AE16 (INTERMEDIATE ACCOUNTING)

1. On July 1, 2020, Tara Company issued 4,000 bonds of 8%, P 1,000 face amount for P 3,504,000. The bonds
were issued to yield 10%. The bonds are dated July 1, 2020 and mature on July 1, 2029. Interest is payable
semi-annually on January 1 and July 1.

What amount of the bond discount should be amortized for the six months ended December 31, 2020?

a. 30,400
b. 24,800
c. 19,840
d. 15,200

2. On January 1, 2020, Moon Company issued 10% bonds payable in the face amount of P 4,500,000. The
bonds mature on January 1, 2030. The bonds were issued for P 3,987,000 to yield 12% resulting in bond
discount of P513,000. The entity used the effective interest method of amortizing bond discount. Interest is
payable semi-annually on January 1 and July 1.

For the six months ended June 30, 2020, what amount should be reported as bond interest expense?

a. 225,000
b. 239,220
c. 250, 650
d. 255,780

For item 3 and 4 are based on the following information.

On January 1, 2020, Ward Company issued 9% bonds with face amount of P 4,000,000, which mature on
January 1, 2030. The bonds were issued for P 3,756,000 to yield 10%, resulting in bond discount of P 244,000.
The entity used the interest method of amortizing bond discount. Interest is payable annually on December 31.

3. On December 31, 2020, what is the balance of the discount on bonds payable?

a. 228,440
b. 208,000
c. 206,440
d. 204,000

4. What is the carrying amount of bonds payable on December 31, 2020?

a. 3,756,000
b. 4,000,000
c. 3,771,600
d. 3,740,400
For item 5 and 6 are based on the following information.
On January 1, 2020, Wolf Company issued 10% bonds in the face amount of P 5,000,000, which mature on
January 1, 2030. The bonds were issued for P 5,675,000 to yield 8%, resulting in bond premium of P 675,000.
The entity used the interest method of amortizing bond premium. Interest is payable annually on December 31.

5. On December 31, 2020, what is the balance of the premium on bonds payable?

a. 675,000
b. 629,000
c. 607,500
d. 507,500

6. What is the carrying amount of bonds payable on December 31, 2020?

a. 5,000,000
b. 5,629,000
c. 4,371,000
d. 5,675,000

For item 7 and 8 are based on the following information.

Webb Company has outstanding 7%, 10-year P 5,000,000 face amount 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,
2020, the carrying amount of the outstanding bond was P 5,250,000.
7. What amount of premium on bond payable should be reported on December 31, 2020?
a. 225,000
b. 172,000
c. 215,000
d. 52,500

8. What is the carrying amount of bonds payable on December 31, 2020?

a. 5,250,000
b. 4,785,000
c. 5,215,000
d. 5,000,000

For item 9 and 10 are based on the following information.

On January 1, 2020, West Company issued 9% bonds in the face amount of P 5,000,000, which mature on
January 1, 2030. The bonds were issued for P 4, 695,000 to yield 10%. Interest is payable annually on
December 31. The entity used the interest method.

9. What is the interest expense for 2020?

a. 450,000
b. 469,500
c. 422,550
d. 500,000

10. What is the carrying amount of the bonds payable on December 31, 2020?

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

11. On January 1, 2020, Luyang Company issued 3-year bonds with face amount of P 5,000,000 at 98.
Additionally, the entity paid bond issue cost of P 140,000.

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 bond payable on December 31, 2020?

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

For item 12 and 13 are based on the following information.

On January 1, 2020, Carol Company issued 10% bonds in the face amount of P 5,000,000 that mature on
January 1, 2026. The bonds were issued for P 4,580,000 to yield 12% resulting in bond discount of P 420,000.

The entity used the interest method. Interest is payable semi-annually on January 1 and July 1.

12. What amount should be reported as interest expense for 2020?

a. 551,088
b. 500,000
c. 274,800
d. 549,600

13. What is the carrying amount of the bonds payable on December 31, 2020?

a. 4,580,000
b. 4,604,800
c. 4,631,088
d. 5,000,000
14. On January 1, 2020, Masbate Company issued 5-year bonds with face amount of P 5,000,000 at 110. The
entity paid bond issue cost of P 80,000 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, 2020, what is the carrying amount of the bond payable?

a. 5,000,000
b. 5,400,000
c. 5,345,000
d. 5,430,000

15. On January 1, 2020, Bontoc Company issued P5, 000,000, 8% serial bonds to be repaid in the amount of P
1,000,000 each year. Interest is payable annually on December 31. The bonds were issued to yields 10% a year.

The bonds proceeds were P 4,757,000 based on the present value at January 1, 2020 of five annual payments.
The entity amortized the bond discount by the interest method.

On December 31, 2020, 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

16. Moon Company reported on January 1, 2020 9% bonds payable of P 4,000,000 less unamortized discount of
P 320,000

These bonds were issued to yield 10%. The effective interest method is used. Semi-annual interest was paid on
January 1 and July 1 of each year.

On July 1, 2020, the entity retired the bonds at 103 before maturity.

What is the loss on retirement of the bonds payable on July 1, 2020?

a. 436,000
b. 440,000
c. 432,000
d. 120,000

For item 17 and 18 are based on the following information.

Nixon Company reported 10% bonds payable with carrying amount of P 5,700,000 on January 1, 2020. The
bonds had a face amount of P 6,000,000 and were issued by yield 12%.

The interest method of amortization is used. Interest was paid on January 1 and July 1 of each year.

On July 1, 2020, the entity retired the bonds at 102. The interest payment on July 1, 2020 was mad of
scheduled.

17. What is the carrying amount of the bonds payable on July 1, 2020?

a. 5,700,000
b. 5,742,000
c. 6,000,000
d. 5,658,000

18. What amount should be recorded as loss on the early extinguishment of the bonds?

a. 120,000
b. 378,000
c. 336,000
d. 462,000

19. What is the interest rate written on the face of the bond?

a. Coupon rate d. Coupon rate, nominal rate or stated rate

b. Nominal rate
c. Stated rate
20. What is the rate of interest actually incurred?

a. Market rate
b. Yield rate
c. Effective rate
d. Market, yield or effective rate

21. 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

22. The 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

23. Bond issue cost

a. Is included in the measurement of the bonds payable measured at amortized cost

b. Is amortized using the internet method over the life of the bonds payable
c. Will effectively increase the market rate of interest
d. All of these relate to bond issue cost

24. Under the effective interest method of amortization, the interest expense is equal to

a. The stated rate of interest multiplied by the face amount of the bonds
b. The market rate of interest multiplied by the face amount of the bonds
c. The stated rate of interest multiplied by the beginning carrying amount of the bonds
d. The market rate of interest multiplied by the beginning carrying amount of the bonds

25. 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

26. 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

27. Bonds usually sell at

a. Maturity amount
b. Face amount
c. Present value
d. Statistical expected value

28. Which statement is true about bonds payable?

a. The specific provisions of a bond issue are described in a document called bond indenture
b. Periodic interest expense is the stated interest rate times the amount of bond outstanding.
c. Bonds will sell for a premium when the market rate of interest exceeds stated rate.
d. The initial sale price of bond represents the sum of all future cash outflows.

29. 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 discount
30. 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 discount

31. 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 carrying amount

31. When bonds are sold at a premium and the effective interest method is used, at each interest payment date,
the interest expense

a. Remains contant
b. Is equal to the change in carrying amount
c. Increases
d. Decreases

32. Interest expense is

a. The effective rate times the carrying amount of the bond during the interest period
b. The stated rate times the face amount of the bond
c. Increases
d. Decreases

33. What is the effective interest rate of a bond measured at amortized cost?

a. The stated rate of the bond

b. The interest rate currently 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

34. For a bond issue which sells for less than face 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

34. What is the market rate of interest for a bond issue which sells for more than face value?

a. Less than rate stated on the bond

b. Equal to rate stated on the bond
c. Higher that rate stated on the bond
d. Independent of rate stated on the bond

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

a. The yield rate exceeds the nominal rate

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

36. 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 as a percentage of the bond carrying amount varies from period to period
b. Interest expense increases each six-month period
c. The interest remains constant each six-month period
d. Nominal interest rate exceeds effective interest rate
37. In theory, the proceeds from the sale of a bond will be equal to

a. The face amount of the bond

b. The present value of the principal 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.

38. The market price of a bond issued at a discount is the present value of the principal amount at the market
rate of interest

a. Less the present value of all future interest payments at the market rate of interest
b. Less 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 rate of interest
d. Plus the present value of all future interest payments at the rate of interest stated on the bond

39. Under international accounting standard, the valuation method used for bond 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

40. How should an entity calculate the net proceeds to be received from bond issuance?

a. Discount the bonds at the stated rate of interest.

b. Discount the bonds at the market rate of interest
c. Discount the bonds at the stated rate of interest and deduct bond issuance cost
d. Discount the bonds at the market rate of interest and deduct bond issuance cost

41. An entity issued a bond with a stated rate of interest that is less than the effective interest rate. 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 discount on bond payable
d. A debit to premium on bond payable

For item 42 and 44 are based on the following information.

At the beginning of current year, Fence Company issued 12% P 5,000,000 nonconvertible bonds at 103 which
are due in 5 years.

In addition, each P 1,000 bond was issued 30 share warrants, each of which entitled the bondholder to purchase
for P 50 one share of Fence Company, par value P25. Interest is payable annually every end of the year.
On the date of issuance, the market value of the share was P40 and the market value of the warrant 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.

42. What amount should be recognized as discount or premium on the original issuance of the bonds?

a. 342,000 premium
b. 342,000 discount
c. 450,000 premium
d. 450,000 discount

43. What is the equity component arising from the issuance of bonds payable?

a. 150,000
b. 450,000
c. 492,000
d. 0

44. What amount is credited to share premium if all of the share warrants are exercised?

a. 4,242,000
b. 3,500,000
c. 3,600,000
d. 3,950,000
For item 45 and 48 are based on the following information.

Armanda Company issued P 5,000,000 face amount, 5-year bonds at 109. Each P1, 000bondswere 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 end of the year. 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.

45. What is the carrying amount of the bonds payable on the date of issuance?

a. 5,450,000
b. 4,830,000
c. 5,000,000
d. 4,380,000

46. What amount should be recorded initially as discount or premium on bonds payable?

a. 170,000 discount
b. 450,000 premium
c. 450,000 discount
d. 800,000 discount

47. What is the equity component arising from the issuance of bonds payable?

a. 450,000
b. 500,000
c. 620,000
d. 0

48. What amount is credited to share premium if all of the share warrants are existed?

a. 1,000,000
b. 1,450,000
c. 1,500,000
d. 1,620,000

For item 49 and 51 are based on the following information.

At the beginning of current year, case company issued P5, 000,000 of 12% nonconvertible bonds payable at 103
which are due in five years.

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 the date of issuance, the quoted market value of each warrant was P4. The market value of the bonds ex-
warrants at the time of issuance is 95.

49. What is the carrying amount of the bonds payable on the date of issuance?

a. 5,000,000
b. 4,750,000
c. 5,150,000
d. 4,550,000

50. What amount of the proceeds from the bond issue should be recognized as an increase in shareholders’
equity?

a. 600,000
b. 300,000
c. 200,000
d. 400,000
51. What amount is credited to share premium if all of the share warrants are exercised?

a. 4,350,000
b. 3,750,000
c. 4,150,000
d. 0

52. Moriones Company issued P5, 000,000 face amount 12% 5-year convertible bonds at 110 at the beginning
of current year, paying interest semi-annually on January 1 and July 1

It is estimated that the bonds would sell only at 103 without the conversion feature. Each P1, 000bondsare
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?

a. 350,000
b. 500,000
c. 150,000
d. 0

53. At the beginning of current year, Susan Company issued 5,000 convertible bonds. The bonds have a three-
year term and are issued at 110 with a face amount of P1000 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

a. 1,150,000
b. 1,650,000
c. 891,000
d. 391,000

54. On December 31, 2020, Cey Company had outstanding 12% P5, 000,000 face amount convertible bonds
maturing on December 31, 2025. Interest is payable on June 30 and December 31. Each P1, 000bondsare
convertible into 50 shares of Cey Company with P10 par value.

On December 31, 2020, the unamortized 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, 2020, 2,000 bonds were converted when the share had a market price of P24. The entity
incurred P20, 000 in connection with the bond conversion.

What is the share premium arising from the bond conversion?

a. 1,400,000
b. 1,100,000
c. 1,380,000
d. 1,120,000

55. Spare Company had an outstanding share capital with par value of P5, 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, 000bonds.

The holders 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 of premium should be recognized by reason of the conversation of bonds payable into
share capital?

a. 2,000,000
b. 2,750,000
c. 3,000,000
d. 1,750,000

56.. What is the principal accounting for a compound financial instrument?

a. The issuer shall classify a compound instrument as either liability or equity

b. The issuer shall classify the liability and equity components of a compound instrument separately as liability or
equity instrument
c. The issuer shall classify a compound instrument as a liability in its entirety, until converted into equity.
d. The issuer shall classify a compound instrument as a liability in its entirety

57. How are the proceeds from issuing a compound instrument allocated between the liability and equity?

a. The liability component is measured at fair value and the remainder of the proceeds is allocated to the equity
component
b. The proceeds are allocated to the liability and equity based on fair value
c. The proceeds are allocated to the liability and equity based on carrying amount
d. The proceeds are not allocated because of compound instrument is accounted for either as liability or equity.

58. The proceeds from an issue of bonds with share warrants should not be allocated between the liability and
equity components when

a. The fair value of the warrants is not readily available

b. The exercise of the warrants within the next reporting period seems remote.
c. The warrants issued are non-detachable.
d. The proceeds should be allocated between liability and equity under all of these circumstances.

59. 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

b. Retained earnings
c. Liability account
d. Share premium – share warrants

60. When bonds are issued with share warrants, the equity component is equal to

a. Zero
b. The excess of the proceeds over the face amount of the bonds
c. The market value of the share warrants
d. The excess of the proceeds over the fair value of the bonds without the share warrants.

61. What is the main reason of issuing convertible bond?

a. The ease with which convertible bond is sold even if the entity has a poor credit rating.
b. The fact that equity capital has issue cost and convertible bond has none.
c. Entities can obtain financing at lower rate
d. Convertible bond will always sell at premium.

62. The major difference between convertible bonds and bonds issued with share warrants is that upon exercise
of the warrants

a. The shares are held by the issuer for a certain period before issuance to the warrant holder
b. The holder has to pay a certain amount to obtain the shares
c. The shares involved are restricted.
d. No share premium can be part of the transaction.

63. What is the accounting for issued convertible bond?

a. The instrument should be presented solely as bond.

b. The instrument should be presented either as bond or equity but not both.
c. The instrument should be presented solely as equity.
d. The instrument should be presented as part bond and part equity.
64. Issued convertible bonds are

a. Separated into debt and equity components with the liability component recorded at fair value and the residual
assigned to the equity component.
b. Always recorded using the fair value option.
c. Recorded at face amount for the liability along with the associated premium or discount.
d. Recorded at face amount without consideration of a premium or discount.

65. When convertible bond payable is not converted but paid at maturity

a. A gain or loss is recorded for the difference between the carrying amount of the bond and the present value of
the cash flows
b. The amount allocated to equity is recorded as a gain.
c. The amount allocated to equity is recorded as a loss.
d. The carrying amount of the bond equal to face amount is derecognized.

For item 66 and 67 are based on the following information.

Joshua Company bought a new machine and agreed to pay in equal annual instalment of P600, 000 at the end
of each of the next five years. The prevailing interest rate for this type of transaction is 12%.

The present value of an ordinary annuity of 1 at 12% for five periods is 3.60. The future amount of an annuity of
1 at 12% for five periods is 6.35. The present value of 1 at 12% for five periods is 0.567.

66. What amount should be reported as note payable if financial statements were prepared today?

a. 1,700,000
b. 2,160,000
c. 3,000,000
d. 3,810,000

67. What is the interest expense for the first year?

a. 259,200
b. 187,200
c. 360,000
d. 457,200

68. Mann Company reported a 10% note payable of P3, 600,000 on June 30, 2020. The note is dated Oct 1,
2018 and payable in three equal annual payments of P1, 200,000 plus interest.

The first interest and principal payment was made on October 1, 2019.

On June 30, 2020, what amount should be reported as accrued interest payment for this note?

a. 270,000
b. 180,000
c. 90,000
d. 80,000

69. On December 32, 2020, Bart Company purchased a machine from Fell Company in exchange for a non-
interest bearing note requiring eight payments of P200, 000.

The first payment was made on December 31, 2020 and the others are due annually on December 31.

At date of issuance, the prevailing rate of interest for this type of note was 11%.

PV of an ordinary annuity of 1 at 11% for 8 periods 5.146

PV of an annuity of 1 in advance at 11% for 8 periods 5.712

On December 31, 2020, what is the carrying amount of the note payable?

a. 1,142,400
b. 1,029,200
c. 1,046,200
d. 942,400
70. At the beginning of the current year, Pares Company borrowed P 3,600,000 from a major customer
evidenced by a noninterest bearing note due in three years.

The entity agreed to supply the customer’s inventory needs for the loan period at an amount lower than market
price.

At the 12% imputed interest rate for this type of loan, the present value of the note is P 2,550,000 at the date of
issuance.

What amount of interest expense should be reported in the income statement for the current year?

a. 432,000
b. 350,000
c. 306,000
d. 0

71. At year-end, Roth Company issued a P 1,000,000 face amount note payable in exchange for service
rendered.

The note, made at usual trade terms is due in nine months and bears interest, payable at maturity, at the annual
rate of 3%.

The market interest rate is 8%. The compound interest factor is 1 due in nine months at 8% is .944.

At what amount should the note payable be reported at year end?

a. 1,030,000
b. 1,000,000
c. 965,200
d. 944,000

72. On September 1, 2019, Pine Company issued a note payable in the amount of P 1,800,000, bearing interest
at 12% and payable in three equal annual principal payments of P 600,000. On this date, the prime rate was
11%.

The first interest and principal payment was made on September 1, 2020.

On December 31, 2020, what amount should be reported as accrued interest payable?

a. 44,000
b. 48,000
c. 66,000
d. 72,000

73. On March 1, 2019, Fine Company borrowed P 1,000,000 and signed a 2-year note bearing interest at 12%
per annum compounded annually. Interest is payable in full at maturity on February 28, 2021.

What amount should be reported as accrued interest payable on December 31, 2020?

a. 100,000
b. 120,000
c. 232,000
d. 240,000

74. On January 1, 2020, Solemn Company sold land to Glory Company. There was no established market price
for the land.

Glory gave Solemn a P 2,400,000 noninterest bearing note payable in three equal annual instalments of P
800,000 with the first payment due December 31, 2020.

The note has no ready market. The prevailing rate of interest for a note of this type is 10%.

The present value of a P 2,400,000 note payable in three equal annual instalments of P 800,000 at a 10% rate of
interest is P 1,989,600.
What is the carrying amount of the note payable on December 31, 2020?

a. 1,989,600
b. 2,126,400
c. 1,388,560
d. 2,400,000

75. On January 1, 2020 Easy Company reported a note payable of P 1,200,000.

The note is dated October 1, 2019, bears interest at 15% and is payable in three equal annual payments of P
400,000.

The first interest and principal payment was made on October 1, 2020.

What amount should be reported as interest expense for 2020?

a. 165,000
b. 180,000
c. 135,000
d. 30,000

For item 76 and 78 are based on the following information.

On July 1, 2020, Justine Company borrowed P 1,000,000 on a 10% five year interest bearing note.

On December 31, 2020, the fair value of the note is determined to be P 975,000.

The entity irrevocably elected the fair value option in measuring the note payable.

76. What is the interest expense for 2020?

a. 100,000
b. 50,000
c. 97,500
d. 48,750

77. What is the carrying amount of the note payable on December 31, 2020?

a. 1,000,000
b. 500,000
c. 975,000
d. 900,000

78. What amount should be reported as gain from change in fair value of the note payable for 2020?

a. 100,000
b. 75,000
c. 25,000
d. 0

For item 79 and 82 are based on the following information.

On January 1, 2020, Jonathan Company borrowed P 500,000 8% note due in four years. The present value of
the note on the date of issuance was P 367,500.

The entity elected irrevocably the fair value option in measuring the note payable. On December 31, 2020, the
fair value of the note is P 408,150.

79. What is the carrying amount of the note payable on December 31, 2020?

a. 500,000
b. 367,500
c. 408,150
d. 460,000

80. What amount should be reported as interest expense for 2020?

a. 40,000
b. 29,400
c. 32,562
d. 20,000
81. What amount of gain from change in fair value of the note payable should be reported for 2020?

a. 132,500
b. 172,500
c. 91,850
d. 29,400

82. At what amount should the discount on note payable be presented on December 31, 2020?

a.132, 500
b. 103,100
c. 91,850
d. 0

82. When an entity issued a note solely in exchange for cash, the present value of the at issuance is equal to

a. Face amount
b. Face amount discounted at the prevailing interest rate
c. Proceeds received
d. Proceeds received discounted at the prevailing interest rate

83. If the present value of a note issued in exchange for a property is less than face amount, the difference
should be

a. Included in the cost of the asset

b. Amortized as interest expense over the life of the note
c. Amortized as interest expense over the life of the asset
d. Included in interest expense in the year of issuance

84. An entity borrowed cash from a bank and issued to the bank a short-term noninterest bearing note payable.
The bank discounted the note at 10% and remitted the proceeds to the entity. The effective interest rate paid by
the entity in this transaction would be

a. Equal to the stated discount rate of 10%

b. More than the stated discount rate of 10%
c. Less than the stated discount rate of 10%
d. Independent of the stated discount rate of 10%

85. At issuance date, the present value of a promissory note is equal to the face amount if the note

a. Bears a stated rate of interest which is realistic

b. Bears a stated rate of interest which is less than the prevailing market rate for similar notes.
c. Is noninterest bearing and the implicit interest rate is less than the prevailing market rate for similar notes
d. Is noninterest bearing and the implicit interest rate is equal to the prevailing market rate for similar notes.

86. Which statement concerning discount on note payable is incorrect?

a. Discount on note payable may be debited when entity discount its own note with the bank
b. The discount on note payable is a deduction from the face amount note payable.
c. The discount on note payable represents interest charges applicable to future periods.
d. Amortizing the discount on note payable gradually decreases the carrying amount of the liability over the life of
the note.

87. A note payable with no ready market is exchanged for property whose fair value is currently indeterminable.
When such a transaction takes place.

a. The present value of the note payable must be approximated using an imputed interest rate.
b. The note payable should not be recorded until the fair value of the property becomes evident.
c. The entity receiving the property should estimate a value for the property.
d. Both entities involved in the transaction should negotiate a value to be assigned to the property.

88. When a note payable is issued for property, the present value of the note is measured by

a. The fair value of the property

b. The fair value of the notes payable
c. Using an imputed interest rate to discount all future payments on the note payable
d. All of these are considered in measuring the present value of the note payable.
89. When a note payable is exchanged for property, the stated interest rate is presumed to be fair when

a. No interest rate is stated.

b. The stated interest rate is unreasonable.
c. The face amount of the note is materially different from the cash sale price for similar property
d. The stated interest rate is equal to the market rate.

90.The discount resulting from the determination of the present value of a note payable should be reported as

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

91. Which statement is correct when an entity issued a note payable with no stated interest rate in exchange for
a depreciable asset?

a. The asset should be depreciated over the term of the note payable.
b. If fair value is unavailable, the note payable should be recorded at present value discounted at the market rate
of interest.
c. Both the note and the asset are recorded at the face amount of the note payable
d. The note payable is recorded at face amount even if the fair value of the asset is readily available.

92. Which is not included in lease payments?

a. Any payment required by a purchase option that is reasonably certain to be exercised
b. Costs for services and taxes paid by and lessee
c. Required payments over the lease term
d. Amount guaranteed by a party related to the lessee

93. Which is not part of the lease payment?

a. The rental payments called for by the lease
b. Any residual value guarantee of the lessee
c. Any residual value at the end of the lease term
d. Any payment the lessee must make to purchase the underlying asset under a purchase option that is
reasonably certain to be exercised

94. The lease payments include all, except

a. The residual value guarantee
b. The lessee’s obligation to pay executor cost
c. The purchase option that is reasonably certain to be exercised
d. Any payment that the lessee must make upon failure to extend or renew the lease

95. What is the interest rate used when the implicit interest rate cannot be determined?
a. The prime rate
b. The lessor’s published rate
c. The lessee’s average borrowing rate
d. The lessee’s incremental borrowing rate

96. What is the treatment of initial direct cost incurred by the lessee in a finance lease?
a. Added to the lease liability
b. Added to the carrying amount of the right of use asset
c. Expensed immediately
d. Added to the carrying amount of the right of use asset and lease liability

97. Which of the following statements concerning residual value guarantee is appropriate for the lessee?
a. The asset related liability should be increased by the absolute amount of the residual value.
b. The asset and related liability should be decreased by the present value of the residual value.
c. The asset and related liability should be decreased by the present value of the residual value.
d. The asset and related liability should be increased by the present value of the residual value.

98. In computing depreciation of a right of use asset under a lease, the lessee should detect
a. The residual value guarantee and depreciate over the lease term.
b. An unguaranteed residual value and depreciate over the lease term.
c. The residual value guarantee and depreciate over the useful life of the asset.
d. An unguaranteed residual value and depreciate over the useful life of the asset.
99. If the residual value of underlying asset is greater than the amount guaranteed by the lessee
a. The lessor pays the lessee for the difference.
b. The lessee recognizes a gain at the end of the lease term.
c. The lessee has no obligation related to the residual value.
d. The lessee pays the lessor for the difference.

100. What is the cost of right of use asset acquired in a finance lease?
a. The absolute sum of the lease payments over the lease term
b. The present value of the lease payments including executor costs discounted at an appropriate rate
c. The present value of the lease payments exclusive of executor costs discounted at an appropriate rate
d. The present value of the market value of the asset discounted at an appropriate rate

10. The carrying amount of the right of use asset from the capitalization of a lease would be periodically
reduced by
a. Total lease payment
b. Portion of the lease payment allocable to the interest
c. Portion of the lease payment allocable to reduction of the lease liability
d. Depreciation of the asset