PROBLEM 3
PROBLEM 3 (APPLE CORPORATION): On December 31, 2022, the following information is presented for the various liabilities of Apple Corporation: Bonds Payable On January 1, 2021, APPLE Corporation issued 5-year, 6,000 convertible bonds at face value of P1,000 per bond. Interest is to be paid annually in arrears at the stated coupon rate of 7%. Each bond is convertible, at the holder's option, into 300, P2 par value ordinary shares at any time up to maturity. On the date of issuance, the prevailing market rate for similar debt without the conversion privilege was 9%. On the same date, the market price of one ordinary share was P3. 2,500 of the bonds were converted on December 31, 2022. The relevant present value factors are presented below: Present value of 1 at 7% for 5 periods 0.649931 Present value of an ordinary annuity of 1 at 7% for 5 periods 3.889656 Present value of 1 at 9% for 5 periods 0.712986 Present value of an ordinary annuity of 1 at 9% for 5 periods 4.100200 Lease Liability On December 31, 2021, APPLE Corporation signed a 10-year noncancellable lease agreement on a storage facility to be used for its ice cream business unit. The agreement provides for equal annual rental payments of P720,000, inclusive of P24,705 executory costs, beginning on December 31, 2021. The storage facility has a fair value of P4,400,000 on December 31,2021 and has an estimated economic life of 12 years with an unguaranteed residual value. Since the lease is non-renewable, the storage building will revert back to the lessor upon termination of the lease. The interest rate implicit in the lease, which is not known to APPLE Corporation is 11%%. The rate of interest that APPLE Corporation would have to borrow the funds necessary to obtain a storage facility of similar value is determined to be 12%. The relevant present value factors are presented below: Present value of an ordinary annuity of 1 at 11% for 3 periods 5.889232 Present value of an annuity due of 1 at 11% for 3 periods 6.537048 Present value of an ordinary annuity of 1 at 12% for 10 periods 5.650223 Present value of an annuity due of 1 at 12% for 3 periods 6.328250 Deferred Tax Liability On December 31, 2021, APPLE Corporation had a temporary difference of P200,000 related to depreciation on its property, plant and equipment. At December 31, 2022, the company had four temporary differences as follows: Temporary Difference 2023 2024 2025 onwards Depreciation (straight-line for accounting P160,000 P220,000 P760,000 purposes and accelerated for tax purposes Rent collected in advance (recognized as income 380,000 when earned for accounting purposes and when received for tax purposes) Various expenses (recognized as expense when 90,000 incurred for accounting purposes and when paid for tax purposes) Developments costs (capitalized and amortized 276,000 210,000 144,000 over future periods for accounting purposes but deducted when paid for tax purposes) The company has income taxes of P435,000 due per the tax return for 2022. The enacted tax rate is 30% for all periods
