,000 + 90,000 x 10%)
4. Note payable
Accrued interest payable
Cash
Problem 12-6
1. Machinery
Discount on note payable
Cash
Note payable
2. Note payable
Cash
3. Interest expense
Discount on note payable
Year
2011
2012
2013
2014

Note payable
800,000
600,000
400,000
200,000
2,000,000

600,000
300,000
72,000
372,000
300,000
36,000
336,000
1,000,000
100,000
900,000
90,000
90,000
99,000
99,000
900,000
189,000
1,089,000
750,000
250,000
200,000
800,000
200,000
200,000
100,000
100,000

Fraction
8/20
6/20
4/20
2/20

Problem 12-7
1. Building (500,000 + 3,602,700)
Discount on note payable
Cash
Note payable
Face of note
Present value (1,500,000 x 2.4018)
Imputed interest
2. Note payable
Cash
3. Interest expense
Discount on note payable (12% x 3,602,700)
Problem 12-8
1. Land (1,250,000 + 2,847,200)
Discount on note payable
Cash
Note payable

600,000

Amortization
100,000
75,000
50,000
25,000
250,000
4,102,700
897,300
500,000
4,500,000
4,500,000
3,602,700
897,300
1,500,000
1,500,000
432,324
432,324
4,097,200
1,152,800
1,250,000
4,000,000

Face value of note payable

Present value (4,000,000 x .7118)
Imputed interest
2. Interest expense
Discount on note payable (12% x 2,847,200)
3. Note payable
Cash
Problem 12-14
1. Total liability
Less: Book value of property:
Land
Building
Gain
2. Mortgage payable
Accrued interest payable
Accumulated depreciation
Land
Building
Gain on extinguishment of debt
Problem 12-15
1. Note payable
Accrued interest payable
Investment in equity securities
Gain on extinguishment of debt
2. Note payable
Accrued interest payable
Investment in equity securities
Gain on exchange
Gain on debt restructuring

4,000,000
2,847,200
1,152,800
341,664
341,664
4,000,000
4,000,000
6,000,000
1,500,000
,200,000

5,700,000
300,000

5,000,000
1,000,000
1,800,000
1,500,000
6,000,000
300,000
1,000,000
200,000
600,000
600,000
1,000,000
200,000
600,000
500,000
100,000

Fair value
Book value
Gain on exchange

1,100,000
600,000
500,000

Note payable
Accrued interest payable
Total liability
Less: Fair value of securities
Gain on debt restructuring

1,000,000
200,000
1,200,000
1,100,000
100,000

Problem 12-16
Bonds payable
Premiums on bonds payable
Accrued interest payable
Land
Gain on extinguishment of debt
Problem 12-17
Note payable
Accrued interest payable
Inventory
Gain on extinguishment of debt
Problem 12-18
1. Mortgage payable
Accrued interest payable
Loss on extinguishment of debt

5,000,000
150,000
300,000
3,200,000
2,250,000
6,000,000
600,000
3,600,000
3,000,000
4,000,000
300,000
250,000

Share capital
Share premium (35,000 x 30)

3,500,000
1,050,000

2. Mortgage payable
Accrued interest payable
Loss on extinguishment of debt
Share capital
Share premium

4,000,000
300,000
200,000

3. Mortgage payable
Accrued interest payable
Share capital (35,000 x 100)
Share premium

4,000,000
300,000

3,500,000
1,000,000

3,500,000
800,000

Problem 12-19
1. Note payable
Accrued interest payable
Ordinary share capital
Share premium ordinary
Preference share capital
Share premium preference
Gain on extinguishment of debt
2. Note payable
Accrued interest payable
Ordinary share capital
Share premium ordinary
Preference share capital
Share premium preference
Gain on extinguishment of debt
Ordinary
Preference

Market value
3,000,000
1,500,000
4,500,000

3. Note payable
Accrued interest payable
Ordinary share capital
Share premium ordinary
Preference share capital
Share premium preference
Ordinary
Preference

5,000,000
400,000
1,500,000
1,500,000
250,000
1,250,000
900,000
5,000,000
400,000
1,500,000
1,700,000
250,000
1,350,000
600,000
Fraction
30/45
15/45

Issue price
3,200,000
1,600,000
4,800,000

5,000,000
400,000
1,500,000
2,100,000
250,000
1,550,000
Market value
3,000,000
1,500,000
4,500,000

Problem 12-20
1. Bonds payable
Accrued interest payable
Discount on bonds payable
Share capital
Share premium
Gain on extinguishment of debt
2. Bonds payable
Accrued interest payable
Discount on bonds payable
Share capital
Share premium
Gain on extinguishment of debt

Fraction
30/45
15/45

Issue price
3,600,000
1,800,000
5,400,000

5,000,000
250,000
200,000
2,500,000
2,000,000
550,000
5,000,000
250,000
200,000
2,500,000
2,100,000
450,000

3. Bonds payable
Accrued interest payable
Discount on bonds payable
Share capital
Share premium
Problem 12-21
1. Note payable
Land
Gain on extinguishment of debt
2. Note payable
Share capital
Share premium
Gain on extinguishment of debt
Problem 12-22
Note payable
Accrued interest payable
Carrying amount of liability
Restructured liability:
Principal
Interest
Gain on debt restructuring
Note payable
Accrued interest payable
Note payable
Gain on debt restructuring

5,000,000
250,000
200,000
2,500,000
2,550,000
5,000,000
2,800,000
2,200,000
5,000,000
4,000,000
800,000
200,000
8,000,000
800,000
8,800,000
7,000,000
800,000

7,800,000
1,000,000

8,000,000
800,000
7,800,000
1,000,000

Problem 12-23
PV of principal (7,000,000 x .8573)
PV of interest payments (700,000 x 1.7833)
Total present value of new liability

6,001,100
1,248,310
7,249,410

Note payable
Accrued interest
Total old liability
PV of new liability
Gain on extinguishment of debt

8,000,000
640,000
8,640,000
7,249,410
1,390,590

1. Note payable - old

Accrued interest payable
Note payable new
Premium on note payable
Gain on debt extinguishment of debt
2. Interest expense
Cash
3. Premium on note payable
Interest expense

8,000,000
640,000
7,000,000
249,410
1,390,590
700,000
700,000
120,047
120,047

Interest paid
Interest expense (7,249,410 x 8%)
Amortization of premium
4. Interest expense
Cash
Premium on note payable
Interest expense (249,410 120,047)
Note payable
Cash

700,000
579,953
120,047
700,000
700,000
129,363
129,363
7,000,000
7,000,000

Problem 12-24
PV of principal (5,500,000 x .6355)
PV of interest payments (440,000 x 3.0373)
PV of new liability
Face value
Discount on note payable

3,495,250
1,336,412
4,831,662
5,500,000
668,338

Note payable old

Accrued interest (6,000,000 x 12%)
Total old liability
PV of new liability
Gain on extinguishment of debt

6,000,000
720,000
6,720,000
4,831,662
1,888,338

1. Note payable - old

Accrued interest payable
Discount on note payable
Note payable new
Gain on extinguishment of debt
2. Interest expense (8% x 5,500,000)
Cash
Interest expense
Discount on note payable

6,000,000
720,000
668,338
5,500,000
1,888,338
440,000
440,000
139,799
139,799

Interest paid
Interest expense (4,831,662 x 12%)
Discount amortization

440,000
579,799
139,799

Problem 12-25
PV of principal (8,000,000 x .8722)
PV of interest payments (800,000 x .8772)
Total present value of new liability

7,017,600
701,760
7,719,360

Old liability
New liability
Gain on extinguishment of debt

8,500,000
7,719,360
780,640

The gain is less than 10% of the old liability of P8,500,000. Thus, the gain is not recognized.
1. Note payable old
Note payable new
Premium on note payable
2. Interest expense (10% x 8,000,000)
Cash
Premium on note payable
Interest expense

8,500,000
8,000,000
500,000
800,000
800,000
500,000
500,000

Actually, using a financial calculator, the effective rate is 3.53%. Accordingly, the amortization of premium is
computed as follows:
Interest paid (10% x 8,000,000)
Interest expense (3.53% x 8,500,000) rounded
Amortization of premium
Note payable new
Cash

800,000
300,000
500,000
8,000,000
8,000,000

Problem 12-26
PV of principal (4,500,000 x .8264)
PV of interest payments (540,000 x 1.7355)
Total PV of new liability
Face value
Premium on note payable

3,718,800
937,170
4,655,970
4,500,000
155,970

Note payable old

Accrued interest
Total old liability
PV of new liability
Gain on extinguishment

5,000,000
1,000,000
6,000,000
4,655,970
1,344,030

1. Note payable - old

Accrued interest payable
Note payable new
Premium on note payable
Gain on extinguishment
2. Interest expense (4,500,000 X 12%)
Cash

5,000,000
1,000,000
4,500,000
155,970
1,344,030
540,000
540,000

Premium on note payable

Interest expense

74,403
74,403

Interest paid (4,500,000 x 12%)

Interest expense (4,655,970 x 10%)
Premium amortization

540,000
465,597
74,403

Problem 12-27
Present value of new principal (700,000 x .79719)
Present value of interest payment (8% x 700,000 = 56,000 x 1.69006)
Total present value of new note

558,033
94,643
652,676

Note payable old

Accrued interest payable
Carrying amount
Present value of new note
Gain on extinguishment

1,000,000
120,000
1,120,000
652,676
467,324

Note payable new

Present value
Discount on note payable

700,000
652,676
47,324

Date
Dec.31, 2011
Dec.31, 2012
Dec.31, 2013

Nominal interest (8%) Effective interest (12%)

56,000
56,000

78,321
81,003*

22,321
25,003
*Adjusted for rounding figures.

Books of Jane Company (debtor)

2011
Dec.31 Note payable old
Accrued interest payable
Discount on note payable
Note payable new
Gain on extinguishment of debt
2012
Dec.31 Interest expense
Cash
31 Interest expense
Discount on note payable

Amortization

Present value
652,676
674,997
700,000

1,000,000
120,000
47,324
700,000
467,324
56,000
56,000
22,321
22,321

2013
Dec.31 Interest expense
Cash
31 Interest expense
Discount on note payable
31 Note payable new
Cash
Books of Mark Company (creditor)
2011
Dec.31 Note receivable old
Loss on debt restructuring
Note receivable old
Accrued interest receivable
Unearned interest income
2012
Dec.31 Cash
Interest income
31 Unearned interest income
Interest income
2013
Dec.31 Cash
Interest income
31 Unearned interest income
Interest income
31 Cash
Note receivable new

56,000
56,000
25,003
25,003
700,000
700,000

700,000
467,324
1,000,000
120,000
47,324
56,000
56,000
22,321
22,321
56,000
56,000
25,003
25,003
700,000
700,000

CHAPTER 13
Problem 13-7
2011 Benefit expense
Cash (4,000,000 x 5%)
2012 Benefit expense
Cash (4,200,000 x 5%)

200,000
200,000
210,000
210,000

Problem 13-8
2011 Benefit expense
Cash
Prepaid/accrued benefit cost
2012 Benefit expense
Prepaid/accrued benefit cost
Cash

850,000
700,000
150,000
1,000,000
50,000
1,050,000

Noncurrent liability 12/31/2008

Accrued benefit cost

150,000

Noncurrent liability 12/31/2009

Accrued benefit cost

100,000

Problem 13-9
1. Annual pension payment PBO (300,000 x 1.48 x 3% x 12)
2. Annual pension payment ABO (300,000 x 3% x 12)

159,840
108,000

Problem 13-10
1. Annual pension payment ABO (500,000 x 2% x 10 years)
Multiply by PV of an ordinary annuity of 1 at 8% for 15 years
Present value 1/1/2034
Multiply by PV of 1 at 8% for 25 years
Accumulated benefit obligation 1/1/2009

100,000
8.559
855,900
0.146
124,961

2. Future salary PBO (500,000 x 2.094)

1,047,000

Annual pension payment PBO (1,047,000 x 2% x 10 years)

Multiply by PV of an ordinary annuity of 1 at 8% for 15 years
Present value 1/1/2034
Multiply by PV of 1 at 8% for 25 periods
Projected benefit obligation 1/1/2009

209,400
8.559
1,792,255
0.146
261,669

Problem 13-11
Future salary (600,000 x 1.48)

888,000

Annual pension payment (2% x 888,000 x 15 years)

Multiply by PV of an ordinary annuity of 1 at 10% for 8 periods
Present value 12/31/2021
Multiply by PV of 1 at 10% for 10 periods
PBO 12/31/2011
Problem 13-12
1. Annual retirement benefit (10% x 1,440,000)
Current service cost
2011
144,000
2012
144,000
2013
144,000
432,000
2.
Date
12/31/2011
12/31/2012
12/31/2013

Service cost
130,608
137,146
144,000

PV factor
.9070
.9524
1.0000
(5% x liability)
Interest cost
6,530
13,716

266,400
5.335
1,421,244
0.386
548,600
144,000
Discounted
130,608
137,146
144,000
411,754
Liability
130,608
274,284
432,000

Problem 13-13
Annual benefit (5% x 1,500,000)

75,000

2011
2012
2013

Service cost
75,000
75,000
75,000

PV factor
.361
.404
.452

Discounted
27,075
30,300
33,900

Date
12/31/2011
12/31/2012
12/31/2013

Service cost
27,075
30,300
33,900

(5% x liability)
Interest cost
3,249
7,275

Liability
27,075
60,624
101,799

Problem 13-14
1. Service cost
Interest cost (10% x 4,000,000)
Expected return (12% 5,000,000)
Benefit expense
2. Benefit expense
Prepaid/accrued benefit cost
Cash
3. P/ABC January 1 (5,000,000 4,000,000)
Debit adjustment
Debit balance
4. FVPA January 1
Contribution
Actual return
Balance December 31

1,550,000
400,000
( 600,000)
1,350,000
1,350,000
150,000
1,500,000
1,000,000
150,000
1,150,000
5,000,000
1,500,000
600,000
7,100,000

PBO January 1
Service cost
Interest cost
Balance December 31
Prepaid/accrued benefit cost December 31

4,000,000
1,550,000
400,000
5,950,000
1,150,000

Problem 13-15
1. Current service cost
Interest cost (10% x 6,500,000)
Expected return (8% x 5,750,000)
Benefit expense
2. Benefit expense
Prepaid/accrued benefit cost
Cash

600,000
650,000
(460,000)
790,000
790,000
110,000
900,000

3. P/ABC January 1 (credit)

Debit adjustment
Balance December 31

(750,000)
110,000
(640,000)

4. FVPA January 1
Contribution
Actual return
Balance December 31

5,750,000
900,000
460,000
7,110,000

PBO January 1
Current service cost
Interest cost
Balance December 31
P/ABC December 31(credit)

6,500,000
600,000
650,000
7,750,000
( 640,000)

Problem 13-16
1. Current service cost
Interest cost (10% x 7,600,000)
Expected return (8% x 6,725,000)
Benefit expense

1,450,000
760,000
(538,000)
1,672,000

Actual return
Expected return
Actuarial loss deferred
2. Benefit expense
Cash
Prepaid/accrued benefit cost

500,000
538,000
( 38,000)
1,672,000
1,500,000
172,000

3. P/ABC January 1 (credit)

Credit adjustment
Balance December 31

875,000
172,000
1,047,000

4. FVPA January 1
Contribution
Actual return
Balance December 31
Actuarial loss
Total debits

6,725,000
1,500,000
500,000
8,725,000
38,000
8,763,000

PBO January 1
Current service cost
Interest cost
Balance December 31
P/ABC December 31 (credit)

7,600,000
1,450,000
760,000
9,810,000
(1,047,000)

Problem 13-17
1. Actual fair value of plan assets
Expected fair value
Actuarial gain -1/1/2008

7,200,000
5,400,000
1,800,000

2. Actuarial gain
Corridor (10% x 7,200,000)
Excess actuarial gain

1,800,000
720,000
1,080,000

Amortization of actuarial gain (1,080,000 / 10)

108,000

Problem 13-18
1. Expected return
2008 (12% x 5,000,000)
2009 (12% x 6,750,000)

600,000
810,000

2. Fair value of plan assets 1/1/2008

Add: Expected return in 2008
Expected fair value 1/1/2009
3. Actual fair value
Expected fair value
Actuarial gain

5,000,000
600,000
5,600,000
1/1/2008
5,000,000
5,000,000
0

1/1/2009
6,750,000
5,600,000
1,150,000

4. 2011 No amortization because there is no actuarial gain or loss on January 1, 2008.

2012 Actuarial gain 1/1/2009
1,150,000
Corridor (10% x 7,000,000)
700,000
Excess gain to be amortized
450,000
Amortization of actuarial gain (450,000 / 10)

45,000

Problem 13-19
Cumulative actuarial loss
Corridor 10% of greater
Aye (10% x 5,000,000)
Bee (10% x 6,500,000)
Cee (10% x 8,000,000)
Excess
Amortization of actuarial loss
Aye
Bee (250,000 / 8)
Cee (125,000 / 5)
Problem 13-20
1.
FVPA
PBO
Net actuarial gain - 1/1/2011

Aye
350,000

Bee
900,000

Cee
925,000

650,000
_______
250,000

800,000
125,000

500,000
_______
0
None
31,250
25,000
Expected
4,000,000
4,800,000

Actual
5,500,000
5,000,000

Gain (Loss)
1,500,000
( 200,000)
1,300,000

2.

FVPA January 1, actual

PBO January 1, actual
Deferred actuarial gain
Total credits
P/ABC January 1 (credit)

5,500,000
5,000,000
1,300,000
6,300,000
( 800,000)

3.

Current service cost

Interest cost
Expected return (8% x 5,500,000)
Amortization of actuarial gain
Total benefit expense

1,750,000
700,000
( 440,000)
( 75,000)
1,935,000

Deferred actuarial gain January 1

Corridor (10% x 5,500,000)
Excess over corridor

1,300,000
550,000
750,000

Amortization actuarial gain (750,000 / 10)

4. Benefit expense
Cash
Prepaid/accrued benefit cost
5.

75,000
1,935,000
1,500,000
435,000

P/ABC January 1
Credit adjustment
Balance December 31

(800,000)
(435,000)
(1,235,000)

FVPA January 1
Contribution
Actual return
FVPA December 31
PBO January 1
Service cost
Interest cost
PBO December 31
Deferred actuarial gain December 31 (1,300,000 75,000)
Total credits
P/ABC December 31

5,500,000
1,500,000
440,000
7,440,000
5,000,000
1,750,000
700,000
7,450,000
1,225,000
8,675,000
(1,235,000)

Problem 13-21
1.
Current service cost
Interest cost
Expected return

2,100,000
240,000
(380,000)

Amortization of actuarial loss

Amortization of past service cost
Total benefit expense
2. Benefit expense
Prepaid/accrued benefit cost
Cash

40,000
60,000
2,060,000
2,060,000
140,000
2,200,000

Problem 13-22
1.
Current service cost
Interest cost
Expected return
Amortization of past service cost (300,000 / 3)
Total benefit expense
2. Benefit expense
Cash
Prepaid/accrued benefit cost

3.

800,000
450,000
(600,000)
100,000
750,000
750,000
500,000
250,000

P/ABC January 1
Credit adjustment
P/ABC December 31, debit

800,000
(250,000)
550,000

FVPA January 1
Contribution
Actual return
Total
Less: Benefits paid
FVPA December 31

6,000,000
500,000
600,000
7,100,000
150,000
6,950,000

PBO January 1
Current service cost
Interest cost
Total
Less: Benefits paid
PBO December 31

5,500,000
800,000
450,000
6,750,000
150,000
6,600,000

FVPA
Unamortized past service cost (300,000 100,000)
PBO
P/ABC December 31

6,950,000
200,000
(6,600,000)
550,000

4. Surplus reduction
Prepaid/accrued benefit cost
Debit balance surplus
Limit (200,000 + 300,000)
Adjustment

50,000
50,000
550,000
500,000
50,000

The surplus must not exceed the total of the unamortized past service cost, unrecognized actuarial loss and
present value of future refund.
Problem 13-23
1.
Current service cost
Interest cost
Expected return
Amortization of PSC (1,250,000 / 10)
Amortization of actuarial gain
Total benefit expense
Actuarial gain January 1
Corridor (10% x 5,500,000)

925,000
660,000
(570,000)
125,000
( 30,000)
1,110,000
850,000
550,000

Excess over corridor

300,000

Amortization actuarial gain (300,000 / 10)

2. Benefit expense
Prepaid/accrued benefit cost
Cash
3.

1,110,000
240,000
1,350,000

FVPA January 1
Contribution
Actual return
Total
Less: Benefits paid
FVPA December 31

4,750,000
1,350,000
570,000
6,670,000
995,000
5,675,000

Past service cost

Amortization for 2008
Unamortized PSC December 31

1,250,000
( 125,000)
1,125,000

PBO January 1
Current service cost
Interest cost
Increase due to changes n actuarial assumptions
Total
Less: Benefits paid
PBO December 31

5,500,000
925,000
660,000
140,000
7,225,000
995,000
6,230,000

Unrecognized actuarial gain January 1

Amortization for 2008
Balance
Actuarial loss due to increase in accrued benefit obligation
Net unrecognized gain December 31

850,000
( 30,000)
820,000
(140,000)
680,000

FVPA
Unamortized PSC
Total debits

5,675,000
1,125,000
6,800,000

PBO
Unrecognized actuarial gain
Total credits
P/ABC December 31

6,230,000
680,000
6,910,000
( 110,000)

P/ABC January 1
Debit adjustment
P/ABC December 31

( 350,000)
240,000
( 110,000)

Problem 13-24
1.
Current service cost
Interest cost (10% x 7,500,000)
Expected return (10% x 8,500,000)
Amortization of PSC (350,000 / 10)
Amortization of actuarial loss (150,000 / 10)
Total benefit expense

2.

30,000

1,000,000
750,000
( 850,000)
35,000
15,000
950,000

Unamortized actuarial loss January 1

Corridor (10% x 8,500,000)
Excess loss to be amortized

1,000,000
850,000
150,000

P/ABC January 1
Overfunding (1,200,000 950,000)
P/ABC December 31

2,350,000
250,000
2,600,000

3.

FVPA January 1
Contribution
Actual return (12% x 8,500,000)
Total
Less: Benefits paid
FVPA December 31

8,500,000
1,200,000
1,020,000
10,720,000
1,500,000
9,220,000

Unamortized PSC January 1

Amortization for 2008
Balance December 31

350,000
( 35,000)
315,000

Unrecognized actuarial loss January 1

Amortization for 2008
Balance December 31
Actuarial gain due to decrease in accrued benefit obligation
Actuarial gain due to the difference in actual and expected
return (1,020,000 850,000)
Net unrecognized actuarial loss December 31

1,000,000
( 15,000)
985,000
( 200,000)

PBO January 1
Current service cost
Interest cost
Total
Less: Benefits paid
Decrease in obligation
PBO December 31

7,500,000
1,000,000
750,000
9,250,000
1,500,000
200,000

( 170,000)
615,000

1,700,000
7,550,000

Summary
FVPA
Unamortized PSC
Unrecognized actuarial loss
Total
PBO
P/ABC December 31
4.

Benefit expense
Prepaid/accrued benefit cost
(2,600,000 930,000)

9,220,000
315,000
615,000
10,150,000
(7,550,000)
2,600,000
1,670,000
1,670,000

Surplus
Limit:
Unamortized PSC
Unrecognized actuarial loss
Adjustment

2,600,000
315,000
615,000

930,000
1,670,000

CHAPTER 14
Problem 14-6
Requirement a
1. Memo entry
The corporation was authorized to issue share capital of P5,000,000, divided into 100,000 shares with par
value of P50.
Subscriptions receivable
Subscribed share capital
(25% x 100,000 = 25,000 shares)
2. Cash (25% x 1,250,000)
Subscriptions receivable
3. Cash
Subscriptions receivable (15,000 x 50 x 75%)
Subscribed share capital
Share capital (15,000 x 50)
4. Land
Share capital (10,000 x 50)
Share premium
5. Cash (5,000 x 60)
Share capital (5,000 x 50)
Share premium
6. Legal expenses
Share capital (2,000 x 50)

1,250,000
1,250,000
312,500
312,500
562,500
562,500
750,000
750,000
600,000
500,000
100,000
300,000
250,000
50,000
100,000
100,000

Requirement b
Shareholders equity:
Share capital, P50 par, 100,000 shares authorized,
32,000 shares issued
Subscribed share capital
Subscriptions receivable
Share premium
Problem 14-7
Requirement a
1. Unissued share capital
Authorized share capital
Subscriptions receivable
Subscribed share capital
(40% x 50,000 = 20,000 shares)
2. Cash (25% x 2,000,000)
Subscriptions receivable
3. Cash
Subscriptions receivable (10,000 x 100 x 75%)
Subscribed share capital
Unissued share capital (10,000 shares x 100)
4. Patent (5,000 x 100)
Unissued share capital
5. Cash (15,000 x 120)
Unissued share capital (15,000 shares x 100)
Share premium
Requirement b
Shareholders equity:
Authorized share capital, P100 par, 50,000 shares
Unissued share capital
Issued share capital, 30,000 shares
Subscribed share capital
Subscriptions receivable
Share premium

1,600,000
500,000
(375,000)
150,000
1,875,000
5,000,000
5,000,000
2,000,000
2,000,000
500,000
500,000
750,000
750,000
1,000,000
1,000,000
500,000
500,000
1,800,000
1,500,000
300,000

5,000,000
(2,000,000)
3,000,000
1,000,000
(750,000)
300,000
3,550,000

Problem 14-8
1. Subscriptions receivable
Subscribed share capital
(40,000 x 100)
2. Accounts receivable
Note receivable
Inventory
Accounts payable
Subscriptions receivable
3. Land
Building
Subscriptions receivable
4. Cash
Subscriptions receivable (15,000 x 100 x 25%)
5. Legal expenses
Share capital
6. Subscriptions receivable (1,000 x 120)
Subscribed share capital
Share premium
Cash (1,000 x 40)
Subscriptions receivable
7. Cash
Subscriptions receivable

4,000,000
4,000,000
350,000
70,000
680,000
100,000
1,000,000
150,000
850,000
1,000,000
375,000
375,000
50,000
50,000
120,000
100,000
20,000
40,000
40,000
1,100,000
1,100,000

A
B
C (800,000 x 75%)
Total
Subscribed share capital
Share capital (33,000 x 100)

200,000
300,000
600,000
1,100,000
3,300,000
3,300,000

Requirement b
Shareholders equity:
Share capital, P100 par
Authorized 50,000 shares
Issued and outstanding 33,500 shares
Subscribed share capital 8,000 shares
Subscriptions receivable
Share premium

3,350,000
800,000
( 605,000)
20,000
3,565,000

Problem 14-9
1. Memo The company was authorized to issue share capital as follows:
Preference share capital, P100 par, 30,000 shares
Ordinary share capital, P50 par, 100,000 shares
Total authorized share capital
2. Cash

3,000,000
5,000,000
8,000,000
2,400,000

Ordinary share capital

Share premium ordinary share
3. Cash
Preference share capital
Share premium ordinary share
4. Subscriptions receivable
Subscribed preference share capital
5. Cash
Subscriptions receivable
6. Legal expenses
Preference share capital
7. Property, plant and equipment
Preference share capital
Share premium preference share

2,000,000
400,000
1,200,000
1,000,000
200,000
1,000,000
1,000,000
400,000
400,000
100,000
100,000
1,300,000
1,000,000
300,000

8. Subscriptions receivable
Subscribed ordinary share capital
9. Cash
Subscriptions receivable
10. Cash
Subscriptions receivable
Subscribed preference share capital
Preference share capital
11. Treasury ordinary shares
Cash
12. Retained earnings
Retained earnings appropriated for treasury shares
13. Profit and loss
Retained earnings
Brook Company
Shareholders equity
December 31, 2011
Preference share capital
Ordinary share capital
Subscribed ordinary share capital
Subscriptions receivable
Share premium:
Preference share
Ordinary share
Retained earnings:
Unappropriated
Appropriated for treasury shares
Treasury ordinary shares
Shareholders equity
Problem 14-10
1. Unissued ordinary share capital
Authorized ordinary share capital
2. Subscriptions receivable
Subscribed ordinary share capital
3. Cash
Subscriptions receivable
4. Cash
Subscriptions receivable (10,000 x 100 x 75%)
5. Subscribed ordinary share capital
Unissued ordinary share capital
6. Land
Building
Unissued ordinary share capital
Share premium
7. Loan payable
Accrued interest payable
Unissued ordinary share capital
Share premium
8. Profit and loss
Retained earnings

750,000
750,000
300,000
300,000
600,000
600,000
1,000,000
1,000,000
200,000
200,000
200,000
200,000
2,000,000
2,000,000

2,100,000
3,000,000
750,000
(450,000)
200,000
700,000
1,800,000
200,000

900,000
2,000,000
( 200,000)
8,100,000

10,000,000
10,000,000
2,500,000
2,500,000
625,000
625,000
750,000
750,000
1,000,000
1,000,000
800,000
2,500,000
3,000,000
300,000
1,100,000
200,000
1,000,000
300,000
3,000,000
3,000,000

Shareholders equity
December 31, 2011
Authorized ordinary share capital
Unissued ordinary share capital
Issued ordinary share capital
Subscribed ordinary share capital
Subscriptions receivable
Share premium
Retained earnings

10,000,000
(5,000,000)
5,000,000
1,500,000
(1,125,000)
600,000
3,000,000
8,975,000

Problem 14-11
1. Subscriptions receivable PS (20,000 x 100)
Subscribed preference share capital
2. Subscriptions receivable - PS (4,000 shares x 120)
Subscribed preference share capital
Share premium preference
3. Cash (2,480,000 120,000)
Subscriptions receivable PS
4. Subscribed preference share capital
Preference share capital (22,000 x 100)
5. Land
Ordinary share capital (8,000 x 10)
Share premium ordinary
6. Subscription receivable CS
Subscribed ordinary share capital (40,000 x 10)
Share premium ordinary (950,000 150,000)

2,000,000
2,000,000
480,000
400,000
80,000
2,360,000
2,360,000
2,200,000
2,200,000
230,000
80,000
150,000
1,200,000
400,000
800,000

Ordinary shares issued and outstanding

Ordinary shares subscribed
Total
Less: Ordinary shares issued to acquire land
Ordinary shares originally subscribed
7. Cash (1,200,000 360,000)
Subscriptions receivable ordinary
8. Subscribed ordinary share capital
Ordinary share capital (24,000 8,000 x 10)
Issued
Subscribed
Share premium
Subscriptions receivable
Contributed capital

Preference
2,200,000
200,000
80,000
(120,000)
2,360,000

Problem 14-12
Jan.1 Land
Organization expense
Ordinary share capital (10,000 shares)
Share premium ordinary
Feb.20 Cash (15,000 x 120)
Preference share capital
Share premium preference
Share premium preference
Cash
Mar.10 Cash (25,000 x 260)
Ordinary share capital
Share premium ordinary
Share premium preference
Cash
April 1 Subscription receivable (20,000 x 350)
Subscribed ordinary share capital
Share premium ordinary
July 15 Cash (10,000 shares)
Ordinary share capital
Share premium ordinary
Building
Ordinary share capital (12,000 x 100)
Share premium ordinary (12,000 x 200)
Preference share capital (20,000 x 100)
Share premium preference

24,000
24,000
48,000
8,000
40,000
840,000
840,000
160,000
160,000
Ordinary
240,000
240,000
950,000
(360,000)
1,070,000
2,500,000
500,000
1,000,000
2,000,000
1,800,000
1,500,000
300,000
50,000
50,000
6,500,000
2,500,000
4,000,000
200,000
200,000
7,000,000
2,000,000
5,000,000
3,000,000
1,000,000
2,000,000
7,000,000
1,200,000
2,400,000
2,000,000
1,400,000

Aug.1 Cash
Subscription receivable
Subscribed ordinary share capital
Ordinary share capital (10,000 x 100)
Dec.31 Subscribed ordinary share capital (5,000 shares)
Share premium ordinary (5,000 x 2500
Subscription receivable
Share premium forfeited subscriptions

4,500,000
4,500,000
1,000,000
1,000,000
500,000
1,250,000
1,500,000
250,000

Requirement 2
Preference share capital, 100 par, 50,000 shares authorized, 35,000 shares
Issued and outstanding
Share premium preference
Ordinary share capital, 100par, 100,000 shares authorized, 67,000 shares
Issued and outstanding
Subscribed ordinary share capital 5,000 shares
Share premium ordinary
Share premium forfeited subscriptions
Subscription receivable
Retained earnings
Total shareholders equity

3,500,000
1,650,000
6,700,000
500,000
13,950,000
250,000
(1,000,000)
3,000,000
28,550,000

Problem 14-13
1. Preference share capital authorized (50,000 shares x P100 par)
Ordinary share capital authorized (200,000 shares x P15 stated value)
Total authorized share capital

5,000,000
3,000,000
8,000,000

2. Unissued preference share capital

Unissued ordinary share capital (20,000 x 15)
Total unissued share capital

1,800,000
300,000
2,100,000

3. Preference share capital issued (5,000,000 1,800,000)

Ordinary share capital issued
Total issued share capital

3,200,000
2,700,000
5,900,000

4. Preference share capital available for subscription:

Unissued preference share capital
Less: Subscribed preference share capital
Ordinary share capital available for subscription:
Unissued ordinary share capital
Less: Subscribed ordinary share capital
Ordinary share capital available for subscription

1,800,000
300,000
270,000

5. Authorized preference share capital

Unissued preference share capital
Issued preference share capital
Ordinary share capital
Subscribed preference share capital
Less: Subscription receivable
Subscribed ordinary share capital
Less: Subscription receivable
Share premium ordinary
Retained earnings
Treasury preference shares
Shareholders equity
Problem 14-14
1. a. Preference share capital (5,000 x 100)
Share premium - PS (5,000 / 50,000 x 500,000)
Ordinary share capital (5,000 x 50)
Share premium ordinary share

1,500,000
300,000
30,000
1,530,000
5,000,000
(1,800,000)
3,200,000
2,700,000
300,000
(200,000)
270,000
(170,000)
950,000
2,000,000
( 600,000)
8,450,000

500,000
50,000
250,000
300,000

b. Preference share capital

Share premium PS
Retained earnings
Ordinary share capital (20,000 x 50)
2. a. Preference share capital
Share premium PS
Retained earnings
Cash (5,000 x 120)
b. Preference share capital
Share premium PS
Cash (5,000 x 80)
Share premium redemption
Problem 14-15
2011
Jan.1 cash

500,000
50,000
450,000
1,000,000
500,000
50,000
50,000
600,000
500,000
50,000
400,000
150,000

5,000,000

Redeemable preference shares

Dec.31 Interest expense
Accrued interest payable (10% x 5,000,000)

500,000

2012
Dec.31 Interest expense
Accrued interest payable (10% x 5,500,000)

550,000

2013
Jan.1

Redeemable preference shares

Accrued interest payable
Cash

Problem 14-16
1. Cash (4,000 x 60)
Ordinary share capital (20,000 rights/5 = 4,000 shares)
Share premium
2. Cash
Bonds payable
Premium on bonds payable
Share warrants outstanding
Cash (5,000 x 60)
Share warrants outstanding
Ordinary share capital (5,000 x 50)
Share premium
3. Sales price
Less: Market value of warrants (20,000 x 10)
Issue price of preference shares
Cash

5,000,000
500,000

550,000
5,000,000
1.050,000
6,050,000
240,000
200,000
40,000
2,600,000
2,000,000
400,000
200,000
300,000
200,000
250,000
250,000
2,500,000
200,000
2,300,000
2,500,000

Preference share capital

Share premium PS
Share warrants outstanding
Cash (9,000 x 60)
Share warrants outstanding (18,000 / 20,000 x 200,000)
Ordinary share capital
Share premium ordinary shares
Share warrants outstanding
Share premium unexercised warrants
4. Market value of ordinary share
Less: Option price
Excess
Multiply by
Value of warrants

2,000,000
300,000
200,000
540,000
180,000
450,000
270,000
20,000
20,000
80
60
20
25,000 shares
500,000

Cash

6,000,000
Preference share capital
Share premium PS
Share warrants outstanding

5,000,000
500,000
500,000

Cash (25,000 x 60)

Share warrants outstanding
Ordinary share capital (25,000 x 50)
Share premium ordinary share
Problem 14-17
2011
May 31 Cash

1,500,000
500,000
1,250,000
750,000

6,000,000
Bonds payable
Premium on bonds payable
Share warrants outstanding

5,000,000
250,000
750,000

Sales price of bonds with warrants

Less: Market value of bonds ex-warrants
Issue price of warrants

6,000,000
5,250,000
750,000

Dec.31 Cash (10,000 x 120)

Share warrants outstanding (10,000 / 15,000 x 750,000)
Ordinary share capital
(10,000 x 100)
Share premium

1,200,000
500,000

Dec.31 Profit and loss

Retained earnings

2,000,000

2012
July 15

1,000,000
700,000
2,000,000

Memo Issued 60,000 rights permitting shareholders to acquire 1 share at P130 for every 5 rights.

Dec.31 Cash (60,000 / 5 = 12,000 x 130)

Ordinary share capital (12,000 x 100)
Share premium issuance
31 Share warrants outstanding
Share premium unexercised share warrants
31 Profit and loss
Retained earnings

1,560,000
1,200,000
360,000
250,000
250,000
3,000,000
3,000,000

Shareholders Equity
December 31, 2012
Ordinary share capital, P100 par
Authorized 200,000 shares
Issued and outstanding 72,000 shares
Share premium
Retained earnings
Shareholders equity
Problem 14-18
Requirement 1
a. Treasury shares
Cash
b. Cash
Treasury shares
Share premium
c. Cash
Retained earnings
Treasury shares

7,200,000
2,310,000
8,000,000
17,510,000

800,000
800,000
1,000,000
800,000
200,000
700,000
100,000
800,000

Requirement 2
Ordinary share capital
Share premium (5,000 / 50,000 x 200,000)
Retained earnings
Treasury share

500,000
20,000
280,000
800,000

Problem 14-19
Requirement a
1. Cash
Share capital (200,000 x 15)
Share premium
2. Cash
Share capital (250,000 x 15)
Share premium
3. Treasury shares
Cash
4. Cash
Treasury shares
Share premium

4,000,000
3,000,000
1,000,000
6,250,000
3,750,000
2,500,000
1,000,000
1,000,000
1,250,000
1,000,000
250,000

Requirement b
1. Cash
Share capital (200,000 x 20)
2. Cash
Share capital (250,000 x 20)
Share premium
3. Treasury shares
Cash
4. Cash
Treasury shares
Share premium

4,000,000
4,000,000
6,250,000
5,000,000
1,250,000
1,000,000
1,000,000
1,250,000
1,000,000
250,000

Problem 14-20
Requirement a
a. Cash
Preference share capital
Share premium PS
b. Cash
Ordinary share capital
Share premium ordinary share
c. Preference share (10,000 x 100)
Share premium PS
Cash (10,000 x 120)
Share premium redemption
d. Treasury shares (15,000 x 52)
Cash
e. Cash (10,000 x 60)
Treasury shares (10,000 x 52)
Share premium treasury share
f. Received 20,000 ordinary shares as donation from shareholders.
Cash (10,000 x 65)
Donated capital
g. Profit and loss
Retained earnings
h. Retained earnings
Retained earnings appropriated for treasury shares

4,200,000
3,000,000
1,200,000
5,500,000
5,000,000
500,000
1,000,000
400,000
1,200,000
200,000
780,000
780,000
600,000
520,000
80,000
650,000
650,000
3,000,000
3,000,000
260,000
260,000

Shareholders Equity
December 31, 2011
Preference share capital, 12% P100 par
Ordinary share capital, P50, 100,000 shares issued, of which
5,000 shares are in treasury and 10,000 shares are donated

2,000,000
5,000,000

Share premium:
Preference share
Redemption of preference share
Ordinary share
Treasury share
Donated capital
Retained earnings:
Unappropriated
Appropriated for treasury shares
Treasury shares, at cost
Shareholders equity

800,000
200,000
500,000
80,000
650,000
2,740,000
260,000

2,230,000
3,000,000
(260,000)
11,970,000

Problem 14-21
Requirement a
1. Cash
1,000,000
Ordinary share capital
1,000,000
2. Treasury shares
300,000
Cash
300,000
3. Memo Issued 140,000 new ordinary shares with par of P25 as a result of a 2 for 1 split of 70,000 original
shares with a par of P150.
4. Cash
120,000
Treasury shares (3,000 / 10,000 x 300,000)
90,000
Share premium treasury shares
30,000
5. Memo Received 15,000 ordinary shares by way of donation.
Cash (10,000 x 40)
400,000
Donated capital
400,000
6. Profit and loss
500,000
Retained earnings
500,000
7. Retained earnings
210,000
Retained earnings appropriated for treasury shares
210,000
Shareholders Equity
December 31, 2011
Preference share capital
Ordinary share capital
Share premium:
Preference share
Ordinary share
Treasury share
Donated capital
Retained earnings:
Unappropriated
Appropriated for treasury shares
Treasury shares, at cost
Shareholders equity

500,000
3,500,000
200,000
500,000
30,000
400,000
2,290,000
210,000
( 210,000)

1,130,000
2,500,000
7,420,000

Problem 14-22
a. Share capital
3,000,000
Share premium
200,000
Share capital (40,000 x 50)
2,000,000
Share premium recapitalization
1,200,000
b. Memo Issued 100,000 new shares with par of P30 as a result of 5 for 1 split of 20,000 original shares with
par of P150.
c. Share capital (20,000 x 50)
1,000,000
Share premium recapitalization
1,000,000
d. Share capital (2,000 x 150)
300,000
Donated capital
300,000
e. Share capital
3,000,000
Share premium
200,000
Retained earnings
800,000
Share capital (80,000 x 50)
4,000,000

Problem 14-23
a. Share capital
Donated capital (5,000,000 x 10%)
Donated capital
Retained earnings
b. Share capital (50,000 x 50)
Share premium
Share premium
Retained earnings
c. Share capital
Share premium
Share capital (100,000 x 55)
Retained earnings
d. Share capital
Share premium
Share capital (150,000 x 20)
Share premium recapitalization
Share premium - recapitalization
Retained earnings

500,000
500,000
500,000
500,000
2,500,000
2,500,000
500,000
500,000
5,000,000
1,000,000
5,500,000
500,000
5,000,000
1,000,000
3,000,000
3,000,000
500,000
500,000