FINANCIAL ACCOUNTING AND REPORTING
INSTRUCTIONS: Select the best answer for each of the following questions. ALL questions are compulsory and
MUST be attempted. Mark only one answer for each item on the answer sheet provided. Strictly NO ERASURES
ALLOWED. Erasures will render your examination answer sheet INVALID. Use PENCIL NO. 2 only. GOODLUCK!
1. The following are represented both to the FRSC and the
AASC, except
a. Securities and Exchange Commission
b. Bangko Sentral ng Pilipinas
c. Commission on Audit
d. Bureau of Internal Revenue
2. Which statement is true about the IASB’s development
of IFRSs?
a. The IASB gives precedence to the balance sheet
over Profit or Loss.
b. The IASB gives precedence to fair value accounting
over amortized cost.
c. Both a and b.
d. Neither a nor b.
3. Which of the following steps in the accounting cycle
are listed in a logical order?
a. Post the closing entries, take a post-closing trial
balance, and journalize the closing entries.
b. Post the journal entries to the general ledger
accounts, prepare a worksheet, and then take a
trial balance.
c. Take a trial balance, prepare a worksheet, then
prepare financial statements.
d. Prepare the income statement, prepare the balance
sheet and then prepare a trial balance.
4. The accountant of Review Company made the following
adjusting entry on December 31.
Prepaid Rent P1,800
Rent Expense P1,800
If annual rent is paid in advance every October 1, the
original transaction entry made was
a. Debit Prepaid Rent and credit Cash, P1,800.
b. Debit Rent Expense and credit Cash, P1,800.
c. Debit Rent Expense and credit Cash, P2,400.
d. Debit Rent Expense and credit Cash, P7,200.
5. Which of the following is the foundation of the
Conceptual Framework?
a. The objective of general purpose financial
reporting.
b. A reporting entity concept.
c. The qualitative characteristics of, and the
constraint on, useful financial information.
d. The elements of financial statements.
6. Contributions from and distributions to owners are
considered as income and expenses, respectively,
under
a. The financial capital concept
b. The physical capital concept
c. Both a and b
d. Neither a nor b
7. Which statement is incorrect regarding presentation of
financial statements?
a. An entity shall prepare its financial statements,
without exception, using the accrual basis of
accounting.
b. An entity shall present separately each material
class of similar items and items of a dissimilar
nature or function unless they are immaterial.
c. An entity shall not offset assets and liabilities or
income and expenses, unless required or permitted
by a PFRS.
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d. An entity shall present a complete set of financial
statements (including comparative information) at
least annually.
Use the following information for the next two questions.
Presented below is the statement of financial position of
Simple Corporation prepared by the chief accountant for
the current year, 2015.
Simple Corporation
Statement of Financial Position
December 31, 2015
Current assets P 435,000
Investments 640,000
Property plant, and equipment 1,720,000
Intangible assets 305,000
P3,100,000
Current liabilities P 330,000
Long-term liabilities 1,000,000
Shareholders’ equity 1,770,000
P3,100,000
Consider the following information:
1. The current assets section includes: cash P100,000,
accounts receivable P170,000 less P10,000 for
allowance for doubtful accounts, inventories P180,000,
and unearned revenue P5,000. The cash balance is
composed of P114,000, less a bank overdraft of
P14,000. Inventories are stated on the lower of FIFO
cost or market.
2. The investments section includes: the cash surrender
value of a life insurance contract P40,000; investment
in ordinary shares, short-term (trading) P80,000 and
long-term (available-for-sale) P270,000; and bond
sinking fund P250,000. The cost and fair value of
investments in ordinary shares are the same.
3. Property, plant, and equipment includes: buildings
P1,040,000 less accumulated depreciation P360,000;
equipment P450,000 less accumulated depreciation
P180,000; land P500,000; and land held for future use
P270,000.
4. Intangible assets include: a franchise P165,000:
goodwill P100,000; and discount on bonds payable
P40,000.
5. Current liabilities include: accounts payable P90,000;
notes payable - short term P80,000 and long - term
P120,000: and taxes payable P40,000.
6. Long - term liabilities are compose solely of 10% bonds
payable due 2022.
7. Shareholders' equity has: preference shares, no par
value, authorized 200,000 shares, issued 70,000
shares for P450,000; and ordinary shares, P1.00 par
value, authorized 400,000 shares, issued 100,000
shares at an average price of P10. In addition, the
corporation has retained earnings of P320,000.
FAR
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QUESTIONS: Increase
2015 2014 (Decrease)
Compute the adjusted amount to be reported on the
company’s statement of financial position as of December equipment
31, 2015: Accumulated
depreciation—
8. Current assets buildings and
a. P548,000 c. P588,000 equipment (90,000) (40,000) 50,000
b. P574,000 d. P534,000 Land 450,000 200,000 250,000
b. P520,000 d. P790,000 P1,635,000 P1,285,000 P350,000
9. Current liabilities
a. P224,000 c. P210,000 Accounts payable P 340,000 P 275,000 P65,000
b. P229,000 d. P215,000 Accrued expenses 60,000 90,000 ( 30,000)
Notes payable—
bank, long-term 200,000 (200,000)
Use the following information for the next two questions. Mortgage payable 150,000 150,000
Tawi2 Company’s income statement for the year ended Share capital, P10
December 31, 2015 reported net profit of P10,000,000. par 1,045,000 795,000 250,000
The auditor raised questions about the following amounts Retained earnings
that had been included in the net profit: (deficit) 40,000 (75,000) 115,000
Unrealized loss on decline in value of P1,635,000 P1,285,000 P350,000
available for sale securities P 500,000
Loss on write-off of inventory due to a Land was acquired for P250,000 in exchange for ordinary
government ban net of tax 1,500,000 shares, par P250,000, during the year; all equipment
Adjustment of profit of prior year net-debit 2,000,000 purchased was for cash. Equipment costing P25,000 was
Loss from expropriation of property, sold for P10,000; book value of the equipment was P20,000
net of tax 3,500,000 and the loss was reported as an ordinary item in net
Exchange differences gain on translating income. Cash dividends of P50,000 were charged to
foreign operations 4,500,000 retained earnings and paid during the year; the transfer of
Revaluation surplus realization 1,000,000 net income to retained earnings was the only other entry in
the Retained Earnings account.
The loss from expropriation was unusual in occurrence in
Tawi2’s line of business. Based of the foregoing information, compute for the
following.
10. Tawi2 Company’s 2015 statement of comprehensive
income should report profit at 13. Net cash provided by operating activities.
a. P9,000,000 c. P7,000,000 a. P120,000 c. P140,000
b. P6,500,000 d. P8,500,000 b. P130,000 d. P165,000

11. Tawi2 Company’s 2015 statement of comprehensive 14. Net cash provided by (used in) financing activities.
income should total comprehensive income at a. P150,000 c. (P100,000)
a. P12,000,000 c. P5,000,000 b. P350,000 d. (P250,000)
b. P11,000,000 d. P4,000,000

15. The following pertains to Miraflor, Inc. on December 31

12. Gary Company had net income of P700,000 for the of the current year: Checking account balance
year ended December 31, 2015 after giving effect to P925,000; an overdraft in special checking account at
the following events which occurred during the year: same bank as normal checking account of P17,000;
 The decision was made January 2 to discontinue certificate of deposit P400,000; cash held in a bond
the travel agency segment. sinking fund P200,000; postdated check from customer
 The travel agency segment was sold June 30. P11,000; certified check from customer P9,800; NSF
 Operating loss from January 1, to June 30 for the check received from customer P15,000; cash advance
travel agency segment amounted to P60,000 to subsidiary of P300,000; postage stamps on hand
before tax benefit. P620; utility deposit paid to electric company P8,000;
 Travel agency assets with a book value of P350,000 currency and coins in a petty cash fund (the company
were sold for P200,000 has not replenished the fund to the imprest amount of
P5,000) P800. The correct amount that should be
Gary’s tax rate was 40% for 2015. For the year ended reported as cash is
December 31, 2015, Gary’s after-tax income from a. P908,800 c. P1,318,600
continuing operations was b. P918,600 d. P1,322,800
a. P574,000 c. P784,000
b. P700,000 d. P826,000 16. You obtained the bank statement, paid checks, and
other memoranda relating to Lucy Company’s bank
Use the following information for the next two questions. account for December 2015. In reconciling the bank
balance at December 31, 2015, you observed the
The statement of financial position data of Davao Company
following facts:
at the end of 2015 and 2014 follow:
Balance per bank statement, 12/31/15 P1,465,800
Increase Outstanding checks, 12/31/15 624,750
2015 2014 (Decrease) Receipts of 12/31/15, deposited 1/2/15
Cash P 125,000 P 175,000 (P50,000) 95,550
Accounts Proceeds of bank loan, 12/15/15,
receivable (net) 300,000 225,000 75,000 discounted for 90 days at 10% per
Inventory 350,000 225,000 125,000 year, omitted from records 195,000
Prepaid expenses 50,000 125,000 ( 75,000) Deposit of 12/23/15, omitted from 53,000
Buildings and 450,000 375,000 75,000 bank statement
Check 733 of Lucky Co., charged by 82,100

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the bank in error to Lucy Co.
Proceeds of note receivable of Lucy Co.
collected by bank, 12/10/15, not 40,300
entered in cash records (Principal,
P40,000; Interest, P400; Collection
charge, P100)
Erroneous debit memo of 12/31/15, to
charge company’s account with
settlement of bank loan, paid by 100,000
check no. 9344 on same date
Deposit of another client on 12/6/15
credited in error to Lucy Co. 25,000
The cash balance per books of Lucy Company on
December 31, 2015 is
a. P1,491,000 c. P961,800
b. P1,146,700 d. P911,400
17. Which statement is incorrect regarding loans and
receivables?
a. An entity shall measure loans and receivables on
initial recognition at fair value plus transaction
costs that are directly attributable to the
acquisition of the financial asset.
b. The fair value of a long-term loan or receivable that
carries no interest can be estimated as the present
value of all future cash receipts discounted using
the prevailing market rate of interest for a similar
instrument with a similar credit rating.
c. Short-term receivables with no stated interest rate
may be measured at the original invoice amount if
the effect of discounting is immaterial.
d. Loans and receivables are derivative financial
assets with fixed or determinable payments that
are not quoted in an active market.
18. On January 1, 2015, Comforter Company sold
equipment with a carrying amount of P800,000 to Cold
Company. As payment, Cold gave Comforter Company
a P1,200,000 note. The note bears an interest rate of
5% and is to be repaid in three annual installments of
P400,000 (plus interest on the outstanding balance).
The first payment was received on December 31, 2015.
The market price of the equipment is not reliably
determinable. The prevailing rate of interest for notes
of this type is 10%.
The interest income to be recognized in 2016 is
a. P 40,000 c. P 74,708
b. P 69,587 d. P109,735
19. The Premier National Bank has a note receivable of
P200,000 from the Marvelous Company that it is
carrying at face value and is due on December 31,
2019. Interest on the note payable at 9% each
December 31. The Marvelous Company paid the
interest due on December 31, 2015, but informed the
bank that it would probably miss the next two years'
interest payments because of its financial difficulties.
After that, it expected to resume its annual interest
payments, but it would make the principal payment
one year late, with interest paid for that additional year
at the time of the principal payments. How much
should be recognized as loan impairment loss in 2015?
(Round off present value factors to four decimal
places.)
a. P12,752 c. P19,965
b. P31,669 d. P32,812
20. Which of the following is incorrect regarding expected
credit losses on financial assets in accordance with
PFRS 9?
a. Expected credit losses are a probability-weighted
estimate of credit losses (ie the present value of all
cash shortfalls) over the expected life of the
financial instrument.
b. A cash shortfall is the difference between the cash
flows that are due to an entity in accordance with
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the contract and the cash flows that the entity
expects to receive.
c. Expected credit losses consider the amount and
timing of payments.
d. A credit loss cannot arise if the entity expects to be
paid in full even if later than when contractually
due.
21. On January 1, 2015, Alaska Corporation purchased
P1,000,000 10% bonds for P1,051,510 (including
broker’s commission of P20,000). Interest is payable
annually every December 31. The bonds mature on
December 31, 2017. The prevailing market rate for the
bonds is 9% at December 31, 2015. (Round off present
value factors to four decimal places)
If the bonds are classified as held-to-maturity (HTM),
the amount to be reported on the entity’s December
31, 2015 statement of financial position is
a. P1,034,340 c. P1,025,330
b. P1,035,630 d. P1,017,610
22. On April 1, 2015, Etcha Co. purchased 25,000 ordinary
shares of Pwera Co. at P180 per share which reflected
book value as of that date. At the time of the
purchase, Pwera had 100,000 ordinary shares
outstanding. The shares are intended as a long term
investment. The first quarter statement ending March
31, 2015 of Pwera recorded profit of P480,000. For the
year ended December 31, 2015, Pwera reported profit
of P2,400,000. Pwera paid Etcha dividends of P60,000
on June 1, 2015 and again P60,000 on December 31,
2015. The shares of Pwera are selling at P190 per
share on December 31, 2015.
Etcha is entitled to appoint two directors to the board,
which consists of eight members. The remaining of the
voting rights are held by two other companies, each of
which is entitled to appoint three directors. The board
makes decisions on the basis of simple majority.
Because board meetings are often held at very short
notice, Etcha does not always have representation on
the board. Often the suggestions of the representative
of Etcha are ignored, and the decisions of the board
seem to take little notice of any representations made
by the director from Etcha Corp.
Based on the above information, the carrying amount
of the investment in Pwera Co. as of December 31,
2015 should be
a. P4,750,000 c. P4,860,000
b. P4,500,000 d. P4,950,000
23. Losses recognized using the equity method in excess of
the entity’s investment in ordinary shares are applied
first to which of the following?
a. Preference shares
b. Trade receivables
c. Long-term receivables
d. Secured loans
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24. On January 1, 2014, Job Corporation enters into a estimates are made, of the amount the inventories
forward contract to purchase on January 1, 2016, a are expected to realize.
specified number of barrels of oil at a fixed price. Job d. Materials and other supplies held for use in the
Corporation is speculating that the price of oil will production of inventories are written down below
increase and plans to net settle the contract if the price cost even if the finished products in which they will
increases. Job Corporation does not pay anything to be incorporated are expected to be sold at or
enter into the forward contract on January 1, 2014. Job above cost.
Corporation does not designate the forward contract as
a hedging instrument. At the end of 2014, the fair 28. Yumul Company provided the following data:
value of the forward contract has increased to Cost Retail
P400,000. At the end of 2015, the fair value of the Beginning inventory P 160,000 P 400,000
forward contract has declined to P350,000. How much Purchases 2,800,000 3,200,000
should be recognized in 2015 profit or loss related to Freight in 40,000
this forward contract? Markup 300,000
a. P400,000 c. P50,000 Markup cancellation 30,000
b. P350,000 d. P 0 Markdown 160,000
Markdown
25. Orang Dampuan Co. wholesales bicycles. It uses the cancellation 40,000
perpetual inventory system. The company's reporting Sales 3,000,000
date is 31 December. At 1 December 2015, inventory Physical inventory at
on hand consisted of 350 bicycles at P820 each and 43 year end 500,000
bicycles at P850 each. During the month ended 31 Estimated normal
December 2015, the following inventory transactions shrinkage is 4% of
took place (all purchase and sales transactions are on sales
credit):
Assuming the company uses the average retail
Dec. 02 Sold 300 bicycles for P1,200 each. inventory method, the estimated inventory shortage is
03 Five bicycles were returned by a customer. a. P104,000 c. P200,000
They had originally cost P820 each and were b. P130,000 d. P 4,000
sold for P1,200 each.
09 Purchased 55 bicycles at P910 each. 29. Items of property, plant and equipment acquired for
13 Purchased 76 bicycles at P960 each. safety or environmental reasons
15 Sold 86 bicycles for P1,350 each. a. Qualify as assets because the acquisition of such
16 Returned one damaged bicycles to the property, plant and equipment directly increases
supplier. This bicycle had been purchased on the future economic benefits of existing item of
9 December. property, plant and equipment.
22 Sold 60 bicycles for P1,250 each. b. Qualify as assets because they enable an entity to
26 Purchased 72 bicycles at P980 each. derive future economic benefits from related assets
29 Two bicycles, sold on 22 December, were in excess of what could be derived had those items
returned by a customer. The bicycles were not been acquired.
badly damaged so it was decided to write c. Do not qualify as assets because the acquisition of
them off. They had originally cost P910 each. such property, plant and equipment does not
directly increase the future economic benefits of
The cost of inventory as of December 31, 2015 using existing item of property, plant and equipment.
moving average method is (Round unit costs to the d. Do not qualify as assets because the acquisition of
nearest peso) such property, plant and equipment is not
a. P133,672 c. P145,349 necessary for an entity to obtain the future
b. P143,485 d. P145,285 economic benefits from its other assets.
26. The closing inventory at cost of a company at 31 30. On April 1, 2015, the new machinery was ordered at a
December 2015 amounted to P284,700. The following quoted price of P56,000. On July 1, 2015, it arrived at
items were included at cost in the total: Dodik Corp.’s plant with an actual invoice price of
 400 coats, which had cost P80 each and normally P58,000, which it paid immediately. During July 2015, a
sold for P150 each. Owing to a defect in new concrete platform was constructed at a cost of
manufacture, they were all sold after the reporting P4,000 to properly install the machine. In August
date at 50% of their normal price. Selling expenses 2015, testing was performed at a cost of P7,000 to
amounted to 5% of the proceeds. ensure the machine was operating properly. On August
 800 skirts, which had cost P20 each. These too 31, 2015, the machine was entered into service. Minor
were found to be defective. Remedial work in repairs and maintenance costs on the new machine
February 2016 cost P5 per skirt, and selling amounted to P3,000 in September 2015. No other
expenses for the batch totaled P800. They were costs were incurred prior to December 31, 2015.
sold for P28 each. Similar machinery is depreciated on a straight-line
basis over 10 years and typically has no residual value.
What should the inventory value be according to PAS 2 What should be the depreciation expense for the year
Inventories after considering the above items? ended 31 December 2015?
a. P281,200 c. P282,800 a. P2,300 c. P2,875
b. P282,100 d. P329,200 b. P2,233 d. P3,350
27. Which is incorrect regarding writedown of inventory to
net realizable value?
a. Inventories are usually written down to net
realizable value item by item.
b. Each service of a service provider is treated as a
separate item.
c. Estimates of net realizable value are based on the
most reliable evidence, available at the time the

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31. Roxanne Co. purchased equipment for P500,000. The
equipment had an estimated 10-year service life.
Roxanne’s policy for 10-year assets is to use the 150%
declining balance depreciation method for the first five
years of the asset’s life and then switch to the straight-
line depreciation method. What amount should
Roxanne report as accumulated depreciation for
equipment at the end of the sixth year?
a. P300,000 c. P278,147
b. P322,518 d. P311,425
32. Which of the following will most likely result to
reclassification?
a. An entity decided to dispose of an investment
property without development.
b. An entity begins to redevelop an existing
investment property for continued future use as
investment property.
c. Commencement of development with a view to
sale.
d. All of the above.
33. Cute Corporation owns the following properties at 1
January 2015:
Property A
An office building used by Cute for administrative
purposes with a depreciated historical cost of P2
million. At 1 January 2015 it had a remaining life of 20
years. After a re-organization on 1 July 2015, the
property was leased to a third party and reclassified as
an investment property applying Cute’s policy of the
fair value model. An independent valuer assessed the
property to have a fair value of P2.3 million at 1 July
2015, which had risen to P2.34 million at 31 December
2015.
Property B
Another office building sub-leased to a subsidiary of
Cute. At 1 January 2015, it had a fair value of P1.5
million which had risen to P1.65 million at 31
December 2015. At 1 January 2015 it had a remaining
life of 15 years.
In relation to these properties, the net amount to be
recognized in profit or loss in the entity’s separate
financial statements for the year ended December 31,
2015 is
a. P540,000 c. P190,000
b. P490,000 d. P140,000
34. An intangible asset shall be recognized if, and only if it
is probable that the expected future economic benefits
that are attributable to the asset will flow to the entity
and the cost of the asset can be measured reliably.
The probability recognition criterion is always
considered to be satisfied for intangible assets
acquired
a. Separately.
b. In a business combination.
c. Either a or b
d. Neither a nor b
35. Which statement is correct regarding initial recognition
of research and development costs?
a. Research costs may be capitalized.
b. All development costs should be
capitalized.
c. If an entity cannot distinguish the research
phase of an internal project to create an intangible
asset from the development phase, the entity
treats the expenditure for that project as if it were
incurred in the development phase only.
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d. A research and development project
acquired in a business combination is recognized
as an asset.
36. Which statement is incorrect regarding intangible
assets contained in or on a physical substance such as
a compact disc (in the case of computer software),
legal documentation (in the case of a license or patent)
or film?
a. In determining whether an asset that incorporates
both intangible and tangible elements should be
treated property, plant and equipment or as an
intangible asset, an entity uses judgment to assess
which element is more significant.
b. Computer software for a computer-controlled
machine tool that cannot operate without that
specific software is an integral part of the related
hardware and it is treated as property, plant and
equipment.
c. When the software is not an integral part of the
related hardware, computer software is treated as
an intangible asset.
d. The operating system of a computer is treated as
an intangible asset.
37. On 1 January 2015 an entity purchased a new software
package to operate its production equipment for
P600,000, including P50,000 refundable purchase
taxes. The purchase price was funded by incurring a
loan of P605,000 (including P5,000 loan origination
fees). The loan is secured against the software
licenses.
In January 2015 the entity incurred the following costs
in customizing the software so that it is more suited to
the systems used by the entity:
 Labor – P120,000
 Depreciation of plant and equipment used to
perform the modifications – P15,000.
In January 2015 the entity’s production staff were
trained in how to operate the new software. Training
costs included:
 Cost of an expert external instructor – P7,000
 Labor – P3,000.
In February 2015 the entity’s production team tested
the software and the information technology team
made further modifications necessary to get the new
software to function as intended by management. The
following costs were incurred in the testing phase:
 Material, net of P3,000 recovered from the
sale of the scrapped output – P21,000
 Labor – P11,000
 Depreciation of plant and equipment while it
was used to perform the modifications – P5,000.
The new software was ready for use on 1 March 2015.
However, because of low initial order levels, the entity
incurred a loss of P23,000 on operating the software
during March.
What is the cost of the software?
a. P550,000 c. P722,000
b. P685,000 d. P732,000
38. At the end of the reporting period, a tomato grower’s
vines are six months old and bearing fully developed
ripe tomatoes. The accumulated cost of the fruit-
bearing vines is P12,500 and their fair value is
P100,000. It is expected to cost the entity P5,000 to
sell the tomato crop at market. Once the tomatoes
have been harvested the then-worthless vines will be
abandoned. At the end of the reporting period:
a. The entity measures the tomatoes at P82,500,
the tomato vines at P12,500 and recognizes a
gain of P82,500 for the increase in fair value.
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b. The entity measures the tomato-bearing vines
at P95,000 and recognizes a gain of P82,500
for the increase in fair value.
c. The entity measures the tomato-bearing vines
at P100,000 and recognizes a gain of P87,500
for the increase in fair value.
d. The entity measures the tomatoes at P95,000,
the tomato vines at P0 and recognizes a gain of
P82,500 for the increase in fair value.
39. Which statement is incorrect regarding ‘bearer plants’?
a. Tea bushes, grape vines, oil palms and rubber trees
usually meet the definition of a bearer plant.
b. Bearer plants are within the scope of PAS 16.
c. The produce growing on bearer plants, for
example, tea leaves, grapes, oil palm fruit and
latex, is within the scope of PAS 41.
d. Incidental scrap sales would prevent the plant from
satisfying the definition of a bearer plant.
40. Which statement is incorrect regarding impairment of
assets classified as ‘held-for-sale’ in accordance with
PFRS 5?
a. Impairment must be considered both at the time of
classification as held for sale and subsequently.
b. Immediately prior to classifying an asset as held for
sale, any impairment loss is recognized in profit or
loss unless the asset had been measured at
revalued amount under PAS 16 or PAS 38, in which
case the impairment is treated as a revaluation
decrease.
c. After classification as held for sale, impairment loss
is the difference between the adjusted carrying
amounts of the asset and fair value less costs to
sell.
d. Any impairment loss that arises by using the
measurement principles in PFRS 5 must be
recognized in profit or loss, except for assets
previously carried at revalued amounts.
41. The balance in Iwig Co.'s accounts payable account at
December 31, 2015 was P400,000 before any
necessary year-end adjustments relating to the
following:
 On December 28, 2015, Iwig purchased and
received goods for P40,000, terms 2/10, n/30. Iwig
records purchases and accounts payable at net
amounts. The invoice was recorded and paid
January 3, 2016.
 Goods were in transit to Iwig from a vendor on
December 31, 2015. The invoice cost was
P50,000. The goods were shipped f.o.b. shipping
point on December 29, 2015 and were received on
January 4, 2016.
 Goods shipped f.o.b. destination on December 21,
2015 from a vendor to Iwig were received on
January 6, 2016. The invoice cost was P25,000.
 Goods shipped to Iwig, f.o.b. shipping point on
December 20, 2015, from a vendor were lost in
transit. The invoice price was P20,000. On January
5, 2016, Iwig filed a P20,000 claim against the
common carrier.
In Iwig's December 31, 2015 statement of financial
position, the accounts payable should be
a. P439,200 c. P509,200
b. P489,200 d. P534,200
42. Pythagoras Co. must determine the December 31,
2015 year-end accruals for advertising and rent
expenses. A P2,000 advertising bill was received
January 7, 2016. It related to costs of P1,500 for
advertisements in December 2015 issues and P500 for
advertisements in January 2, 2016 issues of the
Page 6 of 10 www.prtc.com.ph
newspaper. A store lease, effective December 16,
2014, calls for fixed rent of P4,800 per month payable
1 month from the effective date and monthly
thereafter. In addition, rent equal to 5% of net sales
over P1,200,000 per calendar year is payable on
January 31 of the following year. Net sales for 2015
were P2,200,000. In its December 31, 2015 statement
of financial position, Pythagoras should report accrued
liabilities of
a. P56,800 c. P56,300
b. P51,500 d. P53,900
43. Funan Industries purchases new specialized
manufacturing equipment on July 1, 2014. The
equipment cash price is P79,000. Funan signs a
deferred payment contract that provides for a down
payment of P10,000 and an 8-year note for P103,472.
The note is to be paid in 8 equal annual payments of
P12,934. The payments include 10% interest and are
made on June 30 of each year, beginning June 30,
2015.
The total interest expense for the year ended
December 31, 2015 is
a. P6,900 c. P6,612
b. P6,599 d. P5,982
44. On December 31, 2015, X Corp. was indebted to
Zyland Co. on a P1,000,000, 10% note. Only interest
had been paid to date, and the remaining life of the
note was 2 years. Because X Corp. was in financial
difficulties, the parties agreed that X Corp. would settle
the debt on the following terms:
 Settle one-half of the note by transferring land with
a recorded value of P400,000 and a fair value of
P450,000.
 Settle one-fourth of the note by transferring
10,000, P1 par, ordinary shares with a fair market
value of P15 per share.
 Modify the terms of the remaining one-fourth of the
note by reducing the interest rate to 5% for the
remaining 2 years and reducing the principal to
P150,000.
What total gains should X Corp. record in 2015 from
this troubled debt restructuring?
a. P100,000 c. P213,024
b. P200,000 d. P313,024
45. Hosea Corporation gives warranties at the time of sale
to purchasers of its product. Under the terms of the
contract for sale the manufacturer undertakes to make
good, by repair or replacement, manufacturing defects
that become apparent within one year from the date of
sale. On the basis of experience, it is probable (ie
more likely than not) that there will be some claims
under the warranties.
Sales of P10 million were made evenly throughout
2015.
At 31 December 2015 the expenditures for warranty
repairs and replacements for the product sold in 2015
are expected to be made 50 per cent in 2015 and 50
per cent in 2016. Assume for simplicity that all the
2016 outflows of economic benefits related to the
warranty repairs and replacements take place on 30
June 2016.
Experience indicates that 95 per cent of products sold
require no warranty repairs; 3 per cent of products sold
require minor repairs costing 10 per cent of the sale
price; and 2 per cent of products sold require major
repairs or replacement costing 90 per cent of sale
price.
The entity has no reason to believe future warranty
claims will be different from its experience.
FAR
TeamPRTC

At 31 December 2015 the appropriate discount factor deduction to equity.

for cash flows expected to occur on 30 June 2016 is c. Joint costs, which include fee for fairness opinion
0.95238. Furthermore, an appropriate risk adjustment and valuation report, tax opinion cost and other
factor to reflect the uncertainties in the cash flow joint costs, amounting to P475,000 will be allocated
estimates is an increment of 6 per cent to the using the proportion of newly sold shares to the
probability-weighted expected cash flows. total number of shares outstanding immediately
after the new share issuance.
At 31 December 2015 the entity recognizes a warranty
provision measured at: d. The total costs incurred of P1,000,000 will be
a. P210,000 c. P113,300 treated as a contra shareholders’ equity account.
b. P222,600 d. P106,000
49. On January 1, 2015, Entity D enters into a forward
46. The N Corporation is authorized to issue 100,000 contract that requires the entity to repurchase 1,000
ordinary shares, P17 par value. At the beginning of the shares for P60,000 on December 31, 2015. No
year, 18,000 ordinary shares were issued and consideration is paid or received at the inception of the
outstanding. These shares had been issued at P24. contract. The market interest rate is 10% on January 1,
During the year, the company entered into the 2015 and 12% on December 31, 2015. The forward
following transactions: contract decreased Entity D’s equity on January 1,
Jan. 16 - Issued 1,300 ordinary shares at P25 per share. 2015 by
Mar. 21 - Exchanged 12,000 ordinary shares for a a. P60,000 c. P53,574
building. The ordinary shares were selling at b. P54,546 d. P 0
P27 per share.
May 7 - Reacquired 500 ordinary shares at P26 per 50. Cerritos Corporation began operations on January 1,
share to be held in treasury. 2012. During its first three years of operations,
July 1 - Accepted subscriptions to 1,000 ordinary Cerritos reported net income and declared dividends as
shares at P28 per share. The contract called follows:
for 10% down payment with the balance due Net income Dividends declared
on June 30 next year. 2012 P 80,000 P 0
Sept. 20 - Sold 500 treasury shares at P29 per share. 2013 250,000 100,000
2014 300,000 100,000
Total contributed capital at December 31 is
a. P615,000 c. P613,500
The following information related to 2015:
b. P818,000 d. P816,500
Prior period adjustment:
47. The following balances are shown in the shareholders' understatement of 2013 depreciation
equity of tamarind company on December 31, 2014: expense (before taxes) P 40,000
Cumulative decrease in income from
Preference share capital, P10 par,
change in inventory methods (before
100,000 shares P1,000,000
taxes) 70,000
Ordinary share capital, P10 par,
Income before income tax 480,000
500,000 shares, 5,000,000
Dividends declared (of this amount,
Share premium - preference 50,000
P50,000 will be paid on January 15,
Share premium – ordinary 200,000
2016) 200,000
Retained earnings 100,000
Effective tax rate 35%
Total P6,350,000
As at December 31, 2015, the retained earnings of
During 2015, the following transactions pertaining to
Cerritos Corporation is
the shareholders' equity were completed:
a. P520,500 c. P430,000
 Retirement of 5,000 preference shares at P11 per
b. P484,500 d. P470,500
share.
 Purchase of 5,000 ordinary shares at P12 per 51. The shareholders’ equity of Windy Company on
share. December 31, 2015, consists of the following capital
 Share split, ordinary, 2 for 1. balances:
 Reissue of 2,000 treasury shares at P8 per share.
Preference share capital, 10%
 Profit for 2015, P300,000. cumulative, 3 years in arrears, P100
par, P110 liquidation price 150,000
The total shareholders' equity on December 31, 2015 is shares P15,000,000
a. P6,556,000 c. P6,350,000 Ordinary share capital, P100 par,
b. P6,551,000 d. P6,251,000 200,000 shares 20,000,000
48. Open Sesame Company undertakes an IPO for the
listing and issuance of 700,000 new shares and Subscribed ordinary share capital, net
300,000 existing shares. In relation to this, the of subscription receivable of
company incurred the following costs: P4,000,000 6,000,000
Documentary stamp tax P 25,000 Treasury shares-ordinary, 50,000
Fairness opinion and valuation report 125,000 shares at cost 4,000,000
Tax opinion 75,000 Share premium 3,000,000
Newspaper publication 200,000 Retained earnings 20,000,000
Listing fee 300,000
Other joint costs 275,000 The book value per share of ordinary is
P1,0000,000 a. P156.00 c. P172.00
b. P190.00 d. P286.67
Which statement is incorrect?
a. The company will recognize the listing fee of
52. Edmund Halvor of the controller's office of East Aurora
P300,000 immediately to profit or loss.
Corporation was given the assignment of determining
b. The documentary stamp tax and newspaper
the basic and diluted earnings per share values for the
publication fee amounting to P25,000 and
year ending December 31, 2015.
P200,000, respectively, will be recognized as a

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TeamPRTC

shares at P20 per share 500,000

Additional information:
a. The company is authorized to issue 8,000,000, P10 par
value, ordinary shares. As of December 31, 2014,
3,000,000 shares had been issued and were
outstanding.
b. The per share market prices of the ordinary shares on
selected dates were as follows.
Price per Share
July 1, 2014 P20.00
January 1, 2015 21.00
April 1, 2015 25.00
July 1, 2015 11.00
August 1, 2015 10.50
November 1, 2015 9.00
December 31, 2015 10.00
c. A total of 700,000 shares of an authorized 1,200,000
shares of convertible preferred shares had been issued
on July 1, 2014. The share was issued at its par value
of P25, and it has a cumulative dividend of P3 per
share. The share is convertible into ordinary shares at
the rate of one share of convertible preference for one
share of ordinary. The rate of conversion is to be
automatically adjusted for share splits and share
dividends. Dividends are paid quarterly on September
30, December 31, March 31, and June 30.
d. East Aurora Corporation is subject to a 40% income tax
rate.
e. The after-tax profit for the year ended December 31,
2015 was P13,550,000.
The following specific activities took place during 2015.
1. January 1 — A 5% ordinary share dividend was
issued. The dividend had been declared on December
1, 2014, to all shareholders of record on December 29,
2014.
2. April 1 — A total of 200,000 preference shares was
converted into ordinary shares. The company issued
new ordinary shares and retired the preference shares.
3. July 1 — A 2-for-1 ordinary share split became
effective on this date. The board of directors had
authorized the split on June 1.
4. August 1 — A total of 300,000 ordinary shares were
issued to acquire a factory building.
5. November 1 — A total of 24,000 ordinary shares
were purchased on the open market at P9 per share.
These shares were to be held as treasury shares and
were still in the treasury as of December 31, 2015.
6. Ordinary shares cash dividends — Cash dividends
to ordinary shareholders were declared and paid as
follows.
April 15 — P0.30 per share
October 15 — P0.20 per share
7. Preference shares cash dividends — Cash dividends
to preference shareholders were declared and paid as
scheduled.
Determine the number of shares used to compute
diluted earnings per share for the year ended
December 31, 2015.
a. 7,891,000 c. 7,836,000
b. 7,981,000 d. 7,286,000
53. The information below pertains to Prancer Company.
Profit for the year P1,200,000
8% convertible bonds issued at par
(P1,000 per bond). Each bond is
convertible into 40 ordinary
shares 2,000,000
6% convertible, cumulative
preference shares, P100 par
value. Each share is convertible 3,000,000
into 3 ordinary shares.
Ordinary shares, P10 par value 6,000,000
Share options (granted in a prior
year) to purchase 50,000 ordinary
Tax rate 40%
Average market price of ordinary P25 per
shares share
There were no changes during the year in the number
of ordinary shares, preference shares, or convertible
bonds outstanding. There is no treasury share.
Compute diluted earnings per share.
a. P1.70 c. P1.66
b. P1.62 d. P1.26
54. At the beginning of year 1, an entity grants 100 share
options to each of its 200 employees. Each grant is
conditional upon the employee remaining in service
over the next three years. The entity estimates that
the fair value of each option is P21. On the basis of a
weighted average probability, the entity estimates that
60 employees will leave during the three-year period
and therefore forfeit their rights to the share options.
Suppose that 15 employees leave during year 1. Also
suppose that by the end of year 1, the entity’s share
price has dropped, and the entity reprices its share
options, and that the repriced share options vest at the
end of year 3. The entity estimates that a further 35
employees will leave during years 2 and 3. During
year 2, a further 10 employees leave, and the entity
estimates that a further 10 employees will leave during
year 3. During year 3, a total of 8 employees leave.
The entity estimates that, at the date of repricing, the
fair value of each of the original share options granted
(ie before taking into account the repricing) is P10 and
that the fair value of each repriced share option is P13.
The amount to be recognized as expense in year 2 is
a. P159,000 c. P150,750
b. P105,000 d. P135,750
55. An entity grants to an employee the right to choose
either 1,000 phantom shares, ie a right to a cash
payment equal to the value of 1,000 shares, or 1,200
shares. The grant is conditional upon the completion
of three years’ service. If the employee chooses the
share alternative, the shares must be held for three
years after vesting date.
At grant date, the entity’s share price is P50 per share.
At the end of years 1, 2 and 3, the share price is P52,
P55 and P60 respectively. The entity does not expect
to pay dividends in the next three years. After taking
into account the effects of the post-vesting transfer
restrictions, the entity estimates that the grant date
fair value of the share alternative is P48 per share.
Compute for the amount to be recognized as
compensation expense in year 2.
a. P21,868 c. P19,334
b. P36,667 d. P19,200
56. During 2015, Grant Industries, Inc. constructed a new
manufacturing facility at a cost of P12,000,000. The
weighted average accumulated expenditures for 2015
were calculated to be P5,400,000. The company had
the following debt outstanding at December 31, 2015:
 10 percent, five-year note to finance construction
of the manufacturing facility, dated January 1,
2015, P3,600,000.
 12 percent, 20-year bonds issued at par on April
30, 2011, P8,400,000.
 8 percent, six-year note payable, dated March 1,
2014, P1,800,000.
Determine the amount of interest to be capitalized by
Grant Industries for 2015.
a. P360,000 c. P557,280
b. P563,220 d. P591,840

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TeamPRTC

57. Which of the following statements is true?
a. If a lease qualifies as a finance lease for the lessor,
it will also always qualify as a finance lease for the
lessee.
b. It is possible for neither the lessor nor lessee to
depreciate the asset under lease.
c. A lessee's debt equity ratio is not increased if the
lease is a finance lease, whereas, it would be if the
asset were purchases outright.
d. There is always "accounting symmetry" for
recording and reporting leases between the lessor
and lessee.
58. Porkee Corp. sells equipment with a carrying amount
P150,000 to Chopee Corp. for P170,000 when the
equipment's fair value is P100,000, and then enters
into a cancellable operating lease agreement to use
the equipment for two years. In the current year, how
much profit would Porkee Corp. record on the sale of
the equipment?
a. P20,000 c. P70,000
b. P50,000 d. Nil
59. The Waloneke Company has a policy of using non-
current assets until they can no longer be operated and
are worthless. On 1 January 2015 it acquired an item of
plant and machinery for P100,000. It is being
depreciated over 10 years on a straight-line basis. For
tax purposes there is an allowance of 20% per annum on
a reducing balance basis. There are two rates of tax:
15% on trading profits and 25% on gains on disposals.
What deferred tax balance should Waloneke recognize at
31 December 2015, according to PAS12 Income taxes?
a. Deferred tax asset of P2,500
b. Deferred tax asset of P1,500
c. Deferred tax liability of P2,500
d. Deferred tax liability of P1,500
Use the following information for the next two questions.
Additional information
 The company can claim a deduction of P15,000 (15%)
for depreciation on equipment, but the motor vehicle is
fully depreciated for tax purposes.
 The equipment sold during the year had been
purchased for P30,000 two years before the date of
sale.
 The company tax rate is 30%.
60. The current tax expense for 2015 is
a. P6,030 c. P7,500
b. P6,930 d. P8,040
61. The deferred tax expense (benefit) for 2015 is
a. P6,570 c. (P2,430)
b. (P3,270) d. (P1,080)
Use the following information for the next two questions:
To encourage employees older than 60 years to extend
their employment with the entity, Lamentations
Corporation promises its 60-year-old employees a lump-
sum benefit equal to 1 per cent of final salary for each year
of service they remain employed by the entity after their
60th birthday provided they remain in the employ of
Lamentations Corporation until they are 65, at which time,
in accordance with local laws, employees are required to
retire. The benefit is payable to the employees on
retirement.
Employee A’s 60th birthday is on 1 January 2014. Her
salary for the year ended 31 December 2014 is P100,000.
At 31 December 2014 the entity made the following
actuarial assumptions:
 Employee A’s salary should increase by 5 per cent
(compound) each year.
 There is a 20 per cent probability that employee A’s
employment with the entity will terminate before 1
January 2019.
 The appropriate discount rate is 10 per cent per year.

The accounting profit before tax for the year ended Employee A’s salary for 2015 is P105,000.
December 31, 2015 for Regiel Ltd amounted to P18,500
and included: At 31 December 2015 the entity revised its actuarial
assumptions as follows:
Depreciation – motor vehicle (25%) P 4,500
 Employee A’s salary should increase by 15 per cent
Depreciation - equipment (20%) 20,000
Rent revenue 16,000 (compound) each year.
Royalty revenue (exempt from tax) 5,000  There is a 10 per cent probability that employee A’s
Doubtful debts expense 2,300 employment with the entity will terminate before
Entertainment expense (non-deductible) 1,500 reaching retirement date of 1 January 2019.
Proceeds on sale of equipment 19,000  The appropriate discount rate remains 10 per cent per
Carrying amount of equipment sold 18,000 year.
Annual leave expense 5,000 The entity does not fund its obligation to pay lump-sum
benefits. (Round off future and present value factors to
The draft statement of financial position at December 31, four decimal places)
2015 contained the following assets and liabilities:
2015 2014 62. Calculate the amount that the entity would recognize
Assets in profit or loss for the year ended 31 December 2015.
Cash P 11,500 P 9,500 a. P1,146 c. P1,437
Receivables 12,000 14,000 b. P1,080 d. P1,534
Allowance for doubtful debts (3,000) (2,500)
Inventory 19,000 21,500 63. Calculate the amount that the entity would recognize
Rent receivable 2,800 2,400 in other comprehensive income for the year ended 31
Motor vehicle 18,000 18,000 December 2015.
Acc. Dep. - motor vehicle (15,750) (11,250) a. P1,014 c. P350
Equipment 100,000 130,000 b. P1,080 d. Nil
Acc. Dep. - equipment (60,000) (52,000)
Deferred tax asset ? 5,550 64. On January 1, Lessor Company signed a 1-year rental
P135,200 with quarterly payments of P100,000 due at the end of
Liabilities each quarter. In addition, the lessee must pay
Accounts payable 15,655 21,500 contingent rent of 5% of all sales in excess of
Provision for annual leave 4,500 6,000 P10,000,000. The contingent rent is paid in one
Current tax liability ? 7,600 payment on December 31. The same lessee has used
Deferred tax liability ? 2,745 the building for the past 5 years, and in each of those
37,845 years the lessee reached the contingent rent threshold

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TeamPRTC
of P10,000,000 in sales. Sales of the lessee for the first
two quarters are as follows:
Quarter ended Amount
March 31 P3,200,000
June 30 3,000,000
What amount of rent expense should be reflected in
Lessee’s quarterly income statement for the three
months ended June 30?
a. P100,000 c. P130,000
b. P125,000 d. P160,000
65. The Maddy Company is preparing interim financial
statements for the six months to 30 June 2016 in
accordance with the minimum requirements of PAS34. Its
accounting year ends on 31 December each year.
Which of the following comparative statement is not
appropriate?
a. Statement of financial position at 30 June 2015
b. Statement of profit or loss and other comprehensive
income for the half year to 30 June 2015
c. Statement of changes in equity for the half year to
30 June 2015
d. Statement of cash flows for the half year to 30 June
2015
66. Which of the following are not considered external
users of SMEs’ financial statements?
a. Banks that make loans to SMEs.
b. Vendors that sell to SMEs and use SMEs’ financial
statements to make credit and pricing decisions.
c. Credit rating agencies and others that use SMEs’
financial statements to rate SMEs.
d. SMEs’ shareholders that are also managers of their
SMEs.
67. If an SME that uses the PFRS for SMEs in a current year
breaches the floor or ceiling of the size criteria at the
end of that current year, and the event that caused the
change is considered “significant and continuing”, the
entity should
a. Transition to the applicable financial reporting
framework in the next accounting period.
b. Transition to the applicable financial reporting
framework in the current accounting period.
c. Transition to the applicable financial reporting
framework from the previous accounting period.
d. Use the same financial reporting framework.
Page 10 of 10 www.prtc.com.ph
68. The following accounting policy options in full IFRSs are
not included in the IFRS for SMEs, except
a. Financial instrument options, including available-
for-sale, held-to-maturity and fair value options.
b. The revaluation model for property, plant and
equipment, and for intangible assets.
c. Proportionate consolidation for investments in
jointly-controlled entities.
d. The use of fair value model for investment
property.
69. Which of the following is not a recognition and
measurement simplication of the full IFRSs in the IFRS
for SMEs?
a. Financial instruments meeting specified criteria are
measured at cost or amortized cost. All others are
measured at fair value through profit or loss.
b. The IFRS for SMEs does not require separate
accounting for ‘embedded derivatives’.
c. Goodwill and other indefinite-life intangible assets
are not subject to impairment.
d. Research and development costs must be
recognized as expenses.
70. The Retry Company uses cash-basis accounting for
their records. During 2015, Retry collected P500,000
from its customers, made payments of P200,000 to its
suppliers for inventory, and paid P140,000 for
operating costs. Retry wants to prepare accrual-basis
statements. In gathering information for the accrual-
basis financial statements, Retry discovered the
following:
a. Customers owed Retry P50,000 at the beginning
and P35,000 at the end of the year.
b. Retry owed suppliers P20,000 at the beginning and
P27,000 at the end of the year.
c. Retry's beginning inventory was P42,000, and its
ending inventory was P44,000.
d. Retry had prepaid expenses of P5,000 at the
beginning and P7,400 at the end of the year.
e. Retry had accrued expenses of P12,000 at the
beginning and P19,000 at the end of the year.
f. Depreciation for the year was P51,000.
Determine the accrual basis net income of Retry
Company for the year ended December 31, 2015.
a. P79,600 c. P91,400
b. P84,400 d. P98,400
 - end - 
FAR
 Junior Philippine Institute of Accountants
College of Business Administration
University of the East - Caloocan

Qualifying Exam evie!er "#$%

&inancial Accounting and eporting

I. Development of
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of the accountancy professions in the Philippines.
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 /. #he IASB &ramewor0 outlines two underlying assumptions of financial statements.
#hese are

 Assumption 1 Assumption "

a. Accrual basis of accounting !ele(ance and reliability
b. Cash basis of accounting Insol(ency assumption
c. Accrual basis of accounting ,oing concern assumption
d. Cash basis of accounting Perpetual life concept

c. Accrual basis of accounting; going concern assumption

. 2hich of the following statements concerning the &ramewor0 is incorrect3

a. Primary responsibility for the preparation and presentation of the financial
statements rests with the management.
b. #he &ramewor0 pro(ides that the transactions must be accounted for in
accordance with their legal form.
c. &inancial statements must not eclude comple matters in order to achie(e
understandability.
d. 2here any conflict arises between the Framework and a PFRS % the re'uirement
of the P&!S pre(ails.

b. he !rame"or# provides that the transactions must be accounted for in

accordance "ith their legal form.

4. In respect to information included in financial statements% the accounting concept of 

5prudence6 ensures that7
a. #he financial statements report what they purport to report .
b.  A degree of caution in the eercise of *udgments about estimates is made.
c.  An appropriate balance is achie(ed between the rele(ance and the reliability of 
information that has been included.
d. Information is pro(ided to users within the time period in which it is most li0ely to
bear on their decisions.

b. A degree of caution in the e$ercise of %udgments about estimates is made.

II. &ash and &ash '(uivalents

8. Information about the sources and uses of an enterprise9s cash and cash e'ui(alents is
pro(ided in the

a. Balance sheet c. Statement of changes in e'uity

b. Income statement d. Cash flow statement

d. &ash flo" statement

:. #he following data pertain to Sanghaya Corporation on ;ecember )1% "<17

Current account at BPI P )%<<<%<<<

 Current account at PB =/<%<<<>
Payroll account 1%<<<%<<<
&oreign ban0 account ? restricted =in peso> 4/<%<<<
Postage tamps 1%<<<
Employee9s post dated chec0 -%<<<
I@ from controller9s sister 1<%<<<
Credit memo from a (endor for a purchase return "<%<<<
#ra(eler9s chec0 /<%<<<
ot$sufficient funds$chec0 1/%<<<
+oney order )<%<<<
Petty cash fund =-%<<< in currency epenses receipts for %<<<> 1<%<<<
#reasury bills% due ))114 =purchased 1")11> )<<%<<<
#reasury bills% due 1)114 =purchased 111> 11<%<<<
Based on the abo(e information% compute for the cash and cash e'ui(alent that would
be reported on the ;ecember )1% "<1 balance sheet.

a. P -%))-%<<< c. P -%-<-%<<<
b. P -%)8-%<<< d. P -%-<:%<<<

Current account at BPI )%<<<%<<<

Payroll account 1%<<<%<<<
#ra(elerDs chec0 /<%<<<
+oney order )<%<<<
Petty cash fund =the amount in currency only> -%<<<
#reasury bills% due ))114 )<<%<<<
b. P )*+,)*

1<. ou noted the following composition of Fiyas Company9s 5cash account6 as of
;ecember )1% "<1

;emand deposit P )%<<<%<<<

#ime deposit $ )< days "%<<<%<<<
S& chec0 of customer -<%<<<
+oney mar0et placement =due Gune )<% "<14> 1%/<<%<<<
Sa(ings deposit in a closed ban0 1<<%<<<
I@ from employee "<%<<<
Pension fund "%<<<%<<<
Petty cash fund 1<%<<<
Customer chec0 dated Ganuary 1% "<14 /<%<<<
Customer chec0 outstanding for 18 months -<%<<<
:%4<%<<<

 Additional information are as follows7

a> Chec0 of P 1<<%<<< in payment of accounts payable was recorded on ;ecember 
)1% "<1 but mailed to suppliers on Ganuary 4% "<14.
b> Chec0 of P )<<%<<< dated Ganuary 1/% "<14 in payment of accounts payable was
recorded and mailed on ;ecember )1% "<1.
 c> #he company uses the calendar year. #he cash receipts *ournal was held open
until Ganuary 1/% "<14% during which time P-<<%<<< was collected and recorded
on ;ecember )1% "<11.

#he cash and cash e'ui(alent to be shown on the ;ecember )1% )<1 balance sheet is

a. P /%<1<%<<<
b. P %/1<%<<<
c. P %//<%<<<
d. P %"/<%<<<

;emand deposit P )%<<<%<<<

#ime deposit "%<<<%<<<
Petty cash fund 1<%<<<
ndeli(ered chec0 =payment to suppliers> 1<<%<<<
Post dated chec0 =payment to suppliers> )<<%<<<
2indow dressing =-<<%<<<>
a. P */*

III. Ban# 0econciliation and Proof of &ash

11. #he *ournal entries for a ban0 reconciliation

a. +ay include a debit to accounts payable for an S& chec0.
b. +ay include a credit to accounts recei(able for an S& chec0.
c. +ay include a debit to office epense for ban0 ser(ice charges.
d. Are ta0en from the balance per ban0 only.

c. May include a debit to office e$pense for ban# service charges.

1". A proof of cash is a

a. Proof of company9s li'uid position.
b. Proof of the eistence of a cash deposit in a ban0.
c. !econciliation of the cash receipts and payments during the pre(ious period%
together with the beginning and ending balances of cash.
d. !econciliation of the cash receipts and payments during the current period%
together with the beginning and ending balances of cash.

d. 0econciliation of the cash receipts and payments during the current

period* together "ith the beginning and ending balances of cash.

1). #he boo00eeper of Sambisig Company recently prepared the following ban0
reconciliation on ;ecember )1% "<17

Balance per ban0 statement "<%<<<%<<<

 Add7 ;eposit in transit 1%/<<%<<<
Chec0boo0 and other ban0 charge /<%<<<
Error made by Sambisig in recording chec0 1<</ =issued in
;ecember> 1/<%<<<
Customer chec0 mar0ed ;AI& /<<%<<< "%"<<%<<<
#otal ""%"<<%<<<
;educt7 @utstanding chec0s 1%:<<%<<<
ote collected by ban0 =includes P "<<%<<< interest> "%)<<%<<< -%"<<%<<<
Balance per boo0 18%<<<%<<<

Sambisig has P 1%<<<%<<< cash on hand on ;ecember )1% "<1. #he amount to be
reported as cash on the balance sheet as of ;ecember )1% "<1 should be7
a.

b. P 1:%<<%<<< d. P "<%<<%<<<
c. P 18%<<%<<< e. P 1:%4/<%<<<

Balance per boo0 18%<<<%<<<

Chec0boo0 and other ban0 charge =/<%<<<>
Chec0 mar0ed as ;AI& =/<<%<<<>
otes collected "%)<<%<<<
Cash on hand 1%<<<%<<<
Boo0 error =1/<%<<<>
 Ad*usted cash balance c. 1*2*

1-. !econciliation of Adliwa Corporation9s ban0 account at o(ember )<% "<1 follows7

Balance per ban0 statement P )%1/<%<<<

;eposit in transit -/<%<<<
Chec0s outstanding =-/%<<<>
Correct cash balance P )%///%<<<
Balance per boo0s P )%//8%<<<
Ban0 ser(ice charge =)%<<<>
Correct cash balance P )%///%<<<

;ecember data are as follows7

Ban0 Boo0s
Chec0s recorded P)%-/<%<<< P)%/-<%<<<
;eposits recorded "%-)<%<<< "%4<<%<<<
Collection by ban0 =P<<%<<< plus interest> )<%<<< $
S& chec0 returned with ;ecember ban0 statement 1/%<<< $
Balances "%4-/%<<< "%41/%<<<
 #he chec0s outstanding on ;ecember )1% "<1 amount to7
a.

b. P-/%<<< d. P:<%<<<
c. P1)/%<<<
e. one of the abo(e

Chec0s recorded by boo0 =;ecember> )%/-<%<<<

Chec0s recorded by ban0 =;ecember> =)%-/<%<<<>
Chec0s outstanding =o(ember> -/%<<<
Chec0s outstanding on ;ecember )1  b. /+*

I3. 0eceivables

1/. Credit balances in accounts recei(ables should be classified as

a. Current liabilities c. Addition to current assets
b. Part of accounts payable d. ;eduction from accounts recei(able

 b. Part of accounts payable

1. Firayag Company pro(ided the following transactions affecting accounts recei(able
for the year "<17

Sales =cash and credit> /%:<<%<<<

Cash recei(ed from credit customers =too0 ad(antage of -1<% n)< )%<"-%<<<
discount feature>
Cash recei(ed from cash customers "%1<<%<<<
 Accounts recei(able written off as worthless /<%<<<
Credit memorandum issued to credit customers for sales returns and "/<%<<<
allowances
Cash refunds gi(en to cash customers for sales returns and allowances "<%<<<
!eco(eries on accounts recei(able written off as uncollectible in prior  8<%<<<
periods but not included in cash recei(ed from customers stated abo(e

#he balances on Ganuary 1% "<1 were as follows7

 Accounts recei(able :/<%<<<

 Allowance for doubtful accounts 1<<%<<<

#he entity pro(ided for uncollectible account losses by crediting allowance for doubtful
accounts in the amount of P4<%<<< for the current year.

2hat are the balances of accounts recei(able and allowance for doubtful epense on
;ecember )1% "<13

a. 1%)<<%<<< "<<%<<< b. 1%)<<%<<<% 1)<%<<<

 c. 1%-"%<<<% )<<%<<< d. 1%-4%<<<% "<<%<<<

 Accounts !ecei(able
Beg. bal :/<%<<<
Credit sales H)%8<<%<<< HH)%1/<%<<< Collections
/<%<<< 2ritten off  
"/<%<<< Credit memo
a. /*+*

 Allowance for ;A

1<<%<<< Beg. bal.
2ritten off /<%<<< 4<%<<< ;A epense
!eco(ery of
  8<%<<<  A!
a. 1*

HCredit sales  #otal sales ? cash sales

)%8<<%<<<  /%:<<%<<< ? "%1<<%<<<
HHCollection  Cash recei(ed J discount or cash recei(ed  1 $ discount rate
)%1/<%<<<  )%<"-%<<<.:
!eco(ered accounts recei(able are subse'uently collected% hence it is not included
in computing for ending balance of accounts receu(able

3. Inventories

14. @n ;ecember )1% "<1% a storm surge damaged the warehouse of Siuala Company.
#he following pertains to the data reco(ered.

4anuary / December +/
In(entory 1%/<<%<<<
Purchases /%/<<%<<<
Cash sales :<<%<<<
Collections of accounts recei(able 8%-<<%<<<
 Accounts recei(able 4<<%<<< 1%1<<%<<<
,ross profit on sales -<K

2hat is the in(entory loss from the storm surge3

a. 1%4"<%<<<
b. "%"<%<<<
c. 1%18<%<<<
 d. "%4<<%<<<

Accounts !ecei(able In(entory

Beg bal 4<<%<<< Beg bal. 1%/<<%<<<
Sales =s'ueeze> 8%8<<%<<< Purchases /%/<<%<<<
/%8"<%<<
Collections 8%-<<%<<< C@,SH <
Ending bal 1%1<<%<<< c. /*/,*
H Cost of ,oods Sold  #otal sales  =1$,ross Profit on sales>
 =8%8<<%<<<J:<<%<<<>  =1$.-<>
 /%8"<%<<<

3I. '(uity Investments

18. &rade*as Company ac'uired an e'uity financial instrument for P-%<<<%<<< on Gune 1/%
"<1. #he financial instrument is classified as financial asset at fair (alue through other 
comprehensi(e income. ;irect ac'uisition cost amounted to P4<<%<<<. @n ;ecember 
)1% "<1% the fair (alue of the instrument was P/%/<<%<<< and the transaction costs that
would be incurred on the sale of the in(estment are estimated at P-<%<<<. 2hat gain
should be recognized in profit or loss for the year ended ;ecember )1% "<13
a. P:<<%<<<
b. P8<<%<<<
c. P<
d. P"<<%<<<

c. P

1:. Alipio Company pro(ided the following data for "<17

i. !ecei(ed P/<<%<<< cash di(idend from 2illiam Company.
ii. !ecei(ed P<%<<< li'uidating di(idend from #rinidad Company. Alipio owns
/K interest in #rinidad.
iii. ,onzales Company declared P"%<<<%<<< cash di(idend from which Alipio
owns "K interest in ,onzales9s e'uity. ;i(idends are payable on the 1/ th of 
Ganuary the following year.
2hat amount should Alipio report as di(idend income for "<13
a. P/-<%<<<
b. P1<<%<<<
c. P<<%<<<
d. P-<%<<<

a. P)*
Cash di(idend from 2illiam Company /<<%<<<
Cash di(idend from ,onzales Company ="%<<<%<<<H.<"> -<%<<<
/-<%<<<
3II. Property* Plant and '(uipment

"<. #he following costs 'ualify for recognition ecept

a. Cost of site of operation
b. Cost of opening a new facility
c. Cost of employee benefits of persons doing the installation
d. Professional fees

c. &ost of employee benefits of persons doing the installation

"1. #he cost model means that the PPE are carried at cost less any accumulated
depreciation and any accumulated impairment loss.

#he re(aluation model means that the PPE are carried at the fair (alue at the date of 
re(aluation less any subse'uent accumulated depreciation and subse'uent
accumulated impairment loss
a. Both statements are false
b. Both statements are true
c. @nly the first statement is true
d. @nly the first statement is false.

b. Both statements are true

"". @n Ganuary 1% "<1% #hor Company too0 out a loan of P1"%<<<%<<< in order to finance
specifically the reno(ation of a building. #he loan carried annual interest at 1<K. 2or0
on the building% started from Ganuary 1% was substantially completed on @ctober )1 of 
the same year. #he load was repaid on ;ecember )1% "<1 and P1/<%<<< in(estment
income was earned in the period to @ctober )1 on the proceeds of the loan not yet
used for the reno(ation. Compute for the amount of borrowing cost to be included in
the cost of the building.
a. P1%</<%<<<
b. P1%)/<%<<<
c. P1%"<<%<<<
d. P8/<%<<<

d. P,*

Interest incurred =1"%<<<%<<<  %1<  1<1"> 1%<<<%<<<

Interest income =1/<%<<<>
Capitalized borrowing cost 8/<%<<<

3III. 5tatement of !inancial Position

"). Coulson Company reported the following assets on ;ecember )1% "<1

Cash =includes P1%<<<%<<< sin0ing fund and P-<<%<<< -%<<<%<<<

 postdated chec0>>
 Accounts !ecei(able %8<<%<<<
In(entory -%/<<%<<<
;eferred #a Asset "%/<<%<<<
oncurrent Asset Feld for Sale )%<<<%<<<

#he accounts recei(able is comprised of the following amount

Customers9 debit balance% net of customers9 credit balance of  /%<<<%<<<
P"<<%<<<
 Allowance for doubtful accounts =4<<%<<<>
Selling prince of unsold in(entory sent out on consignment at "%/<<%<<<
1"/K of cost and already included in the ending in(entory at
cost
 Accounts !ecei(able %8<<%<<<

@n ;ecember )1% "<1% what amount should be reported as total current assets3
a. P1/%<<<%<<<
b. P14%<<<%<<<
c. P14%/<<%<<<
d. P1%<<%<<<

Cash =-%<<<%<<<$1%<<<%<<<$-<<%<<<> "%<<%<<<

 Accounts !ecei(able =/%<<<%<<<J"<<%<<<$4<<%<<<J-<<%<<<> -%:<<%<<<
In(entory -%/<<%<<<
CA held for sale )%<<<%<<<
 a. /**

I6. 5tatement of &omprehensive Income

"-. Benedict Company pro(ided the following data for the current year 
Income from continuing operations /%<<<%<<<
Income from discontinued operations <<%<<<
nrealized gain on a(ailable for sale securities :<<%<<<
nrealized gain on futures contract designated as a cash flow -<<%<<<
hedge
 Actuarial loss during the year fully recognized in the other  )<<%<<<
comprehensi(e income
&oreign translation ad*ustment $ debit 1<<%<<<
!e(aluation surplus during the year "%/<<%<<<

2hat is the comprehensi(e income for the current year3

a. P8%-<<%<<<
b. P:%<<<%<<<
c. P8%<<<%<<<
d. P8%"<<%<<<

Income from continuing operations /%<<<%<<<

Income from discontinued operations <<%<<<
 nrealized gain on a(ailable for sale securities :<<%<<<
nrealized gain on futures contract -<<%<<<
 Actuarial loss =)<<%<<<>
Loss on foreign translation ad*ustment =1<<%<<<>
!e(aluation surplus "%/<<%<<<
b. 7**

6. 5tatement of &ash !lo"s

"/. 2hich of the following is not an ob*ecti(e of cash flow statements3

a. #o pro(ide information to enable assessment of the ability of the entity to
generate future cash flows.
b. #o pro(ide information to enable assessment of the ability of the entity to pay
di(idends and meet financial obligations
c. #o pro(ide information to enable assessment of the ability of the entity to
generate long term profitability.
d. #o pro(ide information to enable assessment of the ability of the entity to finance
changes in the nature and scope of acti(ities.

d. o provide information to enable assessment of the ability of the entity to

finance changes in the nature and scope of activities.

". Fow would cash recei(ed from the sale of shares in another company be classified in a
cash flow statement3
a. @perating acti(ities c. &inancing acti(ities
b. In(esting acti(ities d. one of the abo(e

b. Investing activities

6I. 'rror &orrection

"4. Gac0son Company9s statement included errors as follows7

ear Ending In(entory ;epreciation

"<1/ "<<%<<< o(erstated /<%<<< understated
"<1 )<<%<<< understated 1<<%<<< o(erstated

Fow much should retained earnings be retroacti(ely ad*usted at Ganuary 1% "<143

a. ;educt P"/<%<<< c. Add P)/<%<<<
b. Add P"/<%<<< d. Add P1/<%<<<

Effect on et Income Ad*ustment to retained earnings

nderstated depreciation on
@(erstated ;educt /<%<<<
"<1/
nderstated ending nderstated =due to Add )<<%<<<
 in(entory on "<1 o(erstated C@,S>
@(erstated depreciation on
nderstated Add 1<<%<<<
"<1
c. 8et ad%ustment9 Add +*

"8. A change in accounting policy from one that is not generally acceptable to one that is
generally acceptable should be treated as
a. An error and corrected by prior$period ad*ustment.
b. A change in accounting policy and the cumulati(e effect included in the net
income.
c. A change in accounting policy and prior period financial statements are related to
profit or loss.
d. A change in accounting policy and ad*ustments are made prospecti(ely.

a. An error and corrected by prior-period ad%ustment.

6II. Accrual Basis and &ash Basis

":. Accrual basis profit is more useful for 

a. Predicting the performance of an entity for the succeeding reporting period.
b. ;etermining the amount of income ta payable to the go(ernment.
c. ;etermining the amount that will be paid as interest to creditors and di(idends to
shareholders.
d. Predicting the long term performance of an entity.

a. Predicting the performance of an entity for the succeeding reporting period.

)<. 2hen con(erting from cash basis to accrual basis of accounting% which of the following
ad*ustments should be made to cash collections from customers to arri(e at the accrual
bases of sales3
a. Add beginning accounts recei(able
b. Subtract beginning accounts recei(able
c. Subtract ending account recei(able
d. Add ending accounts recei(able

d. Add ending accounts receivable

)1. Sy Company reported sales re(enue of P"%)<<%<<< in its income statement for the year 
ended ;ecember )1% "<1. Additional information are as follows7
1")1"<1/ 1")1"<1
 Accounts recei(able "%<<<%<<< "%<<%<<<
 Allowance for uncollectible accounts 4<%<<< 1"<%<<<
 ;uring the year. Sy wrote off uncollectible accounts totalling P)<%<<<. nder cash basis
of accounting% Sy would ha(e reported "<1 sales of 
a. P1%4<%<<< c. P1%4"<%<<<
b. P1%"<%<<< d. one of the abo(e

 Accounts !ecei(able
Beg. bal. "%<<<%<<<
Sales "%)<<%<<<
2rite$off  )<%<<<
Collections a. /*2:*
Ending bal. "%<<%<<<
)". &errer Company 0ept its records on a cash basis. At the end of "<1% the accountant
prepared the following cash basis income statement7

!e(enue 1%:1<%<<<
Epenses 8<:%<<<
et income 1%1<1%<<<

In preparing the income statement% the following amounts of accrued% prepaid and
unearned items were ignored at the end of "<1/ and "<17

"<1/ "<1
 Accrued re(enue :1%<<< 4)%<<<
nearned re(enue %<<< 1<8%<<<
 Accrued epenses -:%<<< /%<<<
Prepaid epenses -%<<< /%<<<

#he net income on the accrual basis for "<1 should be7
a. P1%14%<<<
b. P1%<4%<<<
c. P1%<)/%<<<
d. P1%1<)%<<<

nad*usted net income 1%1<1%<<<

;ecrease in accrued re(enue =18%<<<>
Increase in unearned re(enue =-"%<<<>
HIncrease in accrued epense =1%<<<>
HHIncrease in prepaid epenses 1<%<<<
 Ad*usted net income c. /*+*

H Epense Account 1%<<<

Accrued Epense =Liability> 1%<<<
#hus% an increase in a trade current liability account is a deduction from net income of 
cash basis to arri(e at accrual basis net income

HHPrepaid Epense =Asset> 1<%<<<

Epense Account 1<%<<<
#hus% an increase in trade current asset account is an addition to net income of cash
basis to arri(e at accrual basis net income
6III. Bonds Payable

)). @n Ganuary 1% "<1. +adrid Company issued :K bonds in the face amount of 
P-%<<<%<<<% which mature on Ganuary "% "<"/. #he bonds were issued for P)%4/%<<<
to yield 1<K resulting in bond discount of P"--%<<<. sing the effecti(e interest method%
compute for the unamortized bond discount if the interest is payable annually on
;ecember )1.
a.
b. P"/:%<< d. P1/%<<
c. P""8%-<< e. P)4/%<<

;ate =A> =B>

=C> =;>
ominal Effecti(e
;iscount Carrying Malue
Interest Interest
 Amortization =Pre(ious ; J
=-%<<<%<<<  . =;  .1<>
=B$A> C>
<:>
111 )%4/%<<<
1")11 )<%<<< )4/%<< 1/%<< )%441%<<

namotized bond discount  &ace amount ? carrying (alue

 -%<<<%<<< ? )%441%<<
 11,*) <B=

)-. @n Ganuary 1% "<1% ;elos Santos Company issued ) year bonds with face (alue of 
P/%<<<%<<< at :8. Additionally% the entity paid bond issue cost of P1-<%<<<. #he nominal
rate is 1<K and the effecti(e rate is 1"K. #he interest is payable annually on ;ecember 
)1. #he entity used the effecti(e interest method in amortizing bond discount and issue
cost.

2hat is the carrying amount of bonds payable on ;ecember )1% "<13

a. P-%8)1%"<<
b. P-%88%8<<
c. P-%4<%<<<
d. P-%:-)%"<<

Issue price =/%<<<%<<<  .:8> -%:<<%<<<

Bond issue cost =1-<%<<<>
Carrying (alue% 111 -%4<%<<<

;ate =A> =B> =C> =;>

ominal Effecti(e ;iscount Carrying Malue
Interest Interest  Amortization =Pre(ious ; J
=/%<<<%<<<  .1> =;  .1"> =B$A> C>
 111 -%4<.<<<
1")11 /<<%<<< /41%"<< 41%"<< a. )*,+/*1

6I3. Intangibles

)/. 2hich of the following are the essential characteristics of an intangible asset3
a. Identifiability% controlled by the enterprise% epected future economic benefits and
indefinite useful life.
b. Identifiiability% controlled by the enterprise% and indefinite useful life.
c. Identifiability% owned by the enterprise% epected economic benefits and definite
useful life.
d. Identifiability% controlled by the enterprise and epected future economic benefits

d. Identifiability% controlled by the enterprise and epected future economic benefits

). 2hich of the following are considered as research and de(elopment acti(ity3
i. Laboratory research aimed at disco(ery of new 0nowledge
ii. ;esign% construction and testing of pre$production prototypes and models
iii. !outine design of tools% *igs% molds and dies.
i(. Conceptual formulation and design of product or process alternati(es.
a. i% ii% iii and i(
b. ii% iii and i( only
c. i% ii and i( only
d. i and i( only.

c. i* ii and iv only

63. Biological Asset

Ingat emen company has a herd of 1< " year old animals on Ganuary 1% "<1/. @ne
animal aged "./ years was purchased on Guly 1% "<1/ for P1<8% and one animal was
born on Guly 1% "<1/. o animals were sold or disposed of during the year. #he fair (alue
less cost of disposal per unit is as follows7
" year old animal on Ganuary 1 1<<
"./ year old animal on Guly 1 1<8
ew born animal on Guly 1 4<
" year old animal on ;ecember )1 1</
"./ year old animal on ;ecember )1 111
ew born animal on ;ecember )1 4"
) year old animal on ;ecember )1 1"<
<./ year old animal on ;ecember )1 8<

)4. 2hat is the fair (alue of the biological assets on ;ecember )13
 a. 1%-<< c. 1%--<
b. 1%)"< d. 1%)<
&air (alue of ) yo animals on ;ecember =111"<> 1%)"<
&air (alue of <./ yo animal on ;ecember =1  8<> 8<
a. /*)

)8. 2hat is the gain from change in fair (alue due to price change3
a.
b. ":" d. ")4
c. """ e. //

1< " year old animals N=1</$1<<>  1<O /<

1 "./ year old animal N=111$1<8>  1O )
1 newborn on Guly N=4"$4<>  1O "
d. 

63I. Property* Plant and '(uipment <0evaluation=

):. ueen #ela Company owned an e'uipment costing P/%"<<%<< with original residual
(alue of P-<<%<<<. #he life of the asset is 1< years and was depreciated using the
straight line method.

#he e'uipment has a replacement cost of P8%<<<%<<< with residual (alue of P"<<%<<<.
#he age of the asset is - years.

#he appraisal of the e'uipment showed a total re(ised useful life of 1" years and the
entity decided to carry the e'uipment at re(alued amount.

Before income ta% what amount should be initially reported as re(aluation surplus3
a.
b. %8<%<<< d. "%<<%<<<
c. 1%8<%<<< e. 1%<<%<<<

Cost !eplacement Cost Appreciation

E'uipment /%"<<%<<< 8%<<<%<<< "%8<<%<<<
!esidual (alue ="<<%<<<> ="<<%<<<> $
;epreciable amount /%<<<%<<< 4%8<<%<<< "%8<<%<<<
 Accumulated
depreciation
=-1<  -%8<<%<<<> 1%:"<%<<<
=-1<  4%8<<%<<<> )%1"<%<<< 1%"<<%<<<
Balance )%<8<%<<< -%8<%<<< d. /*2*

63II. Diluted 'arnings Per 5hare

-<. Bane Company had earnings per share of P1"< for the current year% before ta0ing any
diluti(e securities into consideration. o con(ersion or eercise of diluti(e securities too0
place during the year. Fowe(er% possible con(ersion of con(ertible preference shares
would ha(e reduced earnings per share to P11:. #he effect of possible eercise of 
ordinary share warrants would ha(e reduced earnings per share by an additional P".
2hat amount should be reported as diluted earnings per share3
a. 1"1 c. 114
b. 1"< d. 11:
Basic earnings per share 1"<
Effect of possible con(ersion of preference shares =1>
Effect of possible eercise of warrants =">
;iluted earnings per share c. //:

FAR
FAR.2836 – Non-financial Liabilities Summary (DIY)
1. Which of the following is not a characteristic of a
liability?
a. It represents a probable, future sacrifice of
economic benefits.
b. It arises from present obligations to other entities.
c. It results from past transactions or events.
d. It must be payable in cash.
2. The most common type of liability is:
a. One that comes into existence due to a loss
contingency.
b. One that must be estimated.
c. One that comes into existence due to a gain
contingency.
d. One to be paid in cash and for which the amount
and timing are known.
3. An entity made an unusually high profit for the current
year because it negotiated a significantly lower cost
m
er as
price for its main raw material at a time when the
selling price of its products was rising sharply.
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Management does not want to make public the
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unusually high profit because they believe that
knowledge of the entity’s profitability would result in
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their customers seeking to negotiate lower selling
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prices when purchasing goods from the entity.
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Consequently, management would like to decrease
profit for the year by recognizing a provision for
unforeseen possible expenses.
a. Because creation of the provision is prudent, it is
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acceptable accounting.
b. Because creation of the provision is common
aC s
practice in the jurisdiction in which the entity
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operates, it is acceptable accounting.
c. Because they do not satisfy the definition of a
liability, the entity cannot create a provision for
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unforeseen possible expenses.
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d. Provided the reason for creating the provision is
explained in the notes, it is acceptable accounting.
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4. Which of the following is a situation that would
normally lead to a lease being classified as a finance
lease?
is
a. The lease assets are of a specialized nature such
that only the lessee can use them without major
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modifications being made.
b. If the lessee is entitled to cancel the lease, the
lessor's losses associated with the cancellation are
borne by the lessee.
c. Gains or losses from fluctuations in the fair value
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of the residual fall to the lessee (for example, by
means of a rebate of lease payments).
d. The lessee has the ability to continue to lease for a
secondary period at a rent that is substantially
lower than market rent.
5. Which of the following statements is true?
a. In a finance lease, the lessee, but not the lessor,
should use present value computations in
recording and reporting the lease results.
b. Accounting symmetry is said to exist in accounting
for leases when the lessor and lessee record the
same amounts but the accounts and the
debits/credits are reciprocal.
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Since 1977
OCAMPO/CABARLES/SOLIMAN/OCAMPO
MAY 2020
c. There is always "accounting symmetry" for
recording and reporting leases between the lessor
and lessee.
d. A finance lease does not transfer substantially all
of the risks and rewards of ownership from the
lessor to the lessee, whereas an operating lease
does.
6. Which statement is correct?
a. The distinction between a direct-financing lease
and a sales-type lease is the presence or absence
of a transfer of title.
b. Lessors classify and account for all leases that
don’t qualify as sales-type leases as operating
leases.
c. Only the lessee makes the distinction of classifying
leases as operating or finance leases.
d. Lessors classify and account for all leases that do
not qualify as direct-financing or sales-type leases
as operating leases.
7. Inrelation to leases, initial direct costs exclude
a. Commissions
b. Legal fees
c. Internal costs that are incremental and directly
attributable to negotiating and arranging a lease
d. General overheads such as those incurred by a
sales and marketing team
8. Which is the correct accounting treatment for a finance
lease in the accounts of a lessor?
a. Treat as a noncurrent asset equal to net
investment in lease. Recognize all finance
payments in statement of comprehensive income.
b. Treat as a receivable equal to gross amount
receivable on lease. Recognize finance payments in
cash and by reducing debtor.
c. Treat as a receivable equal to net investment in
the lease. Recognize finance payment by reducing
debtor and taking interest to statement of
comprehensive income.
d. Treat as a receivable equal to net investment in
the lease. Recognize finance payments in cash and
by reduction of debtor.
9. Lessors should show assets that are out on operating
leases and income from there as follows:
a. The asset should be shown in the statement of
financial position according to its nature with the
lease income going to the statement of
comprehensive income.
b. The asset should be kept off the statement of
financial position and the lease income should go
to reserves.
c. The asset should be kept off the statement of
financial position and the lease income should go
to the statement of comprehensive income.
d. The asset should be shown in the statement of
financial position according to its nature and the
lease income should go to reserves.
FAR.2836
EXCEL PROFESSIONAL SERVICES, INC.
10. Which statement is incorrect regarding measurement
of lease liabilities in accordance with PFRS 16?
a. A company measures lease liabilities at the present
value of future lease payments.
b. Lease liabilities include only economically
unavoidable payments.
c. Lease liabilities include fixed payments (including
inflation-linked payments) and only those optional
payments that the company is reasonably certain
to make.
d. Lease liabilities include variable lease payments
linked to future use or sales.
11. Lease liabilities do not include
a. Fixed payments
b. Inflation-linked payments
c. Optional payments that the company is reasonably
certain to make
d. Variable lease payments linked to future use or
sales
12. Which of the following is most likely an effect of PFRS
16 on lessor’s financial statements?
a. Increase in finance lease receivables.
b. Increase in finance income
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c. Increase in asset turnover.
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d. None of the above.
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13. An entity contributes to an industrial pension plan that
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provides a pension arrangement for its employees. A
large number of other employers also contribute to the
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pension plan, and the entity makes contributions in
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respect of each employee. These contributions are kept
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separate from corporate assets and are used together
with any investment income to purchase annuities for
retired employees. The only obligation of the entity is
to pay the annual contributions. This pension scheme
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is a
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a. Multiemployer plan and a defined contribution
scheme
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b. Multiemployer plan and a defined benefit scheme
c. Defined contribution plan only
d. Defined benefit plan only
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14. Visor Co. maintains a defined benefit pension plan for
its employees. The service cost component of Visor’s
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net periodic pension cost is measured using the
a. Unfunded accumulated benefit obligation.
b. Unfunded vested benefit obligation.
c. Projected benefit obligation.
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d. Expected return on plan assets.
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15. Service cost excludes
a. Current service cost
b. Past service cost
c. Gain or loss on settlement
d. Actuarial gains and losses
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16. Current service cost is
a. The increase in the present value of the defined
benefit obligation resulting from employee service
in the current period.
b. The change in the present value of the defined
benefit obligation for employee service in prior
periods.
c. The difference between the present value of the
defined benefit obligation being settled, as
determined on the date of settlement and the
settlement price, including any plan assets
transferred and any payments made directly by the
entity in connection with the settlement.
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d. The change during the period in the net defined
benefit liability (asset) that arises from the
passage of time.
17. Which of these events will cause a change in a defined
benefit obligation?
I. Changes in mortality rates or the proportion of
employees taking early retirement.
II. Changes in the estimated salaries or benefits that
will occur in the future.
III. Changes in the estimate employee turnover.
IV. Changes on the discounted rate used to calculate
defined benefit liabilities and the value of assets.
a. I, II, III and IV c. I, II and IV
b. II and III d. II, III and IV
18. Which of these elements are taken into account when
determining the discount rate to be used?
a. Markets yields at the balance sheets dates on high-
quality corporate bonds
b. Investment or actuarial risk
c. Specific risk associated with the entity's business
d. Risk that future experiences may differ from
actuarial assumptions
19. In accordance with PAS 19, the discount rate used to
determine defined benefit cost reflects
a. Time value of money
b. Actuarial risk
c. Investment risk.
d. All of the above
20. The return on plan assets is interest, dividends and
other income derived from the plan assets, together
with realized and unrealized gains or losses on the plan
assets, less:
a. Any costs of managing plan assets.
b. Any tax payable by the plan itself, other than tax
included in the actuarial assumptions used to
measure the present value of the defined benefit
obligation.
c. Both a and b.
d. Neither a nor b.
21. In accordance with the revised PAS 19, which of the
following can be deferred?
a. Actuarial gains and losses
b. Past service cost if not yet vested
c. Both a and b
d. Neither a nor b
22. In determining the present value of the prospective
benefits (often referred to as the defined benefit
obligation), the following are considered by the
actuary:
a. Retirement and mortality rate.
b. Interest rates.
c. Benefit provisions of the plan.
d. All of these factors.
23. An entity has decided to improve its defined benefit
pension scheme. The benefit payable will be
determined by reference to 60 years service rather
than 80 years service. As a result, the defined benefit
pension liability will increase by P10 million. The
average remaining service lives of the employees is 10
years. How should the increase in the pension liability
by P10 million be treated in the financial statements?
a. The past service cost should be charged against
retained profit
b. The past service cost should be charged against
profit or loss for the year
www.prtc.com.ph FAR.2836
EXCEL PROFESSIONAL SERVICES, INC.
c. The past service cost should be spread over the
remaining working lives of the employees
d. The past service cost should not be recognized
24. An entity changes its defined benefit pension plan to a
defined contribution plan. The entity agrees with the
employees to pay them P9 million in total on the
introduction of a defined contribution plan. The
employees forfeit any pension entitlement for the
defined benefit plan. The pension liability recognized in
the balance sheet was P10 million. How should this
curtailment be accounted?
a. A settlement gain of P1 million should be shown
b. The pension liability should be credited to reserves
and a cash payment of P9 million should be shown
in expense in the income statement
c. The cash payment should go to reserves and the
pension liability should be shown as a credit to the
income statement
d. A credit to reserves should be made of P1 million
25. When an employee has rendered service to an entity
during an accounting period, the entity shall recognize
the undiscounted amount of short-term employee
benefits expected to be paid in exchange for that
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service:
er as
a. As a liability, after deducting any amount already
paid.
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b. As an expense, unless another PFRS requires or
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permits the inclusion of the benefits in the cost of
an asset.
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c. Both a and b
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d. Neither a nor b
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26. Which one of the following factors will be reflected in
the amount of a short-term employee benefit
obligation measured in accordance with PAS 19
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Employee Benefits?
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a. The risk-free interest rate
b. Salary rates current at reporting date
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c. Salary rates that reflect the future sacrifice
d. Interest rates on high-quality corporate bonds
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27. On June 1, 20X4, an entity offered its employees share
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options subject to the award being ratified in a general
meeting of the shareholders. The award was approved
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by a meeting on September 5, 20X4. The entity's year-
end is June 30. The employees were to receive the
share options on June 30, 20X6. At which date should
the fair value of the share options be valued for the
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purposes of PFRS 2?
a. June 1, 20X4. c. September 5, 20X4.
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b. June 30,20X4. d. June 30, 20X6.
28. The entity has issued a range of share options to
employees. What type of share-based payment does
this represent?
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a. Asset settled share-based payment.
b. Cash settled share-based payment.
c. Equity settled share-based payment.
d. Liability settled share-based payment.
29. In accounting for share-based compensation under
PFRS 2, what interest rate is used to discount both the
exercise price of the option and the future dividend
stream?
a. The risk-free interest rate.
b. The firm’s known incremental borrowing rate.
c. Any rate that firms can justify as being reasonable.
d. The current market rate that firms in that
particular industry use to discount cash flows.
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30. Under PFRS2 Share-based payment, in which ONE of the
following will a cash-settled share-based payment give
rise to an increase?
a. A current asset c. Equity
b. A non-current asset d. A liability
31. In accordance with PFRS2 Share-based payment, how,
if at all, should an entity recognize the change in the fair
value of the liability in respect of a cash-settled share-
based payment transaction?
a. Should not recognize in the financial statements but
disclose in the notes thereto
b. Should recognize in the statement of changes in
equity
c. Should recognize in other comprehensive income
d. Should recognize in profit or loss
32. In relation to provisions, for a present obligation to
exist, which one of the following factors must be
present?
a. The obligation must be capable of being reliably
measured.
b. The entity must have a legal obligation that can be
enforced by law.
c. The entity must have no realistic alternative to
settling the obligation.
d. It must be more likely than less likely that there
will be a future flow of economic benefits.
33. In accordance with the requirements of PAS 37
Provisions, Contingent Liabilities and Contingent
Assets, where measurement uncertainty exists, which
one of the following methods is not an appropriate
valuation for a provision based on accounting
standards?
a. The mid-point of a range of equally likely outcomes
of expenditure.
b. No provision should be recognized where
measurement uncertainty exists.
c. The minimum amount expected to represent a best
estimate, where the other option is omission.
d. The most likely amount expected to represent a
best estimate, where there is a single obligation.
34. Which statement is incorrect regarding distinction
between provisions and accruals?
a. Provisions can be distinguished from accruals
because there is uncertainty about the timing or
amount of the future expenditure required in
settlement.
b. Accruals are liabilities to pay for goods or services
that have been received or supplied but have not
been paid, invoiced or formally agreed with the
supplier, including amounts due to employees.
c. Although it is sometimes necessary to estimate the
amount or timing of accruals, the uncertainty is
generally much less than for provisions.
d. Accruals and provisions are often reported as part
of trade and other payables.
35. A contingent liability
a. Definitely exists as a liability but its amount and
due date are indeterminable.
b. Is accrued even though not reasonably estimated.
c. Is the result of a loss contingency.
d. Is not recognized in the financial statements.
36. Which of the following is the proper way to report a
probable contingent asset?
a. As an accrued amount.
b. As deferred revenue.
FAR.2836
EXCEL PROFESSIONAL SERVICES, INC.
c. As an account receivable with additional disclosure
explaining the nature of the contingency.
d. As a disclosure only.
37. Ortiz Corporation, a manufacturer of household paints,
is preparing annual financial statements at December
31. Because of a recently proven health hazard in one
of its paints, the government has clearly indicated its
intention of having Ortiz recall all cans of this paint
sold in the last six months. The management of Ortiz
estimates that this recall would cost P800,000. What
accounting recognition, if any, should be accorded this
situation?
a. No recognition
b. Note disclosure only
c. Operating expense of P800,000 and liability of
P800,000
d. Appropriation of retained earnings of P800,000
38. Information available prior to the issuance of the
financial statements indicates that it is probable that, at
the date of the financial statements, a company has a
present obligation related to product warranties. The
amount of the expense involved can be reasonably
estimated. Based on the above facts, the estimated
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warranty expense should be
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a. Accrued.
b. Disclosed but not accrued.
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c. Neither accrued nor disclosed. eH w
d. Classified as an appropriation of retained earnings.
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39. Which of the following is not considered when
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evaluating whether or not to record a liability for
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pending litigation?
a. Time period in which the underlying cause of action
occurred.
b. The type of litigation involved.
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c. The probability of an unfavorable outcome.
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d. The ability to make a reasonable estimate of the
amount of the loss.
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40. A competitor has sued an entity for unauthorized use
of its patented technology. The amount that the entity
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may be required to pay to the competitor if the
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competitor succeeds in the lawsuit is determinable with
reliability, and according to the legal counsel it is less
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than probable (but more than remote) that an outflow
of the resources would be needed to meet the
obligation. The entity that was sued should at year-
ended:
is
a. Recognize a provision for this possible obligation.
b. Make a disclosure of the possible obligation in
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footnotes to the financial statements.
c. Make no provision or disclosure and wait until the
lawsuit is finally decided and then expense the
amount paid on settlement, if any.
d. Set aside, as an appropriation, a contingency
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reserve, an amount based on the best estimate of
the possible liability.
41. What condition is necessary to recognize an
environmental liability?
a. Company has an existing legal obligation and can
reasonably estimate the amount of the liability
b. Company can reasonably estimate the amount of
the liability
c. Company has an existing legal obligation
d. Obligation event has occurred
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42. A company is legally obligated for the costs associated
with the retirement of a long-lived asset
a. Only when it hires another party to perform the
retirement activities.
b. Only if it performs the activities with its own
workforce and equipment.
c. Whether it hires another party to perform the
retirement activities or performs the activities
itself.
d. When it is probable the asset will be retired.
43. To record an environmental liability, the cost
associated with the liability is:
a. Included in the carrying amount of the related
long-lived asset
b. Expressed
c. Included in a separate account
d. None of these answer choices are correct
44. Which of the following is a contingency that should be
accrued?
a. The company is being sued and a loss is
reasonably possible and reasonably estimable.
b. The company deducts life insurance premiums
from employees' paychecks.
c. The company offers a two-year warranty and the
expenses can be reasonably estimated.
d. It is probable that the company will receive
P1,000,000 in settlement of a lawsuit.
45. All of the following are examples of provision, EXCEPT
a. Advanced receipt of subscription
b. Environmental contamination
c. Warranty and guarantee
d. Pending court case
46. A restructuring is a programme that is planned and
controlled by management, and materially changes:
a. The scope of a business undertaken by an entity
b. The manner in which that business is conducted
c. Either a or b
d. Neither a nor b
47. The board of directors of ABC Inc. decided on
December 15, to wind up international operations in
the Middle East and move them to China. The decision
was based on a detailed formal plan of restructuring.
This decision was conveyed to all workers and
management personnel at the headquarters in Manila.
How should ABC Inc. treat this restructuring in its
financial statements for the year-end December 31?
a. Because ABC Inc. has not announced the
restructuring to those affected by the decision and
thus has not raised an expectation that ABC Inc.
will actually carry out the restructuring (and as no
constructive obligation has arisen) only disclose
the restructuring decision and the cost of
restructuring in footnotes to the financial
statements.
b. Recognize a provision for restructuring since the
board of directors has approved it and it has been
announced in the headquarters of ABC Inc. in
Manila.
c. Mention the decision to restructure and the cost
involved in the chairman's statement in the annual
report since it is a decision of the board of
directors.
d. Do nothing in this year's financial statements.
FAR.2836
 EXCEL PROFESSIONAL SERVICES, INC.

48. The rationale for inter-period income tax allocation is
to
a. Recognize a tax asset or liability for the tax
consequences of temporary differences that exist
at the balance sheet date.
b. Recognize a distribution of earnings to the taxing
agency.
c. Reconcile the tax consequences of permanent and
temporary differences appearing on the current
year's financial statements.
d. Adjust income tax expense on the income
statement to be in agreement with income taxes
payable on the balance sheet.
49. Which of the following examples would not give rise to
a temporary difference?
a. Revenue from installment sales recognized under
the installment method for taxation.
b. Straight-line depreciation used for accounting
purposes while an accelerated method is used for
tax purposes.
c. Warranty costs recognized for accounting purposes
but not recognized for tax purposes until paid.
d. Recognition of goodwill in a business combination.
52. Under PAS 12, deferred tax assets and liabilities are
measured at the tax rates that:
a. Are expected to apply when the asset is recovered
or the liability is settled.
b. Applied at the beginning of the reporting period.
c. At the end of the reporting period.
d. At the rates that prevail at the reporting date.
53. Which statement is correct regarding recovery of
underlying asset in PAS 12?
a. PAS 12 requires an entity to measure deferred tax
relating to an asset on a sale basis.
b. Deferred tax on investment property measured at
fair value is always required to be determined
using the presumption that the carrying amount of
the underlying asset will be recovered through sale
c. Deferred tax on non-depreciable assets measured
using the revaluation model in PAS 16 will always
be determined on a sale basis.
d. All of the above.
54. At the December 31, 20X1 statement of financial
position date, Unruh Corporation reports an accrued
receivable for financial reporting purposes but not for
tax purposes. When this asset is recovered in 20X2, a

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50. Which of the following differences would result in future taxable amount will occur and

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future taxable amounts? a. Pretax financial income will exceed taxable income
a. Expenses or losses that are tax deductible after in 20X2.

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they are recognized in financial income. eH w b. Total income tax expense for 20X2 will exceed
b. Revenues or gains that are taxable before they are current tax expense for 20X2.
recognized in financial income. c. Unruh will record an increase in a deferred tax

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c. Revenues or gains that are recognized in financial asset in 20X2.
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income but are never included in taxable income. d. Unruh will record a decrease in a deferred tax
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d. Expenses or losses that are tax deductible before liability in 20X2.

they are recognized in financial income.
55. The tax expense related to profit or loss of the period
51. The deferred tax expense is the is required to be presented:
o

a. Increase in balance of deferred tax asset minus the a. On the face of the statement of financial position
aC s

increase in balance of deferred tax liability. b. On the face of the statement of profit or loss
b. Increase in balance of deferred tax liability minus c. In the statement of cash flows
vi re

the increase in balance of deferred tax asset. d. In the statement of changes in equity
c. Increase in balance of deferred tax asset plus the
increase in balance of deferred tax liability.
y

d. Decrease in balance of deferred tax asset minus

ed d

the increase in balance of deferred tax liability. J - end of FAR.2836 - J

ar stu
is
Th

SUGGESTED ANSWERS
1. D 11. D 21. D 31. D 41. A 51. B
2. D 12. D 22. D 32. C 42. C 52. A
sh

3. C 13. A 23. B 33. B 43. A 53. C

4. A 14. C 24. A 34. D 44. C 54. D
5. B 15. D 25. C 35. D 45. A 55. B
6. D 16. A 26. C 36. D 46. C
7. D 17. A 27. C 37. C 47. A
8. C 18. A 28. C 38. A 48. A
9. A 19. A 29. A 39. B 49. D
10. D 20. C 30. D 40. B 50. D
1.

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 2011 NATIONAL CPA MOCK BOARD EXAMINATION
In partnership with the Professional Review & Training Center, Inc. and Isla Lipana & Co.
THEORY OF ACCOUNTS
INSTRUCTIONS: Select the best answer for each of the following questions. Mark only
one answer for each item on the answer sheet provided. AVOID ERASURES. Answers
with erasures may render your examination answer sheet INVALID.
NO.2 only. GOODLUCK!
1. 1. Choose the incorrect statement.
a. The objective of external financial statements
is to communicate the economic effects of
completed transactions and other events in the
entity.
b. General purpose financial statements were
developed primarily because all outside users
have the same information needs.
c. The double-entry system of accounting has
been used for centuries.
d. The practice of accounting requires
considerable professional judgment.
2. Which statement is incorrect regarding Philippine
Financial Reporting Standards (PFRSs)?
a. PFRSs set out recognition, measurement,
presentation and disclosure requirements
dealing with transactions and events that are
important in general purpose financial
statements.
b. PFRSs are based on the Framework, which
addresses the concepts underlying the
information presented in general purpose
financial statements.
c. PFRSs are designed to apply to the general
purpose financial statements and other
financial reporting of all profit-oriented entities.
d. PFRSs are designed to apply to not-for-profit
activities in the private sector.
3. Which of the following statements regarding the
conceptual framework is correct?
a. The framework is concerned with special-
purpose financial statements.
b. The framework applies to financial statements
of business reporting enterprises in the private
sector but not in the public sector
c. In cases where there is conflict between the
framework and an PFRS, the requirement of
the framework will prevail
d. Theframeworkdealswithconceptsofcapital
4. If an item of income is not material, then the
manner of presenting that information, or whether
or not it is disclosed:
a. will have an impact on the economic decisions
of users;
b. should not affect the economic decisions of
users;
c. should not be included in the determination of
profit or loss for the period;
d. will be included directly in retained earnings.
5. Which of the following statements is false?
a. Depreciation expense, bad debt expense, and
warranty expense are estimated expense
because they all depend upon future events.
b. Reversing entries are made to eliminate the
need to monitor the effect of year-end
adjusting entries during the next accounting
period
c. Depreciation expense and accrued revenues
are example of deferred items.
Use PENCIL
d. When a company records reversing entries,
adjusting entries like deferred expenses
recorded initially as assets upon payment of
cash generally are not reversed.
6. Which of the following statements is correct?
a. The use of a general journal implies that there
is no need for special journals.
b. Each subsidiary ledger has a related control
account in the general journal.
c. Assume a company always records prepaid
expenses as assets upon payment of cash, and
deferred revenues as liabilities upon receipt of
cash. If this company records reversing
entries, generally only adjusting entries for
accrued expenses and accrued revenues
should be reversed.
d. All entries in the general journal are supported
by details contained in the special journals.
7. OJ Inc. decided to extend its reporting period from
a year (12-month period) to a 15-month period.
Which of the following is(are) not required under
PAS in case of change in reporting period?
I. XYZ Inc. should disclose the reason for using a
longer period than a period of 12 months
II. XYZ Inc. should change the reporting period
only if other similar entities in the geographical
area in which it generally operates have
done so in the current year; otherwise its
financial statements would not be comparable
to others
III. XYZ Inc. should disclose that comparative
amounts used in the financial statements are
not entirely comparable
a. I and II
b. II and III
c. III only
d. IIonly
8. At a minimum, based on PAS 1, the face of the
Statement of Financial Position shall include all of
the following line items, except
a. Biological assets
b. Investment property
c. Agriculturalproduce
d. Deferred tax assets and liabilities
9. The statement of changes in equity should disclose
the following, except
a. total comprehensive income
b. effect of the change in an accounting
estimate
c. capital transactions with owners and
distributions to owners
d. effects of retrospective restatement
10. Revenue should be measured at
a. Fair value of the consideration received or
receivable
b. Cost of the consideration received or
receivable
c. Amount of cash received or receivable
d. Book value of the consideration received or
receivable
Page 1 of 7

11. Which of the following criteria do not have to be
met in order for an operation to be classified as
discontinued?
a. The operation should represent a separate
line of business or geographical area
b. The operation is part of a single plan to
dispose of a separate major line of
business or geographical area
c. The operation is a subsidiary acquired
exclusively with a view to resale
d. The operation must be sold within three
months of the year-end.
12. Which statement is incorrect regarding investment
property ?
a. Gains or losses arising from changes in the
fair value of investment property must be
included in net profit or loss for the period
in which it arises.
b. The cost of the purchased investment
property includes its purchase price and
any directly attributable expenditure
c. Transfer from investment property to
property, plant, and equipment are
appropriate only when the entity adopts
the fair value model under PAS 38.
d. Investment property includes property that
is being constructed or developed fuse as
an investment property
13. Which statement is incorrect regarding PPE?
a. Items of PPE should be recognized as
assets when it is probable that the future
economic benefits associated with the
asset will flow to the enterprise and the
cost of the asset can be measured reliably.
b. If an asset acquired in exchange
for another asset is not measured at
fair value, its cost is measured at the
carrying amount of the asset given up.
c. Depreciation should be charged to the
income statement, unless it is included in
the carrying amount of another asset.
d. Depreciation is not recognized if the
fair value of the asset exceeds its
carrying amount, even if the asset’s
residual value does not exceed its carrying
amount.
14. An entity imported machinery to install in its new
factory before year-end. However, due to
circumstances beyond its control, the machinery
was delayed by a few months but reached the
factory premises before year-end. While this was
happening, the entity learned from the bank that it
was being charged interest on the loan it had
taken to fund the cost of the plant. What is the
proper treatment of freight and interest expense
under PAS 16?
a. Both expenses should be capitalized
b. Interest may be capitalized but freight
should be expressed
c. Freight charges should be capitalized but
interest cannot be capitalized under these
circumstances
d. Both expenses should be expensed
15. Which statement is correct regarding initial
recognition of research and development costs?
a. All research costs should be charged to
expense.
b. All development costs should be
capitalized.
c. If an enterprise cannot distinguish the
research phase of an internal project to
create an intangible asset from the
development phase, the enterprise treats
the expenditure for that project as if
it were incurred in the development
phase only.
d. A research and development project
acquired in a business combination is not
recognized as an asset.
16. Which is incorrect concerning the recognition and
measurement of an intangible asset?
a. If an intangible asset is acquired separately,
the cost comprises its purchase price,
including import duties and taxes and
any directly attributable expenditure of
preparing the asset for its intended use.
b. If an intangible asset is acquired in a business
combination that is an acquisition, the cost is
based on its fair value at the date of
acquisition.
c. If an intangible asset is acquired free of charge
or by way of government grant, the cost is
equal to its fair value.
d. If payment for an intangible asset is deferred
beyond normal credit terms, its cost is equal to
the total payments over the credit period.
17. Which of the following expenditures would never
qualify as an exploration and evaluation asset?
a. Expenditure for acquisition of rights to explore
b. Expenditure for exploratory drilling
c. Expenditures related to the development of
mineral resources
d. Expenditure for activities in relation to
evaluating the technical feasibility and
commercial viability of extracting a mineral
resource
18. Which statement is incorrect regarding recognition
of government grants as income?
a. Grants in recognition of specific expenses
should be recognized as income over the
period of the related expense.
b. Grants related to depreciable assets should be
recognized as income over the periods and in
proportion to the depreciation of the related
assets.
c. Grants related to nondepreciable assets
requiring fulfillment of certain conditions
should be recognized as income immediately
after meeting the condition.
d. A grant receivable as compensation for costs
already incurred or for immediate financial
support, with no future related costs, should be
recognized as income in the period in which it
is receivable.
19. What is the acceptable approach in accounting for
government grants?
a. Government grants should be recognized
as income over the periods necessary to match
them with the related costs
b. Government grants should be credited
directly to donated capital
c. Government grants should be credited
directly to retained earnings
d. Government grants should be deferred and
amortized over a maximum period of 20 years
20. Which of the following is not considered a
borrowing cost?
a. Interest on short-term and long-term
borrowings
b. Finance charges in respect of finance
leases
c. Dividendspaidonpreferredstock
Page 2 of 7
d. All of the above are considered borrowing c. An unconditional government grant related to a
costs biological asset that has been measured at fair
value less point of sale costs should be
21. When a qualifying asset is financed by both recognized as income when the grant becomes
specific and general borrowings, the interest rate to be receivable.
used in computing capitalizable borrowing costs d. Biological assets are measured at fair value
attributed to general borrowings should be less costs to sell at initial recognition and at
a. the lowest interest rate on the general each subsequent reporting period.
borrowings
b. the highest interest rate on the general 28. Which of the following values is unlikely to be used
borrowings in fair value measurement for biological assets?
c. the weighted average interest rate on a. Quoted price in a market
general borrowings b. The most recent market transaction price
d. the average of the lowest and highest c. The present value of the expected net cash
interest rates on the general borrowings flows from the assets
d. Externalindependentvaluation
22. Capitalization of borrowing costs
a. Shall be suspended during temporary periods of 29. Which of the following statements regarding
delay discontinued operations is true?
b. May be suspended only during extended periods of a. The assets and liabilities of a disposal group
delay in which active development is delayed classified as held for sale by an entity may be
c. Should never be suspended once capitalization offset and shown as a single item on the
commences Statement of Financial Position of the entity.
d. Shall be suspended only during extended periods b. The assets and liabilities of a disposal group of
of delays in which active development is delayed an entity must be shown separately in the
asset and liabilities sections of the Statement
23. The following may be included in the cost of of Financial Position of the entity and cannot be
inventories, except offset.
a. Administrative overheads. c. An adjustment in a subsequent period to the
b. Wasted materials, labor and other production selling price of a component of an entity sold
costs. must be reported as a retrospective
c. Storage costs. adjustment in the prior-period financial
d. Sellingcosts. statements of the entity in which the
discontinued operation was reported.
24. BMC, Inc. is evaluating whether to apply the lower d. The gain or loss on disposal of a component of
of cost or net realizable value rule to total an entity classified as a discontinued operation
inventory, to groups of similar items, or to each need not be disclosed separately from the loss
item. Which application should it use if it wants to from operations of the discontinued segment.
show the lowest inventory amount?
a. Separatelytoeachtime. b. 30. Which of the following is correct?
Total inventory. a. Discontinued operations are shown as the last
c. Groups of similar items. category on the Statement of Comprehensive
d. It does not matter, as all applications result in Income after income from continuing
the same amount. operations.
b. The Discontinued Operations section of the
25. The retail method has been used by a retail Statement of Comprehensive Income consists
department store during its first year of only of the gain or loss on disposal of the
operations. As of the end of the year, compare (A) discontinued component net of the tax effect.
the markdowns with (B) the markdown c. The Discontinued Operations section of the
cancellations: Statement of Comprehensive Income consists
a. A will be equal to B only of the income or loss from operating the
b. A will be less than or equal to B discontinued component net of the tax effect.
c. AwillbegreaterthanorequaltoB d. The Discontinued Operations section of the
d. A cannot be equal to B Statement of Comprehensive Income consists
of the income or loss from operating the
26. Which of the following is an appropriate discontinued component net of the tax effect
combination of a biological asset and its as well as the gain or loss on disposal of the
agricultural produce? discontinued component net of the tax effect.
Biologicalassets Agriculturalproduce
a. Sheep Yarn 31. The following are external indicators of
b. Trees in a plantation Logs impairment, except
forest a. Market value declines.
c. Dairy cattle Butter b. Negative changes in technology, markets,
economy, or laws.
d. Pigs Carcass
c. Increases in market interest rates.
d. Worse economic performance than expected.
27. Which statement is incorrect concerning biological
assets and agricultural produce? 32. Which statement is incorrect concerning the
a. Inventories comprising agricultural reversal of an impairment loss?
produce that an entity has harvested from its a. The increased carrying amount due to reversal
biological assets are measured on initial should not be more than what the depreciated
recognition at fair value. historical cost would have been if the
b. Changes in fair value of a biological assets or impairment had not been recognized.
an agricultural produce are included in the b. Reversal of an impairment loss is recognized as
determination of income of the current period. income in the income statement.
c. Adjust depreciation for future periods.
Page 3 of 7
 d. Reversal of an impairment loss for goodwill is a. It is a contra-stockholders' equity account.
recognized as income in the income statement. b. It is an account that appears only on the books
of the investor.
c. It increases when amortization entries are
33. Which statement is incorrect in determining made until it reaches its maturity value.
recoverable amount? d. It decreases when amortization entries are
a. If the carrying amount is less than fair made until its balance reaches zero at the
value less costs to sell or value in use, it maturity date.
is not necessary to calculate the other amount.
b. If fair value less costs to sell cannot be 41. Use of the effective interest method in amortizing a
determined, then recoverable amount is value premium on bonds payable would result in
in use. a. A constant amount of premium amortization
c. For assets to be disposed of, recoverable each period over the life of the bonds
amount is fair value less costs to sell. b. An increasing amount of premium amortization
d. Alloftheabovestatementsarecorrect each period over the life of the bonds
c. A decreasing amount of premium amortization
34. Which of the following appears on the bank side of each period over the life of the bonds
the bank reconciliation? d. Cannot be determined from the information
a. Outstandingchecks given.
b. Interest earned on bank balance
c. NSF check 42. Which of the following transactions does not result
d. Book error in a decrease in retained earnings?
a. Declaration and issuance of dividends for the
35. If the balance shown on a company's bank period.
statement is less than the correct cash balance, b. Incurrence of a net loss for the period.
and neither the company nor the bank has made c. Acquisition of treasury stock for more than par
any errors, there must be value but less than the original issue price,
a. deposits credited by the bank but not yet when the cost method is used.
recorded by the company. d. Correction of an error in which depreciation
b. outstandingchecks. expense was understated in a prior period.
c. bank charges not yet recorded by the
company. 43. What do an appropriation of retained earnings and
d. deposits in transit. a declaration of cash dividend (for the same amount)
have in common?
36. Which of the following is a method to generate a. Both increase the amount of appropriated
cash from accounts receivable? retained earnings
Assignment Factoring b. Both have the same consequences for
a. No Yes stockholders
b. Yes Yes c. Both permanently reduces future ability to pay
c. Yes No dividends.
d. No No d. Both result in a decrease in unappropriated
retained earnings.
37. Which of the following items would be excluded
from current liabilities? 44. A temporary difference which would result in a
a. A long-term liability callable or due on deferred tax liability is
demand by the creditor even though the a. Accrual of estimated litigation loss
creditor has given no indication that the debt b. Accrual of estimated warranty cost
will be called. c. Subscriptions received in advance
b. Normal accounts payable which had been d. An installment sale which is included in
assigned by the creditor to the finance financial income at the time of sale and
company. included in taxable income when collected
c. Long-term debt callable within one year or less
because the debtor violated a debt provision. 45. It is the amount attributed to an asset or liability
d. Short-term debt which at the discretion of the for tax purposes
entity can be rolled over at least twelve a. Carrying amount
months after the balance sheet date. b. Taxbase
c. Measurement base
38. Which of the following statements regarding provisions is d. Taxable amount
incorrect?
a. Provisions should be recognized for penalties or clean-up costs for 46. A future taxable amount is exemplified by:
unlawful environmental damage. a. revenue that is included in the tax return
b. Provisions should be recognized for product warranties before it is included in pretax accounting
c. Provisionsshouldberecognizedforfutureoperatinglosses
income
d. Provisions should be recognized for outstanding premiums offered
to customers
b. gain that is included in the tax return before it
is included in pretax accounting income.
39. A contingent liability is c. expense that is included in the tax return after
a. A liability of uncertain timing or amount. it is included in pretax accounting income.
b. A possible obligation depending on d. expense that is included in the tax return
whether some uncertain future event occurs. before it is included in pretax accounting
c. A present obligation but payment is not income.
probable or the amount cannot be measured
reliably. 47. The classification of the lease is normally carried
d. Eitherborc. out
a. At the end of the lease term.
40. Which of the following is true of a premium on b. After “cooling off” period of one year.
bonds payable? c. Attheinceptionofthelease.

Page 4 of 7
 d. When the entity deems it necessary.
48. An eight-year capital lease specifies equal
minimum annual lease payments. Part of this payment
represents interest and part represents a reduction in
the net lease liability. The portion of the minimum
lease payment in the fourth year applicable to the
reduction of the net lease liability should be
a. the same as in the third year
b. less than in the third year
c.lessthaninthefifthyear d.
more than in the fifth year
49. PROCESSOR Inc. leased a new machine having an
expected useful life of 30 years from Carbide Co.
Terms of the noncancellable 25-year lease were
that PROCESSOR would gain title to the property
upon payment of a sum equal to the fair market
value of the machine at the termination of the
lease. PROCESSOR accounted for the lease as a
finance lease and recorded an asset and a liability
in the finance records. The asset recorded under
this lease should properly be
amortized/depreciated over
a. 5 years (the period of actual ownership).
b. 22.5 years (the period of actual
ownership).
c. 25years(thetermofthelease). d.
30 years (the total asset life).
50. The excess of the fair value of leased property at
the inception of the lease over its cost or carrying
amount should be classified by the lessor as
a. Unearned income from a sales-type lease.
b. Unearned income from a direct-financing
lease.
c. Manufacturer’s or dealer’s profit from a
sales-type lease.
d. Manufacturer’s or dealer’s profit from a
direct-financing lease.
51. Which of the following is a correct statement of
one of the criteria for finance lease?
a. The lease transfers ownership of the
property to the lessor.
b. The lease contains a purchase option.
c. The lease term is equal to or more than
75% of the estimated economic life of the
leased property.
d. The minimum lease payments (excluding
executory costs) equals or exceeds 90% of
the fair value of the leased property.
52. Which of the following statements characterizes
defined benefit plans
a. They are comparatively simple in
construction and raise few accounting
issues for employers
b. Retirement benefits are based on the plan’s
benefit formula
c. Retirement benefits depend on how well
pension fund assets have been managed
d. All of the above
53. What is measured by the projected benefit
obligation?
a. The pension expense, computed by the plan formula applied c.toAy
assuming future salary levels.
b. The pension expense, computed by the plan formula applie d.toAyseanrsaodfjussetrmviecnetto todraetea,ined earnings in the first
using existing salary levels.
c. The pension obligation, computed by the plan formula applied to years of service to
date, assuming future salary levels.
d. The pension obligation, computed by the plan formula applie.d to ysh
date, using existing salary levels.
54. Which of the following is not a component of the
retirement benefit expense under the defined benefit
plan?
a. Interest cost
b. Expected return on plan assets
c. Benefitspaidtoretirees
d. Amortization of prior service cost
55. Accounting policies should be followed -
a. When the financial results are improved
b. Consistently
c. Never
d. Rarely
56. A cumulative effect of change in an accounting
policy is measured as the
a. the difference between the prior
periods’
pre tax profit under the old method
and what would have been reported if the
new method had been used in the prior
years
b. the post tax difference between the prior
period profit under the old method
and what would have been reported if the
new method had been used in the prior
years
c. the difference between the total of the
prior period profit and the current
period profit under the new method and
the total of the prior period profit and
current period profit under the old method
d. the post tax difference between the total of
the prior period profit and current
period profit under the new method and
the total of the prior period profit and
current period profit under the old method
57. Which statement is correct regarding changes in
accounting policies?
a. An entity is not permitted to change an
accounting policy.
b. Changes in accounting policies include applying
an accounting policy to a kind of transaction or
event that did not exist in the past.
c. If a change in accounting policy is required by
a new FRSC standard or interpretation, the
change is accounted for as required by that
new pronouncement.
d. If a new pronouncement does not include
specific transition provisions, the change
in accounting policy is applied prospectively.
58. Which of the following items is reported only in
current and future periods?
a. correction of a prior period error
b. effectsofachangeinaccountingestimates c.
effects of a change in accounting policies
d. all of the above
59. If it is impracticable to determine the cumulative
effect of a change in accounting policy to any of the
prior periods, the change in accounting policy should
be accounted for
a. As a correction of prior period error
b.Onaprospectivebasis
s ea rcsum
ofusla
etrivieceetfo fecdtatceh,ange in the Statement of
Comprehensive Income
period presented
60 In computing the weighted-average number of
earsesofou setsrtvaicneditnog during the year, which of the
following midyear events must be treated as if it
had occurred at the beginning of the year?
a. Declaration and distribution of bonus
Page 5 of 7
 issue.
b. Purchase of treasury stock.
c. Sale of additional ordinary shares.
d. Sale of convertible preference share.
61. When computing basic earnings per share on
ordinary shares, dividends on cumulative,
nonconvertible preference shares should be
a. deducted from net income only if the dividends
were declared or paid in the current period.
b. deducted from net income regardless of
whether the dividends were not paid or declared
in the period.
c. deducted from net income only if net income is
greater than the dividends.
d. ignored.
62. Which statement is incorrect regarding cash flow
statements?
a. All enterprises that prepare financial
statements in conformity with GAAP are
required to present a cash flow statement.
b. Cash flows must be analyzed between
operating, investing and financing activities.
c. The cash flow statement analyses changes in
cash and cash equivalents during a period.
d. For operating cash flows, the indirect method
of presentation is encouraged, but the direct
method is acceptable.
63. PAS 7 Cash Flow Statements, requires that
investing and financing transactions that do not require
the use of cash or cash equivalents should be:
a. excludedfromacashflow statement;
b. included in a cash flow statement before
operating, investing and financing activities;
c. presented in the cash flow statement after
operating activities and before investing and
financing activities;
d. presented in a cash flow statement after the
operating, investing and financing activities have
been presented.
64. Which of the following information should be
included in Melay, Inc.’s 2010 summary of
significant account policies?
a. Property, plant and equipment is recorded
at cost with depreciation computed
principally by the straight-line method.
b. During 2010, the Delay Segment was sold.
c. Business segment 2010 sales are Alay P1
M, Belay P2M, and Celay P3M.
d. Future common shares dividends are
expected to approximate 60% of earnings.
65. The management of an entity completes draft of
financial statements for the year ended December 31,
2008 on February 28, 2009. On March 15, 2009, the
board of directors reviews the financial statements and
authorizes them for issue. The entity announces its
profit and selected other financial information on March
20, 2009. The financial statements are made available
to shareholders and others on April 1, 2006. The
shareholders approved the financial statements at their
annual meeting on May 10, 2009 and the approved
financial statements are then filed with SEC and BIR on
May 30, 2009. For purposes of identifying events after
balance sheet date, the financial statements
were authorized for issue on
a. March15,2009 c. March 20, 2009
b. May 10, 2009 d. May 30, 2009
66. Non-adjusting events that are indicative of
conditions that arose after the balance sheet date are
given the following treatment:
a. recognition in the income statement;
b. recognition in the balance sheet;
c. recognition in the cash flow statement;
d.notedisclosureinthefinancialstatements.
67. Which statement is incorrect regarding events after
balance sheet date?
a. Events after the balance sheet date that
provide further evidence of conditions that
existed at the balance sheet date will
require adjustments to the financial
statements.
b. Events or conditions that arose after the
balance sheet date does not require
adjustments to the financial statements.
c. If an entity declares dividends after the
balance sheet date, the entity shall recognize
those dividends as a liability at the balance
sheet date.
d. An entity shall not prepare its financial
statements on a going concern basis
if management determines after the
balance sheet date either that it intends to
liquidate the entity or to cease trading, or
that it has no realistic alternative but to do so.
68. Unrelated parties include all of the following,
except
a. Providers of finance
b. Two venturers simply because they share joint
control over the joint venture
c. Single customer with whom the entity transacts
significant volume of business merely by virtue of the
resulting economic dependence
d. Key management personnel and close family
members of such individual
69. The minimum disclosures prescribed under PAS
24 are to be made separately for certain categories of
related parties. Which of the following is not among
the list of categories specified under the Standard for
the purposes of separate disclosure?
a. Entities with joint control or significant influence
over the entity
b. The parent company of the entity
c. An entity that has a common director with the
entity
d. Joint ventures in which the entity is a venturer
70. Under PFRS 8 Operating Segments, separate
segments of an entity must be identified as reportable
segments until at least:
a. 100% of total entity result is included;
b. 80% of total entity liabilities are included;
c.75%oftotalentityrevenueisincluded;
d. 70% of total entity assets are included.
71. Interim period is a financial reporting period
a. equal to six months
b. shorterthanoneyear c.
longer than one year d.
equal to three months
72. Financial liabilities include
a.Bankoverdraft.
b. Loans receivable.
c. Income tax payable.
d. Cumulative, redeemable preference shares at
the option of the issuer
73. The following transfers/reclassifications of financial
assets are permitted, except
a. Transfer from held-to-maturity investments to
available-for-sale category.
b. Reclassification of non-derivative financial
assets out of the fair value through profit or
Page 6 of 7
 loss category if the financial asset is no longer
held for the purpose of selling it in the near
term in particular circumstances.
c. Reclassification of non-derivative financial
assets designated at fair value through profit
or loss by the entity upon initial recognition out
of the fair value through profit or loss
category.
d. Transfer from the available-for-sale category to
the loans and receivables category a financial
asset that would have met the definition of
loans and receivables (if the financial asset had
not been designated as available-for-sale), if
the entity has the intention and ability to hold
that financial asset for the foreseeable future.
74. In which of the following circumstances is
derecognition of a financial asset not appropriate?
a. The contractual rights to the cash flows of the
financial assets have expired
b. The financial asset ha been transferred and
substantially all the risks and rewards of
ownership of the transferred asset have also
been transferred
c. The financial asset has been transferred and the
entity has retained substantially all the risks and
reward of ownership of the transferred asset
d. The financial asset has been transferred and the
entity has neither retained nor transferred
substantially all the risks and rewards of
ownership of the transferred asset. In addition,
the entity has lost control of the transferred asset
75. When two or more venturers combine their
operations, resources and expertise to
manufacture, market and distribute jointly a
particular product such as aircraft is an example of
a. Joint venture
b. Jointlycontrolledoperation c.
Jointly controlled asset
d. Jointly controlled entity
76. A feature of government accounting that provides
for the ceiling or maximum amount an agency can
spend or incur in the performance of its functions is
known as
a. Budgetary accounting
b. Responsibility accounting
c. Obligationaccounting
d. Fund accounting
77. A statement of financial position reports
unrestricted, temporarily restricted and
permanently restricted net assets is required for
which of the following?
I. A public university
II. A private, nonprofit hospital
a. Both I and II
b. I only
c. Neither I nor II
d. IIonly
End of Examination
Thank you for participating in the 2011 National Mock CPA Board Examinations!
78. Financial reporting by a development stage
enterprise differs from financial reporting for an
established operating enterprise in regard to note
disclosures
a. Only
b. And expense recognition principles only
c. And revenue recognition principles only
d. And revenue and expense recognition
principles
79. An entity shall disclose in the summary of
significant accounting policies:
a. the measurement basis (or bases) used in
preparing the financial statements.
b. all the measurement bases specified in
the PFRS for SMEs irrespective of whether
they were used by the entity in
preparing its financial statements.
c. the measurement basis (or bases) used in
preparing the financial statements and the
accounting policies used that are relevant to an
understanding of the financial statements.
d. all of the measurement bases and the
accounting policy choices available to the
entity (ie specified in the PFRS for SMEs)
irrespective of whether they were used by the
entity in preparing its financial statements.
80. An entity:
a. must chose to present either a statement of
income and retained earnings or a statement
of comprehensive income and a statement of
changes in equity (ie a free accounting policy
choice available to all entities that prepare
their financial statements in accordance with
the PFRS for SMEs).
b. whose only changes to its equity in the periods
for which financial statements are presented
arise from profit or loss, payment of dividends,
corrections of prior period errors, and changes
in accounting policy is required to present a
statement of income and retained earnings in
place of a statement of comprehensive income
and a statement of changes in equity.
c. whose only changes to its equity in the periods
for which financial statements are presented
arise from profit or loss, payment of dividends,
corrections of prior period errors, and changes
in accounting policy is permitted but not
required to present a statement of income and
retained earnings in place of a statement of
comprehensive income and a statement of
changes in equity.
d. that chooses to present a statement of income
and retained earnings must also present a
statement of comprehensive income and a
statement of changes in equity.
Page 7 of 7
 SET B

FINANCIAL ACCOUNTING 2
Final Examination

THEORY OF ACCOUNTS

1. The Philippine term for rights issue is a. The exercise price is higher than the average
a. Right of preemption market price.
b. Share Option b. The exercise price is equal to the average market
c. Stock right price.
d. Share Warrant c. The exercise price is lower than the average market
price.
2. The features most frequently associated with preference d. The option shares represent 20% of the ordinary
shares include all of the following, except shares actually outstanding
a. Convertible into ordinary shares
b. Nonvoting 11. In computing diluted EPS, dividends on convertible
c. Preference as to assets in the event of liquidation cumulative preference shares shall be
d. Callable at the option of the shareholder a. Deducted from net income, whether declared or not
b. Ignored
3. Earnings per share disclosures are required only for c. Deducted from net income only when declared
a. Private entities d. Added to net income net of tax
b. Entities with complex capital structure
c. Public entities 12. What is PAS 12?

co m
d. Entities that change their capital structure during the a. Leases

eH e w as
reporting period. b. Earnings per share

m
o. co
er ro.as
rs seH e w c. Share-based payment
4. Where in the financial statements should basic and d. Income Taxes
diluted EPS for income from continuing operations be
reported? 13. What is PFRS 2?
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a. In the income statement a. Statement of cash flows
b. In the statement of cash flows b. Income taxes
c. In the accompanying notes c. Leases
d. In management’s discussion and analysis\ d. Share-based payment
a CC s ou

5. Earnings per share shall be reported for all of the 14. What is PAS 17?
following, except a. Share-based payment
vi a reres
o

a. Cash flow from operating activities b. Leases

b. Continuing operations c. Statement of cash flows
c. Net Income d. Interim Financial Reporting
d. Discontinued Operations
o
ed v d y

15. What is PAS 19?

6. Ordinary shares issued as part of a business a. Leases
ar red stu ud
y

combination are included in the EPS calculation from b. Employee Benefits

c. Share-based payment
a. The beginning of the accounting period d. Interim Financial Reporting
sh a s st

b. The end of the accounting period

i

c. The date of acquisition 16. What is PAS 33?

s

d. The midpoint of the accounting year. a. Earnings per share

b. Leases
h i

7. The EPS Computation that is forward-looking and based c. Income Taxes

i

on assumptions about future transactions is d. Share-based payment

T
h

a. Basic EPS
b. Continuing operations EPS 17. For a liability to exist
T

c. Diluted EPS a. The exact amount must be known

h

d. Extraordinary EPS b. A past transaction or event must have occurred

s

c. The identity of the party owed must be known

8. When computing diluted EPS, the treasury share d. The obligation to pay cash in the future must exist.
method can be used for which of the following?
a. Rights issue 18. Which of the following represents a liability?
b. Convertible bond payable a. The obligation to pay for goods that an entity
c. Share option expects to order from suppliers next year.
d. Convertible preference share b. The obligation to pay interest on a five-year note
payable that was issued the last day of the current
9. In computing diluted EPS, interest expense on year.
convertible bond payable shall be c. The obligation to distribute an entity’s own shares
a. Added back to net income net of tax next year as a result of a stock dividend declared
b. Added back to net income at gross near the end of the current year.
c. Deducted back to net income net of tax d. The obligation to provide goods that customers
d. Ignored have ordered and paid for during the current year.

10. Options and warrants are dilutive if 19. Conceptually, a short-term note payable with no stated
rate of interest should be

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 SET B
a. Recorded at maturity value b. Deferred revenue equal to 60% of the main contract
b. Recorded at the face amount price and payable to subcontractor equal to 40% of
c. Discounted to its present value the main contract price.
d. Reported separately from other short-term notes c. Deferred revenue equal to 60% of the main contract
payable. price and no payable to subcontractor
d. No deferred revenue but payable to subcontractor is
20. Which of the following is not an acceptable presentation reported at 40% of the main contract price.
of current liabilities?
a. Offsetting current liabilities against assets that are 28. A contingent liability
to be applied to their liquidation. a. Definitely exists as a liability but the amount and due
b. Listing current liabilities in the order of maturity. date are indeterminable.
c. Listing current liabilities according to amount. b. Is not recognized in the financial statements
d. Showing current liabilities in the order of liquidation c. Is accrued even though not reasonably estimated.
preference. d. Is the result of a loss contingency

21. What is the relationship between present value and the 29. Pending litigation would generally be considered
concept of a liability? a. Contingent liability
a. Present value is used to measure all liabilities. b. Nonmonetary liability
b. Present value is not used to measure liabilities. c. Current liability
c. Present value is only used to measure noncurrent d. Estimated Liability
liabilities.
d. Present value is used to measure certain liabilities 30. Provisions are contingent liabilities which are accrued
because the likelihood of an unfavorable outcome is
22. Which of the following statements best describes the a. Possible
term “liability”? b. Greater than 50%

co m
a. A present obligation of the entity arising from past c. At least 75%

eH e w as
events. d. Virtually certain

m
b. An excess of equity over current assets

o. co
er ro.as
c. Resources to meet financial commitments as they
rs seH e w 31. It is the abusive practice of manipulation and creative
fall due. accounting by dumping all kinds of provisions under the
d. The residual interest in the assets of the entity after banner of provision for restructuring.
deducting all of its liabilities. a. Big bath provision
ou ur urcrce
b. Creative accounting
23. How would the proceeds received from the advance sale c. Cookie jar
of nonrefundable tickets for a theatrical performance be d. General reserve
a CC s ou

reported in the statement of financial position before the

performance? 32. Bonds payable not designated at fair value through profit
a. Unearned revenue for the entire proceeds or loss shall be measure initially at
vi a reres

b. Revenue for the entire proceeds a. Fair Value

o

c. Revenue to the extent of related costs expanded b. Fair value plus bond issue cost’
d. Unearned revenue to the extent of related costs c. Face amount
expended. d. Fair value minus bond issue cost
o
ed v d y

24. Which of the following is a characteristic of the accrual 33. Bonds that mature on a single date are called
ar red stu ud

of warranty but not the sale of warranty? a. Serial Bonds

y

a. Warranty Expense b. Term Bonds

b. Unearned warranty revenue c. Callable Bonds
sh a s st

c. Warranty revenue d. Simple Bonds

i

d. Warranty Liability
34. The proceeds from the sale of bonds
s

25. Unearned rent revenue would normally appear in the a. Will always be equal to the face amount.
i

statement of financial position as b. Will always be less than the face amount
h

a. Plant asset c. Will always be more than the face amount.

i

b. Current Asset d. May be equal, more or less than the face amount
T
h

c. Current Liability depending on market interest rate.

T

d. Noncurrent Liability
35. An entity neglected to amortize the discount on
h

26. Under a royalty agreement, an entity will receive outstanding bonds payable. What is the effect of the
s

royalties from the assignment of a patent for four years. failure to record discount amortization on interest
The royalties received in advance should be recognized expense and bond carrying amount, respectively?
as revenue a. Understate and overstate
a. In the period earned b. Overstate and understate
b. In the period received c. Understate and understate
c. Evenly over the life of the royalty agreement d. Overstate and overstate
d. At the date of the royalty agreement
36. When interest expense for the current year is more than
27. At the end of the current year, an entity received an interest paid, the bonds were issued at
advance payment of 60% of the sales price for special a. A premium
order goods to be manufactured and delivered within five b. Face Value
months. At the same time, the entity subcontracted for c. A discount
production of the special order goods at a price equal to d. Cannot be determined
40% of the main contract price. What liabilities should be
reported in the year-end statement of financial position? 37. When interest expense for the current year is less than
a. None interest paid, the bonds were issued at
a. A discount

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 SET B
b. Face Value 47. There is substantial modification of terms of an old
c. A premium financial liability if the gain or loss on extinguishment is
d. Cannot be determined a. At least 10% of the new liability
b. Less than 10% of the new liability
38. If bonds are issued at a premium, this indicates that c. Less than 10% of the carrying amount of the old
a. The yield rate exceeds the nominal rate liability
b. The yield and nominal rates coincide d. At least 10% of the carrying amount of the old
c. The nominal rate exceeds the yield rate liability
d. No necessary relationship exists between the two
rates 48. The difference between the carrying amount of a
financial liability extinguished and the consideration
39. Under international accounting standard, the valuation given shall
method used for bond payable is a. Not be recognized
a. Historical cost b. Be included in equity
b. Discounted cash flow valuation at current yield rate c. Be recognized in profit or loss
c. Maturity amount d. Be included in retained earnings
d. Discounted cash flow valuation at yield rate at
issuance 49. Which statement characterizes an operating lease?
a. The lessee records depreciation and interest
40. When the entity issued bonds payable that can be b. The lessee records the lease obligation related to
converted into ordinary shares, what will be the effect on the leased asset
liabilities and equity, respectively? c. The lessor records depreciation and lease revenue.
a. Increase and Increase d. The lessor transfers title of the leased property to
b. Increase and No Effect the lessee for the duration of the lease term.
c. No effect and Increase

co m
d. Decrease and Increase 50. A twenty-year operating lease provides for a 10%

eH e w as
increase in annual payments every five years. In the

m
41. An entity issued bonds payable with nondetachable sixth year compared to the fifth year, what could be the

o. co
er ro.as
share warrants. In computing interest expense for the
rs seH e w effect on the entity’s expenses?
first year, the effective interest rate is multiplied by the a. Rent and interest expense will both increase.
a. Fair value of the bonds only b. No increase in both rent and interest expense.
b. Face value of the bonds c. Interest expense will increase but not rent expense
ou ur urcrce
c. Proceeds received from sale of the bonds d. Rent expense will increase but not interest expense
d. Share warrants outstanding
51. The appropriate valuation of an operating lease in the
a CC s ou

42. When the cash proceeds from bonds issued with share
warrants exceed the fair value of the bonds without the
warrants, the excess should be credited to
a. Share premium – ordinary
vi a reres
statement of financial position of the lessee is
a. The absolute sum of the lease payments
b. The present value of the sum of the lease payments

discounted at an appropriate rate

o

b. Retained Earnings c. Zero

c. Liability Account d. The market value of the asset at the inception of the
d. Share premium – share warrants lease.
o
ed v d y

43. Under the fair value option, an entity shall measure the 52. Which of the following would be considered an executory
ar red stu ud

note payable initially at cost?

y

a. Face amount a. Minimum lease payment

b. Fair value plus transaction cost b. Interest expense incurred
sh a s st

c. Fair value minus transaction cost c. Maintenance cost

i

d. Fair value d. Bargain Purchase Option

s

44. The discount resulting from the determination of the 53. A lease contains a bargain purchase option. In
i

present value of a note payable should be reported in determining the lessee’s capitalizable cost at the
h

the statement of financial position as beginning g of the lease term, the payment called for the
i

a. Deferred credit separate from the note bargain purchase option would be
T
h

b. Direct deduction from the face amount of the note. a. Subtracted at its exercise price
T

c. Deferred charge separate from the note b. Added at its present value.
d. Addition to the face amount of the note. c. Subtracted at its present value
h

d. Added at its exercise value

s

45. On October 1, 2013, an entity borrowed cash and signed

a three-year interest bearing note in which both the 54. The lessee’s carrying amount of an asset from the
principal and interest are payable on October 1, 2016. capitalization of a lease would be periodically reduced
On December 31, 2013, accrued interest should by
a. Be reported as current liability. a. Depreciation of the asset
b. Be reported as part of the note payable b. Total minimum lease payment
c. Be reported as noncurrent liability c. Portion of the minimum lease payment allocable to
d. Not to be reported the interest
d. Portion of the minimum lease payment allocable to
46. Under a debt restructuring involving a substantial reduction of the lease liability.
modification of terms, the future cash flows under the
new terms should be discounted using 55. Net investment in a direct financing lease is equal to
a. Market rate of interest a. Cost of the asset
b. Prime interest rate b. Cost of the asset minus guaranteed residual value
c. Interest rate under the new terms c. Cost of the asset plus initial direct cost paid by the
d. Original effective interest rate lessor
d. Cost of the asset plus unguaranteed residual value.

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 SET B
recognized for a period by an employer sponsoring a
56. Lessors shall recognize asset held under a finance lease defined benefit plan?
as a receivable at an amount equal to the a. Net interest
a. Gross investment in the lease b. Past service cost
b. Gross rentals c. Benefit paid
c. Net investment in the lease d. Current service cost
d. Residual value, whether guaranteed or
unguaranteed 66. Retirement benefit plan investments shall be carried at
a. Value in use
57. Under a direct financing lease, the excess of aggregate b. Fair value
rentals over the cost of leased property shall be c. Amortized cost
recognized as income of the lessor d. Historical cost
a. In increasing amounts during the term of the lease
b. In constant amounts during the term of the lease 67. Financial actuarial assumptions include all of the
c. In decreasing amounts during the term of the lease following, except
d. After the cost of leased property has been fully a. Future salary
recovered through rentals. b. Claim rate under medical plan
c. Future medical cost
58. If the sale and leaseback transaction results in an d. Tax payable by the plan
operating lease and the sale price is above fair value,
the excess of the sale price over fair value is 68. The components of defined benefit cost include all of the
a. Not recognized following, except
b. Recognized immediately in profit or loss a. Service cost
c. Recognized in other comprehensive income b. Contribution to the plan
d. Deferred and amortized over the period for which c. Net interest

co m
the asset is expected to be used. d. Remeasurements

eH e w as

m
59. Deferred tax assets are the amount of income taxes 69. What are compensated absences?

o. co
er ro.as
recoverable in future periods in respect of
rs seH e w a. A form of healthcare
a. Carryforward of unused tax losses only b. Payroll deductions
b. Permanent differences c. Paid time off
c. Deductible temporary differences and carryforward d. Unpaid time off
ou ur urcrce
of unused tax losses.
d. Taxable temporary differences and carryforward of 70. These are compensated or paid absences that are
unused tax losses carried forward and can be used in future periods and
a CC s ou

the employees are entitled to a cash payment for unused

60. It is the amount of income tax payable in respect of entitlement on leaving the entity.
taxable profit. a. Accumulating and nonvesting
vi a reres

a. Deferred tax benefit b. Nonaccumulating and vesting

o

b. Current tax expense c. Accumulating and vesting

c. Deferred tax expense d. Nonaccumulating and nonvesting
d. Total income tax expense
71. Share warrants outstanding account shall be reported as
o
ed v d y

61. It is the amount attributable to an asset or liability for tax a. Share Capital
ar red stu ud

purposes. b. Reduction of share premium

y

a. Tax base c. Share Premium

b. Carrying amount d. Liability
sh a s st

c. Measurement base
72. When the total shareholder’s equity is smaller than the
i

d. Taxable amount
amount of contributed capital, this deficiency is called
s

62. Justification for the method of determining periodic a. A net loss

b. A deficit
i

deferred tax expense is based on the concept of

h

a. Matching of periodic expense to periodic revenue. c. A dividend

i

b. Objectivity in the calculation of periodic expense d. A liability

T
h

c. Recognition of assets and liabilities.

73. A “secret reserve” will be created if
T

d. Consistency of tax expense measurement with

actual tax planning strategies. a. Liability is understated
h

b. A capital expenditure is charged to expense

c. Shareholder’s equity is overstated
s

63. Recognizing tax benefits in a loss year due to a loss

carryforward requires d. Inadequate depreciation is charged to income
a. Only a footnote disclosure
b. Creating a new carryforward for the next year 74. Which of the following is issued to shareholders of a
c. Creating a deferred tax liability corporation to acquire its unissued shares within a
d. Creating a deferred tax asset specified time at a specified price?
a. Share subscription
64. In computing the change in deferred tax asset or liability, b. Share warrant
which of the following tax rate is used? c. Share appreciation right
a. Past years’ tax rate d. Share option
b. Estimated future tax rate
c. Enacted future tax rate 75. The residual interest in a corporation belongs to the
d. Current tax rate a. Management
b. Creditors
65. Which of the following components should not be c. Ordinary shareholders
included in the calculation of net pension cost d. Preference shareholders

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 SET B
76. How would a share split affect each of the following? d. Form a new corporation
Asset Shareholder’s Equity
a. Increase Increase 87. How would the declaration and subsequent issuance of
b. No Effect Increase a 10% share dividend by the issuer affect each of the
c. No Effect No Effect following when the fair value of the shares exceeds the
d. Increase No Effect par value of the shares?
Share capital Share Premium
77. Deposit on subscription to a proposed increase in share a. No effect No effect
capital may be classified as b. Increase Increase
a. Current Liability c. No effect Increase
b. Part of shareholder’s equity d. Increase No effect
c. Noncurrent liability
d. Note to financial statement 88. The actual total amount of a cash dividend to be paid is
determined on the date of
78. Under international accounting requirements, which of a. Payment
the following equity reserves is part of distributable b. Declaration
equity? c. Record
a. Par value of shares d. Declaration or record, whichever is earlier
b. Revaluation reserve
c. Retained earnings 89. A dividend which is a return to shareholders of a portion
d. Capital redemption reserve of their original investment is
a. Patronage dividend
79. When an entity goes through a quasi-reorganization, the b. Liability dividend
carrying amounts in the statement of financial position c. Liquidating dividend
are stated at d. Participating dividend

co m
a. Fair value

eH e w as
b. Original Cost 90. It is the date on which the entity and another party agree

m
c. Replacement cost to a share-based payment arrangement, being when the

o. co
er ro.as
d. Original book value rs seH e w entity and the counterparty have a mutual understanding
of the terms and conditions of the arrangement.
80. Which of the following would not affect retained a. Measurement date
earnings? b. Grant date
ou ur urcrce
a. Conversion of preference share into ordinary share c. Exercise date
b. Share split d. End of reporting period
c. Stock dividend
a CC s ou

d. Treasury share transaction 91. What is the date on which the fair value of the equity
instrument granted is measured?
81. If an entity wishes to capitalize part of the earnings, it a. Grant date
vi a reres

may issue a b. Exercise date

o

a. Cash dividend c. Measurement date

b. Share dividend d. End of reporting period
c. Property dividend
d. Liquidating dividend 92. For transactions with employees and others providing
o
ed v d y

similar services, the fair value of the equity instrument

ar red stu ud

82. An entry is not made on granted is measured on

y

a. Date of record a. Grant date

b. Date of declaration b. Exercise date
sh a s st

c. Date of payment c. End of reporting period

i

d. An entry is made on all of these dates d. Beginning of reporting period

s

83. Cash dividends are pain on the basis of the number of 93. Many shares and most share options are not traded in
i

shares an active market. Therefore, it is often difficult to arrive

h

a. Outstanding at a fair value of the equity instrument being issued.

i

b. Authorized Which of the following option valuation techniques

T
h

c. Issued should not be used as a measure of fair value in the first

T

d. Outstanding less the number of treasury shares instance?

a. Black-Scholes Model
h

84. Liquidating dividends b. Intrinsic Value

s

a. Require a credit to share capital c. Binomial Model

b. Are prohibited under PFRS d. Monte-Carlo Model
c. All of the choices are correct
d. Reduce amounts paid in by shareholders 94. What is the measurement date for share-based payment
to employees that is classified as liability?
85. The retained earnings appropriated account is created a. The grant date
for the purpose of b. The service inception date
a. Earmarking cash to be used for particular purposes c. The settlement date
b. Insuring the payment of dividends d. The end of reporting period
c. Protecting the working capital position
d. Preventing losses from contingencies 95. A cash-settled share-based payment transaction will
increase which of the following?
86. The primary purpose of quasi-reorganization is to give a. A current asset
an entity the opportunity to b. A liability
a. Obtain relief from creditors c. A noncurrent asset
b. Revalue understated assets to fair value d. Equity
c. Eliminate a deficit in retained earnings

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 SET B
96. If the entity has the choice of settlement in a “cash and
share alternative”, the entity shall account for the
instrument initially as
a. Equity only
b. Liability only
c. Partly equity and party liability
d. Either equity or liability but not both

97. For cash settled share-based payment transactions,

until the liability is settled, the entity is required to
remeasure the fair value of the liability at each reporting
date and at the date of settlement and any changes in
fair value are
a. Included in retained earnings
b. Treated as component of other comprehensive
income
c. Include in profit or loss
d. Not recognized

98. Total shareholder’s equity divided by the number of

shares outstanding represents the
a. Book value per share
b. Return on equity
c. Stated value per share
d. Price-earnings ratio

co m
eH e w as
99. Which of the following features of preference share

m
would most likely be opposed by ordinary shareholders?

o. co
er ro.as
a. Participating rs seH e w
b. Redeemable
c. Convertible
d. Callable
ou ur urcrce
100. It is the amount which the preference shareholders
normally receive upon liquidation of the entity.
a CC s ou

a. Par value
b. Liquidation Value
c. Book Value
vi a reres

d. Fair Value
o

+++ END OF EXAM +++

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The interest rate that is printed on the bond certificate is Not referred to as the:

A. Stated rate.
B. Contract rate.
C. Nominal rate.
D. Effective rate
20.Most corporate bonds are:

A. Mortgage bonds.
B. Debenture bonds.
C. Secured bonds.
D. Collateral bonds.
21.The method used to pay interest depends on whether the bonds are:

A. Registered or coupon.
B. Mortgaged or unmortgaged.
C. Indentured or debentured.
D. Callable or redeemable.
22.The rate of interest that actually is incurred on a bond payable is called the:

A. Face rate.
B. Contract rate.
C. Effective rate.
D. Stated rate.
23. Interest expense is:

A. The effective interest rate times the amount of the debt outstanding during the interest period.
B. The stated interest rate times the amount of the debt outstanding during the interest period.
C. The effective interest rate times the face amount of the debt.
D. The stated interest rate times the face amount of the debt
24.Bonds usually sell at their:

A. Maturity value.
B. Face value.
C. Present value.
D. Statistical expected value.
25.Straight-line amortization of bond discount or premium:

A. Can be used for amortization of discount or premium in all cases and circumstances.
B. Provides the same amount of interest expense each period as does the effective interest method.
C. Is appropriate for deep discount bonds.
D. Provides the same total amount of interest expense over the life of the bond issue as does the
effective interest method.

26. An amortization schedule for bonds issued at a premium:

A. Summarizes the amortization of the premium, a contra-asset account with a credit balance.
B. Is reported in the balance sheet
C. Is a schedule that reflects the changes in the debt over its term to maturity.
D. All of the above are correct.

31. Bonds are issued on June 1 that have interest payment dates of April 1 and October 1. Bond interest
expense for the year ended December 31, 2011, is for a period of:

A. Three months.
B. Four months.
C. Six months.
D. Seven months.

32.Ordinarily, the proceeds from the sale of a bond issue will be equal to:

A. The face amount of the bond.

B. The total of the face amount plus all interest payments.
C. The present value of the face amount plus the present value of the stream of interest payments.
D. The face amount of the bond plus the present value of the stream of interest payments.

33.A $500,000 bond issue sold for 98. Therefore, the bonds:
A. Sold at a discount because the stated rate of interest was lower than the effective rate.
B. Sold for the $500,000 face amount less $10,000 of accrued interest.
C. Sold at a premium because the stated rate of interest was higher than the yield rate.
D. Sold at a discount because the effective interest rate was lower than the face rate.

34.When the interest payment dates are March 1 and September 1, and the bonds are issued on July 1,
the amount of interest expense reported in the December 31 income statement for the year of issue
would be for:
A. Six months.
B. Four months.
C. Ten months.
D. Twelve months.

37.For a bond issue that sells for more than the bond face amount, the effective interest rate is:
A. The rate printed on the face of the bond.
B. The Wall Street Journal prime rate.
C. More than the rate stated on the face of the bond.
D. Less than the rate stated on the face of the bond.

38.When bonds are sold at a premium and the effective interest method is used, at each subsequent
interest payment date, the cash paid is:
A. Less than the effective interest.
B. Equal to the effective interest.
C. Greater than the effective interest.
D. More than if the bonds had been sold at a discount.

39.When bonds are sold at a discount and the effective interest method is used, at each subsequent
interest payment date, the cash paid is:
A. More than the effective interest.
B. Less than the effective interest.
C. Equal to the effective interest.
D. More than if the bonds had been sold at a premium.

40.When bonds are sold at a discount and the effective interest method is used, at each interest
payment date, the interest expense:
A. Increases.
B. Decreases.
C. Remains the same.
D. Is equal to the change in book value.

41.When bonds are sold at a premium and the effective interest method is used, at each interest
payment date, the interest expense:
A. Remains constant.
B. Is equal to the change in book value.
C. Increases.
D. Decreases.
42.When bonds are sold at a discount, if the annual straight-line amortization amount is compared to
the annual effective interest amortization amount over the life of the bond issue, the annual amount of
the straight-line amortization of discount is:
A. Higher than the effective interest amount every year.
B.Higher than the effective interest amount in the early years and less than the effective interest
amount in the later years.
C.Less than the effective interest amount in the early years and more than the effective interest
amount in the later years.
D. Less than the effective interest amount every year.
49.Zero-coupon bonds
A. offer a return in the form of a deep discount off the face value.
B. result in zero interest expense for the issuer.
C. result in zero interest revenue for the investor.
D. are reported as shareholders' equity by the issuer.

50.The market price of a bond issued at a discount is the present value of its principal amount at the
market (effective) rate of interest
A. Less the present value of all future interest payments at the rate of interest stated on the bond.
B. Plus the present value of all future interest payments at the rate of interest stated on the bond.
C. Plus the present value of all future interest payments at the market (effective) rate of interest.
D. Less the present value of all future interest payments at the market (effective) rate of interest.

75.In each succeeding payment on an installment note:

A. The amount of interest paid increases.
B. The amount of principal paid increases.
C. The amount of interest paid is unchanged.
D. The amounts paid for both interest and principal increase proportionately.

76.When a long-term note is given in exchange for equipment, the amount considered as paid for the
machine is:
A. The invoice price.
B. The wholesale price.
C. The present value of cash outflows discounted at the stated rate.
D. The present value of the note payments discounted at the market rate.

77.When the interest payment dates are March 1 and September 1, and notes are issued on July 1, the
amount of interest expense to be accrued at December 31 of the year of issue would:
A. Not be required.
B. Be for six months.
C. Be for four months.
D. Be for ten months.

78.When an equipment dealer receives a long-term note in exchange for equipment, the present value
of the future cash flows received on the notes:
A. Is treated as a current liability at the exchange date.
B. Is recorded as interest revenue at the exchange date.
C. Is recorded as interest receivable at the exchange date.
D. Is credited to sales revenue at the exchange date.

80.To evaluate the risk and quality of an individual bond issue, savvy investors rely heavily on:
A. Bond ratings provided by financial investment services such as Moody's.
B. Newspaper articles.
C. Bond interest payments.
D. The company's audit report.
81.Which of the following indicates the margin of safety provided to creditors?
A. Rate of return on shareholders' equity.
B. Times interest earned ratio.
C. Gross margin.
D. Debt to equity ratio.

82. Bonds payable should be reported as a long-term liability in the balance sheet of the issuing
corporation at the:
A. Face amount price less any unamortized discount or plus any unamortized premium.
B. Current bond market price.
C. Face amount less any unamortized premium or plus any unamortized discount.
D. Face amount less accrued interest since the last interest payment date.

83.The unamortized balance of discount on bonds payable is reported in the balance sheet as:
A. A prepaid expense.
B. An expense account.
C. A current liability.
D. A contra-liability.

84. Eagle Company issued ten-year bonds at 96 during the current year. In the year-end financial
statements, the discount should be:
A. Deducted from bonds payable.
B. Added to bonds payable.
C. Included as an expense in the year of issue.
D. Reported as a deferred charge.

BONDS PAYABLE

Easy:

1. A bond indenture is
 a. a contract between the corporation issuing the bonds and the underwriters selling the
bonds
b. a contract between the corporation issuing the bonds and the bond trustee, who is acting
on behalf of the bondholders.
c. the amount due at the maturity date of the bonds
d. the amount for which the corporation can buy back the bonds prior to the maturity date

2. An unsecured bond is the same as a

a. term bond.
b. zero coupon bond.
c. debenture bond.
d. bond indenture.

3. Bonds that are subject to retirement at a stated peso amount prior to maturity at the option
of the issuer are called

a. options.
b. early retirement bonds.
c. Debentures
d. callable bonds.

4. When the effective-interest method is used, the amortization of the bond premium

a. has no effect on the interest expense in any period

b. increases interest expense each period
c. increases interest expense in some periods and decreases interest expense in other
periods
d. decreases interest expense each period

5. The Torrez Corporation issues 1,000, 10-year bonds, 8%, P1,000 bonds dated January 1, 2017,
at 97. The journal entry to record the issuance will show a

a. debit to Cash of P1,000,000.

b. credit to Cash for P970,000.
c. credit to Bonds Payable for P1,000,000.
d. credit to Discount on Bonds Payable for P30,000.

6. If the market rate of interest is greater than the contractual rate of interest, bonds will sell

a. at a discount.
b. at face value.
c. at a premium.
 d. only after the stated rate of interest is increased.

7. On January 1, 2017, P1,000,000, 5-year, 10% bonds, were issued for P970,000. Interest is paid
semiannually on January 1 and July 1. If the issuing corporation uses the straight-line
method to amortize discount on bonds payable, the semiannual amortization amount is

a. P6,000
b. P3,000
c. P5,000
d. P5,808

8. Sinking Fund Income is reported in the income statement as

a. gain on sinking fund transactions

b. other income
c. income from operations
d. extraordinary

9. On June 1, P400,000 of bonds were purchased as a long-term investment at 101 and P500
was paid as the brokerage commission. If the bonds bear interest at 12%, which is paid
semiannually on January 1 and July 1, what is the total cost to be debited to the investment
account?

a. 401,500
b. 400,000
c. 403,500
d. 404,500

10. When a corporation issues bonds, the price that buyers are willing to pay for the bonds does
not depend on which of the following below

a. market rate of interest

b. face value of the bonds
c. denominations the bonds are sold
d. periodic interest to be paid on the bonds

11. If P1,000,000 of 8% bonds are issued at 102 1/2, the amount of cash received from the sale is

a. 1,080,000
b. 975,000
c. 1,000,000
d. 1,025,000
12. Debenture bonds are

a. issued on the general credit of the corporation and do not pledge specific assets as
collateral.
b. issued only by the federal government
c. bonds secured by specific assets of the issuing corporation
d. bonds that have a single maturity date

13. When the bonds are sold for more than their face value, the carrying value of the bonds is
equal to

a. face value plus the unamortized discount

b. face value minus the unamortized premium
c. face value plus the unamortized premium
d. face value

14. The balance in Discount on Bonds Payable that is applicable to bonds due in 2020 would be
reported on the balance sheet in the section entitled

a. intangible assets
b. current assets
c. long-term liabilities
d. current liabilities

15. Bonds with a face amount P1,000,000, are sold at 97. The entry to record the issuance is

a. Cash (970,000); Premium on Bonds Payable (30,000); Bonds Payable (1,000,000)

b. Cash (1,000,000); Premium on Bonds Payable (30,000); Bonds Payable (970,000)
c. Cash (970,000); Discount on Bonds Payable (30,000); Bonds Payable (1,000,000)
d. Cash (970,000); Bonds Payable (970,000)

16. If bonds payable are not callable, the issuing corporation

a. must get special permission from the SEC to repurchase them

b. is more likely to repurchase them if the interest rates increase
c. cannot repurchase them before maturity
d. can repurchase them in the open market

17. Bonds payable issued with scheduled maturities at various dates are called

a. Serial bonds
b. Term bonds
c. Callable bonds
 d. Convertible bond

18. If P3,000,000 of 10% bonds are issued at 97, the amount of cash received from the sale is

a. 3,300,000
b. 2,910,000
c. 3,090,000
d. 3,000,000

19. The journal entry a company records for the issuance of bonds when the contract rate and
the market rate are the same is

a. debit Cash, credit Premium on Bonds Payable and Bonds Payable

b. debit Cash and Discount on Bonds Payable, credit Bonds Payable
c. debit Bonds Payable, credit Cash
d. debit Cash, credit Bonds Payable

20. The amortization of discount on bonds purchased as a long-term investment

a. decreases the amount of interest expense

b. increases the amount of the investment account
c. increases the amount of interest expense
d. decreases the amount of the investment account

21. The cash and securities comprising a sinking fund established to redeem bonds at maturity
in 2020 should be classified on the balance sheet as

a. current assets
b. intangible assets
c. investments
d. fixed assets

22. The balance in Premium on Bonds Payable

a. should be reported in the paid-in capital section of the balance sheet

b. should be allocated to the remaining periods for the life of the bonds by the straight-line
method, if the results obtained by that method materially differ from the results that
would be obtained by the interest method
c. would be added to the related bonds payable on the balance sheet
d. should be reported on the balance sheet as a deduction from the related bonds payable

23. Sinking Fund Cash would be classified on the balance sheet as

 a. an investment
b. a current asset
c. a fixed asset
d. an intangible asset

24. If bonds are issued at a discount, it means that the

a. market interest rate is lower than the contractual interest rate.

b. financial strength of the issuer is suspect.
c. bondholder will receive effectively less interest than the contractual rate of interest.
d. market interest rate is higher than the contractual interest rate.

25. If the market rate of interest is 10%, a P10,000, 12%, 10-year bond that pays interest
semiannually would sell at an amount

a. less than face value.

b. equal to the face value.
c. that cannot be determined.
d. greater than face value.

26. If the straight-line method of amortization of bond premium or discount is used, which of
the following statements is true?

a. Annual interest expense will decrease over the life of the bonds with the amortization of
bond discount.
b. Annual interest expense will remain the same over the life of the bonds with the
amortization of bond discount.
c. Annual interest expense will increase over the life of the bonds with the amortization of
bond premium.
d. Annual interest expense will increase over the life of the bonds with the amortization of
bond discount.

27. The market interest rate related to a bond is also called the

a. straight-line rate
b. contract interest rate
c. effective interest rate
d. stated interest rate

28. A legal document that indicates the name of the issuer, the face value of the bond and such
other data is called

a. a bond indenture.
 b. convertible bond.
c. trading on the equity.
d. a bond certificate.

29. A corporation would not be successfully trading on equity if it gathered funds by

a. issuing common stock

b. issuing bonds
c. issuing notes
d. issuing preferred stock

30. The account Investment in Bonds is reported

a. at cost as a long-term asset

b. at cost as a long-term asset less Discount on Bond Investments or plus Premium on Bond
Investments
c. at fair market value because that is all that is required
d. at cost as a long-term liability along with the current portion reported as a current
liability

31. The amortization of premium on bonds purchased as a long-term investment

a. decreases the amount of the investment account

b. increases the amount of interest revenue
c. increases the amount of the investment account
d. decreases the amount of interest expense

32. Any unamortized premium should be reported on the balance sheet of the issuing
corporation as

a. a direct deduction from the face amount of the bonds in the liability section
b. a direct deduction from retained earnings
c. an addition to the face amount of the bonds in the liability section
d. as paid-in capital

33. One potential advantage of financing corporations through the use of bonds rather than
common stock is

a. the interest expense is deductible for tax purposes by the corporation

b. the interest on bonds must be paid when due
c. the corporation must pay the bonds at maturity
d. a higher earnings per share is guaranteed for existing common shareholders
34. Sinking Fund Investments would be classified on the balance sheet as

a. a current asset
b. an investment
c. a deferred debit
d. a fixed asset

35. If P1,000,000 of 8% bonds are issued at 103, the amount of cash received from the sale is

a. P1,000,000
b. P 970,000
c. P1,030,000
d. P1,060,000

36. If bonds are initially sold at a discount and the straight line method of amortization is used,
interest expense in the earlier years

a. Will be less than the coupon rate of interest.

b. Will be less than what it would have been had the scientific method of amortization
been used
c. Will be the same as what it would have been had the scientific method of amortization
been used
d. Will exceed what it would have been had the scientific method of amortization been
used

37. Bonds with a face value of P3 million and a stated interest rate of 12% payable semi-
annually on March 1 and September 1 were purchased on August 1. The total payments for
the purchase equal P3,000,000. The best explanation for the excess amount paid over face
value is that

a. The bonds were purchased at face value plus accrued interest

b. The bonds were purchased at a premium
c. No explanation is possible without knowing the maturity date of the bond issue.
d. The bonds were purchased at a discount plus accrued interest

38. The bond indenture may provide that funds for the payment of bonds at maturity be
accumulated over the life of the issue. The amounts set aside are kept separate from other
assets in a special fund called a(n)

a. sinking fund
b. special assessments fund
c. general fund
d. enterprise fund
39. If you elect to not take a discount on trade credit, the effective interest rate on the funds thus
obtained __________ as the time you take to pay increases

a. remains constant
b. falls
c. falls first, then rises
d. rises

40. If the market rate of interest is 8%, the price of 6% bonds paying interest semiannually with
a face value of P100,000 will be

a. Less than P100,000

b. Equal to P100,000
c. Greater than P100,000
d. Greater than or less than P100,000, depending on the maturity date of the bonds

41. The Royce Corporation issues 1,000, 10-year bonds, 8%, P1,000 bonds dated January 1, 2017,
at 97. The journal entry to record the issuance will show a

a. credit to Bonds Payable for P970,000.

b. credit to Cash for P970,000.
c. debit to Cash of P1,000,000.
d. debit to Discount on Bonds Payable for P30,000.

42. Debtors are interested in the times-interest-earned ratio because they want to

a. know what rate of interest the corporation is paying

b. be sure their debt is backed by collateral
c. have adequate protection against a potential drop in earnings jeopardizing their interest
payments
d. know the tax effect of lending to a corporation

43. The interest rate specified in the bond indenture is called the

a. effective rate
b. discount rate
c. contract rate
d. market rate

44. The Tomas Corporation issues 1,000, 10-year bonds, 8%, P1,000 bonds dated January 1, 2017,
at 97. The journal entry to record the issuance will show a
 a. debit to Cash for P970,000.
b. credit to Discount on Bonds Payable for P30,000.
c. debit to Cash of P1,000,000.
d. credit to Bonds Payable for P970,000.

45. The balance in Discount on Bonds Payable

a. would be subtracted from the related bonds payable on the balance sheet
b. should be allocated to the remaining periods for the life of the bonds by the straight-line
method, if the results obtained by that method materially differ from the results that
would be obtained by the interest method
c. would be added to the related bonds payable to determine the carrying amount of the
bonds
d. should be reported on the balance sheet as an asset because it has a debit balance

46. A corporation issues for cash P14,000,000 of 8%, 20-year bonds, interest payable annually, at
a time when the market rate of interest is 9%. The straight-line method is adopted for the
amortization of bond discount or premium. Which of the following statements is true?

a. The amount of annual interest paid to bondholders remains the same over the life of the
bonds.
b. The carrying amount decreases from its amount at issuance date to P14,000,000 at
maturity.
c. The amount of annual interest expense decreases as the bonds approach maturity.
d. The amount of annual interest paid to bondholders increases over the 20-year life of the
bonds.

47. When the corporation issuing the bonds has the right to repurchase the bonds prior to the
maturity date for a specific price, the bonds are

a. callable bonds
b. convertible bonds
c. unsecured bonds
d. debenture bonds

48. When callable bonds are redeemed below carrying value

a. Retained Earnings is credited

b. Loss on Redemption of Bonds is debited
c. Gain on Redemption of Bonds is credited
d. Retained Earnings is debited

49. Bonds usually sell at a discount when investors are willing to invest in the bonds
 a. At the coupon interest rate
b. At rate lower than the stated interest rate
c. When the need arises.
d. At rate higher than the stated interest rate

50. On June 1, P400,000 of bonds were purchased as a long-term investment at 97 and P500 was
paid as the brokerage commission. If the bonds bear interest at 12%, which is paid
semiannually on January 1 and July 1, what is the total cost to be debited to the investment
account?

a. 400,000
b. 388,000
c. 388,500
d. 400,500

51. A corporation issues for cash P1,000,000 of 10%, 20-year bonds, interest payable annually, at
a time when the market rate of interest is 12%. The straight-line method is adopted for the
amortization of bond discount or premium. Which of the following statements is true?

a. The amount of the annual interest expense gradually decreases over the life of the
bonds.
b. The amount of unamortized premium decreases from its balance at issuance date to a
zero balance at maturity.
c. The amount of the annual interest expense is computed at 10% of the bond carrying
amount at the beginning of the year.
d. The amount of unamortized discount decreases from its balance at issuance date to a
zero balance at maturity.

52. When the market rate of interest on bonds is higher than the contract rate, the bonds will
sell at

a. their face value

b. their maturity value
c. a premium
d. a discount

53. If bonds are issued at a premium, the stated interest rate is

a. lower than the market rate of interest.

b. higher than the market rate of interest.
c. adjusted to a higher rate of interest.
d. too low to attract investors.
54. A long-term investment in debt securities is carried at

a. equity
b. market
c. lower of cost or market
d. cost

55. On July 1, 2013, Rex Company purchased as a long-term investment P5,000,000 face value,
8% bonds for P4,615,000 to yield 10% per year. The bonds pay interest semiannually on
January 1 and July 1. On December 31, 2013, what amount should be reported as accrued
interest receivable?

a. 230,750
b. 0
c. 200,000
d. 400,000

SOLUTION:

5,000,000 x 8% x 6/12= 200,000

56. When the maturities of a bond issue are spread over several dates, the bonds are called

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

57. Sinking Fund Cash would be classified on the balance sheet as

a. a fixed asset
b. an intangible asset
c. an investment
d. a current asset

Average:

58. Bonds that are secured by investment in equity securities are called

a. Term bonds
b. Collateral trust bonds
 c. Debenture bonds
d. Commodity-backed bonds

59. The journal entry a company records for the issuance of bonds when the contract rate is
greater than the market rate would be

a. debit Cash and Discount on Bonds Payable, credit Bonds Payable

b. debit Cash, credit Premium on Bonds Payable and Bonds Payable
c. debit Bonds Payable, credit Cash
d. debit Cash, credit Bonds Payable

60. Long-term debt that matures within one year and is to be converted into stock should be
reported

a. as noncurrent
b. in a special section between liabilities and stockholders’ equity
c. as noncurrent and accompanied with a note explaining the method to be used in its
liquidation
d. as a current liability

61. The present value of P40,000 to be received in one year, at 6% compounded annually, is
(rounded to nearest peso)

a. 40,000
b. 2,400
c. 42,400
d. 37,736

62. Cedric Company issues P10,000,000 face value of bonds at 96 on January 1, 2009. The bonds
are dated January 1, 2009, pay interest semiannually at 8% on June 30 and December 31, and
mature in 10 years. Straight-line amortization is used for discounts and premiums. On
September 1, 2012, P6,000,000 of the bonds are called at 102 plus accrued interest. What gain
or loss would be recognized on the called bonds on September 1, 2012?

a. P453,333 loss
b. P360,000 loss
c. P272,000 loss
d. P600,000 loss

SOLUTION:

{P9,600,000 + [P400,000 × (3 2/3 ÷ 10)]} × .60 = P5,848,000 P6,120,000 - P5,848,000 = P272,000

63. The Saymore Company issued 10-year bonds on January 1, 2017. The 6% bonds have a face
value of P800,000 and pay interest every January 1 and July 1. The bonds were sold for
P690,960 based on the market interest rate of 8%. Saymore uses the effective-interest method
to amortize bond discounts and premiums. On July 1, 2017, Saymore should record interest
expense (round to the nearest peso) of

a. 55,277
b. 24,000
c. 27,638
d. 48,000

64. On July 1, 2010, Joven Co. issued 1,000 of its 10%, P1,000 bonds at 99 plus accrued interest.
The bonds are dated April 1, 2010 and mature on April 1, 2020. Interest is payable
semiannually on April 1 and October 1. What amount did Joven receive from the bond
issuance?

a. 965,000
b. 1,000,000
c. 1,015,000
d. 990,000

SOLUTION:

(P1,000,000 × .99) + (P1,000,000 × .10 × 3/12) = P1,015,000

65. An entity neglected to amortize the premium on outstanding bonds payable. What is the
effect of the failure to record premium amortization on interest expense and bond carrying
value, respectively?

a. Understate and overstate

b. Overstate and understate
c. Understate and understate
d. Overstate and overstate

66. The 10% bonds payable of Francis Company had a net carrying amount of P5,700,000 on
December 31, 2012. The bonds, which had a face value of P6,000,000, were issued at a
discount to yield 12%. The amortization of the bond discount was recorded under the
effective-interest method. Interest was paid on January 1 and July 1 of each year. On July 1,
2013, several years before the maturity, Francis retired the bonds at 102. The interest
payment on Juy 1, 2013 was made as scheduled. What amount should be recorded as loss on
the early retirement of the bonds on July 1, 2013?

a. 336,000
 b. 120,000
c. 420,000
d. 378,000

67. Balance sheet and income statement data indicate the following:

Bonds payable, 8% (issued 1990, due 2015) P1,200,000

Preferred 8% stock, P100 par (no change during the year) 200,000
Common stock, P50 par (no change during the year) 1,000,000
Income before income tax for year 320,000
Income tax for year 80,000
Common dividends paid 60,000
Preferred dividends paid 16,000

What is the number of times bond interest charges were earned (round to two decimal
places)?

a. 4.33
b. 5.67
c. 3.24
d. 3.50

68. Tim Corporation retires its P100,000 face value bonds at 102 on January 1, following the
payment of interest. The carrying value of the bonds at the redemption date is P96,250. The
entry to record the redemption will include a

a. debit of P5,750 to Gain on Bond Redemption

b. credit of P3,750 to Loss on Bond Redemption
c. debit of P2,000 to Premium on Bonds Payable
d. credit of P3,750 to Discount on Bonds Payable

SOLUTION:

P100,000 - P96,250 = P3,750 discount

69. In current accounting practice, the valuation method used for bonds payable is

a. Historical cost
b. Discounted cash flow valuation at current yield rate
c. Maturity amount
d. Discounted cash flow valuation at yield rate at issuance
70. On January 1, 2011, Garry Co. redeemed its 15-year bonds of P2,500,000 par value for 102.
They were originally issued on January 1, 1999 at 98 with a maturity date of January 1, 2014.
The bond issue costs relating to this transaction were P150,000. Garry amortizes discounts,
premiums, and bond issue costs using the straight-line method. What amount of loss should
Garry recognize on the redemption of these bonds (ignore taxes)?

a. 0
b. 90,000
c. 60,000
d. 50,000

SOLUTION:

(P2,500,000 × 1.02) - (2,300,000 + (200,000)/15 x 12) = 90,000

71. On July 1, 2009, Keann, Inc. issued 9% bonds in the face amount of P5,000,000, which mature
on July 1, 2015. The bonds were issued for P4,695,000 to yield 10%, resulting in a bond
discount of P305,000. Keann uses the effective-interest method of amortizing bond discount.
Interest is payable annually on June 30. At June 30, 2011, Keann's unamortized bond
discount should be

a. 244,000
b. 215,000
c. 264,050
d. 255,000

SOLUTION:

2009 - 2010 P4,695,000 + [(P4,695,000 × .1) - (P5,000,000 × .09)]= P4,714,500

2010 - 2011 P4,714,500 + (P471,450 – P450,000) = P4,735,950
P5,000,000 - P4,735,950 = P264,050

72. Brandon Co. is indebted to Cole under a P400,000, 12%, three-year note dated December 31,
2009. Because of Brandon's financial difficulties developing in 2011, Brandon owed accrued
interest of P48,000 on the note at December 31, 2011. Under a troubled debt restructuring, on
December 31, 2011, Cole agreed to settle the note and accrued interest for a tract of land
having a fair value of P360,000. Brandon's acquisition cost of the land is P290,000. Ignoring
income taxes, on its 2011 income statement Brandon should report as a result of the troubled
debt restructuring

a. Gain on Disposal (70,000); Restructuring Gain (88,000)

b. Gain on Disposal (110,000); Restructuring Gain (0)
c. Gain on Disposal (70,000; Restructuring Gain (40,000)
 d. Gain on Disposal (158,000); Restructuring Gain (0)

SOLUTION:

P360,000 - P290,000 = P70,000

(P400,000 + P48,000) - P360,000 = P88,000

73. A P300,000 bond was redeemed at 98 when the carrying value of the bond was P296,000.
The entry to record the redemption would include a

a. loss on bond redemption of P2,000.

b. gain on bond redemption of P4,000.
c. loss on bond redemption of P4,000.
d. gain on bond redemption of P2,000.

74. On October 1, 2010 Ace Corporation issued 5%, 10-year bonds with a face value of P500,000
at 104. Interest is paid on October 1 and April 1, with any premiums or discounts amortized
on a straight-line basis.

The entry to record the issuance of the bonds would include a

a. credit of P12,500 to interest Payable

b. credit of P20,000 to Premium on Bonds Payable
c. credit of P480,000 to Bonds Payable
d. debit of P20,000 to Discount on Bonds Payable

SOLUTION:

(P500,000 × 1.04) - P500,000 = P20,000 premium

75. The Raymore Company issued 10-year bonds on January 1, 2017. The 15% bonds have a face
value of P100,000 and pay interest every January 1 and July 1. The bonds were sold for
P117,205 based on the market interest rate of 12%. Raymore uses the effective-interest
method to amortize bond discounts and premiums. On July 1, 2017, Raymore should record
interest expense (round to the nearest peso) of

a. 7,500
b. 14,065
c. 7,032
d. 8,790

76. The proceeds from bonds issued with nondetachable share warrants shall he accounted for
 a. Partly as bonds payable and partly as shareholders’ equity
b. Entirely as bonds payable
c. Partly, us unearned revenue and partly as bonds payable
d. Entirely as shareholders' equity

77. Which of the following is true of accrued interest on bonds that are sold between interest
dates?

a. The accrued interest will be paid to the seller when the bonds mature
b. The accrued interest is computed at the effective rate
c. The accrued interest is extra income to the buyer
d. None of the above

78. Zern Corporation retires its P100,000 face value bonds at 105 on January 1, following the
payment of interest. The carrying value of the bonds at the redemption date is P103,745. The
entry to record the redemption will include a

a. debit of P3,745 to Premium on Bonds Payable

b. credit of P3,745 to Loss on Bond Redemption
c. debit of P5,000 to Premium on Bonds Payable
d. credit of P1,255 to Gain on Bond Redemption

SOLUTION:

P103,745 - P100,000 = P3,745 premium

79. The entry to record the amortization of a premium on bonds payable is

a. debit Bonds Payable, credit Interest Expense

b. debit Interest Expense, credit Premium on Bond Payable
c. debit Interest Expense, debit Premium on Bonds Payable, credit Cash
d. debit Premium on Bonds Payable, credit Interest Expense Commented [u1]: For me, this is the best answer since the
question only asks for the amortization of the premium not
also for the payment of the interest.
80. Bonds Payable has a balance of P1,000,000 and Premium on Bonds Payable has a balance of
P8,000. If the issuing corporation redeems the bonds at 101, what is the amount of gain or
loss on redemption?

a. P8,000 gain
b. P2,000 gain
c. P2,000 loss
d. P8,000 loss
81. On January 1, 2006, Vino Corp. issued 1,000 of its 10%, P1,000 bonds for P1,040,000. These
bonds were to mature on January 1, 2016 but were callable at 101 any time after December
31, 2009. Interest was payable semiannually on July 1 and January 1. On July 1, 2011, Vino
called all of the bonds and retired them. Bond premium was amortized on a straight-line
basis. Before income taxes, Vino's gain or loss in 2011 on this early extinguishment of debt
was

a. P 8,000 gain
b. P30,000 gain
c. P12,000 gain
d. P10,000 loss

SOLUTION:

1,040,000 - (40,000/20) x 11) - (1,000,000 x 1.01) = 8,000

82. To compute the price to pay for a bond, what present value concept is used?

a. Only the present value Of 1 concept

b. Both the present value of 1 concept and present value of an annuity of 1 concept
c. Only the present value of an annuity of 1 concept
d. Neither the present value of 1 concept 'nor the present value of annuity of 1 concept

83. Bonds that are secured by investment in equity securities are called

a. Term bonds
b. Collateral trust bonds
c. Debenture bonds
d. Commodity-backed bonds

84. The 10% bonds payable of Nikki Company had a net carrying amount of P570,000 on
December 31, 2012. The bonds, which had a face value of P600,000, were issued at a discount
to yield 12%. The amortization of the bond discount was recorded under the effective-
interest method. Interest was paid on January 1 and July 1 of each year. On July 2, 2013,
several years before their maturity, Nikki retired the bonds at 102. The interest payment on
July 1, 2013 was made as scheduled. What amount should be recorded as loss on the early
retirement of the bonds on July 2, 2013?

a. 12,000
b. 42,000
c. 37,800
d. 33,600
85. A corporation issues P100,000, 8%, 5-year bonds on January 1, 2017, for P104,200. Interest is
paid semiannually on January 1 and July 1. If the corporation uses the straight-line method
of amortization of bond premium, the amount of bond interest expense to be recognized on
July 1, 2017, is

a. P4,420.
b. P3,580.
c. P4,000.
d. P8,420.

86. On January 1, 2010, Gerald Company sold property to Gabriel Company. There was no
established exchange price for the property, and Gabriel gave Gerald a P2,000,000 zero-
interest-bearing note payable in 5 equal annual installments of P400,000, with the first
payment due December 31, 2010. The prevailing rate of interest for a note of this type is 9%.
The present value of the note at 9% was P1,442,000 at January 1, 2010. What should be the
balance of the Discount on Notes Payable account on the books of Gabriel at December 31,
2010 after adjusting entries are made, assuming that the effective-interest method is used?

a. 428,220
b. 558,000
c. 0
d. 446,400

SOLUTION:

P2,000,000 - P1,442,000 - (P1,442,000 × .09) = P428,220

87. The journal entry a company records for the issuance of bonds when the contract rate is less
than the market rate would be

a. debit Cash and Discount on Bonds Payable, credit Bonds Payable

b. debit Cash, credit Bonds Payable
c. debit Cash, credit Premium on Bonds Payable and Bonds Payable
d. debit Bonds Payable, credit Cash

88. On January 1, 2010, David loaned P45,078 to Jacob. A zero-interest-bearing note (face
amount, P60,000) was exchanged solely for cash; no other rights or privileges were
exchanged. The note is to be repaid on December 31, 2012. The prevailing rate of interest for
a loan of this type is 10%. The present value of P60,000 at 10% for three years is P45,078.
What amount of interest income should David recognize in 2010?

a. 6,000
b. 18,000
 c. 13,524
d. 4,508

SOLUTION:

P45,078 × .10 = P4,508

89. On its December 31, 2010 balance sheet, Ren Corp. reported bonds payable of P6,000,000
and related unamortized bond issue costs of P320,000. The bonds had been issued at par. On
January 2, 2011, Ren retired P3,000,000 of the outstanding bonds at par plus a call premium
of P70,000. What amount should Ren report in its 2011 income statement as loss on
extinguishment of debt (ignore taxes)?

a. 160,000
b. 230,000
c. 70,000
d. 0

SOLUTION:

(P3,000,000 + P70,000) - [(P6,000,000 - P320,000) × 1/2] = P230,000

90. Bonds Payable has a balance of P1,000,000 and Discount on Bonds Payable has a balance of
P15,500. If the issuing corporation redeems the bonds at 99, what is the amount of gain or
loss on redemption?

a. P 5,500 loss
b. P15,500 gain
c. P 5,500 gain
d. P15,500 loss

91. Which of the following is true for a bond maturing on a single date when the effective
interest method of amortizing bond discount is used?

a. Interest expense remains constant each 6 month period

b. Interest expense as a percentage of the bond’s book value varies from period to period
c. Interest expense increases each 6 month period
d. Nominal interest rate exceeds effective interest rate

92. A ten-year bond was issued in 2009 at a discount with a call provision to retire the bonds.
When the bond issuer exercised the call provision on an interest date in 2011, the carrying
amount of the bond was less than the call price. The amount of bond liability removed from
the accounts in 2011 should have equaled the
 a. call price
b. call price less unamortized discount
c. face amount less unamortized discount
d. face amount plus unamortized discount

93. Costs incurred in connection with the issuance of ten-year bonds which sold at a slight
premium shall be

a. Expensed in the year in which incurred

b. Reported in the balance sheet as a deduction from bonds payable and amortized over
the ten-year bond term
c. Capitalized as organization cost
d. Charged to retained earnings when the bonds are issued

94. On January 1, 2013, Romeo Co. issued eight-year bonds with a face value of P1,000,000 and
a stated interest rate of 6%, payable semiannually on June 30 and December 31. The bonds
were sold to yield 8%. Table values are:

Present value of 1 for 8 periods at 6% .627

Present value of 1 for 8 periods at 8% .540
Present value of 1 for 16 periods at 3% .623
Present value of 1 for 16 periods at 4% .534
Present value of annuity for 8 periods at 6% 6.210
Present value of annuity for 8 periods at 8% 5.747
Present value of annuity for 16 periods at 3% 12.561
Present value of annuity for 16 periods at 4% 11.652

The issue price of the bonds is

a. 889,560
b. 999,600
c. 883,560
d. 884,820

SOLUTION:

534,000 + 349,560 = 883,560

95. The market price of a bond issued at a discount is the present value of its principal amount
at the market rate of interest
 a. Plus the present value of all future interest payments at the rate of interest stated on the
bond
b. Less the present value of all future interest payments at the market rate of interest
c. Plus the present value of all future interest payments at the market rate of interest
d. Less the present value of all future interest payments at the rate of interest stated on the
bond

96. When bonds are sold between interest dates, any accrued interest is credited to

a. Interest payable
b. Bonds payable
c. Interest receivable
d. Interest revenue

97. When interest expense is calculated using the effective interest method, interest expense
equal the

a. Maturity value of the bonds multiplied by the effective interest rate

b. Actual amount of interest paid
c. Book value of the bonds multiplied by the stated interest rate
d. Book value of the bonds multiplied by the effective interest rate

98. Bonds Payable has a balance of P1,000,000 and Discount on Bonds Payable has a balance of
P12,500. If the issuing corporation redeems the bonds at 98, what is the amount of gain or
loss on redemption?

a. P 7,500 gain
b. P34,500 loss
c. P 7,500 loss
d. P34,500 gain

99. The present value of P30,000 to be received in two years, at 12% compounded annually, is
(rounded to nearest peso)

a. 37,632
b. 30,000
c. 23,700
d. 23,916

100. On January 1, 2010, Kei Co. sold P1,000,000 of its 10% bonds for P885,296 to yield 12%.
Interest is payable semiannually on January 1 and July 1. What amount should Kei report as
interest expense for the six months ended June 30, 2010?
 a. 50,000
b. 60,000
c. 53,118
d. 44,266

SOLUTION:

P885,296 × .06 = P53,118

101. Balance sheet and income statement data indicate the following:

Bonds payable, 6% (issued 2000, due 2020) P1,200,000

Preferred 8% stock, P100 par (no change during the year) 200,000
Common stock, P50 par (no change during the year) 1,000,000
Income before income tax for year 340,000
Income tax for year 80,000
Common dividends paid 60,000
Preferred dividends paid 16,000

What is the number of times bond interest charges were earned (round to two decimal
places)?

a. 4.72
b. 5.72
c. 6.83
d. 4.83

102. The proceeds from a bond issued with nondetachable share warrants shallbe accounted
for

a. Entirely as shareholders’ equity

b. Partly as unearned revenue and partly as bonds payable
c. Entirely as bonds payable
d. Partly as bonds payable and partly as stockholders’ equity

103. Bonds Payable has a balance of P900,000 and Premium on Bonds Payable has a balance
of P10,000. If the issuing corporation redeems the bonds at 102, what is the amount of gain
or loss on redemption?

a. P1,100 gain
b. P1,100 loss
c. P8,000 gain
d. P8,000 loss
104. On January 1, 2010, Jomar Co. issued its 10% bonds in the face amount of P3,000,000,
which mature on January 1, 2020. The bonds were issued for P3,405,000 to yield 8%,
resulting in bond premium of P405,000. Jomar uses the effective-interest method of
amortizing bond premium. Interest is payable annually on December 31. At December 31,
2010, Jomar's adjusted unamortized bond premium should be

a. 364,500
b. 304,500
c. 377,400
d. 405,000

SOLUTION:

P405,000 - [(P3,000,000 × .10) - (P3,405,000 × .08)] = P377,400

105. The journal entry a company records for the payment of interest, interest expense, and
amortization of bond premium is

a. debit Interest Expense, credit Cash

b. debit Interest Expense, credit Interest Payable and Premium on Bonds Payable
c. debit Interest Expense, credit Cash and Premium on Bonds Payable
d. debit Interest Expense and Premium on Bonds Payable, credit Cash

106. The debt to total assets ratio is computed by dividing

a. total liabilities by total assets

b. current liabilities by total assets
c. long-term liabilities by total assets
d. total assets by total liabilities

107. An entity incurred printing and engraving, and registration cost in selling bonds. What
will be the effect of these costs on the interest rate of the bonds?

a. It will decrease the effective interest rate

b. It will increase the effective interest rate.
c. It will have no effect on either effective or nominal interest rate.
d. It will increase the nominal interest rate.

108. Selling the bonds at a premium has the effect of

a. increasing the amount of cash paid for interest each 6 months.

b. causing the total cost of borrowing to be higher than the bond interest paid.
 c. raising the effective interest rate above the stated interest rate.
d. causing the total cost of borrowing to be lower than the bond interest paid.

109. On January 1, 2013, Romeo Co. issued eight-year bonds with a face value of P1,000,000
and a stated interest rate of 6%, payable semiannually on June 30 and December 31. The
bonds were sold to yield 8%. Table values are:

Present value of 1 for 8 periods at 6% .627

Present value of 1 for 8 periods at 8% .540
Present value of 1 for 16 periods at 3% .623
Present value of 1 for 16 periods at 4% .534
Present value of annuity for 8 periods at 6% 6.210
Present value of annuity for 8 periods at 8% 5.747
Present value of annuity for 16 periods at 3% 12.561
Present value of annuity for 16 periods at 4% 1.652

The present value of the principal is

a. 534,000
b. 540,000
c. 627,000
d. 623,000

SOLUTION:

1,000,000 × .534 = 534,000

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

a. The nominal rate of interest exceeds the yield rate

b. No necessary relationship exists between the two rates
c. The yield rate of interest exceeds the nominal rate
d. The yield and nominal rates coincide

111. Which of the following is not an advantage of issuing bonds instead of common stock?

a. Tax savings result

b. Earnings per share on common stock may be lower.
c. Stockholder control is not affected.
d. Income to common shareholders may increase.

112. Cyril Company issues P5,000,000 face value of bonds at 96 on January 1, 2009. The bonds
are dated January 1, 2009, pay interest semiannually at 8% on June 30 and December 31, and
 mature in 10 years. Straight-line amortization is used for discounts and premiums. On
September 1, 2012, P3,000,000 of the bonds are called at 102 plus accrued interest. What gain
or loss would be recognized on the called bonds on September 1, 2012?

a. P136,000 loss
b. P226,667 loss
c. P180,000 loss
d. P300,000 loss

SOLUTION:

{P4,800,000 + [P200,000 × (3 2/3 ÷ 10)]} × .60 = P2,924,000 P3,060,000 - P2,924,000 = P136,000

113. An example of an item which is not a liability is

a. dividends payable in stock.

b. advances from customers on contracts.
c. accrued estimated warranty costs.
d. the portion of long-term debt due within one year

114. Note disclosures for long-term debt generally include all of the following except

a. call provisions and conversion privileges

b. restrictions imposed by the creditor
c. names of specific creditors
d. assets pledged as security

115. A 20 year bond was issued at a premium with a call provision to retire the bonds. When
the bond issuer exercised the call provision on an interest date, the call rpice exceeded the
carrying value of the bonds. The amount of the bond liability removed from the accounts
should have equaled the

a. Call price plus unamortized premium

b. Current market price
c. Cash paid
d. Face amount plus unamortized premium

116. On January 1, 2011, Kareen Company issued its 10% bonds in the face amount of
P1,000,000 that mature on January 1, 2021. The bonds were issued for P886,000 to yield 12%
resulting in bond discount of P114,000. Kareen Company uses the interest method of
amortizing bond discount. Interest is payable on January 1 and July 1.For the year ended
December 31, 2011, Kareen should report bond interest expense at
 a. 106,510
b. 50,000
c. 53,160
d. 100,000

SOLUTION:

Date Interest paid Interest expense Discount Amortization Book value

Jan 1, 2011 886,000
July 1, 2011 50,000 53,160 3,160 889,160
Jan 1, 2012 50,000 53,350 3,350 892,510
Total 100,000 106,510 6,510

Interest paid (1,000,000 x 10% x 6/12) 50,000

Interest expense
886,000 x 12% x 6/12 53,160
889,160 x 12% x 6/12 53,350
106,510

117. On January 1, 2010, Fracy Co. issued eight-year bonds with a face value of P1,000,000
and a stated interest rate of 6%, payable semiannually on June 30 and December 31. The
bonds were sold to yield 8%. Table values are:

Present value of 1 for 8 periods at 6% .627

Present value of 1 for 8 periods at 8% .540
Present value of 1 for 16 periods at 3% .623
Present value of 1 for 16 periods at 4% .534
Present value of annuity for 8 periods at 6% 6.210
Present value of annuity for 8 periods at 8% 5.747
Present value of annuity for 16 periods at 3% 12.561
Present value of annuity for 16 periods at 4% 11.652

The present value of the interest is

a. 376,830
b. 344,820
c. 372,600
d. 349,560

SOLUTION:

(P1,000,000 × .03) × 11.652 = P349,560

118. The effective interest rate on bonds is higher than the stated rate when bonds sell

a. Above face value

b. At face value
c. Below face value
d. At maturity Value

119. What is the market rate of interest for a bond issue which sells for more than its par
value?

a. Independent of rate stated on the bond

b. Equal to rate stated on the bond
c. Higher than rate stated on the bond
d. Less than rate stated on the bond

120. Willy Co. took advantage of market conditions to refund debt. This was the fourth
refunding operation carried out by Willy within the last three years. The excess of the
carrying amount of the old debt over the amount paid to extinguish it should be reported as
a

a. part of continuing operations

b. gain, net of income taxes
c. loss, net of income taxes
d. deferred credit to be amortized over the life of the new debt

121. A corporation issues for cash P1,000,000 of 8%, 20-year bonds, interest payable annually,
at a time when the market rate of interest is 7%. The straight-line method is adopted for the
amortization of bond discount or premium. Which of the following statements is true?

a. The carrying amount increases from its amount at issuance date to P1,000,000 at
maturity.
b. The amount of annual interest expense decreases as the bonds approach maturity.
c. The amount of annual interest paid to bondholders increases over the 20-year life of the
bonds.
d. The carrying amount decreases from its amount at issuance date to P1,000,000 at
maturity.

122. Which of the following must be disclosed relative to long-term debt maturities and
sinking fund requirements?

a. The amount of future payments for sinking fund requirements and long-term debt
maturities during each of the next five years
 b. The amount of scheduled interest payments on long-term debt during each of the next
five years
c. The present value of future payments for sinking fund requirements and long-term debt
maturities during each of the next five years
d. The present value of scheduled interest payments on long-term debt during each of the
next five years

123. When the market rate of interest was 12%, Newman Corporation issued P1,000,000, 11%,
10-year bonds that pay interest annually. The selling price of this bond issue was

a. 321,970
b. 943,494
c. 621,524
d. 1,000,000

124. A corporation issues for cash P8,000,000 of 8%, 30-year bonds, interest payable
semiannually. The amount received for the bonds will be

a. present value of 30 annual interest payments of P640,000

b. present value of 30 annual interest payments of P640,000, plus present value of
P8,000,000 to be repaid in 30 years
c. present value of 60 semiannual interest payments of P320,000, plus present value of
P8,000,000 to be repaid in 30 years
d. present value of P8,000,000 to be repaid in 30 years, less present value of 60 semiannual
interest payments of P320,000

125. The journal entry a company records for the payment of interest, interest expense, and
amortization of bond discount is

a. debit Interest Expense and Discount on Bonds Payable, credit Cash

b. debit Interest Expense, credit Cash and Discount on Bonds Payable
c. debit Interest Expense, credit Cash
d. debit Interest Expense, credit Interest Payable and Discount on Bonds Payable

126. The issuer of a 10 year term bond sold at par three years ago with interest payable May 1
and November 1 each year shall report in its December 31 balance sheet

a. Contingent liability
b. Liability for accrued interest
c. Addition to bonds payable
d. Increase in deferred charges
127. When the market rate of interest was 11%, Welch Corporation issued P100,000, 8%, 10-
year bonds that pay interest semiannually. Using the straight-line method, the amount of
discount or premium to be amortized each interest period would be

a. 17,926
b. 4,000
c. 896
d. 1,793

128. An entity neglected to amortize the discount on outstanding bonds payable. What is the
effect of the failure to record discount amortization on interest expense and bond carrying
value, respectively?

a. Overstate and understate

b. Overstate and overstate
c. Understate and understate
d. Understate and overstate

129. A P300,000 bond was redeemed at 103 when the carrying value of the bond was
P311,000. The entry to record the redemption would include a

a. gain on bond redemption of P9,000.

b. gain on bond redemption of P2,000.
c. loss on bond redemption of P9,000.
d. loss on bond redemption of P2,000.

130. Unamortized debt discount shall be reported in the balance sheet of the issuer as a

a. Direct deduction from the face value of the debt

b. Direct deduction from the present value of the debt
c. Deferred charge
d. Part of the issue costs

131. The entry to record the amortization of a discount on bonds payable is

a. debit Interest Expense, credit Discount on Bonds Payable

b. debit Interest Expense, credit Cash
c. debit Bonds Payable, credit Interest Expense
d. debit Discount on Bonds Payable, credit Interest Expense

132. Which of the following is true of a premium on bonds payable?

 a. The premium on bonds payable is an account that appears only on the books of the
investor
b. The premium or bonds payable is a contra stockholders’ equity account
c. The premium on bonds payable decreases when amortization entries are made until its
balance reaches zero at the maturity date.
d. The premium on bonds payable increases when amortization entries are made until it
reaches its maturity value

133. The times interest earned ratio is computed by dividing

a. income before income taxes and interest expense by interest expense

b. income before taxes by interest expense
c. net income and interest expense by interest expense
d. net income by interest expense

134. On June 30, 2011, William Co. had outstanding 8%, P3,000,000 face amount, 15-year
bonds maturing on June 30, 2021. Interest is payable on June 30 and December 31. The
unamortized balances in the bond discount and deferred bond issue costs accounts on June
30, 2011 were P105,000 and P30,000, respectively. On June 30, 2011, William acquired all of
these bonds at 94 and retired them. What net carrying amount should be used in computing
gain or loss on this early extinguishment of debt?

a. 2,820,000
b. 2,895,000
c. 2,865,000
d. 2,970,000

SOLUTION:

P3,000,000 - (P105,000 + P30,000) = P2,865,000

135. How would the amortization of premium on bonds payable affect each of the following?

a. Carrying value of the bond (Decrease); Net income (Decrease)

b. Carrying value of the bond (Increase); Net income (Increase)
c. Carrying value of the bond (Decrease); Net income (Increase)
d. Carrying value of the bond (Increase); Net income (Decrease)

136. The net amount of a bond liability that appears in the balance sheet is the

a. Face value of the bond plus related discount or minus related premium
b. Call price of the bond plus bond discount or minus bond premium
c. Face value of the bond plus related premium or minus related discount
 d. Maturity value of the bond plus related discount or minus related premium

137. A bond issued on June 1 of the current year has interest payment dates of April 1 and
October 1. Bond interest expense for the current year ended December 31 is for a period of

a. 3 months
b. 7 months
c. 6 months
d. 4 months

138. Mark Company's December 31, 2012 statement of financial position contained the
following items in the long-term liabilities section:

9% Registered debentures, callable in 2013, due in 2015 3,500,000

11% Collateral trust bond, convertible into ordinary shares beginning in 3,000,000
2013, due in 2016
10% Subordinate debentures (P500,000 maturing annually beginning 2013) 1,500,000

What is the total amount of terms bonds?

a. 3,500,000
b. 3,000,000
c. 5,000,000
d. 6,500,000

139. When the market rate of interest was 11%, Waverly Corporation issued P1,000,000, 12%,
8-year bonds that pay interest semiannually. The selling price of this bond issue was

a. 1,000,000
b. 720,495
c. 1,052,310
d. 1,154,387

140. On January 1, 2004, Allan Corporation issued P4,500,000 of 10% ten-year bonds at 103.
The bonds are callable at the option of Allan at 105. Allan has recorded amortization of the
bond premium on the straight-line method (which was not materially different from the
effective-interest method).

On December 31, 2010, when the fair market value of the bonds was 96, Allan repurchased
P1,000,000 of the bonds in the open market at 96. Allan has recorded interest and
amortization for 2010. Ignoring income taxes and assuming that the gain is material, Allan
should report this reacquisition as:
 a. a loss of P61,000
b. a gain of P61,000
c. a gain of P49,000
d. a loss of P49,000

141. A corporation called an outstanding bond obligation four years before maturity. At that
time there was an unamortized discount of P300,000. To extinguish this debt, the company
had to pay a call premium of P100,000. Ignoring income tax considerations, how should
these amounts be treated for accounting purposes?

a. Charge P400,000 to a loss in the year of extinguishment

b. Amortize P400,000 over four years
c. Either amortize P400,000 over four years or charge P400,000 to a loss immediately,
whichever management selects
d. Charge P100,000 to a loss in the year of extinguishment and amortize P300,000 over four
years

SOLUTION:

P300,000 + P100,000 = P400,000

142. The covenants and other terms of the agreement between the issuer of bonds and the
lender are set forth in the

a. bond coupon
b. registered bond
c. bond indenture
d. bond debenture

143. The main role of the trustee for debenture holders is to protect the interests of:

a. employees.
b. debenture holders.
c. directors.
d. suppliers.

144. The interest expense recorded on an interest payment date is increased

a. by the amortization of discount on bonds payable.

b. only if the market rate of interest is less than the stated rate of interest on that date.
c. by the amortization of premium on bonds payable.
d. only if the bonds were sold at face value.
145. The discount resulting from the determination of the present value of a note payable
shall be reported in the statement of financial position as

a. Deferred charge separate from the note

b. Direct deduction from the face amount of the note
c. Deferred credit separate from the note
d. Addition to the face amount of the note.

146. On January 1, 2010, Edwin Company sold property to Fredie Company which originally
cost Edwin P760,000. There was no established exchange price for this property. Danis gave
Edwin a P1,200,000 zero-interest-bearing note payable in three equal annual installments of
P400,000 with the first payment due December 31, 2010. The note has no ready market. The
prevailing rate of interest for a note of this type is 10%. The present value of a P1,200,000
note payable in three equal annual installments of P400,000 at a 10% rate of interest is
P994,800. What is the amount of interest income that should be recognized by Edwin in
2010, using the effective-interest method?

a. 99,480
b. 120,000
c. 0
d. 40,000

147. In recent year Jed Corporation had net income of P250,000, interest expense of P50,000,
and a times interest earned ratio of 9. What was Jed Corporation's income before taxes for
the year?

a. 500,000
b. 450,000
c. 400,000
d. None of the above

148. How would the amortization of discount on bonds payable affect each of the following?

a. Carrying value of bond (Decrease); Net income (Decrease)

b. Carrying value of bond (Increase); Net income (Increase)
c. Carrying value of bond (Decrease); Net income (Increase)
d. Carrying value of bond (Increase); Net income (Decrease)

149. When the interest payment dates of a bond are May 1 and November 1, and a bond
issue is sold on June 1, the amount of cash received by the issuer will be

a. Increased by accrued interest from May 1 to June 1

b. Decreased by accrued interest from May 1 to June 1
 c. Increased by accrued interest from June 1 to November 1
d. Decreased by accrued interest from June 1 to November 1

Difficult:

150. A 10 year term bond was issued at a discount with a call provision to retire the bonds.
When the bond issuer exercised the call provision on an interest date, the carrying amount
of the bond was less than the call price. The amount of bond liability removed from the
accounts should have equaled the

a. Call price less unamortized discount

b. Face amount plus unamortized discount
c. Call price
d. Face amount less unamortized discount

151. For a bond issue which sells for less than its par value the market rate of interest is

a. Dependent on rate stated on the bond

b. Equal to rate stated on the bond
c. Less than rate stated on the bond
d. Higher than rate stated on the bond

152. When bonds are retired prior to maturity with proceeds from a new bond issue,any gain
or loss from the early extinguishment of debt should be

a. Amortized over the remaining original life of the retired bond issue
b. Amortized over the life of the new bond issue
c. Recognized in income from continuing operations in the period of extinguishment
d. Recognized in retained earnings in the period of extinguishment

153. On January 1 of the current year, an entity issued bonds at a discount. The entity
incorrectly used the straight line method instead of the effective interest method to amortize
the discount. How were the following amounts, as of December 31 of the current year
affected by the error?

a. Bond carrying amount (Understated); Retained earnings (Understated)

b. Bond carrying amount (Understated); Retained earnings (Overstated)
c. Bond carrying amount (Overstated); Retained earnings (Understated)
d. Bond carrying amount (Overstated); Retained earnings (Overstated)

154. What is the effective interest rate of a bond measured at amortized cost?
 a. The stated rate of the bond
b. The interest rate currenly charged by the entity or by others for similar bond
c. The interest rate that exactly discounts estimated future cash payments through the
expected life of the bond or when appropriate, a shorter period to the net carrying
amount of the bond
d. The basic risk-free interest rate that is derived from observable government bond prices.

155. When bonds are redeemed by the issuer prior to their maturity date,any gain or loss on
the redemption is

a. Amortized over the period remaining to maturity and reported as part of income from
continuing operations
b. Reported as component of other comprehensive income
c. Reported as part of income from continuing operations in the period of redemption
d. Amortized over the period remaining to maturity and reported as other comprehensive
income

156. On January 1, 2012, an entity issued bonds at a discount. The bonds mature on
December 31, 2017. The entity incorrectly used the straight line method instead of the
effective interest method to amortize the discount. How is the carrying amount of the bonds
affected by the error?

a. December 31, 2012 (Understated); December 31, 2017 (Overstated)

b. December 31, 2012 (Overstated); December 31, 2017 (No effect)
c. December 31, 2012 (Overstated); December 31, 2017 (Understated)
d. December 31, 2012 (Understated); December 31, 2017 (No effect)

157. If bonds are initially sold at a discount and the straight line method of amortization is
used, interest expense in the earlier years

a. Will be the same as what it would have been had the scientific method of amortization
been used
b. Will be less than the coupon rate of interest.
c. Will exceed what it would have been had the scientific method of amortization been
used
d. Will be less than what it would have been had the scientific method of amortization
been used

Undefined:

158. Glen Company had the following long-term debt:

 Sinking fund bonds, maturing in installments 2,200,000
Industrial revenue bonds, maturing in installments 1,800,000
Subordinated bonds, maturing on a single date 3,000,000

What is the total amount of serial bonds?

a. 3,000,000
b. 4,000,000
c. 4,800,000
d. 7,000,000

159. Zola Company had the following long-term debt:

Bonds maturing in installments, secured by machinery 1,000,000

Bonds maturing on a single date, secured by realty 1,800,000
Collateral trust bonds 2,000,000

What is the total amount of debenture bonds?

a. 2,000,000
b. 1,000,000
c. 1,800,000
d. 0

160. Blue Company reported the following long-term debt on December 31, 2015:

9% registered debentures, callable in 2016, due in 2017 3,500,000

11% collateral trust bonds, convertible into ordinary shares beginning
in 2016, due in 2017 3,000,000
10% subordinated debentures, P500,000 maturing annually beginning
in 2016 1,500,000

What is the total amount of term bonds?

a. 3,000,000
b. 3,500,000
c. 5,000,000
d. 6,500,000

161. On March 1, 2015, Cain Company issued at 103 plus accrued interest 4,000 of 9%, P1,000
face value bonds. The bonds are dated January 1, 2015 and mature on January 1, 2025.
Interest is payable semiannually on January 1 and July 1. The entity paid bond issue cost of
P200,000.
 What is the net cash received from the bonds issuance?

a. 4,320,000
b. 4,180,000
c. 4,120,000
d. 3,980,000

162. During the current year, Eddy Company incurred the following costs on connection
with the issuance of bonds:

Promotion cost 200,000

Printing and engraving 150,000
Legal fees 800,000
Fees paid to independent accountants for registration 100,000
Commissions paid to underwriter 1,500,000

What amount should be recorded as bond issue costs to be amortized over the term of the
bonds?

a. 2,550,000
b. 2,750,000
c. 1,500,000
d. 1,050,000

163. On July 1, 2015, Carr Company issued at 104, five thousand of 10% P1,000 face value
bonds. The bonds were issued through an underwriter to whom the entity paid bond issue
cost of P125,000.

On July 1, 2015, what amount should be reported as bond liability?

a. 4,875,000
b. 5,075,000
c. 5,200,000
d. 5,325,000

164. Aye Company is authorized to issue P5,000,000 of 6%, 10-year bonds dated July 1, 2015
with interest payments on June 30 and December 31. When the bonds are issued on
November 1, 2015, the entity received cash of P5,150,000 including accrued interest.

What is the discount or premium from the issuance of the bonds payable?

a. 150,000 bond premium

 b. 50,000 bond premium
c. 150,000 bond discount
d. No bond premium and discount

165. In January 1, 2015, Carrow Company issued 10% bonds in the face amount of P1,000,000
that mature on January 1, 2025. The bonds were issued for P886,000 to yield 12%, resulting
in bond discount of P114,000.

The entity used the interest method of amortizing bond discount. Interest is payable on
January 1 and July 1.

For the year ended December 31, 2015, what amount should be reported as bond interest
expense?

a. 106,510
b. 100,000
c. 53,160
d. 50,000

166. On January 1, 2015, West Company issued 9% bonds in the face amount of P5,000,000,
which mature on January 1, 2025. The bonds were issued for P4,695,000 to yield 10%.
Interest is payable annually on December 31. The entity used the interest method of
amortizing bond discount.

On December 31, 2015, what is the carrying amount of the bonds payable?

a. 4,695,000
b. 4,714,500
c. 4,704,750
d. 5,000,000

167. Webb Company had an outstanding 7%, 10-year P5,000,000 face value bond. The bond
was originally sold to yield 6% annual interest. The entity used the effective interest method
to amortize bond premium. On January 1, 2015, the carrying amount of the bond payable
was P5,250,000.

What amount of unamortized premium on bond payable should be reported on December

31, 2015?

a. 225,000
b. 172,500
c. 215,000
d. 52,500
168. On December 31, 2015, Marie Company reported bonds payable of P7,360,000 and
accrued interest payable of P200,000. The bonds are retired on December 31, 2015 for
P8,160,000 including accrued interest.

What amount should be reported as gain or loss on extinguishment of bonds payable?

a. 800,000 gain
b. 800,000 loss
c. 600,000 gain
d. 600,000 loss

169. On December 31, 2015, Boheme Company reported a 9% bonds payable due December
31, 2020 with a carrying amount of P15,405,000. The bonds were issued on December 31,
2011 and had a face amount of P15,000,000 with interest payable semiannually on June 30
and December 31 of each year. On December 31, 2015, the entity retired P5,000,000 of these
bonds at 98.

What amount should be reported as gain or loss on the retirement of the bonds for 2015?

a. 235,000 gain
b. 235,000 loss
c. 100,000 gain
d. 100,000 loss

170. On January 1, 2015, Luyang Company issued 3-year bonds with face value of P5,000,000
at 98. Additionally, the entity paid bond issue cost of P140,000. The nominal rate is 10% and
the effective rate is 12%. The interest is payable annually on December 31. The entity used
the effective interest method in amortizing bond discount and issue cost.

What is the carrying amount of the bonds payable on December 31, 2015?

a. 4,840,000
b. 4,831,200
c. 4,848,000
d. 5,000,000

171. On January 1, 2015, Masbate Company issued 5-year bonds with face value of P5,000,000
at 110. The entity paid bond issue cost of P80,000 on same date. The stated interest rate on
the bonds is 8% payable annually every December 31. The bonds are issued to yield 6% per
annum. The entity used the effective interest method of amortization.

On December 31, 2015, what is the carrying amount of the bonds payable?
 a. 5,000,000
b. 5,400,000
c. 5,435,200
d. 5,430,000

172. On January 1, 2015, Samal Company issued P5,000,000, 8% serial bonds, to be repaid in
the amount of P1,000,000 each year. Interest is payable annually on December 31. The bonds
were issued to yield 10% a year. The bond proceeds were P4,757,000 based on the present
value at January 1, 2015 of five annual payments. The entity amortized the bond discount by
the interest method.

On December 31, 2015, what is the carrying amount of the bonds payable?

a. 4,832,700
b. 3,832,700
c. 4,805,600
d. 3,805,600

173. White Company issued P2,000,000 face value of 10-year bonds on January 1. The bonds
pay interest on January 1 and July 1 and had a stated rate of 10%.

If the market rate of interest is 8%, what is the issue price of the bonds?

a. 2,262,000
b. 2,113,000
c. 2,159,000
d. 2,279,000

174. On January 1. 2015, Ezekiel Company received P1,077,200 for P1,000,000 face amount
12% bonds. The bonds were sold to yield 10%. Interest is payable semiannually every
January 1 and July 1. The entity has elected the fair value option for measuring the financial
liability.

On December 31, 2015, the fair value of the bonds is determined to be P1,064,600 due to
market and interest factors.

What is the carrying amount of the bonds payable on January 1, 2015?

a. 1,000,000
b. 1,077,200
c. 500,000
d. 538,600
 What is the interest expense for 2015?

a. 120,000
b. 100,000
c. 107,720
d. 129,264

What is the gain or loss from change in fair value of the bonds for 2015?

a. 64,600 gain
b. 64,600 loss
c. 12,600 gain
d. 12,600 loss

What is the carrying amount of the bonds payable on December 31, 2015?

a. 1,064,600
b. 1,077,200
c. 1,000,000
d. 1,064,920

175. At the beginning of current year, Taguig Company issued a 3-year bonds with face
value of P5,000,000 at 99. The nominal rate is 10% and the interest is payable annually on
December 31. Additionally, the entity paid bond issue cost of P150,000.

What is the interest expense for the current year using the effective interest method?

a. 550,000
b. 528,000
c. 576,000
d. 559,680

176. 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. Fair value minus bond issue cost
d. Face amount

177. After initial recognition, bonds payable shall be measured at

 a. Amortized cost using the effective interest method.
b. Fair value through profit or loss.
c. Amortized cost using the effective interest method and fair value through other
comprehensive income.
d. Amortized cost using the effective interest method and fair value through profit or loss.

178. The “amortized cost” of bonds payable means

a. Face amount plus premium on bonds payable

b. Face amount minus discount on bonds payable
c. Face amount minus bond issue cost
d. Face amount plus premium on bonds payable, minus discount on bonds payable and
minus bond issue cost

179. Which is a true statement for electing the fair value option for measuring bonds
payable?

a. The effective interest method of amortization must be used to calculate interest expense.
b. Discount or premium is disclosed in the notes to the financial statements.
c. The fair value of the bond and the principal obligation must be disclosed.
d. If the fair value option is elected, it must be applied to all bonds.

180. Under the fair value option, bonds payable shall be measured initially at

a. Fair value
b. Fair value plus bond issue cost
c. Fair value minus bond issue cost
d. Face amount

181. Costs incurred in connection with the issuance of ten-year bonds which sold at a slight
premium shall be

a. Charged to retained earnings

b. Expensed in the year incurred
c. Capitalized as organization cost
d. Reported as a deduction from bonds payable

182. How would the amortization of premium on bonds payable affect the carrying amount
of bond and net income, respectively?

a. Increase and decrease

b. Increase and increase
c. Decrease and decrease
 d. Decrease and increase

183. How would the amortization of discount on bonds payable affect the carrying amount
of bond and net income, respectively?

a. Increase and decrease

b. Increase and increase
c. Decrease and decrease
d. Decrease and increase

184. Which of the following statements is true regarding accrued interest on bonds that are
sold between interest dates?

a. The accrued interest is computed at the effective rate.

b. The accrued interest will be paid to the seller when the bonds mature.
c. The accrued interest is extra income to the buyer.
d. All of the statements are not true.

185. The proceeds from the sale of bonds

a. Will always be equal to the face amount

b. Will always be less than the face amount
c. Will always be more than the face amount
d. May be equal to or more than or less than the face amount depending on market interest
rate

186. An extinguishment of bonds payable originally issued at a premium is made by

purchase of the bonds between interest dates. Which of the following statements is true at
the time of extinguishment?

a. Any costs of issuing the bonds must be amortized up to the purchase date.
b. The premium must be amortized up to the purchase date.
c. Interest must be accrued from the last interest date to the purchase date.
d. All of these statements are true.

187. Bonds for which the bondholders’ names are not registered with the issuer are called

a. Bearer bonds
b. Term bonds
c. Debenture bonds
d. Serial bonds

188. Bonds that pay no interest unless the issuer is profitable are known as
 a. Registered bonds
b. Junk bonds
c. Mortgage bonds
d. Income bonds

189. On theory, the proceeds from the sale of a bond would be equal to

a. The face amount of the bond

b. The present value of the principal amount due at the end of the life of the bond plus the
present value of the interest payments made during the life of the bond
c. The face amount of the bond plus the present value of the interest payments made
during the life of the bond
d. The sum of the face amount of the bond and the periodic interest payments

190. Under international accounting standard, the valuation method used for bonds payable
is

a. Historical cost
b. Discounted cash flow valuation at current yield rate
c. Maturity amount
d. Discounted cash flow valuation at yield rate at issuance

191. An entity issued a bond with a stated rate of interest that is less than the effective
interest rate on the date of issuance. The bond was issued on one of the interest payment
dates. The bond was issued on one of the interest payment dates. What should the entity
report on the first interest payment date?

a. An interest expense that is less than the cash payment made to bondholders.
b. An interest expense that is greater than the cash payment made to bondholders.
c. A debit to the unamortized bond discount.
d. A debit to the unamortized bond premium.

192. A five-year term bond was issued on January 1, 2012 at a premium. The carrying
amount of the bond on December 31, 2013 would be

a. The same as the carrying amount on January 1, 2013

b. Higher than the carrying amount on January 1, 2013
c. Higher than the carrying amount on December 31, 2014
d. Lower than the carrying amount on December 31, 2014

193. A five-year term bond was issued on January 1, 2012 at a discount. The carrying amount
of the bond on December 31, 2013 would be
 a. Higher than the carrying amount on January 1, 2013
b. Lower than the carrying amount on January 1, 2013
c. The same as the carrying amount on January 1, 2013
d. Higher than the carrying amount on December 31, 2014

194. On January 1, 2016, Mariel Company issued bonds payable with face amount of
P8,000,000 and 10% stated interest rate at 95. The bonds have a 5-year term and interest is
payable annually every December 31. The entity elected the fair value option. On December
31, 2016 the fair value of the bonds is 105. It is reliably determined that the fair value
increase comprised P150,000 attributable to credit risk and the remainder attributable to
change in the market interest rate.

What amount of gain or loss should be recognized in profit or loss for 2016 to conform with
the fair value option?

a. 650,000 gain
b. 650,000 loss
c. 800,000 gain
d. 800,000 loss

195. When interest expense for the current year is more than interest paid, the bonds
were issued at

a. A discount
b. A premium
c. Face amount
d. Cannot be determined

196. When interest expense for the current year is less than interest paid, the bonds
were issued at

a. A discount
b. A premium
c. Face amount
d. Cannot be determined

197. When the effective interest method is used, the periodic amortization would

a. Increase if the bonds were issued at a discount

b. Decrease if the bonds were issued at a premium
c. Increase if the bonds were issued at a premium
d. Increase if the bonds were issued at either a discount or a premium
198. A discount on bond payable is charged to interest expense

a. Equally over the life of the bond

b. Only in the year the bond is issued
c. Using the effective interest method
d. Only in the year the bond matures

199. On January 1, 2016, Rizal Company issued 4-year bonds with face amount of P4,000,000
at P4,395,800. The 12% stated rate is payable semiannually every June 30 and December 31.
In addition, the entity paid P137,430 in connection with the issuance of the bonds.

What is the effective rate of interest on the bonds on the date of issue?

a. 12%
b. 11%
c. 10%
d. 9%

200. On January 1, 2016, Taguig Company issued 3-year bonds with face amount of
P5,000,000 at 99. The nominal rate is 10% and the interest is payable annually on December
31. The entity paid bond issue cost of P150,000.

What is the interest expense for 2016 using the effective interest method? (round off present
value factors to four decimal places)

a. 550,000
b. 528,000
c. 576,000
d. 559,680

Liabilities

Problem: Ducky Company

Ducky Company reported the following information at the end of reporting period:

Accounts Payable 1,000,000

Advances to employees 45,000

Unearned rent revenue 300,000

Estimated liability under warranties 250,000

Cash surrender value of officer’s life insurance 75,000

Bonds payable 5,000,000

Discount on bonds payable 500,000

Trademark 50,000

What amount should be reported in the statement of financial position as total liabilities?

Answer: 6,050,000

Problem: Burma Company

Burma Company disclosed the following information about liabilities at year-end:

Accounts payable, after deducting debit balances

in suppliers’ accounts amounting to P100,000 4,000,000

Accrued expenses 1,500,000

Credit balances of customers’ accounts 500,000

Share dividend payable 1,000,000

Claims for increase in wages and allowance by

 employees of the entity covered in a pending lawsuit 400,000

Estimated expenses in redeeming prize coupons presented

by customers 600,000

What total amount should be presented as current liabilities at year-end?

Answer: 6,700,000

Problem: Mill Company

Mill Company revealed the following account balances on December 31, 2017:

Accounts payable 1,500,000

Bonds payable, due 2018 2,500,000

Discount on bonds payable 300,000

Dividends payable 800,000

Note payable, due 2019 2,000,000

What total amount should be reported as current liabilities?

Answer: 4,500,000

Problem: Gar Company

Gar Company disclosed the following liability account balances on December 31, 2017:

Accounts payable 1,900,000

Bonds payable 3,400,000

Premium on bonds payable 200,000

Defered tax liability 400,000

Dividends payable 500,000

Income tax payable 900,000

Note payable, due January 31, 2018 600,000

The deferred tax liability is based on temporary differences that will reverse in 2019.

On December 31, 2017, what total amount should be reported as current liabilities?

Answer: 3,900,000

Problem: Bake Company

Accounts payable 800,000

Bonds payable, due 2018 3,000,000

Premium on bonds payable 150,000

Deferred tax liability 250,000

The deferred tax liability is not related to an asset for financial accounting purposes and is expected to
reverse in 2018.

What total amount should be reported as current liabilities on December 31, 2017?

Answer: 3,950,000

Problem: Grace Company

Grace Company reported the following liability account balances on December 31, 2017:

Accounts payable 2,000,000

Bonds payable, due 2018 4,000,000

Discount on bonds payable 400,000

Deferred tax liability 500,000

Dividend payable due on February 15, 2019 1,000,000

Income tax payable 800,000

Note payable due in January 15, 2019 1,200,000

What total amount should be reported as current liabilities on December 31, 2017?

Answer: 6,400,000

Problem: Brite Company

Brite Company reported the following liabilities on December 31, 2017:

Accounts payable 550,000

Unsecured note payable, 8%, due July 1, 2018 4,000,000

Accrued expenses 350,000

Contingent liability 450,000

Deferred tax liability 250,000

Senior bonds payable, 7% due March 31, 2018 5,000,000

What total amount should be reported as current liabilities?

Answer: 9,900,000

Problem: Gumamela Company

Gumamela Company provided the following data on December 31, 2017:

Trade accounts payable, including cost of goods

received on consignment of P150,000 1,350,000

Accrued taxes payable 125,000

Customers’ deposit 100,000

Gumamela Company as guarantor 200,000

Bank overdraft 55,000

Accrued electric and power bills 60,000

Reserve for contingencies 150,000

What total amount should be reported as current liabilities?

Answer: 1,540,000

Problem: Able Company

Able Company had the following accounts of long-term debt outstanding on December 31, 2017:

14% term note, due 2018 30,000

11% term note, due 2020 1,070,000

8% note, due in 11 equal annual principal payments,

plus interest beginning December 31, 2018 1,100,000

7% guaranteed debentures, due 2019 1,000,000

Total 3,200,000

The annual sinking fund requirement on the guaranteed debentures is P40,000 per year.

What total amount should be reported as current liabilities on December 31, 2017?

Answer: 130,000

Problem: Tagkawayan Company

Tagkawayan Company reported the following liability balances on December 31, 2017:

12% note payable issued on March 1, 2016, maturing

on March 1, 2018 5,000,000

10% note payable issued on October 1, 2016, maturing

October 1, 2018 3,000,000

The 2017 financial statements were issued on March 31, 2018.

On January 31, 2018, the entire P5,000,000 balance of the 12% note payable was refinanced through
issuance of a long-term obligation payable lump sum.
Under the loan agreement for the 10% note payable, the entity has the discretion to refinance the
obligation for at least twelve months after December 31,2017?

Answer: 5,000,000

Problem: Witt Company

Witt Company reported the following liability account balances on December 31, 2017:

6% note payable issued October 1, 2016

maturing October 1, 2018 500,000

8% note payable issued April 1, 2016

maturing April 1, 2018 800,000

The 2017 financial statements were issued on March 31, 2018.

On March 1, 2018, the entire P800,000 balance of 8% note was refinanced by issuance of a long-term
obligation payable lump sum.

On December 31, 2017, what amount of the notes payable should be classified as current?

Answer: 1,300,000

Problem: Eliot Company

Eliot Company reported the following liabilities on December 31, 2017:

Accounts payable and accrued interest 1,000,000

12% note payable issued November 1, 2016

 maturing July 1, 2018 2,000,000

10% debentures payable, next annual principal

installment of P500,000 due on February 1, 2018 7,000,000

On December 31, 2017, the entity consummated a noncancelable agreement with the lender to
refinance the 12% note payable on a long-term basis.

On December 31, 2017, what total amount should be reported as current liabilities?

Answer: 1,500,000

Problem: Largo Company

On December 31, 2017, Largo Company had a P750,000 note payable outstanding due July 31, 2018. The
entity planned to refinance the note by issuing long-term bonds.

Because the entity temporarily had excess cash, it prepaid P250,000 of the note on January 15, 2018.

In February 2018, the entity completed a P1,500,000 bond offering. The entity will use the bond offering
proceeds to repay the note payable at maturity.

On March 31, 2018, the 2017 financial statements were authorized for issue.

What amount of the note payable should be included in current liabilities on December 31, 2017?

Answer: 750,000

Problem: Dean Company

Dean Company has a P2,000,000 note payable due June 30, 2018. On December 31, 2017, the entity
signed an agreement to borrow up to P2,000,000 to refinance the note payable on a long-term basis.

The financing agreement called for borrowing not to exceed 80% of the value of the collateral the entity
was providing.

On December 31, 2017, the value of the collateral was P1,500,000.

On December 31, 2017, what amount of the note payable should be reported as current liability?

Answer: 800,000

Problem: Dana Company

Dana Company had P2,000,000 note payable due on June 30, 2018. Under the existing loan facility, the
entity had the discretion to refinance or roll over the note payable for at least twelve months after the
end of reporting period.

On December 31, 2017, what amount of the note payable should be reported as noncurrent liability?

Answer: 2,000,000

Problem: Willen Company

Willen Company reported the following liabilities on December 31, 2017.

Accounts payable 750,000

Short-term borrowings 400,000

Mortgage payable, current portion P100,00 3,500,000

Bank loan payable, due June 30, 2018 1,000,000

The P1,000,000 bank loan was refinanced with a 5-year loan on January 15, 2018, with the first principal
payment due January 15, 2019.

The financial statements were issued February 28, 2018.

What total amount should be reported as current liabilities on December 31, 2017?

Answer: 2,250,000
Effective Interest Method

Problem: Marsh Company

On January 1. 2019, Marsh Company issued 10% bonds payable in the face amount of P6,000,000. The
bonds mature on January 1, 2029. The bonds were issued P5,316,000 to yield 12% resulting in bond
discount of P684,000. The entity used the effective interest method of amortizing bond discount.
Interest is payable semiannually on January 1 and July 1.
For the six months ended June 30, 2019, what amount should be reported as bond interest expense?

Answer: 318,960

Problem: Tara Company

On July 1, 2019, Tara Company issued 4,000 bonds of 8%, P1,000 face amount for P3,504,000. The
bonds were issued to yield 10%. The bonds are dated July 1, 2019 and mature on July 1, 2028. Interest is
payable semiannually on January 1 and July 1.

What amount of the bond discount should be amortized for the six months ended December 31, 2019?

Answer: 15,200

Problem: Moon Company

On January 1, 2019, Moon company issued 10% bonds payable in the face amount of P4,500,000. The
bonds mature on January 1, 2029. The bonds were issued for P3,987,000 to yield 12%, resulting in bond
discount of P513,000. The entity used the effective interest method of amortizing bond discount.
Interest is payable semiannually on January 1 and July 1.

For the six months ended June 30, 2019, what amount should be reported as bond interest expense?

Answer: 239,220

Problem: Ward Company

On January 1, 2019, Ward Company issued 9% bonds with face amount of P4,000,000, which mature on
January 1, 2029. The bonds were issued for P3,756,000 to yield 10%, resulting on bond discount of
P244,000. The entity used the interest method of amortizing bond discount. Interest is payable annually
on December 31.
 1. On December 31, 2019, what is the balance of the discount on bonds payable?
Answer: 228,400

2. What is the carrying amount of bonds payable on December 31, 2019?

Answer: 3,771,600

Problem: Wolf Company

On January 1, 2019, Wolf Company issued 10% bonds in the face amount of P5,000,000, which mature
on January 1, 2029. The bonds were issued for P5,675,000 to yield 8%, resulting on bond premium oh
P675,000,000. The entity used the interest method pf amortizing bond premium. Interest is payable
annually on December 31.

1. On December 31, 2019, what is the balance of the premium on bonds payable?
Answer: 629,000

2. What is the carrying amount of bonds payable on December 31, 2019?

Answer: 5,629,000

Problem: Webb Company

Webb Company has outstanding 7%, 10-year P5,000,000 face amount bond. The bond was originally
sold to yield 6%annual interest. The entity used the effective interest method to amortized bond
premium. On January 1, 2019, the carrying amount of the outstanding bond was P5,250,000.

1. What amount of premium on bond payable should be reported on December 31, 2019?
Answer: 215,000

2. What is the carrying amount of bonds payable on December 31, 2019?

Answer: 5,215,000

Problem: West Company

On January 1, 2019, West Company issued 9% bonds in the face amount of P5,000,000, which mature on
January 1, 2029. The bonds were issued for P4,695,000 to yield 10%. Interest is payable annually on
December 31. The entity used the interest method.

1. What is the interest expense for 2019?

Answer: 450,000

2. What is the carrying amount of the bonds payable on December 31, 2019?
Answer: 4,704,750

Problem: Luyang Company

On January 1, 2019, Luyang Company issued 3-year bonds with face amount of P5,000,000 at 98.
Additionally, the entity paid bond issue cost of P140,000.

The nominal rate is 10% and the effective rate after considering the bond issue cost is 12%. The interest
is payable annually on December 31. The entity used the effective interest method.

What is the carrying amount of the bonds payable on December 31, 2019?

Answer: 4,831,200

Problem: Carol Company

On January 1, 2019, Carol Company issued 10% bonds in the face amount of P5,000,000 that mature on
January 2025. The bonds were issued for P4,580,000 to yield 12% resulting in bond discount of
P420,000.

The entity used the interest method. Interest is payable semiannually on January 1 and July 1.

1. What amount should be reported as interest expense for 2019?

Answer: 551,088

2. What is the carrying amount of the bonds payable on December 31, 2019?
Answer:
Problem: Masbate Company

On January 1, 2019, Masbate Company issued 5-year bonds with face amount of P5,000,000 at 110. The
entity paid bond issue cost of P80,000 on same date.

The stated interest rate on the bonds is 8% payable annually every December 31.

The bonds are issued to yield 6% per annum after considering the bond issue cost. The entity used the
effective interest method of amortization.

On December 31, 2019, what is the carrying amount of the bonds payable?

Answer: 5,345,200

Problem: Bontoc Company

On January 1, 2019, Bontoc Company issued P5,000,000, 8% serial bonds to be repaid in the amount of
P1,000,000 each year. Interest is payable annually on December 31. The bonds were issued to yield 10%
a year.

The bonds proceed were P4,757,000 based on the present value at January 1, 2019 of five annual
payments. The entity amortized the bond discount by the interest method.

On December 31, 2019, what is the carrying amount of the bonds payable?

Answer: 3,832,700

Problem: Moon Company

Moon Company reported on January 1, 2019, 9% bonds payable of P4,000,000 less unamortized
discount of P320,000.

These bonds were issued to yield 10%. The effective interest method is used. Semiannual interest was
paid on January 1 and July 1 of each year.

On July 1, 2019, the entity retired the bonds at 103 before maturity.

What is the loss on retirement of the bonds payable on July 1, 2019?

Answer: 436,000

Problem: Nixon Company

Nixon Company reported 10% bonds payable with carrying amount of P5,700,000 on January 1, 2019.
The bonds had a face amount of P6,000,000 and were issued to yield 12%.

The interest method of amortization is used. Interest was paid on January 1 and July 1 of each year.

On July 1, 2019, the entity retired the bonds at 102. The interest payment on July 1, 2019 was made as
scheduled.

1. What is the carrying amount of the bonds payable on July 1, 2019?

Answer:
2. What amount should be recorded as loss on the early extinguishment of the bonds?
Answer: 378,000

Problem: Colt Company

At the beginning of the current year, Colt Company issued ten-year bonds with a face amount of
P5,000,000 and a stated interest rate of 8% payable annually at the end of each year. The bonds were
priced to yield 10%.

Present value of 1 for 10 periods at 1% 0.3855

Present value of an ordinary annuity of 1 for 10 periods at 10% 6.145

What is the issue price of the bonds payable?

Answer: 4,385,500

Problem: White Company

White Company issued 10-year bonds with face amount of P2,000,000 on January 1. The bonds pay
interest on January 1 and July 1 and have a stated interest rate of 10%.

The market rate of interest at the time the bonds are sold is 8%.

What is the issuance price of the bonds? Round off present value factor to two decimal places.

Answer: 2,279,000

Problem: Margaret Company

Margaret Company provided the following information pertaining to issuance of bonds payable on
January 1 of the current year:
Face amount 800,000

Term Ten years

Stated interest rate 6%

Yield 9%

Interest payable annually every year-end December 31

At 6% At 9%

Present value of one for ten periods 0.558 0.422

Future value of one for ten periods 1.791 2.367

Present value of ordinary annuity of one

for ten periods 7.360 6.418

What is the issue price for each P1,000 bonds?

Answer: 807

Problem: Rizal Company

At the beginning of current year, Rizal Company issued 4-year bonds with face amount of P4,000,000 at
P4,395,800. The 12% stated rate is payable semiannually every June 30 and December 31.

In addition, the entity paid P137,430 in connection with the issuance of the bonds.

What is the effective rate of interest on the bonds on the date of issue?

Answer: 10%
Compound Financial Instrument

Problem: Fence Company

On March 1, 2019, Fence Company issued 12% P5,000,000 nonconvertible bonds at 103 which are due
on February 28, 2024.

In addition, each P1,0000 bond was issued 30 share warrants, each of which entitled the bondholder to
purchase for P50 one share of Fence Company, par value P25. Interest is payable annually every
February 28.
On March 1, 2019, the market value of the share was P40 and the market value of the warrants was P4.

The market rate of interest for similar bonds ex-warrants is 14%. The present value of 1 at 14% for 5
periods is 0.52 and the present value of an ordinary annuity of 1 at 14% for 5 periods is 3.43.

What amount should be recognized as discount or premium on the original issuance of the bonds?

Answer: 342,000 discounts

Problem: Fort Company

On December 31, 2019, Fort Company issued 5,000 of 8%, 10-year bonds, P1,000 face amount per bond,
with share warrants at 110. Each bond carried a warrant for one share of Fort Company at a specified
option price of P25 per share.

Immediately after issuance, the market value of the bonds without the warrants was P5,400,000 and the
market value of the warrants was P600,000.

On December 31, 2019, what is the carrying amount of bonds payable?

Answer: 5,400,000

Problem: Armada Company

On December 31, 2019 Armada Company issued P5,000,000 face amount, 5-year bonds at 109. Each
P1,000 bond was issued with 10 share warrants, each of which entitled the bondholder to purchase one
share of P100 par value at P120. Immediately after issuance, the market value of each warrant was P5.

The stated interest rate on the bonds is 11% payable annually every December 31. However, the
prevailing market rate of interest for similar bonds without warrants is 12%.
The present value of 1 at 12% for 5 periods is 0.57 and the present value of an ordinary annuity of 1 at
12% for 5 periods is 3.60.

1. What is the carrying amount of the bonds payable on December 31, 2019?
Answer: 4,830,000
2. On December 31, 2019, what amount should be recorded as discount or premium on bonds
payable?
Answer: 170,000 discount
3. What is the equity component arising from the issuance of bonds payable?
Answer: 450,000
4. What amount is credited to share premium if all the share warrants are exercised?
Answer: 1,620,000

Problem: Case Company

On January 1, 2019, Case Company issued P5,000,000 at 12% nonconvertible bonds payable at 103
which are due on December 31, 2023.

In addition, each P1,000 bond was issued with 30 detachable share warrants, each of which entitled the
bondholder to purchase, for P50, one ordinary share of Case Company, par value P25.

On January 1, 2019, the quoted market value of each warrant was P4. The market value of the bonds ex-
warrants at the time of issuance is 95.

1. What is the carrying amount of the bonds payable on January 1, 2019?

Answer: 4,750,000

2. What amount of the proceeds from the bond issue should be recognized as an increase in
shareholders’ equity.
Answer: 400,000

3. What amount is credited to share premium if all of the share warrants are exercised?
Answer:
Problem: Moriones Company

Moriones Company issued P5,000,000 face amount 12% 5-year convertible bonds at 110 at the
beginning of current year, paying interest semiannually on January 1 and July 1.

It is estimated that the bonds would sell only at 103 without the conversation feature. Each P1,000 bond
is convertible into 10 ordinary shares with P100 par value.

What is the increase in shareholders equity arising from the original issuance of the convertible bonds?

Answer: 350,000

Problem: Susan Company

At the beginning of the current year, Susan Company issued 5,000 convertible bonds. The bonds have a
three-year term and are issued at 110 with face amount of P1,000 per bond. Interest is payable annually
in arrears at a nominal 6% interest rate.

Each bond is convertible at any time up to maturity into 100 ordinary shares with par value of P5.

When the bonds are issued, the prevailing market interest rate for similar debt instrument without
conversation option is 9%.

The present value of 1 at 9% for 3 periods is .77 and the present value of an ordinary annuity of 1 at 9%
for 3 periods is 2.53.
What is the equity component arising from the original issuance of the convertible bonds?

Answer: 891,000

Problem: Cey Company

On December 31, 2019, Cey Company had outstanding 12% P5,000,000 face amount convertible bonds
maturing on December 31, 2024, Interest is payable on June 30 and December 31. Each P1,000 bond is
convertible into 50 shares of Cey Company with P10 par value.

On December 31, 2019, the unauthorized balance in the premium on bonds payable account was
P300,000. No equity component was recognized from the original issuance of the convertible bonds.

On December 31, 2019, 2,000 bonds were converted when the share had a market price of P24. The
entity incurred P20,000min connection with the bond conversion.

What is the share premium arising from the bond conversion?

Answer: 1,100,000

Problem: Spare Company

Spare Company had an outstanding share capital with par value of P50,000,000 and a 12% convertible
bond issue in the face amount of P10,000,000. Interest payment dates of the bond issue are June 30 and
December 31.

The conversion clause in the bond indenture entitled the bondholders to receive 40 shares of Spare
Company with P20 par value in exchange for each P1,000 bond.
The holder of P5,000,000 face value bonds exercised the conversion privilege at year-end. The market
price of the bonds at year-end was P1,100 per bond and the market price of the share was P30.

The total unamortized bond discount was P500,000 and the share premium from conversion privilege
has a balance of P2,000,000 at the date of conversion.

What amount of share premium should be recognized by reason of the conversion of bonds payable into
share capital?

Answer: 1,750,000

Problem: Clay Company

Clay Company had P600,000 convertible 8% bonds payable outstanding on June 30, 2019. Each P1,000
bond was convertible into 10 ordinary shares which had a fair value of P75 per share.

On July 1, 2019, the interest was paid to bondholders, and the bonds were converted into ordinary
shares which had a fair value of P75 per share.

The unamortized premium on these bonds was P12,000 at the date of conversion. The equity
component was recognized when the bonds were originally issued.

What is the increase in the share capital and share premium, respectively, as a result of the bond
conversion?

Answer: 300,00 and 312,000

Problem: Young Company

Young Company issued 5,000 convertible bonds at the beginning of the current year. The bonds have a
four-year term with a stated rate of interest of 6% and are issued at face amount of P1,000,000 per
bond.

Interest is payable annually on December 31. Each bond is convertible into 50 ordinary shares with a fair
value of P10.

The market rate of interest on similar nonconvertible bond is 9%. At the issuance date, the amount of
P485,000 was credited to share premium from conversion privilege.

The bonds were not converted and instead, the entity paid off the convertible bondholders at maturity.

What amount should be recorded as gain or loss on the full payment of the convertible bonds at
maturity?

Answer: 0

Problem: Tamia Company

On December 31, 2019, Tamia Company showed the following balances:

Bonds payable – 6% 4,000,000

Discount on bonds payable 500,000

Share premium – issuance 5,000,000

Share premium – conversion privilege 700,000

The interest is payable annually every December 31. The convertible bonds are not converted but fully
paid on December 31, 2019.

On such date, the quoted price of the convertible bonds with conversion option is 105 which is the
payment to the bondholders plus interest.

However, the quoted price of the bonds without the conversion privilege is 95.

1. What is the carrying amount of the bonds payable on December 31, 2019?
Answer: 3,500,000

2. What is the gain or loss from extinguishing of bonds?

Answer: 300,000 loss

3. What is the total payment to the bondholders on December 31, 2019?

Answer: 4,440,000