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REVIEW HANDOUTS AND MATERIALS

SEMESTER 2ND SEMESTER SCHOOL YEAR 2019-2020
SUBJECT FINANCIAL ACCOUNTING AND REPORTING (PROBLEMS)
HANDOUT # MIXED - 1
TOPIC LIABILITIES

Theories

1. A present obligation of the entity arising from past events, the settlement of which is expected to result
in an outflow from the enterprise of resources embodying economic benefits
a. Payables c. Current Liability
b. Liability d. Non-current Liability

2. Not liabilities as yet but may become liabilities in the future

a. Estimated Liability c. Contingent Liabilities
b. Deferred Liabilities d. Deferred Credits

3. A liability that is expected to be settled in the norm al course of the enterprise's operating cycle or is
due to be settled within twelve months of the balance sheet date.
a. Trade accounts Payable c. Current Liabilities
b. Trade Notes Payable d. Non-current liabilities

4. Amounts due trade creditors as a result of ordinary business transactions

a. Trade accounts Payable c. Acceptances payable
b. Trade Notes Payable d. Accrued expenses payable

5. Short-term obligations arising from the normal operating cycle which are evidenced by written promises
to pay.
a. Acceptances payable c. Estimated Liabilities
b. Trade Notes Payable d. Accrued expenses payable

6. Arise when, before the corresponding liability to the bank is paid, the goods are released to the buyer
in behalf of the bank which advanced the money for importation
a. Acceptances Payable c. Estimated Liabilities
b. Liabilities under trust receipts d. Accrued expenses payable

7. Obligation supported by drafts drawn by the supplier on the purchaser of goods and accepted by
such purchaser.
a. a. Acceptances Payable c. Estimated Liabilities
b. b. Liabilities under trust receipts d. Accrued expenses payable

8. Liabilities for expenses incurred on or before the balance sheet date but payable at a later date usually
to specific persons, the amount determinable with reasonable accuracy.
a. Acceptances Payable c. Estimated Liabilities
b. Liabilities under trust receipts d. Accrued expenses payable
9. Accrued liabilities which can be determined only approximately or the specific persons to whom
payment will be made may not be identified definitely but the existence of the liability is certain
a. Acceptances Payable c. Estimated Liabilities
b. Liabilities under trust receipts d. Accrued expenses payable

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10. Cash dividends that have been declared but not yet paid as the balance sheet date.
a. Dividends in arrears c. Stock dividends payable
b. Scrip dividends payables d. Cash dividends payable

11. Arise from advance payments received from regular customers for merchandise to be delivered or
services to be performed in the future, or from overpayments, errors and other causes.
a. Customers' accounts with credit balance c. Advances payable
b. Accounts Payable d. Deposits payable
12. Consists of cash or property received but which are returnable to the depositor or which have been
collected or otherwise accumulated to be remitted to third parties.
a. Customers' accounts with credit balance c. Advances payable
b. Accounts Payable d. Deposits payable

13. Consist of billed or uncollected revenues that are not recognized as income pending completion of
the earning process.
a. Estimated Liabilities c. Contingent Liabilities
b. Deferred Liabilities d. Deferred Credits

14. Portion of bonds, mortgages and other long-term indebtedness which are to be paid within one year
from the balance sheet date and which are not payable out of the special retirement fund or from the
proceeds of a new bond issue or by conversion into capital stock.
a. Current maturities of long-term debts c. Current Liabilities
b. Non-current liabilities d. Deferred Liabilities

15. Obligation extending beyond the current operating cycle or one year, whichever is longer, or through
payable within one year will not be liquidated out of the existing current assets.
a. Current maturities of long-term debts c. Current Liabilities
b. Non-current liabilities d. Deferred Liabilities

16. Which of the following statements is correct?

a. Accounting liabilities and legal debts are the same
b. Theoretically, liabilities should be reported at their contract prices or maturity values.
c. The maturity of a liability is relatively fixed just liked that of owners equity.
d. A mere commitment to acquire goods or services does not require recognition as a liability
until the goods or services ordered have been received or rendered.

17. Statement 1 - Obligations may be legally enforceable as a consequence of a binding contract or

statutory requirement.
Statement 2 - Obligations may also arise from normal business practice, custom and a desire to
maintain good business relation or act in equitable manner.
a. Both statements are correct
b. Both statements are not correct
c. Maybe they are correct
d. One of statements is correct

18. Which of the following statements is not correct?

a. A decision by management of an entity to acquire assets in the future gives rise to a present
obligation.
b. An obligation may be extinguished by a creditor waiving or forfeiting its rights
c. Payables arising from the normal course of business due under customary trade terms not
exceeding one year are stated at their maturity values
d. All the above are correct statements

19. An account which would be classified as a current liabilitiy is

a. Deposits payable
b. Reserve for possible losses on purchase commitments
c. Accounts payable - debit balance
d. Dividends payable in stock

20. In annuity payments, the amount of the interest in each of the equal periodical payments is
a. Increasing c. Equal
b. Decreasing d. Not determinable

21. Of the following items, which one should be classified as a current liability?

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 a. An accommodation endorsement on a demand note issued by an affiliated company
b. A cash dividend declared before the balance sheet date when the date of payment is
subsequent to the balance sheet date
c. Unfunded past service cost of a pension plan to the extent that benefits have not vested and
the cost not yet charged to operations
d. Dividends in arrears on cumulative preferred stock

22. If the present value of a note issued in the exchange for a plant asset is less than its face amount, the
difference should be
a. Included in the costs of the asset
b. Amortized as interest expense over the life of the note
c. Amortized as interest expense over the life of the asset
d. Included in interest expense in the year of issuance

23. Manila Company issued a note in exchange for cash solely. Assuming that the items below differ in
amount, the present value of the note at issuance is equal to the
a. face amount
b. face amount, discounted at the prevailing interest rate for similar notes
c. proceeds received
d. proceeds received, discounted at prevailing interest rate

24. An accrued expense is an expense

a. incurred but not yet paid c. paid but not incurred
b. incurred and paid d. not reasonably estimable

25. Rent revenue collected one month in advance should be accounted for as
a. revenue in the month collected
b. current liability
c. a separate item in the equity section
d. an accrued liability

26. An accrued expense can best be described as an amount

a. paid and currently matched with earnings
b. paid and not currently matched with earnings
c. not paid and not currently matched with earnings
d. not paid and currently matched with earnings

27. Estimated liabilities are disclosed in financial statements by

a. footnote to the statements
b. showing the amount among the liabilities but not extending it to the liability total
c. an appropriation of retained earnings
d. appropriately classifying them as regular liabilities in the balance sheet

28. An overstatement of reported earnings may result from the failure to record
a. dividends in arrears on preferred stock outstanding
b. an accrued liability
c. amortization of premium on bonds payable
d. a contingent liability

29. Calculation of the amount of the equal periodic payments which would be equivalent to a year 0
outlay of P1,000 is most readily affected by reference to a table which shows the
a. Amount of 1 c. Amount of an annuity of 1
b. Present value of 1 d. Present value of an annuity of 1

30. An unpaid workmen's compensation claim against his employer for injuries sustained in an accident
which has already occurred is an example of a (an)
a. contingent loss c. contingent liability
b. anticipated loss d. estimated liability

31. Which of the following should not be classified as a current liability?

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 a. Stock dividends payable
b. Debts which arise from operations directly related to the operating cycle
c. Liabilities whose regular and ordinary liquidation is expected to occur within one year
d. Estimated or accrued amounts expected to be required to cover expenditures within the year
for known liabilities

32. ‘Profit smoothing’ often involves:

a. Contingent assets.
b. Contingent liabilities.
c. Provisions.

33. Product service warrantees are:

a. Contingent assets.
b. Contingent liabilities.
c. Provisions.

34. IAS 37 provisions include:

a. Depreciation.
b. Impairment of assets.
c. Doubtful debts.
d. Environmental provisions.

35. A provision is :
a. A liability of uncertain timing, or amount.
b. An obligation arising from past events.
c. An event that creates a legal, or constructive obligation.

36. A liability is:

a. A liability of uncertain timing, or amount.
b. An obligation arising from past events.
c. An event that creates a legal, or constructive obligation.

37. An obligating event is:

a. A liability of uncertain timing, or amount.
b. An obligation arising from past events.
c. An event that creates a legal, or constructive obligation.

38. A contract in which the costs exceed the benefits is:

a. An onerous contract.
b. A contingent liability.
c. A contingent asset.

39. Provisions are reported:

a. As part of trade payables.
b. As part of accruals.
c. Separately.

40. A constructive obligation:

a. Only relates to construction contracts.
b. Arises when you indicate that you accept certain responsibilities.
c. Arises from a legal duty.

41. A provision is recorded:

a. For a present obligation.
b. For a future obligation.
c. For a future obligation, if the possibility of a penalty is remote.

42. If the possibility of a penalty is remote:

a. Do nothing.
b. Record a contingent liability.
c. Record a provision.

43. The cost of transfer of a liability to a third party is used to:

a. Value a contingent liability.
b. Value a contingent asset.
c. Value a provision.

44. Discount rates should be:

a. Pre-tax.
b. Post-tax.
c. Changed annually.

45. Gains from disposal of assets should:

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 a. Be taken into account in provisions.
b. Be taken into account in provisions, only if closely linked to the event giving rise to the
provision.
c. Not be taken into account in provisions.

46. If it is no longer probable that payment relating to a provision will be required:

a. The provision should be used for other liabilities.
b. The provision should be reversed.
c. The provision should be replaced by a contingent liability.

47. Future operating losses indicate a need to:

a. Test for impairment.
b. Consider making a provision.
c. Consider making a contingent liability.

48. Onerous contracts indicate a need to:

a. Test for impairment.
b. Consider making a contingent asset.
c. Consider making a contingent liability.

49. Examples of restructuring are:

i sale, or termination, of a line of business;
ii the closure of business locations in a country or region, or the relocation of business activities from
one country or region to another;
iii changes in management structure;
iv fundamental reorganisations, that have a material impact on the nature, and focus, of the
undertaking’s operations;
v change of company name.
a. i+iii+iv
b. i – iii
c. i – iv
d. i-v

50. A constructive obligation to restructure only arises when:

a. There is a formal plan.
b. There is an expectation that there will be restructuring.
c. Both A and B.

51. In November, your board decides to restructure the group. In December, the plan is finalised. In
January it is announced. The group has a constructive obligation in:
a. November.
b. December.
c. January.

52. In November, your board decides to restructure the group. In December, the plan is finalised. In
January it is announced. A provision can be considered in:
a. November.
b. December.
c. January.

53. When a sale is only part of a restructuring, but there is no binding sale agreement:
a. No constructive obligation arises.
b. A constructive obligation can arise for the other parts of the restructuring.
c. A constructive obligation arises from the decision to sell the business.

54. A restructuring provision covers:

a. Retraining, or relocating continuing staff.
b. Marketing.
c. Investment in new systems and distribution networks.
d. Redundancy costs.

55. A restructuring provision:

a. Does not cover future operating losses.
b. Covers reasonable future operating losses.
c. Does not cover future operating losses, unless they relate to an onerous contract.

56. A provision should be recorded when:

a. An undertaking has a present obligation legal, or constructive.
b. It is probable that payment will be required.
c. An estimate can be made of the obligation.
d. a-c are all present.

57. If there is a present obligation to pay money, you should record a:

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 a. Contingent asset.
b. Contingent liability.
c. Provision.

58. If there is no present obligation, but one is highly likely, you should record:
a. Nothing.
b. A contingent liability.
c. A provision.
59. If there is no present obligation, but one is highly unlikely, you should record:
a. Nothing.
b. A contingent liability.
c. A provision.

60. Warranty claims normally generate a:

a. Contingent asset.
b. Contingent liability.
c. Provision.

61. Provisions should be:

a. Exact amounts only.
b. Estimates only.
c. Either exact amounts or estimates.

62. Provisions are stated:

a. Before tax.
b. After tax.
c. Both before and after tax.

63. Future events will impact the size of provision if:

a. They involve anticipated completely new technology.
b. They involve cost reductions supported by experts.
c. They are normal trading losses.

64. Reimbursements should be booked when:

a. Notified.
b. When it is virtually certain that the money will be received.
c. When you receive the cash.

65. Reimbursements should be recorded as:

a. A reduction of the provision liability.
b. An expense.
c. A separate asset.

66. A contingent liability is:

a. A possible obligation that arises from past events.
b. A specific obligation that arises from past events.
c. A possible obligation that arises from future events.

67. Joint and several liability.

You and your partners are liable for $100 million of environmental damages.
The case has been brought against you, but your partners will reimburse you for $60 million.
You record:
a. A provision of $100 million.
b. A contingent liability for $100 million.
c. You make a provision for $40 million, and a contingent liability for $60 million.

68. Contingent asset is recorded when cash inflows are:

a. Received.
b. Virtually certain.
c. Probable.

69. Liabilities are

a. any accounts having credit balances after closing entries are made.
b. deferred credits that are recognized and measured in conformity with generally accepted
accounting principles.
c. obligations to transfer ownership shares to other entities in the future.
d. obligations arising from past transactions and payable in assets or services in the future.

70. Which of the following is a current liability?

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 a. A long-term debt maturing currently, which is to be paid with cash in a sinking fund
b. A long-term debt maturing currently, which is to be retired with proceeds from a new debt issue
c. A long-term debt maturing currently, which is to be converted into common stock
d. None of these

71. Which of the following is true about accounts payable?

1. Accounts payable should not be reported at their present value.
2. When accounts payable are recorded at the net amount, a Purchase Discounts account will be used.
3. When accounts payable are recorded at the gross amount, a Purchase Discounts Lost account will be
used.
a. 1
c. 2
d. 3
e. Both 2 and 3 are true.

72. Among the short-term obligations of Lance Company as of December 31, the balance sheet date, are
notes payable totaling $250,000 with the Madison National Bank. These are 90-day notes, renewable for
another 90-day period. These notes should be classified on the balance sheet of Lance Company as
a. current liabilities.
b. deferred charges.
c. long-term liabilities.
d. intermediate debt.

73. Which of the following is not true about the discount on short-term notes payable?
a. The Discount on Notes Payable account has a debit balance.
b. The Discount on Notes Payable account should be reported as an asset on the balance sheet.
c. When there is a discount on a note payable, the effective interest rate is higher than the stated
discount rate.
d. All of these are true.

74. Which of the following may be a current liability?

a. Withheld Income Taxes
b. Deposits Received from Customers
c. Deferred Revenue
d. All of these

75. Which of the following items is a current liability?

a. Bonds (for which there is an adequate sinking fund properly classified as a long-term investment)
due in three months.
b. Bonds due in three years.
c. Bonds (for which there is an adequate appropriation of retained earnings) due in eleven months.
d. Bonds to be refunded when due in eight months, there being no doubt about the marketability
of the refunding issue.

76. Which of the following should not be included in the current liabilities section of the balance sheet?
a. Trade notes payable
b. Short-term zero-interest-bearing notes payable
c. The discount on short-term notes payable
d. All of these are included

77. Which of the following is a current liability?

a. Preferred dividends in arrears
b. A dividend payable in the form of additional shares of stock
c. A cash dividend payable to preferred stockholders
d. All of these

78. Stock dividends distributable should be classified on the

a. income statement as an expense.
b. balance sheet as an asset.
c. balance sheet as a liability.
d. balance sheet as an item of stockholders' equity.

79. Of the following items, the only one which should not be classified as a current liability is
a. current maturities of long-term debt.
b. sales taxes payable.
c. short-term obligations expected to be refinanced.
d. unearned revenues.

80. An account which would be classified as a current liability is

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 a. dividends payable in the company's stock.
b. accounts payable—debit balances.
c. losses expected to be incurred within the next twelve months in excess of the company's
insurance coverage.
d. none of these.

81. Which of the following statements is correct?

a. A company may exclude a short-term obligation from current liabilities if the firm intends to
refinance the obligation on a long-term basis.
b. A company may exclude a short-term obligation from current liabilities if the firm can
demonstrate an ability to consummate a refinancing.
c. A company may exclude a short-term obligation from current liabilities if it is paid off after the
balance sheet date and subsequently replaced by long-term debt before the balance sheet is
issued.
d. None of these.

82. The ability to consummate the refinancing of a short-term obligation may be demon- strated by
a. actually refinancing the obligation by issuing a long-term obligation after the date of the
balance sheet but before it is issued.
b. entering into a financing agreement that permits the enterprise to refinance the debt on a long-
term basis.
c. actually refinancing the obligation by issuing equity securities after the date of the balance
sheet but before it is issued.
d. all of these.

83. Which of the following statements is false?

a. A company may exclude a short-term obligation from current liabilities if the firm intends to
refinance the obligation on a long-term basis and demonstrates an ability to complete the
refinancing.
b. Cash dividends should be recorded as a liability when they are declared by the board of
directors.
c. Under the cash basis method, warranty costs are charged to expense as they are paid.
d. taxes withheld from employees' payroll checks should never be recorded as a liability since the
employer will eventually remit the amounts withheld to the appropriate taxing authority.

84. Which of the following is not a correct statement about sales taxes?
a. Sales taxes are an expense of the seller.
b. Many companies record sales taxes in the sales account.
c. If sales taxes are included in the sales account, the first step to find the amount of sales taxes is
to divide sales by 1 plus the sales tax rate.
d. All of these are true.

85. Mayberry Co. has a loss contingency to accrue. The loss amount can only be reasonably estimated
within a range of outcomes. No single amount within the range is a better estimate than any other
amount. The amount of loss accrual should be
a. zero.
b. the minimum of the range.
c. the mean of the range.
d. the maximum of the range.

86. Marx Company becomes aware of a lawsuit after the date of the financial statements, but before they
are issued. A loss and related liability should be reported in the financial statements if the amount can
be reasonably estimated, an unfavorable outcome is highly probable, and
a. the Marx Company admits guilt.
b. the court will decide the case within one year.
c. the damages appear to be material.
d. the cause for action occurred during the accounting period covered by the financial
statements.

87. Use of the accrual method in accounting for product warranty costs
a. is required for federal income tax purposes.
b. is frequently justified on the basis of expediency when warranty costs are immaterial.
c. finds the expense account being charged when the seller performs in compliance with the
warranty.
d. represents accepted practice and should be used whenever the warranty is an integral and
inseparable part of the sale.

88. Which of the following is not acceptable treatment for the presentation of current liabilities?
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 a. Listing current liabilities in order of maturity
b. Listing current liabilities according to amount
c. Offsetting current liabilities against assets that are to be applied to their liquidation
d. Showing current liabilities immediately below current assets to obtain a presentation of working
capital

89. Accrued liabilities are disclosed in financial statements by

a. a footnote to the statements.
b. showing the amount among the liabilities but not extending it to the liability total.
c. an appropriation of retained earnings.
d. appropriately classifying them as regular liabilities in the balance sheet.

90. Which of the following is not a permissible method of calculating a bonus to an employee?
a. The bonus is based on income before deductions for the bonus and income taxes.
b. The bonus is based on income after deduction of the bonus but before deduction of income
taxes.
c. The bonus is based on income after deductions for the bonus and income taxes.
d. All of these are permissible.

Problems

1. X Co. has the following liabilities as of December 31, 20x1.

a. Trade accounts payable, including cost of goods received on consignment of
P40,000 1,200,000
b. Held for trading financial liabilities 200,000
c. Deferred revenue 80,000
d. Bank overdraft 40,000
e. Income tax payable 200,000
f. Accrued expenses 20,000
g. Share dividend payable 48,000
h. Advances from affiliates payable in 15 months after 92,000
year-end
i. Loan of Y, Inc. guaranteed by X – it is possible that X will be held liable for the
guarantee 180,000

How much is the total current liabilities?

a. 1,660,000 b. 1,800,000 c. 1,740,000 d. 1,620,000

2. J Co. has a 10%, P4,000,000 loan payable as of December 31, 20x1 that is maturing on July 1, 20x2. Interest
on the loan is due every July 1 and December 31. On February 1, 20x2, J Co. entered into a refinancing
agreement with a bank to refinance the loan on a long-term basis. Both parties are financially capable
of honoring the agreement's provisions. J’s financial statements were authorized for issue on March 15,
20x2. How much is presented as current liability in relation to the loan in J’s 20x1 year-end financial
statements?
a. 4,000,000 b. 200,000 c. 4,200,000 d. 0

3. JJ Co. has a 10%, P4,000,000 loan payable as of December 31, 20x1 that is maturing on July 1, 20x2.
Interest on the loan is due every July 1 and December 31. On December 1, 20x1, JJ Co. entered into a
refinancing agreement with a bank to refinance the loan on a long-term basis. The refinancing and roll
over transaction was completed on December 31, 20x1. How much is presented as current liability in
relation to the loan in JJ’s 20x1 year-end financial statements?
a. 4,000,000 b. 200,000 c. 4,200,000 d. 0

4. On January 1, 20x1, JB Co. took a 3-year, P4,000,000 loan from a bank. The loan agreement requires JB
to maintain a current ratio of 2:1. If the current ratio falls below 2:1, the loan becomes payable on
demand. As of December 31, 20x1, JB’s current ratio is 1.8:1. On January 5, 20x2, the bank agreed not to
collect the loan in 20x2 and gave JB 12 months to rectify the breach of loan agreement. How much is
presented as current liability in relation to the loan in JB’s 20x1 year-end financial statements?
a. 4,000,000 b. 200,000 c. 4,200,000 d. 0

5. On December 31, 20x1, JMB Co. has a P4,000,000 note payable on demand. However, on December
31, 20x1, there is no indication that the payee on the note will demand payment over the next 12 months.
How much is the current liability in relation to the note in JMB’s 20x1 year-end financial statements?
a. 4,000,000 b. 200,000 c. 4,200,000 d. 0

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6. To increase sales, Quezon Company inaugurated a promotional campaign on June 30, 20x4. Quezon
placed a coupon redeemable for a premium in each package of cereal sold at P200. Each premium
costs P100. A premium is offered to customers who send in 5 coupons and a remittance of P30. The
distribution cost per premium is P20. Quezon estimated that only 60% of the coupons issued will be
redeemed. For the six months ended December 31, 20x4, the following is available:

Packages of cereal sold 100,000

Premiums purchased 10,000
Coupons redeemed 40,000

What is the estimated liability for coupons on December 31, 20x4?

a. 1,080,000
b. 1,000,000
c. 720,000
d. 360,000

7. Sariaya Company includes one coupon in each box of laundry soap it sells. A towel is offered as a
premium to customers who send in 10 coupons and a remittance of P5. Data for the premium offer are:

20x3 20x4
Boxes of soap sold 1,000,000 1,500,000
Number of towels purchased at P50 per towel 40,000 65,000
Number of towels distributed as premium 35,000 58,000
Number of towels to be distributed as premium next period 3,000 5,000

In its 20x4 income statement, Sariaya Company should report premium expense at
a. 3,000,000
b. 2,700,000
c. 2,610,000
d. 2,835,000

8. During 20x3, Lucena Company introduced a new product carrying a two-year warranty against defects.
The estimated warranty costs related to peso sales are 5% within 12 months following sale and 10% in the
second 12 months following sale. Sales and actual warranty expenditures for the years ended December
31, 20x3 and 20x4 are as follows:

Sales____ Actual expenditures

20x3 20,000,000 1,500,000
20x4 25,000,000 3,000,000

At December 31, 20x4, Lucena would report estimated warranty liability of

a. 1,500,000
b. 2,250,000
c. 750,000
d. 500,000

9. Lucban’s Music Emporium carries a wide variety of music promotion techniques - warranties and
premiums – to attract customers.

Musical instrument and sound equipment are sold in a one-year warranty for replacement of parts and
labor. The estimated warranty cost, based on past experience, is 2% of sales.

The premium is offered on the recorded and sheet music. Customers receive a coupon for each peso
spent on recorded music or sheet music. Customers may exchange 200 coupons and P20 for an
AM/FM radio. Lucban pays P34 for each radio and estimates that 60% of the coupons given to
customers will be redeemed.

Lucban’s total sales for 20x4 were P7,200,000 - P5,400,000 from musical instrument and sound
reproduction equipment and P1,800,000 from recorded music and sheet music. Replacement parts
and labor for warranty work totaled P164,000 during 20x4. A total of 6,500 AM/FM radio used in the
premium program were purchased during the year and there were 1,200,000 coupons redeemed in
20x4.

The accrual method is used by Lucban to account for the warranty and premium costs for financial
reporting purposes. The balance in the accounts related to warranties and premiums on January 1,
20x4, were as shown below:

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 Inventory of Premium AM/FM radio P39,950
Estimated Premium Claims Outstanding 44,800
Estimated Liability from Warranties 136,000

Determine the amounts that will be shown on the 20x4 financial statements for the following:

1. Warranty expense
a. P164,000 c. P108,000
b. 80,000 d. P144,000

2. Estimated liability from warranties

a. P108,000 c. P136,000
b. P164,000 d. P 80,000

3. Premium expense
a. P 75,600 c. P183,600
b. P126,000 d. P108,000

4. Inventory of AM/FM radio

a. P46,950 c. P77,350
b. P39,950 d. P56,950

5. Estimated liability for premiums

a. P75,600 c. P63,450
b. P36,400 d. P44,800

10. Pitogo Company sells gift certificates redeemable only when merchandise is purchased. The certificates
have an expiration date two years after issuance date. Upon redemption or expiration, Pitogo recognizes
the unearned revenue as realized. Data for 20x4 are as follows:

Unearned revenue, 1/1/20x4 1,000,000

Gift certificates sold 5,000,000
Gift certificates redeemed 4,000,000
Expired gift certificates 500,000
Cost of goods sold 60%

At December 31, 20x4, Pitogo report unearned revenue of

a. 1,500,000
b. 1,000,000
c. 500,000
d. 0

11. On September 1, 20x3, Pagbilao Company issued a note payable to National Bank in the amount of
P10,000,000, bearing interest at 15%, and payable in five equal annual principal payments of P2,000,000.
On this date, the bank’s prime rate was 12%. The first payment for interest and principal was made on
September 1, 20x4. At December 31, 20x4, Pagbilao should record accrued interest payable of
a. 1,400,000
b. 1,120,000
c. 400,000
d. 320,000

12. On December 31, 20x4, Gumaca Company had a P15,000,000 note payable outstanding, due July 31,
20x5. Gumaca borrowed the money to finance construction of a new plant. On March 1, 20x5, the note
was replaced by an 18-month note for the same amount. On March 31, 20x5, Gumaca issued its 20x4
financial statements. What amount of the note payable should Gumaca include in the current liabilities?
a. 15,000,000
b. 12,000,000
c. 3,000,000
d. 0

Page 11 of 20
13. On November 5, 20x4, a Calauag Company truck was in an accident with an auto driven by Macalelon.
Calauag received notice on January 15, 20x5, of a lawsuit for P4,000,000 damages for personal injuries
suffered by Macalelon. Calauag’s counsel believes it is probable that Macalelon will be awarded an
estimated amount in the range between P2,000,000 and P3,000,000, and no amount is a better estimate
of potential liability than any other amount. The accounting year ends on December 31, and the 20x4
financial statements were issued on March 31, 20x5. What amount of provision should Calauag accrue
at December 31, 20x4?
a. 4,000,000
b. 3,000,000
c. 2,000,000
d. 2,500,000

14. During January 20x4, Tagkawayan Company won a litigation award for P2,000,000 which was tripled to
P6,000,000 to include punitive damages. The defendant, who is financially stable, has appealed only the
P4,000,000 punitive damages. Tagkawayan was awarded P1,000,000 in an unrelated suit it filed, which is
being appealed by the defendant. Counsel is unable to estimate the outcome of the appeals. In its 20x4
income statement, Tagkawayan should report what amount of pretax gain?
a. 6,000,000 c. 2,000,000
b. 4,000,000 d. 3,000,000

15. Sariaya Company sells office equipment service contracts agreeing to service equipment for a two-year
period. Cash receipts from contracts are credited to unearned service contract revenue and service
contract costs are charged to service contract expense as incurred. Revenue from service contracts is
recognized as earned over lives of the contracts. Information for the year 20x4 is as follows:

Unearned service contract revenue – 1/1/20x4 3,000,000

Cash receipts from service contracts sold 5,000,000
Service contract revenue recognized 4,500,000
Service contract expense 2,500,000

What amount should Sariaya report as unearned service contract revenue at December 31, 20x4?
a. 3,500,000 c. 2,000,000
b. 1,000,000 d. 500,000

16. Edson Corp. signed a three-month, zero-interest-bearing note on November 1, 20x1 for the purchase of
P150,000 of inventory. The face value of the note was P152,205. Assuming Edson used a “Discount on
Note Payable” account to initially record the note and that the discount will be amortized equally over
the 3-month period, the adjusting entry made at December 31, 20x1 will include a
a. debit to Discount on Note Payable for P735.
b. debit to Interest Expense for P1,470.
c. credit to Discount on Note Payable for P735.
d. credit to Interest Expense for P1,470.

17. The effective interest on a 12-month, zero-interest-bearing note payable of P300,000, discounted at the
bank at 10% is
a. 10.87%.
b. 10%.
c. 9.09%.
d. 11.11%.

18. On February 10, 20x1, after issuance of its financial statements for 20x0, Flynn Company entered into a
financing agreement with Lebo Bank, allowing Flynn Company to borrow up to P4,000,000 at any time
through 20x3. Amounts borrowed under the agreement bear interest at 2% above the bank's prime
interest rate and mature two years from the date of loan. Flynn Company presently has P1,500,000 of
notes payable with First National Bank maturing March 15, 20x1. The company intends to borrow
P2,500,000 under the agreement with Lebo and liquidate the notes payable to First National. The
agreement with Lebo also requires Flynn to maintain a working capital level of P6,000,000 and prohibits
the payment of dividends on common stock without prior approval by Lebo Bank. From the above
information only, the total short-term debt of Flynn Company as of the December 31, 20x1 balance sheet
date is
a. P0.
b. P1,500,000.
c. P2,000,000.
d. P4,000,000.

Page 12 of 20
19. On December 31, 20x0, Frye Co. has P2,000,000 of short-term notes payable due on February 14, 20x1.
On January 10, 20x1, Frye arranged a line of credit with County Bank which allows Frye to borrow up to
P1,500,000 at one percent above the prime rate for three years. On February 2, 20x1, Frye borrowed
P1,200,000 from County Bank and used P500,000 additional cash to liquidate P1,700,000 of the short-term
notes payable. The amount of the short-term notes payable that should be reported as current liabilities
on the December 31, 20x0 balance sheet which is issued on March 5, 20x1 is
a. P0.
b. P300,000.
c. P500,000.
d. P800,000.

Raney Co. is a retail store operating in a state with a 6% retail sales tax. The retailer may keep 2% of the sales
tax collected. Raney Co. records the sales tax in the Sales account. The amount recorded in the Sales
account during May was P148,400.

20. The amount of sales taxes (to the nearest peso) for May is
a. P8,726.
b. P8,400.
c. P8,904.
d. P9,438.

21. The amount of sales taxes payable (to the nearest peso) to the state for the month of May is
a. P8,551.
b. P8,232.
c. P8,726.
d. P9,249.

22. Trent, Inc., is a retail store operating in a state with a 5% retail sales tax. The state law provides that the
retail sales tax collected during the month must be remitted to the state during the following month. If
the amount collected is remitted to the state on or before the twentieth of the following month, the
retailer may keep 3% of the sales tax collected. On April 10, 20x1, Trent remitted P81,480 tax to the state
tax division for March 20x1 retail sales. What was Trent 's March 20x1 retail sales subject to sales tax?
a. P1,629,600.
b. P1,596,000.
c. P1,680,000.
d. P1,645,000.

23. Holbert Corporation has P2,500,000 of short-term debt it expects to retire with proceeds from the sale of
75,000 shares of common stock. If the stock is sold for P20 per share subsequent to the balance sheet
date, but before the balance sheet is issued, what amount of short-term debt could be excluded from
current liabilities?
a. P1,500,000
b. P2,500,000
c. P1,000,000
d. P0

24. Grogan Corporation has P1,800,000 of short-term debt it expects to retire with proceeds from the sale of
60,000 shares of common stock. If the stock is sold for P20 per share subsequent to the balance sheet
date, but before the balance sheet is issued, what amount of short-term debt could be excluded from
current liabilities?
a. P1,200,000
b. P1,800,000
c. P600,000
d. P0

25. A company gives each of its 50 employees (assume they were all employed continuously through 20x1
and 20x2) 12 days of vacation a year if they are employed at the end of the year. The vacation
accumulates and may be taken starting January 1 of the next year. The employees work 8 hours per
day. In 20x1, they made P14 per hour and in 20x2 they made P16 per hour. During 20x2, they took an
average of 9 days of vacation each. The company’s policy is to record the liability existing at the end
of each year at the wage rate for that year. What amount of vacation liability would be reflected on
the 20x1 and 20x2 balance sheets, respectively?
a. P67,200; P93,600
b. P76,800; P96,000
c. P67,200; P96,000
d. P76,800; P93,600

Page 13 of 20
26. A company gives each of its 50 employees (assume they were all employed continuously through 20x1
and 20x2) 12 days of vacation a year if they are employed at the end of the year. The vacation
accumulates and may be taken starting January 1 of the next year. The employees work 8 hours per
day. In 20x1, they made P17.50 per hour and in 20x2 they made P20 per hour. During 20x2, they took an
average of 9 days of vacation each. The company’s policy is to record the liability existing at the end
of each year at the wage rate for that year. What amount of vacation liability would be reflected on
the 20x1 and 20x2 balance sheets, respectively?
a. P84,000; P117,000
b. P96,000; P120,000
c. P84,000; P120,000
d. P96,000; P117,000

Simson Company has 35 employees who work 8-hour days and are paid hourly. On January 1, 20x0, the
company began a program of granting its employees 10 days of paid vacation each year. Vacation days
earned in 20x0 may first be taken on January 1, 20x1. Information relative to these employees is as follows:
Hourly Vacation Days Earned Vacation Days Used
Year Wages by Each Employee by Each Employee
20x0 P25.80 10 0
20x1 27.00 10 8
20x2 28.50 10 10

Simson has chosen to accrue the liability for compensated absences at the current rates of pay in effect
when the compensated time is earned.

27. What is the amount of expense relative to compensated absences that should be reported on Simson’s
income statement for 20x0?
a. P0.
b. P68,880.
c. P75,600.
d. P72,240.

28. What is the amount of the accrued liability for compensated absences that should be reported at
December 31, 20x2?
a. P94,920.
b. P90,720.
c. P79,800.
d. P95,760.

29. A company offers a cash rebate of P1 on each P4 package of light bulbs sold during 20x1. Historically,
10% of customers mail in the rebate form. During 20x1, 4,000,000 packages of light bulbs are sold, and
140,000 P1 rebates are mailed to customers. What is the rebate expense and liability, respectively, shown
on the 20x1 financial statements dated December 31?
a. P400,000; P400,000
b. P400,000; P260,000
c. P260,000; P260,000
d. P140,000; P260,000

30. A company buys an oil rig for P1,000,000 on January 1, 20x1. The life of the rig is 10 years and the
expected cost to dismantle the rig at the end of 10 years is P200,000 (present value at 10% is P77,110).
10% is an appropriate interest rate for this company. What expense should be recorded for 20x1 as a
result of these events?
a. Depreciation expense of P120,000
b. Depreciation expense of P100,000 and interest expense of P7,711
c. Depreciation expense of P100,000 and interest expense of P20,000
d. Depreciation expense of P107,710 and interest expense of P7,711

31. Wellman Company self insures its property for fire and storm damage. If the company were to obtain
insurance on the property, it would cost them P1,000,000 per year. The company estimates that on
average it will incur losses of P800,000 per year. During 20x1, P350,000 worth of losses were sustained.
How much total expense and/or loss should be recognized by Wellman Company for 20x1?
a. P350,000 in losses and no insurance expense
b. P350,000 in losses and P450,000 in insurance expense
c. P0 in losses and P800,000 in insurance expense
d. P0 in losses and P1,000,000 in insurance expense

Page 14 of 20
32. A company offers a cash rebate of P1 on each P4 package of batteries sold during 20x1. Historically,
10% of customers mail in the rebate form. During 20x1, 6,000,000 packages of batteries are sold, and
210,000 P1 rebates are mailed to customers. What is the rebate expense and liability, respectively, shown
on the 20x1 financial statements dated December 31?
a. P600,000; P600,000
b. P600,000; P390,000
c. P390,000; P390,000
d. P210,000; P390,000

33. A company buys an oil rig for P2,000,000 on January 1, 20x1. The life of the rig is 10 years and the
expected cost to dismantle the rig at the end of 10 years is P400,000 (present value at 10% is P154,220).
10% is an appropriate interest rate for this company. What expense should be recorded for 20x1 as a
result of these events?
a. Depreciation expense of P240,000
b. Depreciation expense of P200,000 and interest expense of P15,422
c. Depreciation expense of P200,000 and interest expense of P40,000
d. Depreciation expense of P215,420 and interest expense of P15,422

34. During 20x0, Younger Co. introduced a new line of machines that carry a three-year warranty against
manufacturer’s defects. Based on industry experience, warranty costs are estimated at 2% of sales in the
year of sale, 4% in the year after sale, and 6% in the second year after sale. Sales and actual warranty
expenditures for the first three-year period were as follows:
Sales Actual Warranty Expenditures
20x0 P 600,000 P 9,000
20x1 1,500,000 45,000
20x2 2,100,000 135,000
P4,200,000 P189,000
What amount should Younger report as a liability at December 31, 20x2?
a. P0
b. P15,000
c. P204,000
d. P315,000

35. Milner Frosted Flakes Company offers its customers a pottery cereal bowl if they send in 3 boxtops from
Milner Frosted Flakes boxes and P1.00. The company estimates that 60% of the boxtops will be redeemed.
In 20x1, the company sold 675,000 boxes of Frosted Flakes and customers redeemed 330,000 boxtops
receiving 110,000 bowls. If the bowls cost Milner Company P2.50 each, how much liability for outstanding
premiums should be recorded at the end of 20x1?
a. P25,000
b. P37,500
c. P62,500
d. P87,500

36. During 20x0, Venable Co. introduced a new line of machines that carry a three-year warranty against
manufacturer’s defects. Based on industry experience, warranty costs are estimated at 2% of sales in the
year of sale, 4% in the year after sale, and 6% in the second year after sale. Sales and actual warranty
expenditures for the first three-year period were as follows:
Sales Actual Warranty Expenditures
20x0 P 400,000 P 6,000
20x1 1,000,000 30,000
20x2 1,400,000 90,000
P2,800,000 P126,000
What amount should Venable report as a liability at December 31, 20x2?
a. P0
b. P10,000
c. P136,000
d. P210,000

37. Pryor Frosted Flakes Company offers its customers a pottery cereal bowl if they send in 4 boxtops from
Pryor Frosted Flakes boxes and P1.00. The company estimates that 60% of the boxtops will be redeemed.
In 20x1, the company sold 500,000 boxes of Frosted Flakes and customers redeemed 220,000 boxtops
receiving 55,000 bowls. If the bowls cost Pryor Company P2.50 each, how much liability for outstanding
premiums should be recorded at the end of 20x1?
a. P20,000
b. P30,000
c. P50,000
d. P70,000

Page 15 of 20
Kent Co. includes one coupon in each bag of dog food it sells. In return for eight coupons, customers receive
a leash. The leashes cost Kent P2.00 each. Kent estimates that 40 percent of the coupons will be redeemed.
Data for 20x0 and 20x1 are as follows:
20x0 20x1
Bags of dog food sold 500,000 600,000
Leashes purchased 18,000 22,000
Coupons redeemed 120,000 150,000

38. The premium expense for 20x0 is

a. P25,000.
b. P30,000.
c. P35,000.
d. P50,000.

39. The estimated liability for premiums at December 31, 20x0 is

a. P7,500.
b. P10,000.
c. P17,500.
d. P20,000.

40. The estimated liability for premiums at December 31, 20x1 is

a. P11,250.
b. P21,250.
c. P22,500.
d. P42,500.

41. Vernon Co. is being sued for illness caused to local residents as a result of negligence on the company's
part in permitting the local residents to be exposed to highly toxic chemicals from its plant. Vernon's
lawyer states that it is probable that Vernon will lose the suit and be found liable for a judgment costing
Vernon anywhere from P1,200,000 to P6,000,000. However, the lawyer states that the most probable cost
is P3,600,000. As a result of the above facts, Vernon should accrue
a. a loss contingency of P1,200,000 and disclose an additional contingency of up to P4,800,000.
b. a loss contingency of P3,600,000 and disclose an additional contingency of up to P2,400,000.
c. a loss contingency of P3,600,000 but not disclose any additional contingency.
d. no loss contingency but disclose a contingency of P1,200,000 to P6,000,000.

42. Moore Company estimates its annual warranty expense as 4% of annual net sales. The following data
relate to the calendar year 20x1:
Net sales P1,500,000
Warranty liability account
Balance, Dec. 31, 20x1 P10,000 debit before adjustment
Balance, Dec. 31, 20x1 50,000 credit after adjustment
Which one of the following entries was made to record the 20x1 estimated warranty expense?
a. Warranty Expense ...................................................................................... 60,000
Retained Earnings (prior-period adjustment) .......................... 10,000
Warranty Liability ........................................................................... 50,000
b. Warranty Expense ...................................................................................... 50,000
Retained Earnings (prior-period adjustment) ....................................... 10,000
Warranty Liability ........................................................................... 60,000
c. Warranty Expense ...................................................................................... 40,000
Warranty Liability ........................................................................... 40,000
d. Warranty Expense ...................................................................................... 60,000
Warranty Liability ........................................................................... 60,000

Page 16 of 20
43. In 20x0, Slimon Corporation began selling a new line of products that carry a two-year warranty against
defects. Based upon past experience with other products, the estimated warranty costs related to peso
sales are as follows:
First year of warranty 2%
Second year of warranty 5%
Sales and actual warranty expenditures for 20x0 and 20x1 are presented below:
20x0 20x1
Sales P300,000 P400,000
Actual warranty expenditures 10,000 20,000
What is the estimated warranty liability at the end of 20x1?
a. P19,000.
b. P29,000.
c. P49,000.
d. P8,000.

44. On January 3, 20x1, Alton Corp. owned a machine that had cost P200,000. The accumulated
depreciation was P120,000, estimated salvage value was P12,000, and fair market value was P320,000.
On January 4, 20x1, this machine was irreparably damaged by Reed Corp. and became worthless. In
October 20x1, a court awarded damages of P320,000 against Reed in favor of Alton. At December 31,
20x1, the final outcome of this case was awaiting appeal and was, therefore, uncertain. However, in the
opinion of Alton’s attorney, Reed’s appeal will be denied. At December 31, 20x1, what amount should
Alton accrue for this gain contingency?
a. P320,000.
b. P260,000.
c. P200,000.
d. P0.

45. Horton Food Company distributes to consumers coupons which may be presented (on or before a stated
expiration date) to grocers for discounts on certain products of Horton. The grocers are reimbursed when
they send the coupons to Horton. In Horton's experience, 50% of such coupons are redeemed, and
generally one month elapses between the date a grocer receives a coupon from a consumer and the
date Horton receives it. During 20x1 Horton issued two separate series of coupons as follows:
Consumer Amount Disbursed
Issued On Total Value Expiration Date as of 12/31/07
1/1/07 P375,000 6/30/07 P177,000
7/1/07 540,000 12/31/07 225,000
The only journal entries to date recorded debits to coupon expense and credits to cash of P536,000.
The December 31, 20x1 balance sheet should include a liability for unredeemed coupons of
a. P0.
b. P45,000.
c. P93,000.
d. P270,000.

Tangy Candy Company offers a coffee mug as a premium for every ten 50-cent candy bar wrappers
presented by customers together with P1.00. The purchase price of each mug to the company is 90 cents;
in addition it costs 60 cents to mail each mug. The results of the premium plan for the years 20x0 and 20x1
are as follows (assume all purchases and sales are for cash):
20x0 20x1
Coffee mugs purchased 720,000 800,000
Candy bars sold 5,600,000 6,750,000
Wrappers redeemed 2,800,000 4,200,000
20x0 wrappers expected to be redeemed in 20x1 2,000,000
20x1 wrappers expected to be redeemed in 20x2 2,700,000

Instructions
(a) Prepare the general journal entries that should be made in 20x0 and 20x1 related to the above plan by
Tangy Candy.
(b) Indicate the account names, amounts, and classifications of the items related to the premium plan that
would appear on the Tangy Candy Company balance sheet and income statement at the end of 20x0
and 20x1.

Page 17 of 20
James Equipment Company sells computers for P1,500 each and also gives each customer a 2-year
warranty that requires the company to perform periodic services and to replace defective parts. During
20x0, the company sold 700 computers. Based on past experience, the company has estimated the total
2-year warranty costs as P30 for parts and P60 for labor. (Assume sales all occur at December 31, 20x0.)

In 20x1, James incurred actual warranty costs relative to 20x0 computer sales of P10,000 for parts and P18,000
for labor.

Instructions
(a) Under the expense warranty treatment, give the entries to reflect the above transactions (accrual
method) for 20x0 and 20x1.
(b) Under the cash basis method, what are the Warranty Expense balances for 20x0 and 20x1?
(c) The transactions of part (a) create what balance under current liabilities in the 20x0 balance sheet?

Use the following information for the next three questions:

On January 1, 20x1, KISMET FATE Co., purchased inventory with a list price of ₱4,400,000 and a cash price of
₱4,000,000 by issuing a noninterest-bearing note of ₱4,800,000 due on December 31, 20x3.

1. How much is the carrying amount of the note on initial recognition?

a. 4,400,000 b. 4,000,000 c. 4,800,000 d. 3,786,309

2. How much is the interest expense in 20x1?

a. 400,000 b. 279,830 c. 250,780 d. none of these

3. How much is the carrying amount of the note on December 31, 20x1?
a. 4,250,780 b. 4,279,830 c. 4,400,000 d. 4,000,000

Use the following information for the next three questions:

On January 1, 20x1, BLATANT NOISY Co., acquired transportation equipment by paying cash of ₱400,000
and issuing a noninterest-bearing note payable of ₱4,000,000 due on January 1, 20x4. There is no cash
price equivalent for the equipment. The prevailing rate of interest for this type of note is 12%.

4. How much is the carrying amount of the note on initial recognition?

a. 2,847,120 b. 2,000,000 c. 3,247,120 d. 2,786,309

5. How much is the interest expense in 20x1?

a. 341,656 b. 389,654 c. 334,357 d. 480,000

6. How much is the carrying amount of the note on December 31, 20x1?
a. 3,250,780 b. 3,179,830 c. 3,188,776 d. 2,505 ,464

Use the following information for the next five questions:

On January 1, 20x1, DWINDLE DECREASE Co., acquired transportation equipment by paying cash of
₱400,000 and issuing a noninterest-bearing note payable of ₱4,000,000 due in 4 equal annual installments
starting December 31, 20x1. The prevailing rate of interest of this type of note is 12%.

7. How much is the carrying amount of the note on initial recognition?

a. 3,247,120 b. 4,000,000 c. 3,037,348 d. 3,774,309

8. How much is the interest expense in 20x1?

a. 341,656 b. 364,480 c. 334,357 d. 480,000

9. How much is the carrying amount of the note on December 31, 20x1?
a. 2,401,832 b. 2,179,830 c. 2,188,776 d. 2,505 ,464

10. How much is the current portion of the note on December 31, 20x1?
a. 613,409 b. 711,780 c. 814,342 d. 718,324

11. How much is the noncurrent portion of the note on December 31, 20x1?
a. 1,468,050 b. 1,476,996 c. 1,683,508 d. 1,690,052

Page 18 of 20
Use the following information for the next three questions:
On January 1, 20x1, TANGENT IRRELEVANT Co., acquired machinery by issuing a 3-year, ₱4,800,000
noninterest-bearing note payable due in equal semi-annual payments starting July 1, 20x1. The prevailing
rate of interest of this type of note is 10%.

12. How much is the carrying amount of the note on initial recognition?
a. 3,980,342 b. 4,000,000 c. 4,060,552 d. 3,786,309

13. How much is the interest expense in 20x1?

a. 203,028 b. 279,830 c. 350,780 d. 376,207

14. How much is the carrying amount of the note on December 31, 20x1?
a. 3,463,580 b. 2,279,830 c. 3,343,341 d. 2,836,760

Use the following information for the next three questions:

On January 1, 20x1, SUSCEPTIBLE LIABLE Co. acquired machinery by issuing a 3-year, ₱4,800,000 noninterest-
bearing note payable due as follows:
Date Amount
December 31, 20x1 ₱ 2,400,000
December 31, 20x2 1,600,000
December 31, 20x3 800,000
Total ₱4,800,000

The prevailing rate of interest of this type of note is 10%.

15. How much is the carrying amount of the note on initial recognition?
a. 4,105,184 b. 4,100,341 c. 3,980,134 d. 3,086,394

16. How much is the interest expense in 20x1?

a. 400,000 b. 479,340 c. 410,780 d. 410,520

17. How much is the carrying amount of the note on December 31, 20x1?
a. 2,250,780 b. 2,279,830 c. 2,115,702 d. 2,342,140

18. SUCCOR Co. issued a 3-year, noninterest-bearing note of ₱4,000,000 to RELIEF, Inc., a related party. The
proceeds on the note is ₱4,000,000. The note matures on December 31, 20x3. The prevailing interest for
similar type of obligation is 12%.
a. credit to note payable for ₱2,847,120
b. debit to discount on note payable for ₱1,152,880
c. credit to unrealized gain for ₱1,152,880
d. b and c

19. On January 1, 20x1, SCRUPULOUS EXACT Co., acquired equipment by issuing a ₱12,000,000 non-interest
bearing note payable in three equal annual installments starting January 1, 20x4. The current market
rate of interest on January 1, 20x1 is 12%. How much is the carrying amount of the note on initial
recognition?
a. 7,124,844 b. 7,740,084 c. 7,658,901 d. 7,412,769
20. On January 1, 20x1, SEEMLY HANDSOME Co., sold a used equipment for a ₱12,000,000 non-interest
bearing note payable in three annual installments as follows:
Date Amount
January 1, 20x4 ₱ 6,000,000
January 1, 20x5 4,000,000
January 1, 20x6 2,000,000
Total ₱12,000,000

The current market rate of interest on January 1, 20x1 is 12%. How much is the carrying amount of the note
on initial recognition?
a. 7,947,608 b. 7,840,234 c. 7,958,340 d. 7,712,349
21. On January 1, 20x1, SUBDUE Co. borrowed 10%, ₱4,000,000 loan from CONQUER Bank. Principal is due
on January 1, 20x4 but interests are due annually starting January 1, 20x2. SUBDUE was charged by the
bank a 3% nonrefundable loan origination fee representing service fee. How much is the carrying
amount of the note on initial recognition?
a. 3,947,608 b. 3,840,234 c. 3,880,000 d. 3,720,00

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Use the following information for the next two questions:
On January 1, 20x1, SLOPPY UNTIDY Co. issued 10%, ₱4,000,000 bonds at face amount. Commission paid to
underwriters amounted to ₱192,148. Principal is due on December 31, 20x3 but interest payments are made
annually every year-end.

22. How much is the carrying amount of the bonds on initial recognition?
a. 3,947,608 b. 3,840,234 c. 3,807,852 d. 4,000,000

23. How much is the unamortized discount on bonds as of December 31, 20x1?
a. 198,948 b. 135,206 c. 138,844 d. 143,134

Use the following information for the next three questions:

On January 1, 20x1, SCRAWNY SKINNY Co. issued 1,000, ₱4,000, 10%, 3-year bonds for ₱3,807,852. Principal is
due on December 31, 20x3 but interests are due annually every year-end. In addition, SCRAWNY incurred
bond issue costs of ₱179,316. The effective interest rate is 12% before adjustment for bond issue costs.

24. How much is the carrying amount of the note on initial recognition?
a. 3,628,536 b. 4,000,000 c. 3,635,340 d. 3,754,309

25. How much is the interest expense in 20x1?

a. 435,424 b. 576,240 c. 507,995 d. 400,000

26. How much is the carrying amount of the note on December 31, 20x1?
a. 3,401,832 b. 3,391,580 c. 3,288,776 d. 3,736 ,531

27. On January 1, 20x1, VIGILANT WATCHFUL Co. issued its 10%, 3-year, ₱4,000,000 convertible bonds for the
face amount of ₱4,000,000. Each ₱4,000 bond is convertible into 8 shares with par value of ₱400 per
share. When the bonds were issued, they were selling at 98 without the conversion option. VIGILANT
incurred ₱200,000 transaction costs on the issue of the bonds. How much is the equity component of
the compound instrument?
a. 80,000 b. 200,000 c. 76,000 d. 123,489
28. On January 1, 20x1, CRYSTALLINE TRANSPARENT Co. issued its 10%, 3-year, ₱4,000,000 convertible bonds
at 105. Each ₱4,000 bond is convertible into 8 shares with par value per share of ₱400. Principal is due
on December 31, 20x3 but interests are due annually at each year-end. When the bonds were issued,
they were selling at a yield to maturity market rate of 12%without the conversion option. On December
31, 20x2, all of the bonds were converted into equity. Conversion costs incurred amounted to ₱80,000.

How much is the net increase in equity on December 31, 20x2 due to the conversion of the bonds?
a. 3,392,148 b. 3,234,998 c. 3,894,759 d. 3,848,571

***end of handout***

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