71 CHAPTER Problem 4-1 C A D D A 10 B A B A D Problem 4-2 Income tax expense Income tax payable (35% x 1,500,000) 525,000 525,000 Income tax expense Deferred tax liability (35% x 500,000) 175,000 175,000 Income tax payable Cash 200,000 200,000 Current tax expense Deferred tax expense 175,000 Total income tax expense 525,000 700,000 Problem 4-3 Income tax expense Income tax payable (35% x 4,000,000) 1,400,000 Deferred tax asset Income tax benefit (35% x 1,000,000) 350,000 Income tax payable Cash Current tax expense Income tax benefit ( 350,000) 1,400,000 350,000 500,000 500,000 1,400,000 Total income tax expense 1,050,000 72 Problem 4-4 2008 Income tax expense Income tax payable (35% x 7,000,000) 2,450,000 2,450,000 Deferred tax asset Income tax benefit (35% x 1,000,000) 350,000 350,000 Income statement presentation Income before income tax 6,000,000 Income tax expense: Current tax expense Income tax benefit 2,100,000 Net income 3,900,000 2009 Income tax expense Income tax payable (35% x 8,000,000) 2,800,000 Income tax expense Deferred tax asset 350,000 ( 2,450,000 350,000) 2,800,000 350,000 Income statement presentation Income before income tax 9,000,000 Income tax expense: Current tax expense Decrease in deferred tax asset 3,150,000 Net income 5,850,000 2,800,000 350,000 Problem 4-5 2008 Income tax expense Income tax payable (35% x 5,000,000) 1,750,000 Income tax expense Deferred tax liability (35% x 500,000) 175,000 1,750,000 175,000 73 Income statement presentation Income before income tax 5,500,000 Income tax expense: Current tax expense Deferred tax expense 1,925,000 Net income 2009 Income tax expense Income tax payable (35% x 7,500,000) 2,625,000 Deferred tax liability Income tax expense 1,750,000 175,000 3,575,000 2,625,000 175,000 175,000 Income statement presentation Income before income tax 7,000,000 Income tax expense: Current tax expense Decrease in deferred tax liability 2,450,000 Net income 2,625,000 ( 175,000) 4,550,000 Problem 4-6 Accounting income Permanent differences: Nondeductible expenses 4,000,000 200,000 Nontaxable revenue Accounting income subject to tax Taxable temporary differences: Deferred income Excess tax depreciation ( 50,000) Deductible temporary differences: Doubtful accounts Estimated warranty cost 100,000 Taxable income ( 300,000) 3,900,000 ( 450,000) 100,000 3,600,000 Income tax expense Income tax payable (35% x 3,600,000) 1,260,000 1,260,000 Income tax expense Deferred tax liability (35% x 500,000) 175,000 175,000 74 Deferred tax asset Income tax benefit (35% x 200,000) Income before income tax 4,000,000 Income tax expense Current tax expense Deferred tax expense Income tax benefit Net income 70,000 70,000 1,260,000 175,000 ( 70,000) 1,365,000 2,635,000 Problem 4-7 2008 Income tax expense Income tax payable (35% x 2,400,000) 840,000 Income tax expense Deferred tax liability (35% x 600,000) 210,000 2009 Income tax expense 840,000 210,000 1,260,000 Income tax payable (35% x 3,600,000) 1,260,000 Income tax expense Deferred tax liability (35% x 1,500,000) 525,000 525,000 2010 Income tax expense Income tax payable (35% x 6,200,000) 2,170,000 2,170,000 Income before construction income Construction income 3,000,000 Taxable income 3,200,000 6,200,000 Deferred tax liability Income tax expense (35% x 2,100,000) 735,000 735,000 75 Problem 4-8 Requirement The “current expense” is computed as follows: 2008 2011 Income before depreciation 4,000,000 Depreciation – SYD 100,000 Taxable income 3,900,000 Current tax expense (35%) 1,365,000 2009 2010 4,000,000 4,000,000 4,000,000 400,000 300,000 200,000 3,600,000 3,700,000 3,800,000 1,260,000 1,295,000 1,330,000 The deferred tax liability arising from the taxable temporary difference is computed as follows: Temporary difference liability 2008 2009 2010 2011 Balance 150,000 50,000 ( 50,000) (150,000) - 2008 Income tax expense Income tax payable 1,260,000 Income tax expense Deferred tax liability 52,500 2009 Income tax expense Income tax payable 1,295,000 Income tax expense Deferred tax liability 17,500 2010 Income tax expense Income tax payable 1,330,000 Deferred tax liability Income tax expense Rate 35% 35% 35% Deferred tax 52,500 17,500 ( 17,500) ( 52,500) - 1,260,000 52,500 1,295,000 17,500 1,330,000 17,500 17,500 76 2011 Income tax expense Income tax payable 1,365,000 Deferred tax liability Income tax expense 1,365,000 52,500 Requirement – Balance sheet on December 31, 2009 Noncurrent liabilities: 52,500 Deferred tax liability 70,000 Problem 4-9 Requirement 2008 2011 Accounting income 5,000,000 Doubtful accounts Rent income ( 40,000) Warranty cost ( 200,000) Taxable income 4,760,000 Tax rate 35% Current tax expense 1,666,000 2,000,000 3,000,000 ( 40,000) 300,000 ( ( 80,000) 20,000) 2,840,000 35% 882,000 2008 Income tax expense Income tax payable 882,000 Deferred tax asset Income tax benefit 182,000 2009 Income tax expense Income tax payable 994,000 4,000,000 ( 100,000) ( 40,000) 2,520,000 520,000 (160,000) (120,000) (240,000) - 2010 100,000 120,000 Temporary difference 2008 2009 2010 2011 Balance 2009 35% 994,000 Rate 35% 35% 35% 35% 3,880,000 35% 1,358,000 Deferred tax asset 182,000 ( 56,000) ( 42,000) ( 84,000) 882,000 182,000 994,000 77 2009 Income tax expense 56,000 Deferred tax asset 56,000 2010 Income tax expense Income tax payable Income tax expense Deferred tax asset 2011 Income tax expense Income tax payable Income tax expense Deferred tax asset 1,358,000 1,358,000 42,000 42,000 1,666,000 1,666,000 84,000 84,000 Requirement – Balance sheet on December 31, 2008 Noncurrent assets: Deferred tax asset 182,000 Problem 4-10 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 Income tax expense (35% x 100,000) Income tax payable Deferred tax asset (35% x 300,000) Income tax benefit 35,000 35,000 105,000 105,000 78 Income statement presentation Loss before income tax Income tax expense: Current tax expense (200,000) ( 35,000) Income tax benefit Net loss (130,000) 105,000 70,000 Problem 4-11 Accounting income Taxable temporary difference: Tax depreciation Deductible temporary differences: Litigation loss 400,000 Warranty cost Taxable income Income tax expense Income tax payable (35% x 7,600,000) 2,660,000 7,900,000 (1,000,000) 300,000 7,600,000 2,660,000 Income tax expense Deferred tax liability (35% x 1,000,000) 350,000 350,000 Deferred asset Income tax benefit (35% x 700,000) 245,000 245,000 Income statement presentation Income before income tax 7,900,000 Income tax expense: Current tax expense Deferred tax expense Income tax benefit 2,765,000 Net income Balance sheet presentation Noncurrent assets: Deferred tax asset 245,000 Current liabilities: Income tax payable Noncurrent liabilities: Deferred tax liability 2,660,000 350,000 ( 245,000) 5,135,000 2,660,000 350,000 79 Problem 4-12 Income tax expense Deferred tax liability (35% x 7,000,000) 2,450,000 Deferred tax asset Income tax benefit (35% x 2,000,000) 700,000 2,450,000 700,000 Income tax expense Income tax payable 2,800,000 2,800,000 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 (35% x 8,000,000) 2,800,000 Income before income tax 13,000,000 Income tax expense: Current tax expense Deferred tax expense Income tax benefit Net income 2,800,000 2,450,000 ( 700,000) 4,550,000 8,450,000 Problem 4-13 Equipment Accumulated depreciation Revaluation surplus 4,000,000 1,500,000 2,500,000 Cost Appreciation Equipment 4,000,000 Accumulated depreciation ( 8,000,000 x 3/8) (12,000,000 x 3/8) 1,500,000 BV / SV / RS 2,500,000 Revaluation surplus Replacement cost 8,000,000 12,000,000 3,000,000 4,500,000 5,000,000 7,500,000 875,000 to purchase two shares at P140 per share plus one right Cash (20,000 x 140) Share capital Share premium 2,800,000 2,000,000 800,000 Retained earnings (67,000 x 20) Dividends payable 1,340,000 1,340,000 Shares originally issued 50,000 Newly issued Total Less: Treasury 3,000 Outstanding 20,000 70,000 67,000 Share capital (2,000 x 100) Treasury shares (2,000 x 90) 180,000 Share premium 200,000 Profit and loss Retained earnings 540,000 20,000 540,000 160 Retained earnings Retained earnings appropriated for treasury shares 90,000 90,000 Statement of Changes in Equity Year Ended December 31, 2008 Share Treasury shares Balances – January Acquisition of TS (6,000 shares) 540,000 Reissuance of TS (3,000 shares) (270,000) Retirement of TS (2,000 shares) (180,000) Issuance of 20,000 shares Dividends declared Net income capital 5,000,000 Share Retained premium earnings 400,000 1,500,000 90,000 ( 200,000) 2,000,000 20,000 800,000 (1,340,000) 540,000 Appropriated for TS Balances – December 31 90,000 6,800,000 Shareholders’ equity Share capital 6,800,000 Share premium Retained earnings: Unappropriated Appropriated for treasury shares 700,000 Treasury shares Shareholders’ equity ( 90,000) 1,310,000 610,000 1,310,000 610,000 90,000 ( 90,000) 8,720,000 Problem 9-15 Treasury shares (5,000 x 110) Cash 550,000 Cash (3,000 x 140) Treasury shares (3,000 x 110) 330,000 Share premium 420,000 Retained earnings (58,000 x 20) Dividends payable 1,160,000 Dividends payable Cash 550,000 90,000 1,160,000 1,160,000 1,160,000 161 Memo entry – Issued 120,000 new shares with par value of P50 as a result of a for split of 60,000 original shares with par value of P50 There are 4,000 shares in the treasury Equipment Share capital (4,000 x 50) 200,000 Share premium Profit and loss Retained earnings 1,730,000 260,000 60,000 1,730,000 Statement of Changes in Equity Year Ended December 31, 2008 Treasury Share capital shares Balances – January 6,000,000 Acquisition of TS (5,000 shares) Reissuance of TS (3,000 shares) (330,000) Dividends paid Issuance of 4,000 shares for equipment 200,000 Net income Balances – December 31 6,200,000 220,000 Share Retained premium earnings 500,000 1,800,000 550,000 90,000 (1,160,000) 60,000 _ 1,730,000 _ 650,000 2,370,000 Shareholders’ equity Share capital, P50 par, 124,000 shares issued, of which 4,000 shares are in treasury 6,200,000 Share premium Retained earnings (of which P220,000 is appropriated for treasury shares) 2,370,000 Treasury shares, at cost ( 220,000) Shareholders’ equity 9,000,000 650,000 Problem 9-16 Cash (100,000 x 54) Preference share capital 5,000,000 Share premium - preference 5,400,000 Treasury shares (10,000 x 32) Cash 320,000 400,000 320,000 162 Cash (250,000 x 34) Ordinary share capital (250,000 x 20) 5,000,000 8,500,000 Share premium – ordinary 3,500,000 Retained earnings (1,240,000 x 2) Dividends payable 2,480,000 2,480,000 Dividends payable Cash 2,480,000 2,480,000 Cash (5,000 x 42) Treasury shares (5,000 x 32) 160,000 Share premium – TS 50,000 210,000 Retained earnings (9% x 5,000,000) Dividends payable 450,000 450,000 Profit and loss Retained earnings 3,500,000 3,500,000 Retained earnings Retained earnings appropriated for treasury shares 160,000 160,000 Statement of Changes in Equity Year Ended December 31, 2008 Treasury Share capital shares Balances – January 20,000,000 Issuance of 100,000 preference shares, P50 par 5,000,000 Acquisition of TS (10,000 shares) 320,000 Reissuance of TS (5,000 shares) (160,000) Issuance of 250,000 ordinary shares, P20 par 5,000,000 Dividends to ordinary share Dividends to preference share Net income Appropriated for TS Retained Reserves 6,000,000 earnings 5,000,000 400,000 50,000 3,500,000 (2,480,000) ( 450,000) 3,500,000 160,000 ( 160,000) Balances – December 31 160,000 30,000,000 10,110,000 5,410,000 163 Shareholders’ equity Preference share capital, P50 par, 9% cumulative, 400,000 shares authorized 100,000 shares issued 5,000,000 Ordinary share capital, P20 par, 4,000,000 shares authorized, 1,250,000 shares issued, of which 5,000 shares are in treasury 25,000,000 Reserves (Note 1) 10,110,000 Retained earnings 5,410,000 Treasury shares ( 160,000) Total shareholders’ equity 45,360,000 Note – Reserves Share premium Retained earnings appropriated for treasury shares 160,000 Total 9,950,000 10,110,000 Problem 9-17 Retained earnings Inventory Retained earnings Property, plant and equipment Share capital (350,000 x 5) Share premium Share premium Retained earnings 250,000 250,000 1,500,000 1,500,000 1,750,000 1,750,000 2,200,000 2,200,000 Share capital, 350,000 shares, P5 par 1,750,000 Share premium Total shareholders’ equity 350,000 2,100,000 Problem 9-18 Retained earnings Inventory 150,000 150,000 Note payable Accumulated depreciation Retained earnings Equipment 500,000 1,200,000 300,000 2,000,000 164 Note payable Book value 800,000 Loss on extinguishment of debt (300,000) 500,000 Retained earnings Goodwill 1,200,000 1,200,000 Mortgage payable Preference share capital Share premium 4,200,000 4,000,000 200,000 Ordinary share capital (50,000 x 80) Share premium Share premium Retained earnings 4,000,000 4,000,000 4,450,000 4,450,000 Subic Company Balance Sheet December 31, 2008 Assets Cash Accounts receivable Inventory Property, plant and equipment Accumulated depreciation (1,900,000) Total assets 6,850,000 Liabilities and Shareholders’ Equity Accounts payable Preference share capital, P100 par 4,000,000 Ordinary share capital, P20 par Share premium Total liabilities and shareholders’ equity 6,850,000 200,000 300,000 350,000 7,900,000 1,100,000 1,000,000 750,000 Problem 9-19 Preference share capital Retained earnings Bonds payable 1,500,000 500,000 2,000,000 165 Retained earnings Goodwill 500,000 500,000 Property, plant and equipment Accumulated depreciation (25%) Revaluation surplus 3,000,000 4,000,000 1,000,000 Revaluation surplus Retained earnings 2,000,000 2,000,000 Balance Sheet January 1, 2008 Assets Cash Other current assets Property, plant and equipment Less: Accumulated depreciation Total assets 10,750,000 425,000 1,325,000 12,000,000 3,000,000 9,000,000 Liabilities and Shareholders’ Equity Current Liabilities Bonds payable Ordinary share capital Share premium Revaluation surplus Total liabilities and shareholders’ equity 10,750,000 2,000,000 2,000,000 5,000,000 750,000 1,000,000 Problem 9-20 Answer A Retained earnings – December 31, 2007 300,000 Net income for 2008 60,000 Total retained earnings – December 31, 2008 360,000 The retained earnings must be appropriated to the extent of the remaining cost of the treasury shares of P80,000 (4,000 x 20) Thus the unappropriated balance should be P280,000 Problem 9-21 Answer D Retained earnings Scrip dividend payable 100,000 100,000 166 Interest expense (100,000 x 10% x 9/12) Accrued interest payable 7,500 7,500 Problem 9-22 Answer A – 200,000 Property dividend reduces retained earnings at the cost of the property given Problem 9-23 Answer C Retained earnings Cash Dividends payable 1,100,000 Retained earnings (15,000 x 20) Share capital (15,000 x 10) 150,000 Share premium 3,800,000 2,700,000 300,000 150,000 5% x 300,000 = 15,000 shares Problem 9-24 Answer B Shares issued as split (80,000 x 5) 400,000 Less: Treasury (4,000 x 5) 20,000 Outstanding 10% stock dividend Reissuance of treasury Total outstanding Problem 9-25 Answer A 380,000 38,000 20,000 438,000 Market value on date of declaration (10% x 30,000 = 3,000 shares x 90) 270,000 Par value of stock dividend (3,000 x 20) 60,000 Share premium 210,000 Problem 9-26 Answer A 4,000 shares / 20,000 = 20% stock dividend Retained earnings before stock dividend Less: Stock dividend(4,000 x 100) 400,000 Retained earnings after stock dividend 1,500,000 1,100,000 167 Problem 9-27 Answer C Shares issued 55,000 Less: Treasury shares 5,000 Outstanding 50,000 Stock dividend shares 50,000 Treasury shares as stock dividends (5,000 shares at cost) 150,000 Unissued shares as stock dividend (45,000 x P25) 1,125,000 Retained earnings to be capitalized 1,275,000 Problem 9-28 Answer C Shareholders’ equity before dividend 4,090,000 Cash dividends: Preference (2,100 + 2,100 x P500 x 10%) 210,000) Ordinary (3,000 + 3,000 x P10) 60,000) Shareholders’ equity after dividends ( ( 3,820,000 The stock dividends not affect the total amount of shareholders’ equity Incidentally, the retained earnings balance after the dividends is computed as follows: Retained earnings per book Stock dividends: Preference (2,200 – 100 = 2,100 x P500) (1,050,000) Ordinary (3,000 shares at issue price) ( 600,000) Cash dividends: Preference Ordinary Adjusted retained earnings 580,000 2,500,000 ( 200,000) ( 60,000) The shareholders’ equity may also be computed by itemizing the elements as follows: Preference share capital (2,200 + 2,100 x P500) 2,150,000 Treasury preference shares, at cost ( 110,000) Ordinary share capital (600,000 + 600,000) 1,200,000 Retained earnings Total shareholders’ equity 580,000 3,820,000 168 Problem 9-29 Answer A Retained earnings – 12/31/2007 2,800,000 Stock dividend (57,000 x 5) ( 285,000) Cash dividend (247,000 x 10) (2,470,000) Net income Appropriation for treasury shares (10,000 x 30) ( 300,000) Unappropriated balance – 12/31/2008 Shares issued – 12/31/2007 200,000 Treasury shares Outstanding shares Stock dividend (30% x 190,000) Total outstanding shares 247,000 3,000,000 2,745,000 ( 10,000) 190,000 57,000 Problem 9-30 Answer A Net income – 2005, 2006 and 2007 6,300,000 Dividends declared – 2006 and 2007 (2,000,000) Retained earnings – 1/1/2008 4,300,000 Net income for 2008 (4,800,000 x 65%) 3,120,000 Prior period adjustment (400,000 x 65%) 260,000) Cumulative decrease in income from change in inventory method (700,000 x 65%) 455,000) Dividend declared in 2008 (2,000,000) Retained earnings – 12/31/2008 ( ( 4,705,000 Problem 9-31 Answer A Retained earnings – 1/1/2008 Prior period error – overdepreciation (500,000 x 65%) Net income for 2008 Cash dividend – preference Cash dividend – ordinary Retained earnings – 12/31/2008 4,500,000 325,000 4,000,000 (1,000,000) (2,000,000) 5,825,000 169 Problem 9-32 Answer C Retained earnings – 1/1/2008 4,000,000 Excess of cost of treasury over issue price (400,000 – 300,000) 100,000) Property dividend of Digos share, at cost 800,000) Preference dividend (10% x 2,000,000) 200,000) Overstatement of 2007 rent income ( ( ( ( 650,000) Net income for 2008 Retained earnings – 12/31/2008 5,250,000 3,000,000 Problem 9-33 Answer C Dividend declared Retained earnings balance Liquidating dividend 800,000 600,000 200,000 Problem 9-34 Answer A – 1,200,000 Only the retained earnings appropriated for the construction of new plant should be reported The retained earnings appropriated for the construction of office building should be reverted to unappropriated retained earnings because the building is already completed The cash restriction for the retirement of bonds payable does not necessarily require an appropriation of retained earnings Problem 9-35 Answer C Original cost (20,000 x 12) 240,000 Less: Cost of treasury shares reissued (15,000 x 12) 180,000 Remaining cost 60,000 Legally, retained earnings must be appropriated to the extent of the cost of treasury stock 170 Problem 9-36 Answer B To reduce the par value of the common stock: Share capital (100,000 x 25) Share premium 2,500,000 2,500,000 To eliminate the deficit: Share premium Retained earnings 2,100,000 2,100,000 Considering the adjustments, the share premium should have a balance of P1,900,000 Problem 9-37 C Cash Share capital 400,000 Share premium (400,000 x 11.50) 4,600,000 5,000,000 C Share capital (100,000 x 1) Share premium (100,000 x 10) Retained earnings Cash (100,000 x 13) 1,300,000 100,000 1,000,000 200,000 B – 600,000 Suit No is a possible loss and therefore requires only disclosure which may be done by appropriation of retained earnings Suit No is a probable loss and therefore requires accrual to expense A June 15 - 1,800,000 shares x 20 360,000 December 15 – 1,700,000 shares x 20 340,000 Total cash dividend 700,000 171 B – 900,000 Legally, retained earnings must be appropriated equal to the cost of treasury share Problem 9-38 Answer A Shareholders’ equity – January 6,500,000 Acquisition of treasury (50,000 x 10) ( 500,000) Property dividend – at cost ( 750,000) Net income Shareholders’ equity – December 31 2,500,000 7,750,000 Problem 9-39 Answer C To reduce the property, plant and equipment to appraised value: Retained earnings Property, plant and equipment 4,000,000 4,000,000 To reduce the par value of the share: Share capital (700,000 x 5) Share premium 3,500,000 3,500,000 To eliminate the deficit: Share premium Retained earnings 4,900,000 4,900,000 The inventory is not adjusted anymore because it is already recorded at its market value After adjustment, the resulting balances are: Share capital 3,500,000 Share premium Total shareholders’ equity 200,000 3,700,000 172 Problem 9-40 Answer A Deficit Reduction in inventory Reduction in PPE Writeoff of goodwill Total deficit Charged against share premium Reduction of share capital 8,000,000 2,000,000 4,000,000 1,000,000 15,000,000 5,000,000 10,000,000 ... interest payable 90 ,000 90 ,000 Interest expense Accrued interest payable (90 0,000 + 90 ,000 x 10%) 99 ,000 Note payable Accrued interest payable Cash 99 ,000 90 0,000 1 89, 000 1,0 89, 000 89 Problem 5-5... Discount on note payable 440,000 440,000 1 39, 799 1 39, 799 Interest paid Interest expense (4,831,662 x 12%) 5 79, 799 Discount amortization 440,000 1 39, 799 Problem 5-14 Note payable Land 5,000,000... 1, 390 , 590 8,000,000 640,000 7,000,000 2 49, 410 Interest expense Cash 700,000 Premium on note payable Interest expense 120,047 700,000 120,047 Interest paid Interest expense (7,2 49, 410 x 8%) 5 79, 953