PREFINAL EXAM – ACCOUNTING 5 SET B
1. On January 1, 2013, Dean Corporation signed a ten-year
noncancelable lease for certain machinery. The terms of
the lease called for Dean to make annual payments of
P200,000 at the end of each year for ten years with title
to pass to Dean at the end of this period. The machinery
has an estimated useful life of 15 years and no salvage
value. Dean uses the straight-line method of
depreciation for all of its fixed assets. Dean
accordingly accounted for this lease transaction as a
capital lease. The lease payments were determined to
have a present value of P1,342,016 at an effective
interest rate of 8%. With respect to this capitalized lease,
Dean should record for 2013
a. lease expense of P200,000.
b. interest expense of P91,362 and depreciation
expense of P134,202.
c. interest expense of P89,468 and depreciation
expense of P76,136.
d. interest expense of P107,361 and depreciation
expense of P89,468.
2. Metcalf Company leases a machine from Vollmer Corp.
under an agreement which meets the criteria to be a
capital lease for Metcalf. The six-year lease requires
payment of P170,000 at the beginning of each year,
including P25,000 per year for maintenance, insurance,
and taxes. The incremental borrowing rate for the lessee
is 10%; the lessor's implicit rate is 8% and is known by
the lessee. The present value of an annuity due of 1 for
six years at 10% is 4.79079. The present value of an
annuity due of 1 for six years at 8% is 4.99271. Metcalf
should record the leased asset at
a. P723,943.
b. P694,665.
c. P848,760.
d. P814,435.
3. On December 31, 2013, Lang Corporation leased a ship
from Fort Company for an eight- year period expiring
December 30, 2021. Equal annual payments of P400,000
are due on December 31 of each year, beginning with
December 31, 2013. The lease is properly classified as a
capital lease on Lang 's books. The present value at
December 31, 2013 of the eight lease payments over the
lease term discounted at 10% is P2,347,370. Assuming all
payments are made on time, the amount that should be
reported by Lang Corporation as the total obligation
under capital leases on its December 31, 2014 balance
sheet is
a. P1,742,107.
b. P2,400,000.
c. P2,182,108.
d. P2,000,318.
4. Mays Company has a machine with a cost of P600,000
which also is its fair value on the date the machine is
leased to Park Company. The lease is for 6 years and the
machine is estimated to have an unguaranteed residual
value of P60,000. If the lessor's interest rate implicit in
the lease is 12%, the six beginning-of-the-year lease
payments would be
a. P117,270.
b. P100,000.
c. P138,541.
d. P123,698.
DECEMBER 4, 2019
5. The amount to be recorded as the cost of an asset under
capital lease is equal to the
a. present value of the minimum lease payments
plus the present value of any unguaranteed
residual value.
b. carrying value of the asset on the lessor's books.
c. present value of the minimum lease payments.
d. present value of the minimum lease payments or the
fair value of the asset, whichever is lower.
6. On January 1, 2012, Crown Company sold property to
Leary Company. There was no established exchange price
for the property, and Leary gave Crown a P3,000,000
zero- interest-bearing note payable in 5 equal annual
installments of P600,000, with the first payment due
December 31, 2012. The prevailing rate of interest for a
note of this type is 9%. The present value of the note at
9% was P2,163,000 at January 1, 2012. What should be
the balance of the Discount on Notes Payable account on
the books of Leary at December 31, 2012 after adjusting
entries are made, assuming that the effective-interest
method is used?
a. P0
b. P669,600
c. P837,000
d. P642,330
7. On December 31, 2010, Nolte Co. is in financial difficulty
and cannot pay a note due that day. It is a P1,200,000
note with P120,000 accrued interest payable to Piper,
Inc. Piper agrees to accept from Nolte equipment that
has a fair value of P580,000, an original cost of P960,000,
and accumulated depreciation of P460,000. Piper also
forgives the accrued interest, extends the maturity date
to December 31, 2013, reduces the face amount of the
note to P500,000, and reduces the interest rate to 6%,
with interest payable at the end of each year. Nolte
should recognize a gain or loss on the transfer of the
equipment of
a. P120,000 gain.
b. P380,000 loss.
c. P0.
d. P80,000 gain.
8. (Refer to no. 7) Nolte should recognize a gain on the
partial settlement and restructure of the debt of
a. P110,000.
b. P150,000.
c. P0.
d. P30,000.
9. (Refer to no. 7) Nolte should record interest expense for
2013 of
a. P60,000.
b. P90,000.
c. P0.
d. P30,000.
10. When a note payable is issued for property, goods, or
services, the present value of the note is measured by
a. using an imputed interest rate to discount all future
payments on the note.
b. any of these.
c. the fair value of the property, goods, or services.
 PREFINAL EXAM – ACCOUNTING 5
d. the fair value of the note.
11. On January 1, 2012, Ann Price loaned P90,156 to Joe
Kiger. A zero-interest-bearing note (face amount,
P120,000) was exchanged solely for cash; no other rights
or privileges were exchanged. The note is to be repaid on
December 31, 2014. The prevailing rate of interest for a
loan of this type is 10%. The present value of P120,000 at
10% for three years is P90,156. What amount of interest
income should Ms. Price recognize in 2012?
a. P36,000.
b. P27,048.
c. P9,016.
d. P12,000.
12. On January 1, 2012, Jacobs Company sold property to
Dains Company which originally cost Jacobs P950,000.
There was no established exchange price for this
property. Danis gave Jacobs a P1,500,000 zero-interest-
bearing note payable in three equal annual
installments of P500,000 with the first payment due
December 31, 2012. The note has no ready market. The
prevailing rate of interest for a note of this type is 10%.
The present value of a P1,500,000 note payable in three
equal annual installments of P500,000 at a 10% rate of
interest is P1,243,500. What is the amount of interest
income that should be recognized by Jacobs in 2012,
using the effective-interest method?
a. P124,350.
b. P150,000.
c. P0.
d. P50,000.
13. A lessee with a capital lease containing a bargain
purchase option should depreciate the leased asset over
the
a. life of the asset or the term of the lease, whichever
is shorter.
b. life of the asset or the term of the lease, whichever
is longer.
c. asset's remaining economic life.
d. term of the lease.
14. In a lease that is appropriately recorded as a direct-
financing lease by the lessor, unearned income
a. does not arise.
b. should be recognized at the lease's expiration.
c. should be amortized over the period of the lease
using the effective interest method.
d. should be amortized over the period of the lease
using the straight-line method.
15. Mart issued P5,000,000 face value 12% convertible
bonds at 110 on January 1, 2009 maturing on January 1,
2014 and paying interest semiannually on January 1 and
July 1. It is estimated that the bonds would sell only at
103 without the conversion feature. Each P1,000 bond is
convertible into 10 ordinary shares with P100 par value.
How much is the increase in shareholders’ equity arising
from the issuance of the convertible bonds on January 1,
2009?
a. P150,000
b. P 0
c. P350,000
d. P500,000
SET B DECEMBER 4, 2019
16. How should the value of the warrants attached to a debt
security be accounted for?
a. a separate portion of paid in capital
b. a liability
c. no value assigned
d. an appropriation of retained earnings
17. On April 30, 2019, White Corporation had outstanding
12% P1,000,000 face amount, convertible bonds
maturing on April 30, 2023. Interest is payable on April
30 and October 31. On April 30, 2019, all these bonds
were converted into 40,000 shares of P10 par common
stock. On the date of conversion:
 Unamortized bond discount was P30,000.
 Each bond had a market value of P1,080.
 Each share of stock had a market price of P28.
What amount should White record as a loss on
conversion of bonds?
a. P30,000
b. Zero
c. P150,000
d. P110,000
18. On May 1, 2019, Hill issued P2,000,000, 20-year, 10%
bonds for P2,120,000. Each P1,000 bond had a
detachable warrant eligible for the purchase of one share
of Hill’s P50 par common stock for P60. Immediately
after bonds were issued, Hill’s securities had the
following market values:
10% bond without warrant P1,040
Warrant P20
Common stock, P50 par P56
What amount should Hill credit to premium on bonds
payable?
a. P40,000
b. P0
c. P120,000
d. P80,000
19. If a company chooses the fair value option, a decrease in
the fair value of the liability is recorded by crediting
a. Unrealized Gain/Loss from change in fair value
b. None of these.
c. Bonds Payable.
d. Gain on Restructuring of Debt.
20. A troubled debt restructuring will generally result in a
a. gain by both the debtor and the creditor.
b. gain by the debtor and a loss by the creditor
c. loss by the debtor and a gain by the creditor.
d. loss by both the debtor and the creditor.
21. Eddy Co. is indebted to Cole under a P600,000, 12%,
three-year note dated December 31, 2011. Because of
Eddy's financial difficulties developing in 2013, Eddy
owed accrued interest of P72,000 on the note at
December 31, 2013. Under a troubled debt restructuring,
on December 31, 2013, Cole agreed to settle the note
and accrued interest for a tract of land having a fair value
of P540,000. Eddy's acquisition cost of the land is
P435,000. Ignoring income taxes, on its 2013 income
statement Eddy should report as a result of the troubled
debt restructuring
 PREFINAL EXAM – ACCOUNTING 5 SET B DECEMBER 4, 2019
Gain on Disposal Restructuring Gain 26. The excess of the fair value of leased property at the
a. P105,000 P60,000 inception of the lease over its cost or carrying amount
b. P105,000 P132,000 should be classified by the lessor as:
c. P237,000 P0 a. manufacturer’s or dealer’s profit from a sales
d. P165,000 P0 type lease
b. manufacturer’s or dealer’s profit from a direct
22. On December 31, 2015, Fire Company was experiencing financing lease
financial difficulties and entered into a debt restructuring c. unearned income from a sales type lease
agreement with the creditor. The creditor restructured d. unearned income from a direct financing lease
the obligation as follows:
 Reduced the principal note payable from P5,000,000 27. On August 1, 2008, Metro Inc. leased a luxury apartment
to P4,500,000. unit to Centro. The parties signed a 1-year lease
 Forgave P600,000 of accrued interest. beginning September 1, 2008 for a P100,000 monthly
 Extended the maturity date from December 31, 2015 rent payable on the first day of the month. At the August
to December 31, 2003. 1 signing date, Metro collected P54,000 as a
 Reduced the interest from 12% to 10%. Interest was nonrefundable fee for allowing Centro to sign a 1-year
payable annually on December 31, 2016, 2017 and lease (the normal lease term is 3 years) and P100,000
2018. rent for September. Centro has made timely payments
Fire should report loss on debt restructuring of: each month, but prepaid January’s rent on December 20.
a. P500,000 In Metro’s 2008 income statement, rent revenue should
b. P 0 be reported at:
c. P250,000 a. P400,000
d. P850,000 b. P418,000
c. P454,000
23. The following information pertains to the transfer of real d. P518,000
estate pursuant to a troubled debt restructuring by Knot
Company to Ton Company in full liquidation of Knot’s 28. Glade Company leases computer equipment to
liability to Ton: customers under direct financing leases. The equipment
Carrying amount of liability liquidated P150,000 has no residual value at the end of the lease and the
Carrying amount of real estate transferred 100,000 leases do not contain bargain purchase options. Glade
Fair value of real estate transferred 90,000 wishes to earn 8% interest on a 5-year of equipment with
What amount should Knot report as ordinary gain (loss) a fair value of P3,234,000. The present value of an
on transfer of real estate? annuity due of 1 at 8% for 5 years is 4.312. On January 1,
a. P50,000 2009, Glade leased the equipment to Blaze Company.
b. P60,000 What is the total amount of interest revenue that Glade
c. (P10,000) will earn over the life of the lease
d. P 0 a. P516,000
b. P750,000
24. (Refer to no. 23.)What amount should Knot report as c. P1,293,600
pretax extraordinary gain (loss) on restructuring of d. P1,394,500
payables?
a. P50,000 29. On January 1, 2009, Hooks Oil Company sold equipment
b. P60,000 with a carrying amount of P1,000,000, and a remaining
c. (P10,000) useful life of 10 years, to Maco Drilling for P1,500,000.
d. P0 Hooks immediately leased the equipment back under a
10 year capital lease with a present value of P1,500,000
25. For which of the following transactions would the use of and will depreciate the equipment using the straight-line
the present value of an annuity due (in advance) concept method. Hooks made the first annual lease payment of
be appropriate in calculating the present value of the P244,120 in December 2009. In Hooks’ December 31,
asset obtained or liability owed at the date of 2009 balance sheet, the unearned gain on equipment
incurrence? sale should be
a. a 10-year 8% bond is issued on January 2 with a. 255,880
interest payable semiannually on July 1 and b. 0
January 1 yielding 7% c. P500,000
b. a 10-year 8% bond is issued on January 2 with d. P450,000
interest payable semiannually on July 1 and
January 1 yielding 9% 30. Robin leased a machine from Ready. The lease qualifies
c. a capital lease is entered into with the initial as a capital lease and requires 10 annual payments of
lease payment due one month subsequent to P10,000 beginning immediately. The lease specifies an
the signing of the lease agreement interest rate of 12% and a purchase option of P10,000 at
d. a capital lease is entered into with the initial the end of the tenth year, even though the machine’s
lease payment due upon the signing of the lease estimated value on that date is P20,000. Robin’s
agreement incremental borrowing rate is 14%.
The present value of an annuity due of 1 at:
12% 6.328 14% 5.946
 PREFINAL EXAM – ACCOUNTING 5 SET B DECEMBER 4, 2019
The present value of 1 at:
12% 0.322 14% 0.270
What amount should Robin record as lease liability at the
beginning of the lease term?
a. P66,500
b. P69,720
c. P62,160
d. P64,860