Reference no: EM132937779

Questions -

Q1. Cinnamon Corporation entered into a franchise agreement with Toast Company on January 1, 2018 to sell McJonald products for 10 years. The initial franchise fee, which is P20,000,000, was satisfied by Dollibee by paying P4,000,000 as down payment, and by issuing a 5-year P16,000,000, 8%, note. The agreement states that Toast shall provide the necessary initial services, and has already substantially performed all required initial services. The agreement further states that Cinnamon shall pay Toast 5% of its annual sales every December 31 as a continuing franchise fee. The 2018 sales of Cinnamon total to P10,000,000; and the 2019 sales total to P14,300,000.

a. How much expense related to the franchise (excluding the interest expense on the note payable) shall be recognized in 2018?

b. How much expense related to the franchise (excluding the interest expense on the note payable) shall be recognized in 2019?

Q2. FIVE Corporation granted 30,000 share options to a senior executive on January 1, 2017, conditional upon the executive remaining in the entity's employ until December 31, 2019.The par value per share is P50, and the exercise price is P100. However, the exercise price drops to 80% if the entity's earnings increase by at least an average of 10% per year over the three-year period. On grant date, the entity estimated that the fair value of the share option is P30 if the exercise price is P80. If the exercise price is P100, the fair value of the share option is P25.During 2017 and 2018, the earnings increased by 11% and 12%, respectively. However, during 2019, the earnings increased only by 4%. All share options were exercised on December 31, 2019.

a. What amount should be recognized as compensation expense in 2019?

b. What is the share premium upon exercise of the share options on December 31, 2019?

Q3. On January 2, 2018, Inhaler Company purchased a 10-year 9% P5,000,000 bonds of Exhaler, Inc. for an amount resulting to a yield rate of 10%. Interest is collected by Inhaler every December 31. The effective rate of the bonds on December 31, 2018, December 31, 2019, and December 31, 2020, are 8%, 12%, and 11%, respectively. (Use four decimal places for PV factors; i.e. x.xxx)The business model of the entity is to collect contractual cash flows at specified dates, wherein the cash flows are in the form of principal and interest payments on the principal amount, and to sell the investment. Provided that the entity decided to change its business model on December 31, 2019 to collect contractual cash flows only.

a. What will be the carrying value of the investment as of December 31, 2019?

b. What is the carrying value of the investment as of December 31, 2019?

Q4. THREE Company and FOUR Inc. decided to exchange machineries on January 1, 2019. The machine of THREE (Machine L) was purchased in January 1, 2016 for P1,000,000. The estimated useful life of the machine is 10 years, with no residual value. On the date of the exchange, Machine L's fair value is P680,000. FOUR's machine (Machine C) was purchased on January 1, 2018, for P2,500,000. The estimated useful life of the machine is 5 years, with no residual value. The fair value of Machine C on the date of exchange is P2,100,000. Because of the difference in the fair values, included in the agreement is a stipulation wherein THREE shall pay an P1,500,000. The exchange is considered to be with commercial substance.

a. How much shall FOUR Inc. initially recognize Machine L?

b. How much is the gain(loss) from exchange that should be recognized by THREE Company?

Q5. SIX Corporation entered into a nine-year lease on a warehouse on December 31, 2017. The estimated useful life of the warehouse on the date of the agreement is 12 years. The lease is non-renewable, and the warehouse reverts to the lessor at the end of the lease term.Lease payment of P500,000 is due annually starting December 31, 2018, and every December 31 thereafter.The cost of restoring the underlying asset to its original condition as required by the contract is estimated at the present value of P200,000.The interest rate implicit in the lease is 9%. The present value of an ordinary annuity of 1 for nine years at 9% is 5.6.

a. What amount should be reported as lease liability on December 31, 2017?