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Name: ________________________________ Student Number: ___________

Course: _______________________________ Subject: ___________________

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Name and Signature of Student

PRELIMINARY EXAMINATION
Intermediate Accounting 2

1. On November 1, 20x1, a company purchased a new machine that it does not have to pay for
until November 1, 20x3. The total payment on November 1, 20x3, will include both principal and
interest. Assuming interest at a 10% rate, the cost of the machine would be the total payment
multiplied by what time value of money concept?
a. PV of annuity of ₱1. c. FV of annuity of ₱1.
b. PV of ₱1. d. FV of ₱1.

2. Interest payment dates of a bond issue are March 1 and September 1, 20x1. The bond was issued
on June 1, 20x1. Interest expense for the year ended December 31, 20x1 would be for:
a. four (4) months c. seven (7) months
b. six (6) months d. ten (10) months

3. When a note payable is issued for property, goods, or services, the note is initially measured at
a. the fair value of the property, goods, or services.
b. the fair value of the note.
c. using an imputed interest rate to discount all future payments on the note.
d. choice (a) except when this is not determinable, in which case, whichever is the more clearly
determinable between (b) and (c).

4. When a note payable is exchanged for property, goods, or services, the stated interest rate is
presumed to be fair unless
a. no interest rate is stated.
b. the stated interest rate is unreasonable.
c. the stated face amount of the note is materially different from the current cash sales price for
similar items or from current market value of the note.
d. any of these.
5. When debt is issued at a discount, interest expense over the term of the debt equals the cash
interest paid:
a. Minus discount. c. Plus discount.
b. Minus discount minus face amount. d. Plus discount plus face amount.

6. Which of the following statements is true?

a. A noninterest-bearing note sometimes is called a discounted note because the cash received
is more than the face amount of the note.
b. A debtor’s December 31, 20x1 statement of financial position is to be published on March 31,
20x2. An obligation with a due date of December 31, 20x6 is also due on demand by the
creditor. At December 31, 20x1, there is no indication that the creditor intends to call in the
debt. The obligation is a current liability.
c. The market rate of interest is the interest rate used to determine the amount of cash interest
that will be paid on the principal.
d. A debtor’s December 31, 20x1 statement of financial position is to be published on March 31,
20x2. An obligation due December 31, 20x6 has a due date which can be accelerated by the
creditor to the present date if the current ratio falls below 2:1. The current ratio on December
31, 20x1 is 2.2:1. The obligation is a current liability.

7. A short-term note payable may include all of the following except:

a. trade notes payable. c. unearned revenue.
b. nontrade notes payable. d. a current maturity of a long-term liability.

8. Interest expenses are

a. incurred only on interest-bearing obligations
b. incurred due to passage of time.
c. not incurred on redeemable preference shares issued
d. incurred only when the effective interest rate is stated in the instrument

9. 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.

10. Which of the following statements is not correct?

a. The principal amount of a debt is the cash or cash equivalent amount borrowed.
b. When a noncash asset is acquired and the stated rate of interest is different from the current
market rate of interest, the cost of the asset is the present value of the future cash payments
discounted at the current market rate of interest rather than at the stated interest rate.
c. A company that receives cash in an amount less than the face amount of a noninterest-
bearing note payable should record the note at its discounted present value.
d. The carrying amount of a noninterest-bearing note payable due in lump sum will decrease as
time goes by.
Use the following information for the next five questions:
On January 1, 20x1, ABRIDGE TO SHORTEN Company issued a 4-year, ₱1,000,000 noninterest
bearing note payable due in four equal annual installments. The effective interest rate is 12%.
ABRIDGE prepared the following pro-forma amortization table on an electronic spreadsheet:
A B C D E
1 Date Cash paid Interest expense Amortization Present value
2 Jan. 1, 20x1        
3 Dec. 31, 20x1        
4 Dec. 31, 20x2        
5 Dec. 31, 20x3        
6 Dec. 31, 20x4        

11. The amount to be placed on cell E2 is

a. (1M ÷ 4 x PV of ordinary annuity of ₱1 @ 12%, n=4)
b. (1M x PV of ₱1 @12%, n=4)
c. (1M x PV of ordinary annuity of ₱1 @12%, n=4)
d. (1M x PV of ₱1 @12%, n=4) + (1M x 10% x PV of ordinary annuity of ₱1 @ 12%, n=4)

12. The amount to be placed on cell E6 is

a. (1M ÷ 4 x PV of ordinary annuity of ₱1 @ 12%, n=4) c. 1M
b. (1M x PV of ₱1 @12%, n=4) d. 0

13. Interest expense recognized in 20x2 is computed as

a. 12% x E3 c. C4 – D4
b. 12% x E4 d. 1M x 12%

14. The carrying amount of the note payable on December 31, 20x2 is equal to
a. E3 – D4 c. E4 – D4
b. E3 + D4 d. 1M

15. The value placed in cell B4 is equal to

a. 1M x 12% c. 1M – D3
b. 250,000 d. E4 – D5

16. The current portion of the note payable as of December 31, 20x2 is equal to
a. D4 c. D5
b. D3 d. E5

17. The noncurrent portion of the note payable as of December 31, 20x2 is equal to
a. E4 c. E3
b. D5 d. E5

Use the following information for the next nine questions:

On January 1, 20x1, HEARTEN ENCOURAGE CHEER Company issued a 4-year, ₱1,000,000,
noninterest-bearing note due on December 31, 20x4. The effective interest rate is 12%. HEARTEN
prepared the following pro-forma amortization table on an electronic spreadsheet:

A B C D
Interest Discoun Present
Date
1 expense t value
2 Jan. 1, 20x1      
3 Dec. 31, 20x1      
4 Dec. 31, 20x2      
5 Dec. 31, 20x3      
6 Dec. 31, 20x4      

18. The amount to be placed on cell B4 is

a. 10% x E3 c. ₱1M ÷ 4
b. 12% x D3 d. same with B3

19. The amount to be placed on cell D2 is computed as

a. (1M x PV of ₱1 @12%, n=4) + (1M x PV of ordinary annuity of ₱1 @ 12%, n=4)
b. (1M x PV of ₱1 @12%, n=4)
c. (1M x PV of ordinary annuity of ₱1 @12%, n=4)
d. (1M x PV of ₱1 @12%, n=4) + (1M x 10% x PV of ordinary annuity of ₱1 @ 12%, n=4)

20. Interest expense recognized in 20x3 is computed as

a. 12% x D3 c. C4 – D4
b. 12% x D4 d. 1M x 12%

21. The amount to be placed in cell C3 is computed as

a. C2 + B3 c. equal to C4
b. C2 – B3 d. I’m confused

22. The carrying amount of the note payable on December 31, 20x2 is equal to
a. D3 – B4 c. B4 + C4
b. D3 + B4 d. D3 + C4

23. The current portion of the note payable as of December 31, 20x2 is equal to
a. D4 c. D5
b. D3 d. none

24. The noncurrent portion of the note payable as of December 31, 20x2 is equal to
a. E4 c. E3
b. D5 d. none of these

25. The sum of cell C4 and cell D4 is

a. equal to D3 c. 1M
 b. equal to D5 d. none of these

26. The value of cell D6 is

a. equal to D3 c. 1M
b. equal to D5 d. zero

27. Which of the following statements about noninterest-bearing notes is false?

a. The face amount of a noninterest-bearing note may include both the principal and interest as
a single amount to be paid back at maturity date.
b. The principal amount of a noninterest-bearing note is its future cash flows discounted at its
effective interest rate.
c. The effective rate on a short-term noninterest-bearing note, with a specified term, cannot be
determined unless it is given on the face of the note.
d. Noninterest bearing is not a descriptive designation for this type of note because such notes
do bear interest.

28. Gallery Department Store sells gift certificates, redeemable for store merchandise that expires
one year after their issuance. Gallery has the following information pertaining to its gift
certificates sales and redemptions:

Unearned at December 31, 2005 P 600,000

2006 sales 2,000,000
2006 redemptions of prior-year sales 200,000
2006 redemptions of current-year sales 1,400,000

Gallery’s experience indicates that 10% of gift certificates sold will not be redeemed.

In its December 31, 2006 balance sheet, what amount should Gallery report as unearned revenue?
a. 400,000
b. 600,000
c. 800,000
d. 1,000,000

29. On January 1, 20x1 WRECK RUIN Co. acquired land by issuing a three-year, 12%, ₱4,000,000
note payable. Principal and interest are due on December 31, 20x3. How much is the interest
expense in 20x2?
a. 1,017,600 c. 537,600
b. 960,000 d. 764,213

30. ABC Co. is contemplating on issuing a 12%, 3-year, ₱1,000,000 bonds. Principal is due at
maturity but interest is due semi-annually every July 1 and December 31. ABC determines that
the current market rate on January 1, 20x1 is 14%. How much is the estimated issue price of the
bonds assuming ABC issues bonds on January 1, 20x1?
a. 666,342
b. 285,992
 c. 952,334
d. 962,563

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 and 14% after adjustment for bond issue costs.

31. 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

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

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

33. 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

34. Entity A issues convertible bonds with face amount of ₱2,000,000 for ₱2,600,000. Each ₱1,000
bond is convertible into 10 shares with par value of ₱60 per share. On issuance date, the bonds
are selling at 102 without the conversion option. What is the value allocated to the equity
component on initial recognition?
a. 2,040,000
b. 540,000
c. 560,000
d. 460,000

35. On September 30, 20x1, ADMONISH WARN Co. issued new bonds with face amount of ₱10M
for a net issuance proceeds of ₱43,200,000. ADMONISH used the proceeds to retire an existing
10-year, 12%, ₱32,000,000 bonds issued five years earlier. The bonds have an unamortized
discount of ₱1,360,000 as of September 30, 20x1. ADMONISH reacquired the entire outstanding
bonds at a call premium of ₱1,600,000. Costs incurred that are directly attributable to the
retirement amounted to ₱200,000. ADMONISH has an income tax rate of 30%. How much is the
gain (loss) on the retirement of the bonds to be recognized in 20x1?
a. 3,160,000) b. (2,960,000) c. 2,960,000 d. (3,160,000)

36. On January 1, 20x1, POTENT POWERFUL Co. issued 5-year, 12%, ₱4,000,000 bonds for
₱4,303,264. Principal is due at maturity but interests are due annually. The effective interest rate
is 10%. On July 1, 20x3, POTENT called in the entire bonds and retired them at 102. The
retirement price includes payment for any accrued interest. How much is the gain (loss) on the
extinguishment of the bonds?
a. 328,897 b. (328,896) c. (118,948) d. 118,948
37. On January 1, 20x1, TIPSY UNSTEADY Co. issued 10%, ₱12,000,000 bonds for ₱11,601,220.
Principal on the bonds matures in three equal annual installments. Interest is also due annually
at each year-end. The effective interest rate on the bonds is 12%. How much is the carrying
amount of the bonds on December 31, 20x1?
a. 7,844,635 b. 7,793,366 c. 7,683,343 d. 7,543,341

38. Liabilities arise from either legal or constructive obligation. Which of the following is a source of
constructive obligation?
a. contract c. quasi-contract
b. law d. an established pattern of past practice

39. On January 1, 20x1, PAGEANT SHOW Co. issued 10%, ₱12,000,000 bonds at a yield to maturity
interest of 18%. Principal and interest are due on December 31, 20x3. How much is the carrying
amount of the bonds on initial recognition?
a. 15,972,000 b. 9,721,052 c. 9,028,341 d. 9,183,273

40. 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