ACCTG 103

NOTES & LOANS RECEIVABLE

1. Long-term notes receivable which are zero-interest-bearing or those whose rates are unreasonably low may be
stated at ____.
a. Amortized value.
b. Book value.
c. Face value.   
d. Maturity value.

2. Dishonored note receivable should be debited to ____.    

a. Dishonored note receivable at face value.
b. Accounts receivable at face value.
c. Accounts receivable at face value plus interest and other charges.
d. Accounts payable at face value plus interest and other charges.

3. On October 1, 2015, a company received a one-year note receivable bearing interest at the market rate. The
face amount of the note receivable and the entire amount of the interest are due on September 30, 2016. The
interest receivable account at December 31, 2015 would consist of an amount representing.
a. Three months of accrued interest income.
b. Nine months of accrued interest income.
c. One year of accrued interest income.
d. The excess at October 31, 2015 of the present value of the note receivable over its face value.

4. On July 1 of this year, a company received a one-year note receivable bearing interest at the market rate. The
face amount of the note receivable and the entire amount of the interest are due on June 30 of the next year. At
December 31 of this year, the company should report in its balance sheet.
a. A deferred credit for interest applicable to next year.
b. No interest receivable.
c. Interest receivable for the entire amount of the interest due on June 30 of next year.
d. Interest receivable for the interest accruing this year.

5. How should unearned discounts, finance charges, and unearned interest included in the face amount of notes
receivable be presented in the balance sheet?
a. As a deferred credit.
b. As a deduction from the related receivables.
c. In the notes to the financial statements.
d. As a current liability.

6. In calculating the carrying amount of a loan, the lender adds to the principal,
                    A                                     B
Direct loan origination costs                  Loan origination fees
    incurred by the lender                        charged to the borrower
a. A-yes; B-yes
b. A-no; B-no
c. A-no; B-yes
d. A-yes; B-no

7. Notes receivable should be stated subsequently at

a. Maturity amount
b. Net Realizable Amount
c. Face amount
d. Amortized amount

8. Sta. Monica accepted a P2,500,000, 12% interest-bearing note from Asiong Company on December 31, 2016, in
exchange for a machine with a list price of P2,000,000 and a cash price of P1,900,000. The note is payable on
December 31, 2018. In its 2016 income statement, Sta. Monica should report the sale at  
a. P2,600,000  
b. P1,900,000  
c. P2,000,000  
d. P2,500,000  
9. Items 9 and 10 are based on the following:
On January 2, 2020, Emme Co. sold equipment with a carrying amount of P480,000 in exchange for a P600,000
non-interest-bearing note due January 2, 2023. There was no established exchange price for the equipment. The
prevailing rate of interest for a note of this type at January 2, 2020, was 10%. The present value of $1 at 10% for
three periods is 0.75.
In Emme’s 2020 income statement, what amount should be reported as interest income?
a. 9,000
b. 50,000    
c. 60,000    
d. 45,000

10. Based on question number 9, In Emme’s 2020 income statement, what amount should be reported as gain
(loss) on sale of machinery?
a. 30,000 gain
b. 120,000 gain
c. 30,000 loss
d. 270,000 gain

11. Pie Co. uses the installment sales method to recognize revenue. Customers pay the installment notes in
twenty-four equal monthly amounts, which include 12% interest. What is an installment note’s receivable balance
six months after the sale?
a. 75% of the original sales price.
b. The present value of the remaining monthly payments discounted at 12%.
c. Less than the present value of the remaining monthly payments discounted at 12%.
d. Less than 75% of the original sales price.

12. On December 31, 2019, Flint Corporation sold for P75,000 an old machine having an original cost of P135,000
and a book value of P60,000. The terms of the sale were as follows:
P15,000 down payment
P30,000 payable on December 31 each of the next two years
The agreement of sale made no mention of interest; however, 9% would be a fair rate for this type of transaction.
What should be the amount of the notes receivable net of the unamortized discount on December 31, 2019
rounded to the nearest peso?  (The present value of an ordinary annuity of 1 at 9% for 2 years is 1.75911.)
a. 52,773.
b. 60,000
c. 105,546
d. 67,773.

13. Equestrain Roads sold P50,000 of goods and accepted the customer's P50,000 10% 1-year note receivable in
exchange. Assuming 10% approximates the market rate of return, what would be the debit in this journal entry to
record the sale?
a. No journal entry until cash is collected.
b. Debit Notes Receivable for P50,000.
c. Debit Notes Receivable for P45,000.
d. Debit Accounts Receivable for P50,000.

14. On January 1, 2020, West Co. exchanged equipment for a P400,000 zero-interest-bearing note due on January
1, 2023. The prevailing rate of interest for a note of this type at January 1, 2020 was 10%. The present value of P1
at 10% for three periods is 0.75. What amount of interest revenue should be included in West's 2021 income
statement?
a. 0
b. 33,000
c. 40,000
d. 30,000

15. Duff, Inc. borrowed from Martin Bank under a ten-year loan in the amount of P150,000 with a stated interest
rate of 6%. Payments are due monthly, and are computed to be P1,665. Martin Bank incurs P4,000 of direct loan
origination costs and P2,000 of indirect loan origination costs. In addition, Martin Bank charges Duff, Inc. a four-
point or 4% non-refundable loan origination fee based on principal.  Martin Bank, the lender, has an initial
carrying amount of the loan of _____.
a. P144,000 
b. P152,000 
c. P150,000 
d. P148,000 

16. On December 1, 2019, Money Co. gave Home Co. a P200,000, 11% loan. Money Co. paid proceeds of P194,000
after the deduction of a P6,000 nonrefundable loan origination fee. Principal and interest are due in sixty monthly
installments of P4,310, beginning January 1, 2020. The re-payments yield an effective interest rate of 11% at a
present value of P200,000 and 12.4% at a present value of P194,000.
What amount of income from this loan should Money report in its 2019 income statement?
a. P7,833
b. P0
c. P1,833
d. P2,005

17. On December 31, 2019, Peter Company received two P500,000 notes receivable from customers in exchange
for services rendered. On both notes, interest is calculated on the outstanding principal balance at the annual
rate of 3% and payable at maturity. The note from Mini Corporation, made under customary trade terms, is due in
nine months and the note from Maxi Company is due in five years. The market interest rate for similar notes on
December 31, 2019 was 8%. The compound interest factors to convert future value into present value at 8% are:
Present value of 1 due in nine months                            .944
Present value of 1 due in five years                                .680
 At what amounts should these two notes receivable be reported in Peter’s December 31, 2019 balance sheet?
a. Mini P500,000 and Maxi  P391,000
b. Mini P500,000 and Maxi  P340,000
c. Mini P482,000 and Maxi  P391,000
d. Mini P472,000 and Maxi  P340,000

18. On January 2, 2019, Ryan Company sold equipment with a carrying amount of P2,000,000 in exchange for a
P3,000,000 non-interest-bearing 3-year note. There was no established exchange price for the equipment. The
prevailing rate of interest for a note of this type on January 2, 2019, was 10%. The present value of 1 for three
periods is 0.75.
What amount should be reported as gain or loss on sale of equipment?
a. P1,000,000 loss
b. P250,000 gain
c. P1,000,000 gain
d. P250,000 loss

19. On December 30, 2020, Chang Co. sold a machine to Door Co. in exchange for a non-interest-bearing note
requiring ten annual payments of P10,000. Door made the first payment on December 30, 2020. The market
interest rate for similar notes at date of issuance was 8%. Information on present value factors is as follows:
Period    Present value of P1 at 8%          Present value of 
                                                        ordinary 
                                                  annuity of P1 at 8%
9                         0.50                          6.25
10                         0.46                          6.71
In its December 31, 2020 balance sheet, what amount should Chang report as note receivable?
a. 67,100
b. 46,000
c. 45,000
d. 62,500

20. On Dec 31, 2019, Over Bank recorded an investment of P500,000 in a loan granted to a client. The loan has a
10% effective rate payable annually every December 31. The principal is due in full at maturity on Dec 31, 2022.
Unfortunately the borrower is experiencing financial difficulty and will have a difficult time in making full
payment. The bank projected that the entire principal will be paid at maturity and 4% interest or 20,000 will be
paid annually on Dec 31 of the next 3 years. There is no accrued interest on Dec 31, 2019. The present value of 1
at 10% for three periods is 0.75 and the present value of an ordinary annuity of 1 at 10% for three periods is 2.49.
What is the impairment loss for 2019?
a. 752,000
b. 424,800
c. 75,200
d. 500,000
 ACCTG 103
NOTES PAYABLE & DEBT RESTRUCTURING 1

1. On September 1, 2016 Pine Company issued a note payable in the amount of P1.8M, bearing interest at 12%
and payable in three equal annual principal payments of P600,000. On this date the prime rate was 11%. The first
interest and principal payment was made on September 1, 2017. On December 31, 2017, what amount should be
reported as accrued interest payable?
a. 72,000
b. 66,000
c. 48,000
d. 44,000

2. On January 1, 2017, West Company acquired a tract of land for P1M. The entity paid P100,000 down and
signed a 2-year promissory for the balance plus 10% interest compounded annually. The note matures on
January 1, 2019. How much is the accrued interest on December 31, 2018?
a. 199,000
b. 90,000
c. 99,000
d. 100,000

3. Joshua Company bought a new machine and agreed to pay in equal annual installment of P600,000 at the end
of each of the next five years. The prevailing interest of this type of transaction is 12%.
The PV of an ordinary annuity of 1 at 12% for five periods is 3.60
The FV of an ordinary annuity of 1 at 12% for five periods is 6.35.
The present value of 1 at 12% for five periods is 0.567
The amount should be reported as note payable if financial statements were prepared today?
a. 2,160,000
b. 1,700,000
c. 3,810,000
d. 3,000,000

4. On January 1, 2019, He Company lent P1,780,000 cash to She Company. The promissory note made by Stone
for P2M did not bear any interest and was due on December 31, 2020. The prevailing interest rate for a loan of
this type was 6%. The PV of 1 for two periods at 6% is 0.89. What amount of interest expense shall be recognized
for 2017?
a. 106,800
b. 0
c. 120,000
d. 110,000

5. On July 1, 2017, a company borrowed P1M on a 10% five year interest-bearing note. On December 31, 2017, the
fair value of the note is determined to be P975,000. The entity irrevocably elected the fair value option in
measuring the notes payable. What amount should be reported as gain from change in fair value of the notes
payable for 2017?
Answer: 25 000

ACCTG 103
BOND

1. On January 1, 2020, Mishane Company received P1,070,000 for 12% bonds with face amount of P1,000,000.
The bonds were sold to yield 10%. Interest is payable semiannually every January 1 and July 1. The entity
elected the fair value option for measuring financial liabilities. On December 31, 2020, the fair value of the bonds
is P1,065,000. The change in fair value of the bonds is attributable to market factors.
a. 65,000 loss
b. 5,000 loss
c. 5,000 gain
d. 65,000 gain

2. On January 31, 2020, Mishane Company issued P3,000,000 maturity value, 12% bonds for P3,000,000 cash. The
bonds are dated December 31, 2019, and mature on December 31, 2029. Interest will be paid semiannually on
June 1 and December 1. What amount of accrued interest payable should be reported on September 30, 2020?
a. 90,000
b. 120,000
c. 180,000
d. 360,000

3. On January 1, 2019, Mishane Company purchased 12% bonds with face amount of P5,000,000 for P5,500,000
including transaction cost of P100,000. The bonds provide an effective yield of 10%. The bonds are dated
January 1, 2019 and pay interest annually on December 31 of each year.
The bonds are quoted at 110 on December 31, 2019. The entity has irrevocably elected to use the fair value
option. What amount of gain from change in fair value should be reported for 2019?
a. 100,000
b. 0
c. 350,000
d. 200,000

4. On January 1, 2019, Mishane Company acquired P4,000,000 of 10% face amount bonds for P3,767,000 to be
held as financial assets at amortized cost with a 14% effective yield. Interest on bonds is payable annually on
December 31 and the bonds mature on January 1, 2023. The effective interest method of amortization is used.
What is the carrying amount of the bond investment on December 31, 2019?
a. 3,814,380
b. 4,000,000
c. 3,767,000
d. 3,894,380

5. On October 1, 2020, Mishane Company issued 5,000 12% bonds with face amount of P1,000 per bond at 110.
The bonds which mature on January 1, 2025, pay interest semiannually on January 1 and July 1. The entity paid
bond issue cost of P140,000. How much cash was received from the issuance of the bonds?
a. 5,510,000
b. 5,450,000
c. 5,500,000
d. 5,650,000

6. On July 1, 2019, Mishane Company purchased P5,000,000 face amount, 9% bonds for P4,615,000 to yield 10%
per year to be held as financial assets at amortized cost: The bonds pay interest semiannually on January 1 and
July 1. On Dec 31, 2019, what amount should be reported as interest receivable?
a. 225,000
b. 250,000
c. 230,750
d. 200,000

7. On January 1, 2020, Mishane Company issued 6% bonds with face amount of P4,000,000 for net proceeds of
P3,677,600, a price that yields 8%. Interest is payable annually every December 31.
The entity elected the fair value option. On December 31, 2020, the bonds are quoted at 96. What amount should
be reported as gain or loss from change in fair value for 2020?
a. 162,400 gain
b. 162,400 loss
c. 122,400 gain
d. 122,400 loss

8.
Mishane Company had the following long-term debt:
Sinking fund bonds, maturing in installments 2,200,000
Industrial revenue bonds, maturing in installments 900,000
Subordinated bonds, maturing on a single date 2,000,000
What is the total amount of serial bonds?
a. 2,900,000
b. 5,100,000
c. 3,100,000
d. 2,000,000

9. On July 1, 2019, Mishane Company paid P1,198,000 for 10% bonds with a face amount of P1,000,000 to be held
as financial assets at amortized cost. Interest is paid on June 30 and December 31. The bonds were purchased to
yield 9%. The entity used the effective interest method. What is the carrying amount of the bond investment on
December 31, 2019?
a. 1,195,920
b. 1,198,000
c. 1,201,910
d. 1,194,090

10. On July 1, 2020, Mishane Company issued at 104, five thousand 10% bonds with face amount of P1,000 per
bond. The bonds were issued through an underwriter to whom the entity paid bond issue cost of P100,000. On
July 1, 2020, what is the carrying amount of the bonds payable?
a. 5,200,000
b. 5,000,000
c. 5,300,000
d. 5,100,000

11. Mishane Company purchased 8,000, P1,000 face amount, 9% bonds to yield 10%. The carrying amount of the
bonds on January 1, 2019 was 7,800,000. The bonds mature on June 30, 2022 and pay interest semi-annually on
June 30 and December 31.
The entity sold 4,000 bonds on March 1, 2019 for P3,920,000 after the interest has been received. What amount
should be recognized as loss on sale of bonds?
a. 0
b. 25,000
c. 15,000
d. 20,000

12. Mishane Company purchased bonds at a discount of P100,000. Subsequently, the entity sold these bonds at
a premium of P150,000. During the period that the entity held this investment, amortization of the discount
amounted to P40,000. What amount should be reported as gain on sale of bonds?
a. 210,000
b. 200,000
c. 290,000
d. 250,000

13. Mishane Company is authorized to issue P5,000,000 of 6%, 10-year bonds dated July, 1, 2020 with interest
payments on June 30 and December 31. When the bonds are issued on November 1, 2020, the entity received
cash of P5,180,000 including accrued interest. What is the discount or premium from the issuance of the bonds?
a. 80,000 discount
b. 80,000 premium
c. 50,000 premium
d. 50,000 discount

14. Mishane Company reported the following financial liabilities on December 31, 2020:
9% debentures, callable in 2021, due in 2022 3,500,000
11% collateral trust bonds, convertible into share capital beginning in 2021, due in 2022 1,000,000
10% debentures, P300,000 maturing annually 1,500,000
What is the total amount of term bonds?
a. 6,000,000
b. 3,500,000
c. 5,000,000
d. 4,500,000

15. On January 1, 2020, Mishane Company reported bonds payable of P8,000,000 and related unamortized
discount of P430,000.
On January 1, 2020, the entity retired P5,000,000 of the outstanding bonds at face amount plus a call premium of
P150,000
What amount should be reported in the 2020 income of debt?
a. 0
b. 318,750
c. 150,000
d. 418,750
 ACCTG 103
MIDTERM

1. If bonds are issued at a premium, this indicates that

a. the yield and nominal rate coincides
b. there is no relationship exists between the two rates.
c. the nominal rate exceeds the yield rate
d. the yield rate exceeds the nominal rate

2. When interest expense for the current year is less than interest paid, the bonds were issued at
a. face amount
b. cannot be determined
c. a discount
d. a premium

3. For a bond issue which sells for less than face value, the market rate of interest is
a. less than rate stated on the bond
b. equal to rate stated on the bond
c. dependent on the rate stated on the bond
d. higher than rate stated on the bond

4. If bonds are issued between interest dates, the entry of the issuer could include a
a. credit unearned interest
b. credit to interest receivable
c. debit to interest payable
d. credit interest expense

5. What is the contract between the issuer of the bonds and the bondholders?
a. bond indenture
b. registered bond
c. bond debenture
d. bond coupon

6. The amortization of discount on bonds payable

a. decreases the amount of interest expense
b. increases the carrying amount of bonds payable
c. decreases the face amount of bonds payable
d. decreases the carrying amount of bonds payable

7. Bonds payable not designated at fair value through profit or loss shall be measured initially at
a. fair value
b. fair value plus bond issue cost
c. face amount
d. fair value minus bond issue cost

8. Bonds that mature on a single date are called

a. callable bonds
b. debenture bonds
c. term bonds
d. serial bonds

9. When an entity failed to recognize amortization of discount on bonds payable for the current year, what is the
effect of the error on liabilities and equity, respectively?
a. understated; overstated
b. overstated; understated
c. understated; understated
d. overstated; overstated

10. The interest rate actually incurred.

a. yield rate
b. stated rate
c. nominal rate
d. coupon rate

11. In a debt restructuring that is considered asset swap, the gain on extinguishment is equal to the
a. excess of the carrying amount of the debt over the fair value of the asset
b. excess of the carrying amount of the debt over the carrying amount of the asset
c. excess of the fair value of the asset over the carrying amount of the debt
d. excess of the fair value of the asset over its carrying amount

12. An entity shall measure initially a note payable not designated at fair value through profit or loss at
a. fair value
b. fair value minus transaction cost
c. face amount
d. fair value plus transaction cost

13. There is a substantial modification of terms of an old financial liability if the gain or loss on extinguishment is
a. at least 10% of the carrying amount of the old liability
b. less than 10% of the carrying amount of the old liability
c. at least 10% of the new liability
d. less than 10% of the new liability

14. The gain or loss from extinguishment of a financial liability by issuing equity instruments shall be presented
in the statement of comprehensive income as
a. separate line item in profit or loss
b. other income or other expense
c. component of other comprehensive income
d. component of finance cost

15. If both the fair value of the equity instruments issued and the fair value of the financial liability extinguished
cannot be measured reliably, the equity instruments issued shall be measured at
a. par value of equity instruments issued
b. book value of equity instruments issued
c. carrying amount of the financial liability extinguished
d. value assigned by the Board of Directors

16. On September 1, 2016 Mishane Company issued a note payable in the amount of P1.8M, bearing interest at
12% and payable in three equal annual principal payments of P600,000. On this date the prime rate was 11%. The
first interest and principal payment was made on September 1, 2017. On December 31, 2017, what amount should
be reported as accrued interest payable?
a. 44,000
b. 48,000
c. 72,000
d. 66,000

17. On July 1, 2020, Mishane Company issued at 104, five thousand 10% bonds with face amount of P1,000 per
bond. The bonds were issued through an underwriter to whom the entity paid bond issue cost of P100,000. On
July 1, 2020, what is the carrying amount of the bonds payable?
a. 5,200,000
b. 5,300,000
c. 5,000,000
d. 5,100,000

18. Mishane Company purchased 8,000, P1,000 face amount, 9% bonds to yield 10%. The carrying amount of the
bonds on January 1, 2019 was 7,800,000. The bonds mature on June 30, 2022 and pay interest semi-annually on
June 30 and December 31.
The entity sold 4,000 bonds on March 1, 2019 for P3,920,000 after the interest has been received. What amount
should be recognized as loss on sale of bonds?
a. 20,000
b. 0
c. 15,000
d. 25,000
19. During 2020, Mishane Company experienced financial difficulties and is likely to default on a P5M, 15% 3-year
note dated January 1, 2018 payable to Summit Bank.
On Dec 31, 2020, the bank agreed to settle the note and unpaid interest of P750,000 for P4,250,000 cash payable
on Jan 31, 2021. What amount should be reported as gain from extinguishment of debt in the 2020 income
statement?
a. 900,000
b. 1,650,000
c. 750,000
d. 1,500,000

20. Mishane Company is authorized to issue P5,000,000 of 6%, 10-year bonds dated July, 1, 2020 with interest
payments on June 30 and December 31. When the bonds are issued on November 30, 2020, the entity received
cash of P5,180,000 including accrued interest. What is the discount or premium from the issuance of the bonds?
a. 55,000 discount
b. 80,000 discount
c. 55,000 premium
d. 80,000 premium

21. On January 1, 2019, Mishane Company purchased 12% bonds with face amount of P5,000,000 for P5,500,000
including transaction cost of P100,000. The bonds provide an effective yield of 10%. The bonds are dated
January 1, 2019 and pay interest annually on December 31 of each year.
The bonds are quoted at 110 on December 31, 2019. The entity has irrevocably elected to use the fair value
option. What amount of gain from change in fair value should be reported for 2019?
a. 350,000
b. 100,000
c. 0
d. 200,000

22.
Due to the COVID pandemic, Mishane Company negotiated the following to the bank:
OLD LOAN: P6M, 9% and due on Jan 1, 2020. No accrued interest on the note on Jan 1, 2020
NEW LOAN: P5M and extended maturity to 3 years on Dec 31, 2022. New interest is 13% payable annually every
Dec 31.
Present value of 1 at 9% for three periods is 0.77 and the present value of an ordinary annuity of 1 at 9% for three
periods is 2.53.
What is the present value of the new note payable on Jan 1, 2020?
a. 5,000,000
b. 5,494,500
c. 6,000,000
d. 3,850,000

23. At year-end, Mishane Company issued a P1M face amount note payable in exchange for services rendered.
The note, made at usual trade terms, is due in 9 months and bears interests, payable at maturity, at annual rate
of 3%. The market rate of interest is 8%. The compound interest factor of 1 due in 9 months at 8% is 0.944. At
what amount should the note payable be reported at year-end?
a. 965,200
b. 944,000
c. 1,030,000
d. 1,000,000

24.
Mishane Company had the following long-term debt:
Sinking fund bonds, maturing in installments 2,200,000
Industrial revenue bonds, maturing in installments 900,000
Subordinated bonds, maturing on a single date 2,000,000
What is the total amount of term bonds?
a. 3,100,000
b. 2,900,000
c. 5,100,000
d. 2,000,000
25. On July 1, 2020 Mishane Company borrowed P1,000,000 on a 10% 5-year interest-bearing note. On Dec 31,
2020, the fair value of the note is determined to be P925,000. The entity irrevocably elected the fair value option
in measuring the note payable. What amount should be reported from the change in fair value of the note
payable?
a. 75,000 gain
b. 25,000 loss
c. 0
d. 75,000 loss

26. On January 1, 2020, Mishane Company issued 6% bonds with face amount of P4,000,000 for net proceeds of
P3,677,600, a price that yields 8%. Interest is payable annually every December 31.
The entity elected the fair value option. On December 31, 2020, the bonds are quoted at 96. What amount should
be reported as gain or loss from change in fair value for 2020?
a. 122,400 gain
b. 162,400 gain
c. 162,400 loss
d. 122,400 loss

27. Mishane Company acquired a financial asset at its market value of P3,200,000. Broker fees of P200,000 were
incurred in relation to the purchase.
At what amount should the financial asset initially be recognized respectively if it is classified as at fair value
through profit or loss, or as at fair value through other comprehensive income?
a. P3,200,000 and P3,200,000
b. P3,200,000 and P3,400,000
c. P3,400,000 and P3,400,000
d. P3,400,000 and P3,200,000

28. On September 1, 2020, Mishane Co. borrowed on a P1,350,000 note payable from Federal Bank. The note
bears interest at 12% and is payable in three equal annual principal payments of P450,000. On this date, the
bank’s prime rate was 11%. The first annual payment for interest and principal was made on September 1, 2021.
At December 31, 2021, what amount should Mishane report as accrued interest payable?
a. 33,000
b. 36,000
c. 49,500
d. 54,000

29. On January 1, 2020, Mishane Company received P1,070,000 for 12% bonds with face amount of P1,000,000.
The bonds were sold to yield 10%. Interest is payable semiannually every January 1 and July 1. The entity
elected the fair value option for measuring financial liabilities. On December 31, 2020, the fair value of the bonds
is P1,065,000. The change in fair value of the bonds is attributable to market factors.
a. 65,000 loss
b. 5,000 gain
c. 5,000 loss
d. 65,000 gain

30. On Jan 1, 2020 Mishane Company showed the following:

Note payable - due Jan 1, 2020 -14% 5,000,000
Accrued interest payable 1,000,000
Mishane was granted by the creditor the following conditions:
1. Accrued interest of P1M is forgiven.
2. Principal obligation is reduced to P4M
3. The new interest rate is 10% payable every Dec 31
4. The new date of maturity is Dec 31, 2023.
PV of 1 at 14% for 4 periods is 0.5921 and PV of an ordinary annuity of 1 at 14% for 4 periods is 2.9137
How much is the gain on extinguishment of loan?
a. 3,533,880
b. 3,466,120
c. 2,000,000
d. 2,466,120
 ACCTG 103
LEASE

Problem 1
KAYALAGI Company leases a machinery under the direct financing lease. The machinery has no residual value
and does not contain a purchase option. The entity wishes to earn 8% interest on a 5-year lease of the machinery
with a cost of P3, 449,600. The present value of an annuity due of 1 at 8% for 5 years is 4.312.

1-1 Compute the annual rental.

Answer: 800,000

1-2
Compute the gross investment.
Answer: 4,000,000

1-3
What is the total amount of interest revenue to be recognized over the lease term?
Answer: 550,400

Problem 2
At the beginning of current year, KAYALAGI Company leased an equipment from a lessor with the following
information:
Annual rental payable at the end of the year : P 500,000
Lease term: 8 years
Useful Life: 10 years
Implicit Rate: 10%
PV of ordinary annuity of 1 for 8 periods at 10% is 5.33
PV of 1 for 8 periods at 10% is 0.47
The entity has the option to purchase the equipment on the expiration of the lease term by paying P500,000.

2-1. Compute the cost of the right of use asset to be recognized on commencement date.
Answer: 2,900,000

2-2. Compute the depreciation expense for the current year.

Answer: 290,000

2-3. What is the interest expense for current year?

Answer: 290,000

Problem 3
KAYALAGI Company is a dealer and leased an equipment with a cost of P4,000,000 and with the following lease
information:
Annual rental payable at the end of the year : P 1,500,000
Lease term: 5 years
Useful Life: 5 years
Residual Value (unguaranteed): P400,000
Implicit Rate: 12%
PV of ordinary annuity of 1 for 5 periods at 12% is 3.6
PV of 1 for 5 periods at 12% is 0.57
The entity incurred initial direct cost of P100,000 and at the end of the lease term, the equipment will revert to the
lessor.

3-1 What is the gross investment in the lease?

Answer: 7,900,000

3-2. What is the net investment in the lease?

Answer: 5,628,000

3-3. What amount should be reported as gross profit on sale?

Answer: 1,528,000
PROBLEM 4
At the beginning of current year, KAYALAGI sold and equipment with remaining life of 10 years and immediately
leased it back for 4 years at the prevailing market rental.
Sales price at fair value P6M
Carrying amount of equipment P4.5M
Annual rental payable at end of the year P750,000
Implicit rate 10%
PV of an ordinary annuity of 1 at 10% for four periods is 3.17

4-1. Compute the lease liability as of commencement date.

Answer: 2,377,500

4-2. What is the annual depreciation of the lease?

Answer: 445,781

4-3. What is the gain on right transferred?

Answer: 905,625

PROBLEM 5
At the beginning of the current year, KAYALAGI Company entered a 10-yr noncancelable lease requiring yearend
payments of P1M. On the same day, KAYALAGI paid initial direct cost of P150,000 in the leasing agreement.
Ownership of the property remains with the lessor at the end of the term. Other information are as follows:
Incremental borrowing rate is 12%
Implicit rate is 10%
Useful life of the property: 12 years
PV of ordinary annuity for 10 periods at 10% is 6.145
PV of ordinary annuity for 10 periods at 12% is 5.65

5-1. Compute the cost of the lease liability to be recognized.

Answer: 6,145,000

5-2. Compute the cost of the right of use asset.

Answer: 6,295,000

5-3. What is the lease liability at the end of the current year?
Answer: 5,759,500