Solution manual financial accounting by valix ch4 9

The impact of the difference of P50,000 in warranty liability is a higher taxableincome and therefore will result to a deferred tax asset.. Memo – The company was authorized to issue sha

71 CHAPTER 4

1 Income tax expense 525,000

Income tax payable (35% x 1,500,000)

525,000

2 Income tax expense 175,000

Deferred tax liability (35% x 500,000)

175,000

3 Income tax payable 200,000

Deferred tax expense

175,000

Total income tax expense 700,000

Problem 4-3

1 Income tax expense 1,400,000

Income tax payable (35% x 4,000,000)

1,400,000

2 Deferred tax asset 350,000

Income tax benefit (35% x 1,000,000)

Total income tax expense 1,050,000

72Problem 4-4

2008

1 Income tax expense 2,450,000

Income tax payable (35% x 7,000,000)

2,450,000

2 Deferred tax asset 350,000

Income tax benefit (35% x 1,000,000)

350,000

Income statement presentation

Income before income tax

6,000,000

Income tax expense:

Current tax expense 2,450,000

Income tax benefit ( 350,000)

2,100,000

Net income

3,900,000

2009

1 Income tax expense 2,800,000

Income tax payable (35% x 8,000,000)

2,800,000

2 Income tax expense 350,000

Deferred tax asset

350,000

Income statement presentation

Income before income tax

9,000,000

Income tax expense:

Current tax expense 2,800,000

Decrease in deferred tax asset 350,000

3,150,000

Net income

5,850,000

Problem 4-5

2008

1 Income tax expense 1,750,000

Income tax payable (35% x 5,000,000)

1,750,000

2 Income tax expense 175,000

Deferred tax liability (35% x 500,000)

175,000

73Income statement presentation

Income before income tax

5,500,000

Income tax expense:

Current tax expense 1,750,000

Deferred tax expense 175,000

1,925,000

2009

1 Income tax expense 2,625,000

Income tax payable (35% x 7,500,000)

2,625,000

2 Deferred tax liability 175,000

Income statement presentation

Income before income tax

7,000,000

Income tax expense:

Current tax expense 2,625,000

Decrease in deferred tax liability ( 175,000)

Nontaxable revenue ( 300,000)Accounting income subject to tax 3,900,000Taxable temporary differences:

1 Income tax expense 1,260,000

Income tax payable (35% x 3,600,000)

1,260,000

2 Income tax expense 175,000

Deferred tax liability (35% x 500,000)

175,000

74

3 Deferred tax asset 70,000

Income tax benefit (35% x 200,000) 70,000

4 Income before income tax

4,000,000

Income tax expense

Current tax expense 1,260,000

Deferred tax expense 175,000

Income tax benefit ( 70,000) 1,365,000

Problem 4-7

2008

1 Income tax expense 840,000

Income tax payable (35% x 2,400,000)

840,000

2 Income tax expense 210,000

Deferred tax liability (35% x 600,000)

210,000

2009

1 Income tax expense 1,260,000

Income tax payable (35% x 3,600,000)

1,260,000

2 Income tax expense 525,000

Deferred tax liability (35% x 1,500,000)

525,000

2010

1 Income tax expense 2,170,000

Income tax payable (35% x 6,200,000)

2 Deferred tax liability 735,000

Income tax expense (35% x 2,100,000)

Temporary difference Rate Deferred tax liability

1 Income tax expense 1,260,000

Income tax payable

1,260,000

2 Income tax expense 52,500

Deferred tax liability

52,500

2009

1 Income tax expense 1,295,000

Income tax payable

1,295,000

2 Income tax expense 17,500

Deferred tax liability

17,500

2010

1 Income tax expense 1,330,000

Income tax payable

1,330,000

2 Deferred tax liability 17,500

762011

1 Income tax expense 1,365,000

Income tax payable

1,365,000

2 Deferred tax liability 52,500

Requirement 2 – Balance sheet on December 31, 2009

Noncurrent liabilities:

Deferred tax liability 70,000

Warranty cost 300,000 ( 20,000) ( 80,000)( 200,000)

Taxable income 2,520,000 2,840,000 3,880,000

4,760,000

Tax rate 35% 35% 35%

1 Income tax expense 882,000

Income tax payable

882,000

2 Deferred tax asset 182,000

Income tax benefit

182,000

2009

1 Income tax expense 994,000

Income tax payable

Deferred tax asset

56,000

2010

1 Income tax expense 1,358,000

Income tax payable 1,358,000

2 Income tax expense 42,000

2011

1 Income tax expense 1,666,000

Income tax payable 1,666,000

2 Income tax expense 84,000

Requirement 2 – Balance sheet on December 31, 2008

1 Income tax expense (35% x 100,000) 35,000

2 Deferred tax asset (35% x 300,000) 105,000

78Income statement presentation

Loss before income tax (200,000)Income tax expense:

Current tax expense ( 35,000)

Income tax benefit 105,000 70,000Net loss

1 Income tax expense 2,660,000

Income tax payable (35% x 7,600,000)

2,660,000

2 Income tax expense 350,000

Deferred tax liability (35% x 1,000,000)

350,000

3 Deferred asset 245,000

Income tax benefit (35% x 700,000)

245,000

Income statement presentation

Income before income tax

7,900,000

Income tax expense:

Current tax expense 2,660,000

Deferred tax expense 350,000

Income tax benefit ( 245,000)2,765,000

Balance sheet presentation

Problem 4-12

1 Income tax expense 2,450,000

Deferred tax liability (35% x 7,000,000)

2,450,000

2 Deferred tax asset 700,000

Income tax benefit (35% x 2,000,000)

700,000

3 Income tax expense 2,800,000

Pretax accounting income 13,000,000Future taxable amount ( 7,000,000)Future deductible amount 2,000,000

Income tax expense:

Current tax expense 2,800,000

Deferred tax expense 2,450,000

Income tax benefit ( 700,000) 4,550,000

Deferred tax liability (35% x 2,500,000)

875,000

3 Income tax expense 3,150,000

4 Deferred tax liability 175,000

Equipment at replacement cost

6 Income before depreciation 10,000,000Depreciation on revalued amount ( 1,500,000)Income before income tax

8,500,000

Income tax expense:

Current tax expense 3,150,000

Decrease in deferred tax liability ( 175,000)

2,975,000

81Problem 4-14 Answer A

Pretax accounting income 5,000,000

Deferred tax liability (35% x 1,300,000)

82Problem 4-19 Answer A

Current tax expense (35% x 150,000)

52,500

Problem 4-20 Answer D

The deferred tax liability of P75,000 is noncurrent

Problem 4-21 Answer D

Income tax benefit (400,000 – 300,000)

Income tax payable (980,000 x 35%)

560,000

83Problem 4-24 Answer D

Problem 4-25 Answer C

The impact of the difference in the equipment of P80,000 is a higher financialincome and therefore will result to a deferred tax liability Accordingly, it is afuture taxable temporary difference

The difference of P75,000 is a permanent difference because the officers’insurance premium is nondeductible Therefore, this difference has no deferredtax consequence

The impact of the difference of P50,000 in warranty liability is a higher taxableincome and therefore will result to a deferred tax asset Accordingly, it is afuture deductible temporary difference

Pretax accounting income 2,000,000Permanent differences:

Pretax accounting income 20,000,000Taxable temporary differences ( 3,000,000)Deductible temporary differences 2,000,000

Deferred tax liability (35% x 400,000)

140,000

The differences in accounts receivable, warranty and deposit are futuredeductible differences and therefore will give rise to deferred tax asset.

Since there are taxable temporary differences that will reverse in 2009, this willresult to future taxable income

Accordingly, the deferred tax asset on December 31, 2008 is recognized only tothe extent of the taxable temporary differences of P1,200,000 times 35% orP420,000

86Problem 4-34

Question 2 – Answer B

Deferred tax asset – 12/31/2008 (35% x 1,200,000)

420,000

The accrual for product liability in excess of actual claim is a future

deductible amount and therefore will result to a deferred tax asset.

1 To record increase in deferred tax liability:

Deferred tax liability (144,000 – 140,000)

4,000

87

2 To record decrease in deferred tax asset:

Deferred tax asset

40,000

88 CHAPTER 5

Accrued interest payable 200,000

Investment in equity securities

Investment in equity securities

Accrued interest payable 800,000

Note payable – restructured 7,800,000 Gain on debt restructuring

1,000,000

1 Note payable - old 8,000,000

Accrued interest payable 640,000

Note payable – new 7,000,000

Gain on debt extinguishment of debt

Discount on note payable 668,338

1 Note payable - old 6,000,000

Accrued interest payable 720,000

Discount on note payable 668,338

Note payable – new 5,500,000Gain on extinguishment of debt

Gain on extinguishment of debt

1 Note payable – old 8,500,000

Premium on note payable 500,000

Actually, using a financial calculator, the effective

rate is 3.53% Accordingly, the amortization of

premium is computed as follows:

Premium on note payable 155,970

1 Note payable - old 5,000,000

Accrued interest payable 1,000,000

Note payable – new 4,500,000

Accrued interest payable

Accrued interest payable 500,000

Discount on note payable 203,200

Note payable – new

Incidentally, the entries to record the payment of interest on December 31,

2009 and amortization of the discount on note payable for 2009 are:

Cash

320,000

Note payable – new

Interest expense 650,000Cash

Interest expense (12% x 2,550,000)

306,000

99 CHAPTER 6

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

1 Current service cost 1,450,000Interest cost (10% x 7,600,000)

Actuarial loss – deferred

Problem 6-12

1 Actual fair value of plan assets 7,200,000Expected fair value 5,400,000Actuarial gain -1/1/2008

4 2008 – No amortization because there is no actuarial gain or loss

Amortization of actuarial gain (450,000 / 10)

45,000

Problem 6-14

P/ABC – January 1 (credit) ( 800,000)

3 Current service cost 1,750,000

Deferred actuarial gain – January 1 1,300,000Corridor (10% x 5,500,000)

550,000

Amortization actuarial gain (750,000 / 10)

Corridor (10% x 7,400,000)

740,000

Excess over corridor 0

(Loss)

FVPA - 1/1 7,800,000 9,000,000 1,200,000PBO - 1/1 7,600,000 7,800,000

( 200,000)

Add: Net actuarial gain – 1/1/2009 400,000Cumulative actuarial gain 1,400,000Corridor (10% x 9,000,000)

900,000

Cumulative actuarial gain 1,400,000Amortization of actuarial gain for 2009 (500,000 / 10)

Net actuarial gain – 1/1/2010

106Problem 6-17

1 Current service cost 2,100,000

Current service cost 800,000

Amortization actuarial gain (300,000 / 10)

1 Current service cost 1,000,000Interest cost (10% x 7,500,000)

Actual and expected gain on plan assets ( 350,000)Amortization of past service cost 50,000Annual interest on pension liability 500,000Total pension expense 1,800,000

Problem 6-22 Answer C

Current service and interest cost 620,000

Return on plan assets (10% x 1,000,000) (100,000)Retirement benefit expense 520,000Contribution to the plan 1,000,000Retirement benefit expense 520,000Prepaid benefit cost 480,000

Problem 6-23 Answer C

Contribution related to past service cost 114,400Amortization of past service cost 83,400

The current service cost is fully funded at the end of each year

111Problem 6-25 Answer B

Projected benefit obligation:

The entry to recognize the liability for termination benefits is as follows:

Loss on termination benefits 585,000

Liability for termination benefits

630,000

Problem 6-31 Answer A

Amortization of transition loss (150,000 / 3)

Fair value of pension fund – December 31 9,400,000

Projected benefit obligation – December 31

The corporation was authorized to issue share capital of P5,000,000, divided

into 100,000 shares with par value of P50

118Requirement b

1 Unissued share capital 5,000,000

Authorized share capital

Subscribed share capital 1,000,000

Unissued share capital (10,000 shares x 100)

119Requirement b

1 Memo – The company was authorized to issue share capital as follows:

Preference share capital, P100 par, 30,000 shares

Ordinary share capital

Preference share capital 100,000

7 Property, plant and equipment 1,300,000

Preference share capital 1,000,000 Share premium – preference share

Subscribed preference share capital 1,000,000

Preference share capital 1,000,000

11 Treasury ordinary shares 200,000

12 Retained earnings 200,000

Retained earnings appropriated for treasury shares

200,000

13 Profit and loss 2,000,000

Brook Company Shareholders’ equity December 31, 2008

Preference share capital 2,100,000Ordinary share capital 3,000,000Subscribed ordinary share capital 750,000

1 Unissued ordinary share capital 10,000,000

Authorized ordinary share capital

5 Subscribed ordinary share capital 1,000,000

Unissued ordinary share capital

1,000,000

Unissued ordinary share capital

3,000,000

Accrued interest payable 200,000

Unissued ordinary share capital

Authorized ordinary share capital 10,000,000Unissued ordinary share capital

1 Subscriptions receivable – PS (20,000 x 100) 2,000,000

Subscribed preference share capital 2,000,000

2 Subscriptions receivable - PS (4,000 shares x 120) 480,000

Subscribed preference share capital 400,000 Share premium – preference 80,000

3 Cash (2,480,000 – 120,000) 2,360,000

Subscriptions receivable – PS 2,360,000

4 Subscribed preference share capital 2,200,000

Preference share capital (22,000 x 100)

2,200,000

Ordinary share capital (8,000 x 10)

8 Subscribed ordinary share capital 160,000

Ordinary share capital (24,000 – 8,000 x 10)

1 Preference share capital authorized (50,000 shares x P100 par)

2 Unissued preference share capital

1,800,000

Unissued ordinary share capital (20,000 x 15)

300,000

Total unissued share capital 2,100,000

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

3,200,000

Ordinary share capital issued

2,700,000

Total issued share capital 5,900,000

4 Preference share capital available for subscription:

Unissued preference share capital 1,800,000

Less: Subscribed preference share capital 300,000

1,500,000

Ordinary share capital available for subscription:

Unissued ordinary share capital 300,000

Less: Subscribed ordinary share capital 270,000

( 200,000)

Subscribed ordinary share capital 270,000

170,000) Share premium – ordinary

Share premium – ordinary share

Share warrants outstanding 200,000

Ordinary share capital (5,000 x 50)

Issue price of preference shares

Share warrants outstanding (18,000 / 20,000 x 200,000) 180,000

Ordinary share capital 450,000 Share premium – ordinary shares

270,000

Share warrants outstanding 20,000

Share premium – unexercised warrants 20,000

4 Market value of ordinary share 80

Less: Option price 60

Multiply by 25,000 shares Value of warrants 500,000

Share warrants outstanding 500,000

Ordinary share capital (25,000 x 50)

Share warrants outstanding 750,000 Sales price of bonds with warrants

July 15 Memo – Issued 60,000 rights permitting shareholders

to acquire 1 share at P130 for every 5 rights

31 Share warrants outstanding 250,000

Share premium – unexercised share warrants

Ordinary share capital, P100 par

Authorized – 200,000 shares