SAN BEDA COLLEGE ALABANG

HOMEWORK EXERCISE-ACT851R
1. On December 31, 2016, Dome Company issued P4,000,000, 8% serial bonds to be repaid in the amount of
P800,000 each year. Interest is payable annually on Dec. 31. The bonds were issued to yield 10% a year. The
bonds proceeds were P3,805,600 based on the present value on Dec. 31, 2016 of 5 annual payments as
follows:

Due date Principal Interest PV on 12.31.16

12.31.17 800,000 320,000 1,018,000
12.31.18 800,000 256,000 872,200
12.31.19 800,000 192,000 745,000
12.31.20 800,000 128,000 633,800
12.31.21 800,000 64,000 536,600
Total 3,805,600

Required:

1. Determine the carrying amount of the bonds payable on Dec. 31, 2017. The interest method of amortizing
bond discount is used.
2. Prepare journal entries for 2017

2. On Jan. 1, 2016 Surigao Company issued bonds with face amount of P4,000,000 & stated interest rate of
12%. The interest is payable semi-annually on June 30 & Dec. 31. The bonds mature on every Dec. 31 at the
rate of P2,000,000 per year for 2 years. The prevailing market rate for the bonds is 8%. The present value of 1
at 4% is as follows:

One period 0.9615

Two periods 0.9246
Three periods 0.8890
Four periods 0.8548
Required:
a. Compute the market price of the bonds on Jan. 1, 2016
b. Prepare table of amortization using effective interest method
c. Prepare journal entries for 2016 & 2017

3. On June 1, 2016 Java Company issued 10% bonds with face amount of P6,000,000 to yield 12%. Interest is
payable annually on June 1 of each year. The bonds mature in 5 years. The entity follows calendar year.

PV of 1 at 10% for 5 periods 0.62

PV of 1 at 12% for 5 periods 0.57
PV of an ordinary annuity of 1 at 10% for 5 periods 3.79
PV of an ordinary annuity of 1 at 12% for 5 periods 3.60
Required:
a. Determine the market price or issue price of the bonds.
b. Prepare an effective interest amortization table for the first two interest periods
c. Prepare journal entries for 2016 & 2017

4. Anya Company disclosed the following accounts on December 31, 2016.

 SAN BEDA COLLEGE ALABANG
HOMEWORK EXERCISE-ACT851R
12% Bond Payable-Due Jan. 1, 2019
Jan. 1, 2016 Jan. 1, 2009 6,000,000.00
P3,000 face amount
purchased at 90 &
retired 2,700,000.00

Discount on Bonds Payable

Jan. 1, 2009 300,000.00

Required
a. Compute the balance of bonds payable & discount on bonds payable on Dec. 31, 2016. The straight-line
method of amortization is used.
b. Compute the bond interest expenses for the year ended Dec. 31, 2016. Interest is payable semi-annually on
Jan. 1 & July 1
c. Prepare adjusting entries on Dec. 31, 2016

5. Erika Company operates a customer loyalty program. The entity grant loyalty points for goods purchased.
The loyalty points can be used by the customers in exchange for goods of the entity. The points have no expiry
date. During 2016, the entity issued 50,000 award credits & expects that 80% of these award credits shall be
redeemed. The stand alone selling price of the expected award credits is reliably measured at P1,000,000. In
2016, the entity sold goods to customers for a total consideration of P7,000,000 based on stand alone selling
price. The award credits redeemed & the total award credits expected to be redeemed each year are as
follows:

Redeemed Expected to be redeemed

2016 15,000 80%

2017 7,950 85%
2018 2,550 85%
2019 15,000 90%

Required: Prepare journal entries from 2016-2019

6. Miracle Company manufactures a product that is packaged & sold. A plate is offered to customers sending in
3 wrappers accompanied by a remittance of P10. Data with respect to the premium offer are summarized
below:

2016 2017
Sales 3,600,000 4,200,000
Purchase of premium-P50 per plate 390,000 580,000
Number of plates distributed as premium 5,000 9,000
Estimated number of plates to be distributed
In subsequent period 2,000 3,000

Required: Prepare journal entries that would be made in 2016 & 2017 to record sales, premium purchases &
redemptions & year end adjustments.
 SAN BEDA COLLEGE ALABANG
HOMEWORK EXERCISE-ACT851R
7. Farr Company sells products with reusable & expensive containers. The customer is charged a deposit for
each container delivered & receives a refund for each container returned within 2 years after the year of
delivery. The entity provided the following information for 2016:

Containers held by customers on Jan. 1, 2016 from deliveries in:

2015 75,000
2015 215,000 290,000
Containers delivered in 2016 390,000

Containers returned in 2016 from deliveries in:

2014 45,000
2015 125,000
2016 143,000 313,000
Required:
a. Prepare journal entries in 2016 in connection with the containers
b. Compute the liability for containers on Dec. 31, 2016

8. On June 1, 2015, Everly Bottle Company sold P400,000 in long-term bonds for P351,040. The bonds will
mature in 10 years and have a stated interest rate of 8% and a yield rate of 10%. The bonds pay interest
annually on May 31 of each year. The bonds are to be accounted for under the effective-interest method.

Required:
a. Construct a bond amortization table for this problem to indicate the amount of interest expense and discount
amortization at each May 31.
b. Assuming that interest and discount amortization are recorded each May 31, prepare the adjusting entry to
be made on December 31, 2016.

9. Freeze Corporation is having financial difficulty and therefore has asked Manhattan National Bank to
restructure its P3,000,000 note outstanding. The present note has 3 years remaining and pays a current rate
of interest of 10%. The present market rate for a loan of this nature is 12%. The note was issued at its face
value

Instructions
Prepare below are three independent situations. Prepare the journal entry that Freeze would make for each of
these restructurings.
(a) Manhattan National Bank agrees to take an equity interest in Freeze by accepting ordinary shares
valued at P2,200,000 in exchange for relinquishment its claim on this note. The ordinary shares have a
par value of P1,000,000.

(b) Manhattan National Bank agrees to accept land in exchange for relinquishing its claim on this note. The
land has a book value of P1,950,000 and a fair value of P2,400,000.

(c) Manhattan National Bank agrees to modify the terms of the note, indicating that Freeze does not have
to pay interest on the note over the3-year period.

10. The following situations relate to Vivo Inc.

1. Vivo, Inc provides a warranty with all its products it sells. It estimates that it will sell 1,200,000 units of its
product for the year ended December 31, 2015, and that its total revenue for the product will be
 SAN BEDA COLLEGE ALABANG
HOMEWORK EXERCISE-ACT851R
P100,000,000. It also estimates that 60% of the product will have no defects, 30% will have major defects,
and 10% will have minor defects. The cost of a minor defect is estimated to be P5 for each product sold,
and the cost for a major defect cost is P15. The company also estimates that the minimum amount of
warranty expense will be P2,500,000.

2. Vivo, Inc is involved in a tax dispute with the tax authorities. The most likely outcome of this dispute is that
Vivo will lose and have to pay P500,000. Management will expect to pay at maximum is P3,000,000.

3. Vivo has a policy of refunding purchases to dissatisfied customers, even though it is under no obligation to
do so. However, it has created a valid expectation with its customers to continue this practice. These
refunds can range from 5% of sales to 9% of sales, with any amount in between a reasonable possibility. In
2015, Vivo has P50,000,000 of sales subject to possible refund. The average cost of any refund item is
P12

Required

Prepare the journal entry to record provisions, if any, for Washburn at December 31, 2015.